424B3 1 ikona424b3.htm

Filed pursuant to 424(b)(3)
File No. 333-118727

Prospectus

IKONA GEAR INTERNATIONAL, INC.

1,046,667 Shares Common Stock

       This is an offering of shares of the common stock of Ikona Gear International, Inc. by persons who were issued shares of our common stock in private offerings.

       Our common stock is traded on the over-the-counter market and quoted on the OTC Electronic Bulletin Board under the symbol "IKGI." On September 14, 2005, the bid and ask prices of our common stock were $0.51 and $0.59, respectively.

   

Investing in our common stock involves a high degree of risk. You should read the "Risk Factors" beginning on Page 4.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

       Our principal executive offices are located at 1850 Hartley Avenue, Unit # 1, Coquitlam, B.C., Canada, V3K 7A1, and our telephone number is (604) 523-5500.

 

The Date of This Prospectus is October 11, 2005

 

PROSPECTUS SUMMARY

About our Company

       We are commercializing our proprietary patented gearing technology (the "Ikona Gearing System"). The Ikona Gearing System utilizes a proprietary, newly designed, patented tooth shape which enables gears to be smaller, lighter, stronger and more energy efficient than conventional planetary gears. The Ikona Gearing Systems allows what we believe to be the highest single stage reduction ratio, zero backlash gear currently available on the market. In high-ratio applications, the Ikona Gearing System can replace multiple stage gearing systems with a single stage reduction ratio, and is thus more cost effective to manufacture.

       Our business strategy is based on building partnerships on the strength of our technology. Our business model is to develop joint ventures and licensing agreements with leading industry partners. Our plan is that these partnerships will allow us to develop royalty and licensing revenue streams and to participate in revenues generated from the sale of products stemming from the joint ventures.

       Our goal in the current operating year is to enter into licensing agreements in three different vertical markets with different business partners, where we will prove the virtues of our patented gearing technology in applications that generate revenues for us.

       We maintain our principal executive offices at 1850 Hartley Avenue, Unit #1, Coquitlam, British Columbia, Canada V3K 7A1. Our telephone number at that address is (604) 523-5500. Out internet website is located at www.ikonagear.com.

About the Offering

       This is an offering of shares of our common stock by Selling Securityholders who were issued shares of our common stock. We will not receive any proceeds from the resale of common stock by the Selling Securityholders. The Selling Securityholders are offering 1,046,667 shares of common stock. We are registering the common stock covered by this Prospectus either to fulfill the obligations we have under agreements with the Selling Securityholders or as a voluntary accommodation to the Selling Securityholder.
 

Shares Outstanding Before Offering:

25,149,292
     
 

Shares Outstanding After Offering:

25,149,292
     
 

Shares Offered by Selling Securityholders:

1,046,667
     

SUMMARY FINANCIAL DATA

       The following summary financial data is incomplete and should be read in conjunction with the complete financial statements contained elsewhere in this Prospectus. Our historical operating information may not be indicative of our future operating results.

Statement of Operations Data:

Nine Months Ended
May 31,

Fiscal Year Ended
August 31,
   

     2005     

     2004     

     2004     

     2003     
           

   Total revenues

  

$   14,666 

$   114,106 

$   152,782 

$      44,307 

   Operating expenses

  

1,293,729 

732,872 

1,169,422 

413,610 

   Net loss

  

(1,272,637)

(617,510)

(1,016,640)

(369,303)

   Net loss applicable to
     common  stockholders


(1,272,637)


(617,510)


(1,016,640)


(369,303)

   Basic and diluted loss
      per share

  


(0.05)


(0.03)


(0.05)


(0.03)

   Shares used in
     computing basic and
     diluted loss per share

  



24,326,899 



22,814,079 



21,660,390 



11,029,572 
           

At May 31,

At August 31,

      2005      

    2004    

Balance Sheet Data:

          

   Working capital

 

$    670,442

  

$    1,058,506

  

   Total assets

  

942,444

  

1,313,597

  

   Stockholders' equity

  

832,016

  

1,215,210

  

________________

 

RISK FACTORS

An investment in our securities is speculative and involves a high degree of risk. Please carefully consider the following risk factors, as well as the possibility of the loss of your entire investment, before deciding to invest in our securities.

We do not yet have a history of earnings, profit or return on investment and there is no assurance that we will generate revenues, operate profitably or provide a return on investment in the future.

We have never been profitable, we expect to incur net losses for the foreseeable future and we may never be profitable. We incurred net losses of ($1,016,640) and ($369,303) for the fiscal years ended August 31, 2004 and 2003, respectively and ($1,272,637) and ($617,510) for the nine months ended May 31, 2005 and May 31, 2004, respectively.

As a result of our limited operating history it is difficult to forecast our future operating results. We expect to substantially increase our sales and marketing, technology development and general administrative expenses. As a result, we will need to generate significant revenues to achieve and maintain profitability in the future.

Our future operating results will depend on many factors, including:

* The overall growth rate for the market in which we compete

* The level of market acceptance of, and demand for, proprietary gearing technology in general and our Ikona Gearing System in particular

* The level of product and price competition

* Our ability to attract, train, retain and motivate qualified consulting, technical and other key personnel

* Our ability to commercialize the Ikona Gearing System

* Our ability to deliver our products and services on time, on budget, or at all.

If the market's acceptance and adoption of the Ikona Gear proprietary gearing technologies does not develop, our future results may suffer.

All of our products are based upon proprietary gearing technology, which has only recently been commercially introduced. While we believe that the IKONA Gearing System has demonstrated clear advantages over other gearing systems in terms of increased strength, reduced weight, zero backlash, and reduced friction, the vast majority of existing industrial applications already incorporate gearing systems which existing mechanical design engineers may not wish to replace. To date, there has not been widespread adoption of the Ikona Gear proprietary technology, components or applications. As a result, numerous factors, many of which are not in our control, may slow the market adoption of the Ikona Gear proprietary gearing technologies.

We cannot be sure that Ikona Gear proprietary gearing technologies will achieve broad market acceptance, or that other superior proprietary gearing technologies will not be developed. The failure of proprietary gearing technologies to achieve broad acceptance could adversely affect our ability to generate revenues. Our proprietary Ikona Gear technology is one class of several competing gearing systems used by gear designers in their industrial applications.

Our technology is essentially unproven and there is no assurance that, if proven, the IKONA Gear System can be manufactured commercially.

Although we have demonstrated the use and efficiency of our prototype IKONA Gear System in several tests individually and with third parties, and even though our gear design is now being marketed by a joint development partner, we have only indirectly begun limited commercial manufacture of the Ikona Gear System through our partners, and we have not done any direct commercial manufacturing of Ikona Gear Systems and therefore we can provide no assurance regarding our ability to commercially manufacture the Ikona Gear System.

The market for new gearing technologies is expected to continue to grow, and therefore the growth or advancement of both existing and new competitive technologies in our markets could harm our business.

The market for our technology is characterized by a growing interest in energy efficient and environmentally friendly vehicle technologies. We expect additional competitive technologies to emerge, and existing competitive technologies to mature. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources, greater name recognition, a broader range of products to offer and an installed base of customers, any of which factors could provide them with a significant competitive advantage.

If we fail to develop strategic relationships with industry partners, our efforts to license our product or form joint manufacturing initiatives may be unsuccessful.

At the present time, we lack an existing installed customer base to which our innovative IKONA Gear System can be offered. As a result, we will need to establish critical strategic relationships with industry partners who have large installed customer bases to whom we can offer licenses for our products, which may be combined with their own industrially engineered components and technologies. If we are not successful in establishing these relationships, it will be more difficult for us to be successful in our efforts to achieve a large customer base for our products.

There is no assurance that we will have the ability to effectively design, develop and implement our technology for new customers.

As we only have a very small customer base, our success will be dependent upon our ability to convince a significant number of industrial manufacturers to adopt our new technology. Many manufacturers who supply gears directly or indirectly in their engineered solutions or applications have long-term supplier agreements with our competitors and we may be unable to establish strategic partnerships. Manufacturers that have made substantial up-front payments to our competitors for competitive technology and component licenses may be reluctant to replace their current technologies to adopt our IKONA Gear System. As a result, our efforts to create a larger customer base may be more difficult than expected even if we are deemed to offer products and services superior to those of our competitors.

Our patents, trademarks and other intellectual property rights may not provide us with adequate protection.

Our success and ability to compete are substantially dependent on our internally developed technologies and intellectual property, which we protect through a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions.

Although we believe we have taken adequate steps to protect our intellectual property, proprietary information, technological know-how and other rights, we cannot be certain that these steps will prove sufficient for the protection of our technology. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect the proprietary rights of companies to the same extent as the laws of the United States, Canada and Europe. Furthermore, competitors may independently develop technology similar to ours. The number of intellectual property claims in industry may increase as the number of competitive technologies grows. Although we do not believe that any of our products or other intellectual property infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement by us with respect to current or future products. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights, or for purposes of establishing the validity of our proprietary rights. Litigation, either as plaintiff or defendant, could cause us to incur substantial costs and divert management resources from productive tasks whether or not such litigation is resolved in our favor, which could have a material adverse effect on the business. Parties making claims against us could recover substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to sell or license our products. Such a judgment could have a materially adverse effect on our business.

Furthermore, while we have registered our domain name in an effort to protect it, this effort may be inadequate to protect our use of the Ikona Gear name as unique. In addition, the uncertainty surrounding the legal protections of domain names may be unenforceable or limited in other countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our communications. Further, the regulation of web addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to maintain our domain name in the future. Further, the relationship between regulations governing such domain names is unsettled.

In addition to our patents, we also intend to rely on a combination of trade secrets, license agreements, non-disclosure and other contractual provisions, and technical measures to establish and protect the proprietary aspects of the Ikona Gear technology. Most of our current employees, consultants and advisers have signed non-disclosure agreements. We believe that our intellectual property rights are appropriately protected having regard for the technical complexity of design of the Ikona Gear system, the time and cost involved in development, and the expertise required to market, install and support the technology. However, the steps taken by us may not be sufficient to prevent misappropriation of Ikona Gear System technology, and such protection does not preclude competitors from developing products with functionality or features similar to ours.

We have obtained information that suggests there may have occurred a procedural defect in connection with our US patent application. We are currently investigating the matter and what, if any, curative measures might be indicated. At the present time, we cannot predict what, if any, effect such a procedural defect might have on the validity or enforceability of our US patent.

If we fail to continually work to improve and enhance the IKONA Gear System in the face of our industry's growing demand for increasingly efficient and technologically advanced gearing systems, our future results may be adversely affected.

Our growth and future operating results will depend in part upon our ability to enhance the IKONA Gear System technology and develop and introduce new applications or components that:

* meet or exceed technological advances in the marketplace
* meet changing customer requirements
* achieve market acceptance
* integrate successfully with third party components and technologies, and
* respond to competitive products.

Our product development and testing efforts have required, and we are expected to continue to require, substantial investment. We may not possess sufficient resources to continue to make the necessary investments in the development of our technology.

We will continue to need significant capital, without which our business may fail.

We have required significant capital to date and will require additional capital to implement our business plan. We estimate that an additional $1.4 million will be required to continue to develop our business and for other purposes over the next 12 months. We have no current arrangements with respect to other sources of additional financing and there can be no assurance that additional financing will be available to us on commercially reasonable terms, or at all. The inability to obtain additional financing, when needed, would have a material adverse affect on us, including possibly requiring us to curtail or cease our operations. To the extent that future financing involves the sale of our equity securities, our then existing stockholders, including investors in this offering, could be substantially diluted.

If we lose our key personnel or fail to attract and retain additional personnel, the success and growth of our business may suffer.

A portion of our management team has been in place for a relatively short period of time, and we do not have written employment agreements with our most senior engineers. Our future success will also depend significantly on our ability to attract, integrate and retain highly skilled engineering and technical personnel. If we are unable to attract, integrate and retain such persons, our business could be adversely affected.

Exchange rate fluctuations may adversely affect our financial position.

Our business is operated from our head office in the lower mainland of Vancouver, Canada, and our patents are owned by Ikona USA, Inc, located in the United States. Most of our costs and assets are in Canadian dollars, whereas most of our financing is received in US dollars. Any significant increase or decrease in the value of the Canadian dollar compared to the US dollar would have a significant impact on the financial position of our business. Similar exchange rate risks will arise should our business expand into other markets and its business involves other currencies. We do not engage in any foreign currency hedging activities.

The enacting of governmental regulation may impose burdens on our business.

We are not currently subject to direct regulation by any government agency, other than applicable securities laws and regulations applicable to business generally. However, it is possible that a number of laws and regulations may be adopted with respect to regulating our technology indirectly via the existing regulations for future joint-development partners, or for new regulations imposed on gear development entities and related technology and pricing, which may impose additional burdens on companies in our industry, thus increasing our cost of doing business. There can be no assurance that any such new legislation or regulation will not be enacted, nor that the application of laws or regulations from jurisdictions whose laws do not currently apply to our business will subsequently become applicable.

We may be subject to future technology liability claims and the reputation of the IKONA Gear System may suffer.

Our existing joint development and licensing agreements involve applications that are critical to the operations of our customers' businesses. Any failure in a customer's application using the IKONA Gear System could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although our license agreements with our customers will contain provisions designed to limit contractually our liability for damages arising from negligent acts, errors, mistakes or omissions, it is possible that these provisions will not be enforceable in certain instances or would otherwise not protect us from liability for damages. Although we maintain general insurance coverage this coverage may not continue to be available on reasonable terms or at all, or may be insufficient to cover one or more large claims. Moreover, such insurance coverage may not provide benefits for certain product liability claims.

There is a limited and sporadic market for our common shares.

Our common shares presently trade in the US on the Over-the-Counter (OTC) Market and are quoted on the OTC Electronic Bulletin Board under the ticker symbol IKGI. There is presently a very limited market for our common shares. There is no assurance that a liquid market for our common shares will ever develop in the United States, or elsewhere, or that if such a market does develop that it will continue; or that the trading price of the shares will not be subject to significant price fluctuations. Accordingly, an investment in our common shares should only be considered by those investors who do not require liquidity and can afford to suffer a total loss of their investment. An investor should consult with professional advisers before making such an investment.

Over-The-Counter stocks are subject to risk.

Our stock trades on the OTC Market. The OTC Market for securities has experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock.

Trading in our securities is conducted in the OTC Market on an electronic bulletin board established for securities that do not meet NASDAQ listing requirements. As a result, investors will find it substantially more difficult to dispose of our securities. Investors may also find it difficult to obtain accurate information and quotations as to the price of, our common stock.

Our stock price may be volatile, increasing the risk of any investment in our securities.

Our stock price may be volatile and as a result, investors could lose all or part of their investment. The value of an investment could decline due to the impact of any of the following factors upon the market price of our common stock:

*

failure to meet sales goals or operating budget decline in demand for our common stock

*

revenues and operating results failing to meet the expectations of securities analysts or investors in any quarter

*

downward revisions in securities analysts' estimates or changes in general market conditions

*

technological innovations by competitors or in competing technologies

*

investor perception of our industry or prospects

*

general economic trends

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to resell their shares at or above the offering price.

Fluctuations in our quarterly operating results could adversely affect the market for our common stock.

Our quarterly operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors in any quarter, our share price could decline significantly. Factors that may cause our operating results to fluctuate include many of the risk factors discussed elsewhere in this Prospectus, and also include:

*

the nature of a significant proportion of our operating expenses, particularly personnel and facilities

*

our level of research and development activities

*

the effect of employee and contractor utilization rates and the time required to train and productively engage new employees

*

the effect of seasonal variations on disposable income

*

changes in our pricing policies or those of our competitors

Accordingly, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful. Investors should not rely on the results of one quarter as an indication of our future performance.

Future share issuances could be dilutive to our shareholders and negatively impact the market for our common stock.

Future issuances of our stock could dilute current shareholders and adversely affect the market price of our common stock if a public trading market develops. We have the authority to issue up to 100,000,000 shares of common stock and to issue options and warrants to purchase shares of our common stock without stockholder approval. These future issuances could be at values substantially below the price paid for common stock by our current shareholders.

Future sales of our common stock into the market may also depress the market price, if one develops in the future. Sales of these shares of common stock or the market's perception that these sales could occur may cause the market price of our common stock to fall. These sales also might make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.

Trading in our common stock is subject to the "penny stock" rules which have an adverse impact on our public trading market.

Our common stock is subject to rules adopted by the Commission regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission. That disclosure document advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and 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. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.

 

CERTAIN MARKET INFORMATION

Trading Information

       Since December 5, 2003, our common stock has traded on the Over-the-Counter Market and is quoted on the OTC Electronic Bulletin Board under the symbol "IKGI." From September 20, 2000, to December 5, 2003, our stock traded on the OTC Electronic Bulletin Board as "OBAN". To date the Over-the-Counter Market has been the sole trading market for our shares.

       The following table sets forth the high and low prices for our common stock on the over-the-counter market and quoted on the Bulletin Board for each quarter since August 2001. The prices presented below are bid and ask prices which represented price between broker-dealers and do not include retail markups and markdowns or any commission to the broker. The prices do not necessarily reflect actual transactions.

Common Stock

Quarter Ended

Low

High

August 31, 2001

n/a

n/a

November 30, 2001

n/a

n/a

February 28, 2002

n/a

n/a

May 31, 2002

n/a

n/a

August 31, 2002

0.05

0.05

November 30, 2002

0.01

0.05

February 28, 2003

0.01

0.01

May 31, 2003

0.01

0.25

August 31, 2004

0.01

0.01

November 30, 2003

0.01

0.60

February 29, 2004

0.60

3.25

May 31, 2004

1.10

2.10

August 31, 2004

1.10

1.50

November 30, 2004

0.62

1.55

February 29, 2005

0.45

1.11

May 31, 2005

0.73

0.75

August 31, 2005

0.54

0.72

Holders

       As of August 31, 2005, we had approximately 138 shareholders of record. This does not include shareholders who held stock in accounts at broker/dealers.

 

DIVIDEND POLICY

       We have not declared or paid cash dividends on our common stock in the preceding two fiscal years. We currently intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not at this time anticipate paying dividends in the foreseeable future. Future cash dividends, if any, will be determined by our Board of Directors, based upon such factors as our historical and projected earnings, our working capital surplus and anticipated demands for capital expenditure.

 

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

In General

       This prospectus contains statements that plan for or anticipate the future. In this prospectus, forward-looking statements are generally identified by the words "anticipate," "plan," "believe," "expect," "estimate," and the like. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding the following:
 

*

our technology development;
     
 

*

our engineering team's gear design and its development;
     
 

*

consulting and strategic business relationships;
     
 

*

statements about our future business plans and strategies;
     
 

*

anticipated operating results and sources of future revenue;
     
 

*

our organization's growth;
     
 

*

adequacy of our financial resources;
     
 

*

development of new products and markets;
     
 

*

competitive pressures;
     
 

*

commercial acceptance of the Ikona Gearing System;
     
 

*

changing economic conditions; and
     
 

*

expectations regarding competition from other companies.
     

       Although we believe that any forward-looking statements we make in this prospectus are reasonable, because forward-looking statements involve future risks and uncertainties, there are factors that could cause actual results to differ materially from those expressed or implied. For example, a few of the uncertainties that could affect the accuracy of forward-looking statements, besides the specific factors identified above in the Risk Factors section of this prospectus, include:
 

*

changes in general economic and business conditions affecting the industrial gearing industry, or in secondary industries that use gearing applications, such as in the automotive, aerospace, or robotics industries;
     
 

*

technical developments that make our products or services less competitive or obsolete;
     
 

*

changes in our business strategies or business models;
     
 

*

the level of demand for our products and services; and
     
 

*

our ability to develop or maintain strategic relationships within the automotive, aerospace, industries, which are critical to gaining market share.

       In light of the significant uncertainties inherent in the forward-looking statements made in this prospectus, particularly in view of our early stage of operations, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

CAPITALIZATION

       The following table sets forth our capitalization as of May 31, 2005, on an actual basis. This section should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus.
   

As of May 31, 2005

Long-term Debt

$                  -    
   

Stockholders' Equity

  
 

Common Stock,

 
 

25,149,292 issued and outstanding shares

251 
     
 

Additional paid-in capital

3,851,785 
     
 

Accumulated deficit during the development stage

      (3,020,020)
     

Total stockholders' equity and capitalization

$         832,016 

       These amounts do not include 2,069,250 shares of common stock we may issue, upon exercise of options, which may be granted under our Equity Incentive Plan.

       These amounts also do not include 2,319,016 shares of common stock we may issue upon exercise of warrants currently outstanding. We have issued 2,319,016 warrants, all of which remain unexercised. The warrants have a weighted average exercise price of $1.00 per share. Of the 2,319,016 warrants currently outstanding, 310,332 expire on March 1, 2007, 677,469 expire on March 29, 2007, 231,215 expire on April 30, 2007, 3,333 expire on July 31, 2007, 1,046,667 expire on April 1, 2008, and 50,000 expire on March 31, 2010.

SELECTED FINANCIAL DATA

       We have set forth below certain selected financial data. This financial data was derived from the consolidated financial statements and related notes included elsewhere in this prospectus.

Statement of Operations Data:

Nine Months Ended
May 31,

Fiscal Year Ended
August 31,
   

     2005     

     2004     

     2004     

     2003     
           

   Total revenues

  

$      14,666 

$    114,106 

$   152,782 

$      44,307 

   Operating expenses

  

1,293,729 

732,872 

1,169,422 

413,610 

   Net loss

  

(1,272,637)

(617,510)

(1,016,640)

(369,303)

   Net loss applicable to
      common stockholders


(1,272,637)


(617,510)


(1,016,640)


(369,303)

   Basic and diluted loss per
       share

  


(0.05)


(0.03)


(0.05)


(0.03)

   Shares used in computing basic
     and diluted loss per share

  


24,326,899 


22,814,079 


21,660,390 


11,029,572 
           

At May 31,

At August 31,

      2005      

    2004    

Balance Sheet Data:

          

   Working capital

  

$    670,442

  

$    1,058,506

  

   Total assets

  

942,444

  

1,313,597

  

   Stockholders' equity

  

832,016

  

1,215,210

  

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Plan of Operations

In the next 12 months, we will attempt to execute a License Agreement for royalties from Magna Advanced Technologies ("the Magna Agreement"), as more fully described in this prospectus under the heading "Business," for the use of our technology in products in the automotive industry.

We also plan to complete the manufacturing and testing of industrial gearing prototypes for an industrial application in the forestry products industry. We will be expanding the engineering team with gear industry designers, mechanical engineers, and draftsmen, and developing marketing plans for vertical, industry-specific applications of the proprietary Ikona Gearing System for applications which capitalize on the high torque and low weight attributes of the Ikona Gearing System, including but not limited to:
 

*

High torque industrial machinery;
 

*

Aircraft and military equipment;

 

*

Alternate energy sources such as windmills;
 

*

Robotics and high precision machinery;

To achieve these goals we will be developing a sales and marketing team to manage and execute the marketing plans in other vertical markets. The projected budget for the next twelve months for sales and marketing activities is $350,000. These funds are presently available from our recent private placement, which concluded in April 2005.

We will be promoting Ikona Gear technology to European and North American industry leaders through: securing public relations representatives in North America and Europe; participating in gear industry trade shows such as Gear Expo; developing and refining joint venture and licensing agreements for existing and potential customers; developing alliances with gear manufacturers capable of manufacturing Ikona related products; and developing portable demonstration units.

We will be continuing our engineering development activities while trying to secure joint development arrangements with gearing application providers who wish to incorporate the Ikona Gear design into their applications. We will also be trying to secure partnering relationships with gear manufacturers who can manufacture gears under license from Ikona Gear based on our design specifications. Our objective is to maintain our focus as a gear design specialist of patented gearing technology, and delegating non-core functions such as manufacture and distribution to third parties who can leverage our new gear designs. We are presently in an alliance with Magna Advanced Technologies (a division of Magna International Inc.) to develop prototypes for applications in production automobiles. The estimated cost of our internal development program for the next 12 months is $600,000.

We expect to continue to purchase engineering equipment in the next 12 months as we recruit new specialized engineers with requirements for specialized software, hardware and tools. We anticipate that we will need to invest approximately $50,000 in new capital equipment for our research and development laboratory.

We anticipate that staffing levels will continue at their current levels until we have successfully completed significant royalty agreements. We presently have ten employees and we expect to remain at ten employees for the next 12 months.

If we are successful in our marketing activities, we will likely spend additional funds on travel in order to meet prospective customers and joint development partners. We anticipate our annual sales and marketing operating costs may increase from $350,000 to about $500,000 over the next twelve months.

Operating and Financial Review and Prospects

The following discussion and analysis of our financial condition and operating results for the two fiscal years ended August 31, 2004 and 2003 and interim periods ended May 31, 2005 and May 31, 2004, and should be read in conjunction with the financial statements and related notes attached hereto. (See Financial Statements.) These are the results of our business acquired on October 30, 2003, which for generally accepted accounting principles in the United States of America, require that the historical comparative results of the accounting acquirer become the results of the legal parent (previously Oban Mining Inc.).

Our financial statements were prepared in conformity with generally accepted accounted principles for the United States of America. They also comply, in all material respects, without requiring material adjustments, with the rules and regulations of the Securities and Exchange Commission.

Our business is in the development stage and has limited revenues in its last two fiscal years. In the past, we have acquired necessary capital through the limited issuance of common shares. There is no assurance that this source of capital will continue to be available in future operating periods.

Operating Results

Nine-Month Period Ended May 31, 2005 Compared to Nine-Month Period Ended May 31, 2004

Revenues. Revenues are generated from the provision of engineering services and from licensing royalties. In the nine months ended May 31, 2005, we generated revenues of $14,666. In the nine months ended May 31, 2004, we generated revenues of $114,106. The reduction in revenues is due to one client, Magna Advanced Technologies. Although we continue to work with Magna in an effort to reach a licensing agreement, as outlined in the section "Marketing Plan and Engineering Progress" they have discontinued their monthly engineering fee payments of $12,150 ($CAD 15,000), effective September 1, 2004.

Amortization and Depreciation. We record depreciation expense on our property and equipment and amortization expense on our capitalized patents and trademark costs. In the nine months ended May 31, 2005, we recorded depreciation of $60,587. In the nine months ended May 31, 2004, we recorded depreciation of $16,767. The increase in depreciation expense reflects depreciation associated with purchases of depreciable equipment, including leasehold improvements at our new premises, leased as of August 1, 2004. At May 31, 2005, we had depreciable property and equipment recorded with an historical cost of $235,299 (May 31, 2004 - $47,356).

Business Development. Business development expense reflects internal and external costs to market our business opportunity to existing clients and potential new clients. Business development expense includes: the salaries and benefits of our President and CEO and our Executive Vice President; and fees paid to external consultants. Business development expense was $204,411 for the nine months ended May 31, 2005. Business development expense was $163,980 for the nine months ended May 31, 2004. The increase in business development expense pertains to an April 1, 2004, increase in the management fee to our President and CEO, as well as the addition of one salaried marketing and communications employee effective June 1, 2004.

Corporate Finance.. Corporate finance expense reflects costs associated with fees paid to maintain the corporate finance function of our company. These fees are paid to our CFO and consultants who oversee accounting, auditing, fund-raising and regulatory reporting functions for our company. Corporate finance expense was $81,055 for the nine months ended May 31, 2005. Corporate finance expense was $50,338 for the nine months ended May 31, 2004. The increase in corporate finance expense pertains to the addition of a full time CFO effective December 1, 2003, and a corporate finance fee of $7,995 paid to a consultant in stock during the month of April, 2005.

General and Administrative. Our general and administrative expenses consist primarily of clerical and administrative salaries and benefits, office rents, office supplies, telephone and telecommunications expenses, courier and other general costs not attributable directly to other Income Statement line items. Our general and administrative expenses were $83,036 for the nine months ended May 31, 2005. Our general and administrative expenses were $46,271 for the nine months ended May 31, 2004. The increase in general and administrative expense pertains to the recruitment of a full-time salaried accountant in late February 2004, as well as an increased level of office related expenses for office supplies, heat, electricity, and telecommunications associated with our new larger office premises, leased effective August 1, 2004.

Investor Relations.. Our investor relations expense consists primarily of external consulting fees and associated communications costs to increase investors' awareness of our Company. Investor relations expenses were $251,879 for the nine months ended May 31, 2005. In the comparative period, investor relations expenses were $46,271 for the nine months ended May 31, 2004. The increase in investor relations expense is associated with a heightened investor awareness campaign through the use of external consulting firms since our company becoming publicly traded as of October 2003. Also, included in the expense for the nine months ended May 31, 2005, is an amount of $27,206 of non-cash compensation attributed under the Black-Scholes option pricing model to stock options issued to investor relations consultants (May 31, 2004 - $ 0).

Professional Fees. Our professional fees expense consists primarily of external consulting fees associated with our auditors and our US corporate and securities counsel. Professional fees expense was $53,520 for the nine months ended May 31, 2005. In the comparative period, professional fees expense was $87,907 for the nine months ended May 31, 2004. The higher expense in the prior year is associated with additional professional legal fees, audit fees, and external financial consulting expenses related to our company getting publicly listed as of October 2003.

Rent. Rent expense was $53,844 for the nine months ended May 31, 2005. In the comparative period, we recorded rent expense of $24,683 for the nine months ended May 31, 2004. The increase in rent expense pertains to expansion of our Company over the prior year and rent associated with our new 7,089 sq. ft. warehouse facility which we occupied on September 1, 2004. In the prior year the Company was occupying two separate facilities with 1,400 sq. ft. in downtown Vancouver, BC and 2,914 sq. ft. in Surrey, BC, a suburb of the metropolitan Vancouver area. The prior year's comparative rent expenses of $24,683 were reclassified from general and administrative expenses ($13,916) and from research and development expenses ($10,767).

Research and Development. Research and development expense reflects internal and external costs to develop our technology including the salaries of our engineers, fees paid to external consultants, and materials and supplies consumed by our research and development department in advancing our core intellectual property. Research and development expense was $447,843 for the nine months ended May 31,2005. In the comparative period, we recorded research and development expense of $204,122 for the nine months ended May 31, 2004. The increase in research and development expense pertains to the addition of two new engineers to our engineering team over the prior year plus a non-cash compensation expense of $124,192 (May 31, 2004 - $24,602) associated with stock options granted to recruit an external research and development consultant.

Year Ended August 31, 2004 Compared to Year Ended August 31, 2003

Revenues. Revenues are generated from licensing royalties and the provision of engineering services. In the years ended August 31, 2004 and 2003, we generated revenues of $152,782 and $44,307 respectively. Engineering services revenues in the current period relate to services provided to two customers, Magna Advanced Technologies ("MAT") and Aircast Inc. ("Aircast"). MAT has a services agreement that committed them to provide us $11,175 (CAD$ 15,000) per month from May 1, 2003, to April 30, 2004 (extended on April 28, 2004 to cover May 1, 2004 to August 31, 2004). In February 2004, Aircast paid us $10,000 of gear design fees and committed to provide royalties of $2.50 per unit for each of their arm braces sold that incorporate our Ikona Gear. We received a royalty from Aircast for $270 covering a two-week period in March 2004, and a royalty receipt of $1,685 to cover the three months ended June 30, 2004.

Amortization and Depreciation. We record amortization expense on our capitalized patents and trademark costs and depreciation on our property, plant and equipment. In the years ended August 31, 2004 and 2003, we recorded depreciation and amortization expense of $27,643 and $16,507 respectively. The increase in expense reflects depreciation associated with $169,842 of purchases of depreciable equipment (net of disposals) made in the current year, whereas there was no depreciable equipment in the comparative prior year period.

Business Development. Business development expense reflects internal and external costs to market our business opportunity to existing clients and potential new clients. Business development expense includes: the salaries and benefits of our President and our Executive Vice President; and fees paid to external consultants for web design and web based marketing services. Business development expense was $223,616 and $60,959 respectively for the years ended August 31, 2004 and 2003. The increase in business development expense pertains to a significant increase in travel to service our MAT and Aircast relationships and to establish new relationships in North America and Europe, and to salary increases.

Corporate Finance. Corporate finance expense reflects costs associated with fees paid to maintain our corporate finance function. These fees are paid to our CFO and external consultants who oversee our accounting, auditing, fundraising and regulatory reporting functions. Corporate finance expense was $72,688 and $73,138 respectively for the years ended August 31, 2004 and 2003.

General and Administrative. Our general and administrative expenses consist primarily of clerical and administrative salaries and benefits, office rents, office supplies, telephone and telecommunications expenses, courier and other general costs not attributable directly to other statement of operations line items. Our general and administrative expenses were $64,965 and $11,919 for the years ended August 31, 2004 and 2003. The increase in general and administrative expense pertains to the recruitment of an accountant and an executive assistant to support our administrative needs.

Investor Relations. Our investor relations expense consists primarily of external consulting fees, some of which are non-cash compensation expenses associated with stock option incentives. Investor relations expenses also are associated with communications costs to increase investors' awareness of us. Investor relations expenses were $106,185 and $0 for the years ended August 31, 2004 and 2003, respectively. The increase in expense is associated public awareness campaigns initiated after we became publicly traded as of October 2003. Included in the August 31, 2004 expense is an amount of $38,758 of non-cash compensation attributed under the Black-Scholes option pricing model to stock options issued to one investor relations consultant in 2004.

Professional Fees. Our professional fees expense consists primarily of external consulting fees associated with our auditors and our corporate and securities counsel. Professional fees expenses were $140,609 and $3,000 for the years ended August 31, 2004 and 2003, respectively. The increase in expense is associated with our reverse merger in October 2003, with increased legal support for agreements entered into with Aircast and Magna Advanced Technologies, and with minimal audit and legal requirements in the comparative prior year period.

Research and Development. Research and development expense reflects internal and external costs to develop our technology including the salaries of our engineers, fees paid to external consultants, and materials and supplies consumed in advancing our core intellectual property. Research and development expense was $216,329 and $218,600, respectively for the years ended August 31, 2004 and 2003.

Travel and Related. Travel and related expense includes all of our travel costs associated with travel for reasons of business development, research and development, and corporate finance. Included in travel are the costs of flights, trains, automotive rentals, accommodations, meals and other associated travel costs. Travel and related expense was $98,598 and $14,574 respectively for the years ended August 31, 2004 and 2003. In the comparative period virtually all costs were associated with research and development in the Vancouver area and minimal travel was undertaken. In the current year, there has been an increase in travel and related expense associated with joint development partnerships with MAT and Aircast, and with establishing new investor relations business development relationships in North America and in Europe.

Apart from the stock-based compensation expense, our general and administrative costs increased in the aggregate due to the added professional fees, filing and reporting costs, and investor relations expense associated with our status as a public company.

Liquidity and Capital Resources

As of April 30, 2005, our total cash was $826,590, our working capital was $772,281, and our stockholders' equity was $976,649. Since inception, we have incurred cumulative losses of $2,850,046. We have been actively seeking new investment to further our operations. In April 2005, we closed on a private placement of $785,000 to address current operating requirements, having received these funds in February, March and April of 2005. We are actively pursuing more significant investments from a number of possible private placement sources.

We are in the development stage and expect to remain in the development stage for the current operating year. We do not expect to generate significant cash flow from operations in the present year.

We have planned capital expenditures in the form of research and development equipment, computers and software, and leasehold improvements for the next 12 months amounting to $50,000. At this time, in addition to our capital requirements, we anticipate further operating costs of $1,425,000 for the next 12 months. As the combined cash requirements of $1,475,000 exceeds our currently available cash resources, we are continuing discussions with a number of potential sources of funding for the capital and operating requirements in the current operating year, although there currently exist no agreements, commitments or understandings with respect to any financing.

In the nine months ended May 31, 2005, our operations consumed $1,039,487. Our net loss of $1,272,637 was partially offset by amortization and depreciation of $60,587, and by $159,393 of non-cash stock-based compensation.

In the nine months ended May 31, 2005, we spent $65,457 on property and equipment.

Our net cash consumed in the nine months ended May 31, 2005, was $374,894, leaving us with $750,905 of cash balances at May 31, 2005.

In the nine months ended May 31, 2005, we generated $730,050 from financing activities.

In the years ended August 31, 2004 and August 31, 2003, we generated $ 1,962,313 and $326,776, respectively, from financing activities.

In total, our cash and cash equivalents decreased by $374,894 to $750,905 for the nine month period ended May 31, 2005.

As at May 31, 2005, our total cash was $750,905, our working capital was $670,442, and our stockholders' equity was $832,016. Our current working capital is not sufficient to meet our business operating objectives (see Plan of Operations). Our ability to satisfy projected working capital requirements is dependent upon our ability to secure additional funding through public or private sales of securities, including equity securities. There is no assurance that we will be able to secure the necessary capital on terms acceptable to us.

Trends

We are in the development stage and are presently continuing research and development of a platform gearing technology that can be applied to any industry and any product that incorporates a gear. We are jointly developing product prototypes to advance our business development goals. As a result, there are no trends in production, sales or inventory, the state of the order book, or costs and selling prices. For the current financial year, we have doubled our operating cash requirements in our attempt to grow our company more quickly. We believe this trend will continue subject to the raising of additional capital resources through private or public placements to fund our continued growth. We believe that we will continue to expand the number of our employees by 100% per year with a resulting doubling of the associated salaries and benefits expenses of our company.

Sales revenues are of an uncertain nature. We expect royalties to increase as we establish new royalty agreements and as our joint development partners sell more units of their products which incorporate our gears. At present we have one royalty agreement with Aircast Inc. and we have received $4,265 associated with nine months of their sales to May 31, 2005. We expect this trend will continue.

We are presently attempting to negotiate royalty terms in a Licensing Agreement between our company and MAT, however there can be no assurances that we will achieve a License Agreement with MAT at all, or on terms that will be acceptable to us.

We expect that sales levels will likely continue to be indeterminate until we have passed at least another year of operations.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective November 5, 2003, our Board of Directors and the Audit Committee of our Board of Directors approved the appointment of Dohan and Company, P.A., CPA's to serve as our independent accountant to audit our financial statements. Prior to engaging Dohan and Company, we had not consulted Dohan and Company with respect to the application of accounting principles to specific transactions or the type of audit opinion that might be rendered on our financial statements. The engagement of Dohan and Company was effective on November 5, 2003.

Effective November 5, 2003, we dismissed Hoogendoorn Vellmer, Chartered Accountants, as our independent auditors. The Audit Committee approved the dismissal. The audit reports of Hoogendoorn Vellmer on our financial statements as of and for the years ended December 31, 2002 and 2001 did not contain an adverse opinion or disclaimer of opinion, nor were qualified or modified as to audit scope or accounting principles except that each report of Hoogendoorn Vellmer contained an explanatory paragraph as to the uncertainty of our ability to remain a going concern.

In connection with the audits of our financial statements for the fiscal years ended December 31, 2002 and 2001, and in connection with the subsequent period up to November 5, 2003 (the date of dismissal), there were no disagreements with Hoogendoorn Vellmer on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Hoogendoorn Vellmer, would have caused Hoogendoorn Vellmer to make reference to the matter in its report of the financial statements for such years; and there were no reportable events as defined in Item 304(a) (1) (iv) (B) of Regulation S-B. Hoogendoorn Vellmer has not reported on financial statements for any periods subsequent to December 31, 2002.

 

BUSINESS

General

Ikona Gear International, Inc. ("Ikona" or our "company") is engaged in the development of, and plans to commercialize, its proprietary patented gear technology (the "Ikona Gearing System"). The Ikona Gearing System utilizes a unique, newly designed, patented tooth shape which enables gears to be much, smaller, lighter, stronger and more energy efficient while allowing the highest single stage reduction ratio, and zero backlash, than any other gear currently available on the market. In high-ratio applications the Ikona Gearing System can replace multiple stage gearing systems with a single stage reduction ratio and is thus can be more cost effective to manufacture. Ikona has received patents for the gear tooth form in the United States, Canada, Germany, France, Italy, Great Britain and Sweden.

Because of the engineering design of the Ikona Gearing System, we believe that our marketing plans to emphasize the technical advantages of the Ikona Gearing System by jointly developing vertical, industry-specific applications which focus on the unique high torque and low weight attributes of the Ikona Gearing System, including but not limited to: alternative energy sources such as windmills; robotics and high precision machinery; high torque industrial machinery; and aircraft and military equipment.

We seek to enhance shareholder value and maximize income from our patented technology by licensing product to industrial original equipment manufacturers and Tier 1 suppliers for high volume gearing applications, and by supplying and/or licensing the Ikona Gearing System to industry manufacturing specialists and other strategic partners and suppliers. We will also seek to develop further intellectual property and generate royalty income directly and through additional joint-development partnerships.

History of the Ikona Gear System

This highly efficient gear design was originally developed by Ukrainian scientists working in the former USSR for the purpose of reducing the weight of the attack helicopter known as the MIL MI-28 Havoc, a long-range Russian military helicopter. In September 1993, Laith Nosh, our President and founder traveled to Dnepropetrovsk, Ukraine on a trade mission to acquire technology developed by the former military of the USSR. There, Mr. Nosh met with Boris A.Koriakov-Savoysky, Igor V. Aleksahin, and Ivan P. Vlasov, the inventors of the new gear design technology. During 1993, Mr. Nosh collaborated with the Ukrainian inventors and in mid-1994 acquired the rights to the technology from its inventors.

In October 1994, Mr. Nosh introduced the gear technology to Dr. J. R. Colbourne, a Ph.D. in mechanical engineering, gear industry specialist, and professor emeritus at the University of Alberta in Edmonton, Canada. Dr. Colbourne did technical due diligence on the gear design, and then assisted Mr. Nosh with preparing and filing patents for the technology in the USA, Canada and Europe. The patents were filed in August 1994 and issued in the US as patent 5,505,668 in April 1996. The patent was issued in Europe as patent 0770192 in November 1998, and in Canada in September 1999, as patent 2,129,188.

Dr. Colbourne then assisted Mr. Nosh with recruiting gear specialists in 2001, and Ikona Gear International, Inc. was incorporated in August 2001 to carry on the business in the US and Canada. The US patents were originally filed by Ikona Gears Limited, Nicosia, CY (a prior owner of the technology rights), and were transferred by Mr. Nosh to Diversified Sciences Limited (an Alberta corporation) in 1997. Diversified Sciences Limited completed the patents for Europe and Canada, and subsequently transferred the patents to Ikona Gear International, Inc. in August 2001, just after we were incorporated.

History of our Company

We were incorporated as Oban Mining Inc. in the State of Nevada on September 20, 2000. We were originally engaged in the acquisition and exploration of mining properties. We concluded our properties were not suitable for development.

In the third quarter of 2003, we entered into a Letter of Intent with Ikona Gear International, Inc. ("Ikona") to enter into a Share Exchange Agreement to effect a merger between us and Ikona. Upon successful conclusion of the merger with Ikona in October 2003, we changed our name to Ikona Gear International, Inc.

We are now focusing on commercializing and further developing Ikona's unique, patented gear technology, the Ikona Gearing System. Today, we comprise a series of corporations organized in a multi-tiered arrangement depicted in the following schematic:

 

Ikona Gear International, Inc.
                        (Nevada)                    
  |               |
 

Ikona Gear International, Inc.
(Nevada)

  

Ikona Gear Corp.
(British Columbia, Canada)

The functions and relationships of these entities to one another can be summarized as follows:

Ikona Gear International, Inc. ("IKGI") is a corporation incorporated in the Nevada and publicly-traded on the OTC market under the ticker symbol IKGI. We are also listed and trading in the Regulated Unofficial Market on the Frankfurt Stock Exchange under the ticker symbol IG2. We are also listed and trading on the Berlin Stock Exchange under the ticker symbol A0BLY1.

IKGI, is based in Vancouver, British Columbia, and is primarily involved in capital formation, investor relations and head office and executive office administration. We have two wholly-owned subsidiaries:

 

*

Ikona Gear USA, Inc., incorporated in Nevada, is a non-operating entity holding all intellectual property owned by the IKONA group of companies and was formed on August 16, 2001.

     
 

*

Ikona Gear Corp., incorporated in British Columbia, Canada, was formed October 31, 2003. We are the principal operating entity of the Ikona group of companies.

About Gearing Technologies and the Ikona Gearing System

A gear is a toothed wheel, which is usually round. The purpose of gearing is to transmit motion from one shaft to another. This motion transfer may or may not be uniform and may be accompanied by change in direction, speed and shaft torque (rotational force). A gear reducer is used to reduce and convert the higher turning speed of a motor into power or torque for such diverse items as winches and helicopters. Conversely, a gear speed increaser (speed multiplier) converts a higher torque and lower rotational speed into a higher-speed turning shaft that can be used to turn a power generator for the production of electricity such as in windmills.

In general, gears may be divided into several broad classifications based on the arrangement of the axes and of the gear pair. Examples of these classifications include worm, bevel, helical, parallel shaft, spur and planetary. Planetary gears are generally the most energy efficient class of gears and account for approximately 35% of all gearing applications. The Ikona Gearing System can be broadly classified as a planetary gearing system.

The essence of any gear is its tooth form. Gear teeth are classified as being either involute or non-involute. An involute tooth has a specific geometrical curve. The contacting gear teeth on two separate gear system components (i.e. the internal and external gears) are identical in shape. An involute tooth is constructed such that constant angular velocity (rotation rate) is maintained throughout gear contact. This constant angular velocity is what is known as conjugate action and is a necessary feature for many applications. A non-involute tooth is any tooth form that does not have the specific geometry of an involute tooth form.

There are many forms of non-involute teeth. With the Ikona non-involute tooth form - the contacting gear teeth on two separate components of the gear system are complementary in shape to one another. The pinion teeth have convex profiles, while those of the internal gear are concave, making for favourable gear tooth contact conditions.

The Ikona Gearing System improves significantly upon the shortcomings of the planetary gear (i.e. gear backlash and low ratios of contact between gear teeth), and as a result, the Ikona Gearing System has technical advantages over other types of gear systems presently being used (e.g. worm gears). The Ikona gearing system has generally a higher contact ratio than conventional planetary gears. In addition, the contact ratio increases as the gearing reduction ratio increases. As a result, in high torque applications (with a high gearing reduction ratio) the Ikona gear can maintain several times more teeth in contact than a conventional planetary gear. As a result it is possible to reduce the overall size of the gear and maintain the same strength and reliability of a gear system several times the size of a comparable Ikona Gearing system.

The Ikona Gearing System can result in significant weight reductions in applications where high torque and high gearing reduction ratios are required, for example, in aviation where fuel consumption is directly reduced by weight savings.

Advantages of the Ikona Gearing System

The Ikona Gearing System is superior to conventional gearing systems for the following reasons:
 

*

High tooth contact ratio - in gearing, contact ratio can be thought of as the average number of teeth pairs in contact at any one time. Traditional involute gears may have only 1.77 pairs of teeth in contact at a time. In the Ikona Gearing System, up to 40 or more pairs of teeth can be in contact. With more mating teeth, the Ikona Gearing System is stiffer and stronger than its counterparts. With the inherent strength of the Ikona Gearing System, it is also possible to make gearing systems smaller and lighter. These particular benefits are important for the robotics, automotive and aerospace industries.

 

*

Low noise level - the Ikona Gearing System is designed to operate with a noise level lower than most gear systems due to the unique meshing features of its teeth and the rolling motion inherent in the gear system design. Low noise levels are important in the aviation and robotics industries.
 

*

High single stage reduction ratio - reduction ratio is a measurement of the ability of a gear to convert speed from the input, high-speed shaft into power at the output, slow-speed shaft. A single gear stage is comprised of one input shaft and one output shaft. In multi-stage gear systems, the output shaft of one gear system will be the input shaft of the gear system that follows. When a high reduction ratio is required, such as for winches and cranes, which convert enormous torque (i.e. more than 30:1 gear reduction ratios), most gear systems must be designed as multi-stage systems to achieve the high torque required for that application. Every stage added to the system equates to an increase in cost and a decrease in gearbox efficiency (i.e. more friction, bearings and weight in a larger gearbox). The Ikona Gearing System is capable of a single stage reduction ratio of up to 5,000:1, which means higher efficiency and lower cost. This feature is ideal for winches and cranes since they typically require significant amounts of power or torque and therefore a high reduction ratio to lift or pull heavy objects.
 

*

Cost effectiveness - devices that have more components or high part counts are inherently more expensive due to production and maintenance costs. They also waste a significant amount of energy because of the added number of moving pieces. While doing the work of competitors' multi-stage gear systems in a single stage, the Ikona Gearing system is more cost effective because of its reduced part count.
 

*

Conjugate system - the Ikona Gearing System is conjugate, meaning that it operates at a constant speed. Conjugate action equates to repeatability, which is an essential characteristic of precise machinery and positioning devices. In applications such as robotics, this feature is a necessity.

 

*

Zero backlash - backlash can be thought of as the movement of one gear while the mating gear is held stationary. This freedom of movement implies imprecision (e.g. putting a car's transmission into park still allows the vehicle to roll a few inches before reaching a complete stop). With present involute technology, zero backlash is only realized using a gear reducer with very tight tolerances. These tight tolerances are expensive and the result is still not absolutely zero backlash. With the Ikona Gearing System, zero backlash is inherent in the design of the tooth form. Robotics is an ideal application for the Ikona Gearing System due to the necessity of extreme precision.

Intellectual Property, Patents and Licenses

Our technology includes a number of proprietary and patented technologies. We hold patents issued from the United States (5,505,668), Canada (2,129,188), Europe (including France, Great Britain, Germany, Italy and Sweden) (0770192). All intellectual property, including original patents for the Ikona Gearing System, provisional patent applications, design specifications, trade secrets, improvements to the technologies, software, contractual provisions with third parties, were assigned to us according to an acquisition agreement dated August 31, 2001, between Diversified Sciences Limited and Ikona Gear International, Inc. (now Ikona Gear USA, Inc.). We have subsequently ensured that all patents have been duly re-assigned under the name of Ikona Gear USA, Inc.

Although we intend to continue to protect the technology and any improvements to the technology with additional patent applications, no assurance can be given that any patent will be issued or that the scope of any patent protection will exclude competitors or that any patent, if issued, will be held valid if subsequently challenged.

In meetings in March 2004, conducted with Magna Advanced Technologies, we were advised that we had neglected to advise the U.S. Patent Office regarding all material correspondences with the European Patent Office during the application period for the US Patent.

We have been informed by patent counsel that it would be preferable to re-file the US Patent with additional disclosures to ensure the validity of US Patent protection going forward. We are presently working with our patent attorneys to prepare the additional filings necessary in the reexamination application for our US Patent.

It is difficult to forecast the outcome of a reexamination procedure if we requested a reexamination to be filed, and therefore we cannot be assured that the outcome would be favorable to us. We do not foresee a cancellation of our US Patent, but we cannot provide assurances that cancellation will not occur.

Jurisdiction/
Title


Patent/Appln No.


Issue Date


Applicant


Assigned To


Expiry Date

USA/
Gear system

5,505,688

April 9, 1996

Ikona Gears Limited (Nicosia, CY)

Ikona Gear USA, Inc.

November 11, 2015

Canada/
Gear system

2,129,188

Sept. 7, 1999

Ikona Gears Limited & Ikona Inc.

Ikona Gear USA, Inc.

July 29, 2014

Europe/
Gear system

0770192

November 11, 1998

Ikona Gears Limited & Ikona Inc.

Ikona Gear USA, Inc.

July 26, 2015

We also intend to rely on a combination of trade secrets, license agreements, non-disclosure and other contractual provisions, and technical measures to establish and protect the proprietary aspects of the IKONA Gearing System. All of our current employees, consultants and advisers have signed non-disclosure agreements. We believe that our intellectual property rights are appropriately protected having regard for the technical complexity of the systems, and the expertise required to design and manufacture gearing systems that are unique to their applications.

Other Intellectual Property

We have registered the domain name www.ikonagear.com..

Limitations of Intellectual Property Protection

The Ikona trademark and domain name play an important role in expanding the awareness of our technology on the Internet and in developing partnerships between those who use the Internet to retrieve information and many providers of products and services available on the Internet. We have applied for Canadian registration of the "Ikona" trademarks and we have registered our domain name in an effort to protect them, our efforts may be inadequate to prevent others from claiming violations of our marks and may be inadequate to protect our use of those names as unique. In addition, trademark protection and the uncertainty surrounding the legal protections of domain names may be unenforceable or limited in other countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our communications. The regulation of web addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to maintain our domain name in the future. Furthermore, the relationship between regulations governing such domain names and the laws protecting trademarks is unsettled.

Competition

Ikona's Gearing system is based on a design similar to the cycloidal drive system, originally developed in Japan and now manufactured by a number of large Japanese companies. We have identified the following five competing companies as those with technology most comparable to the Ikona Gearing System. We believe the Ikona Gearing system is technologically superior to technologies marketed by these companies. However, as these companies have the legacy of lengthy historical operations and well established reputations, it is our challenge to continue to establish Ikona Gear as a company and to prove the importance of the superior technological characteristics of the Ikona Gearing system, including low weight, high strength, zero backlash and reduced friction and wear.

Sumitomo Heavy Industries ("Sumitomo") - Operating since 1888, Sumitomo serves the steel, heavy machinery, ship, bridge manufacturing, automotive, chemical, construction, materials handling, medical, timber, and utility industries. Sumitomo has more than 30 major subsidiaries and affiliates operating in Japan and other Asian countries in addition to the US and Europe. Sumitomo is part of Japan's Sumitomo Group and, while it has a global customer base, Japan and North America account for about 90% of sales. Its mass-produced industry segment (which includes the manufacturing of gears) generated 140 billion yen ($1.1 billion) in 2000.

Sumitomo gear manufacturing, with a 9% share of the global gearing market, may be considered one of Ikona's largest competitors. Its main gear product uses a cycloidal drive system similar to the IKONA Gearing System; however, Sumitomo's technology uses a wave plate and pins (a non-conjugate gear system) as opposed to meshed teeth. As a result, its product performance is inferior when compared to Ikona's system.

SEW-Eurodrive - has focused on the following five technologies: gear reducers, adjustable speed drives, electric motors, brakes, and electronic controls. SEW-Eurodrive has grown during the past 65 years in drive technology, with more than 38,000 employees in 142 countries and sales in excess of DM1.9 billion ($880 million).

Flender USA ("Flender") - has over 9,500 employees located in 15 manufacturing operations with over 70 sales offices worldwide. Each product line and facility is supported by ongoing research, development, the latest in manufacturing techniques, and a rapid transfer of today's technologies to Flender operations throughout the world. Flender offers gear reducer packages with helical or bevel gearing with smooth action and low noise and a maximum reduction ratio of 450:1.

Harmonic Drive Technologies - is a leading manufacturer of precision gearing systems, gearboxes, servo actuators and custom assemblies based on the unique principle of harmonic drive. It is also an importer of heavy-duty precision gear and servo actuator systems based on the cycloidal gear system.

Fairfield Manufacturing Company, Inc. - a manufacturer of custom gears, gear sets and transmission assemblies. Services also include design engineering, heat treating, and testing. Fairfield has over 1,300 employees with a 600,000 square foot manufacturing space.

Research and Development

       We charge research and development expenditures to operations as expended. In the two years ended August 31, 2003, and 2004, our expenditures on research and development were $218,600 and $216,329 respectively. In the nine months ended May 31, 2005, our expenditures on research and development were $447,843.

Employees and Consultants

       We have nine full-time employees, and one part time employee.

Facilities

       We occupy our executive offices located at 1850 Hartley Avenue, Unit #1, Coquitlam, British Columbia, Canada, V3K 7A1 under a three-year lease expiring July 31, 2007, requiring monthly rent of $4,875. The facilities are adequate for the foreseeable future.

 

MANAGEMENT

Directors, Executive Officers and Key Employees

       Our executive officers, key employees and outside Directors and their respective ages and positions are set forth below:

Name

  

Age

  

Position

Laith Nosh

  

57

  

President, Chief Executive Officer and Director

Dal Brynelsen

  

58

  

Executive Vice President

Raymond Polman

  

45

  

Chief Financial Officer and Director

Simon Anderson

  

44

  

Secretary and Director

Nicola Simon

  

37

  

Director

Joe Vosburgh

  

37

  

Director
         

Two of our directors are "independent" within the meaning of the National Association of Securities Dealers, Inc.'s listing standards. For this purpose, a director is deemed to be independent if he does not have a relationship which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Laith Nosh, Director, President and Chief Executive Officer

Mr. Nosh has served as a director and our President and CEO since October 2003. Mr. Nosh was a founder of our predecessor company and the current operating subsidiaries, where he worked as President and Chief Executive Officer since inception in August 2001. He has been instrumental in the development, refinement and patenting of the IKONA Gearing System over the last eight years. He has also developed and patented consumer product devices for the construction industry. He received his degree from the University of Alberta in Mechanical Engineering and has over 30 years of experience in engineering, business management and marketing.

Dal Brynelsen, Executive Vice President

Mr. Brynelsen has served as our Executive Vice President since October 2003 and served as a director until June 30, 2005. From August 2001 until the merger with our company, Mr. Brynelsen worked for our predecessor and the current operating subsidiaries developing the business model, raising funds for the business and being active in business development activities. Mr. Brynelsen is presently, and has been since 1990, the President and CEO of Vangold Resources Ltd. He has been a director of Griffin Mining Ltd. since 2001, and a director of International Silver Ridge Inc. since 2003. From 1999 through 2001, Mr. Brynelsen acted in a corporate finance consulting position with Thomson Kernaghan (a Canadian national brokerage firm). Mr. Brynelsen is a graduate of the University of British Columbia, Vancouver (1972), and has over 25 years of experience sourcing ongoing private and public financing for early stage companies.

Raymond L. Polman, B. Sc., CA, Director, Chief Financial Officer

Mr. Polman has served as a director and our Chief Financial Officer since December 2001. From October 1999 to September 2001, Mr. Polman was founder, President and Chief Executive Officer of Oglenet Software Inc., a private start-up company. From October 2001 to November 2003, Mr. Polman consulted to MCSI Consulting Services Inc. From April 2002 to November 2002 Mr. Polman was President and Chief Executive Officer of Nomadic Collaboration International, Inc., an OTC Bulletin Board company. Prior to the past five years, from 1992-95, he managed the finances and administration of a rapid-growth global environmental consultancy. In 1995-1998 as Chief Financial Officer of Nexmedia Technologies Inc., a display advertising software developer, he was responsible for fund raising and regulatory compliance. Mr. Polman has consulted to a number of rapid growth companies in the Vancouver area including fSONA Communications, and has been an associate with the MCSI Consulting Group, a Vancouver, BC-based firm specializing in corporate finance matters, strategic planning and business planning services. From 1985 to 1992, Mr. Polman was with Deloitte & Touche where he specialized in Information Technology Consulting and Audit services, upon completion of his articles in accountancy, audit and taxation. Mr. Polman's academic qualifications include designation as a (Canadian) Chartered Accountant (1990) and a Bachelor of Sciences (Econ) degree from the University of Victoria (1985).

Simon Anderson, CA, CBV, Director

Mr. Anderson has served as one of our directors since October 2003. Mr. Anderson has been a 50% owner and Vice President of MCSI Consulting Services Inc. from 1996 to present, to which he devotes approximately 50% of his time and attention. Mr. Anderson is both a Chartered Accountant and a Chartered Business Valuator and from 1994 to 1996 was a partner with BDO Dunwoody, an international accounting and consulting firm, where he specialized in mergers, acquisitions and valuations. From August 1999 to March 2000 he was Treasurer of MC2 Learning Systems, Inc. From August 1999 until March 2004 he was CFO of XML Global Technologies, Inc., and from August 1999 until June 2004 he was a director of that company. Since February 2004 he has been CFO of Shep Technologies Inc. and since May 2004 he has been CFO of Buffalo Gold Ltd. Mr. Anderson received a Bachelor of Commerce in Accounting and Management Information Systems from the University of British Columbia in May 1983 and was admitted as a member of the Institute of Chartered Accountants in British Columbia in 1986. He has also been a member of the Canadian Institute of Charter Business Valuators since 1990.

Nicola Simon, B. Eng. (Hons.), Director

Ms. Simon has served as one of our directors since April 2005. Ms. Simon joined Ikona's board after an almost 15 year career in engineering, international manufacturing, product development, and project management. Presently and for the past eight years, Ms. Simon has been employed with Ballard Power Systems, a global leader in fuel cell development and manufacture. In her current role as Platform Manager for Fuel Cell Development (Vancouver, Canada & Nabern, Germany), Nicola manages multi-million dollar project budgets and is responsible for product and process development of fuel cells intended for automotive applications. Nicola's past projects have led to the development and implementation of fuel cells for fleet vehicles, buses and stationary applications. Previously, Nicola held production management, project and manufacturing engineering positions at T&N (automotive part producer) and was a development engineer with IBM, France. She holds a Bachelor's Degree, First Class (Honors), in Mechanical Engineering from Brunel University in the United Kingdom.

Joe Vosburgh, Director

Mr. Vosburgh has served as an independent director since July, 2005. Mr. Vosburgh joined Ikona's board after more than 12 years experience in product strategy, product marketing and development, global product portfolio planning, and risk analysis. Presently, Mr. Vosburgh is senior product manager, strategic marketing, for Ballard Power Systems, a global leader in fuel cell development and manufacture. In this role, Joe has redefined Ballard's international product strategy for light-duty fuel cell products, developed global portfolio strategies, and spearheaded corporate-wide business realignment and product cost reduction projects.

From 1997-2001 Mr. Vosburgh held senior level product management positions in marketing, business development and professional services positions with CREO Inc. (now owned by Kodak). From 2001 to 2002, Joe was Director, Professional Services with INFOWAVE SOFTWARE INC. From 2002 to 2003, he was a Product Marketing Director with NORSAT INTERNATIONAL INC., and from 2003 to 2004 he was Senior Product Manager for CHANCERY SOFTWARE INC.

Mr. Vosburgh holds a Master's of Business Administration (MBA) in marketing and accounting from Queen's University (1995), and a Bachelor's Degree of Engineering from the University of Victoria (1993). Joe has also received certification in managing new product development from Kellogg Graduate School of Management (2001), and lectures on Strategic Marketing and Business Strategy at the University of Phoenix.

Except as indicated above, during the last five years none of our directors or officers have:
 

a.

had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
 

b.

been convicted in a criminal proceeding or subject to a pending criminal proceeding;
     
 

c.

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
     
 

d.

been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

2003 Equity Incentive Plan

       On October 28, 2003, the Board of Directors authorized and our stockholders approved, the 2003 Equity Incentive Plan for our officers, directors and other employees, plus outside consultants and advisors. Under the Equity Incentive Plan, our employees, outside consultants and advisors may receive awards of non-qualified options and incentive options, stock appreciation rights or restricted stock. A maximum of 4,400,000 shares of our common stock are subject to the Equity Incentive Plan. As of the date of this Prospectus, no stock appreciation rights or restricted stock has been granted under the Equity Incentive Plan, and options to purchase 2,069,250 shares of our common stock have been granted. To date no options have been exercised. The purpose of the Equity Incentive Plan is to provide employees, including our officers and employee directors, and non-employee consultants and advisors, with an increased incentive to make significant and extraordinary contributions to our long-term performance and growth, to join their interests with the interests of our shareholders, and to facilitate attracting and retaining employees of exceptional ability.

       Currently under the Plan we have issued 2,069,250 options of which 2,069,250 remain unexercised. The options have a weighted average exercise price of $0.98 per share. The stock that we may issue under our Equity Incentive Plan shall not exceed 4,400,000 shares of Common Stock (determined without giving effect to any stock split) but we may reclaim stock and re-issue terminated options. The exercise price of each Incentive Stock Option shall be not less than 100% of the Fair Market Value and such options may not be transferable. The exercise price of each Non-statutory stock option shall be not less than 100% of the Fair Market value. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments at the discretion of the Board of Directors or the Compensation Committee. Options terminate on the earliest of (i) the date three months after termination, (ii) seven years from the date of grant, or (iii) an earlier date as previously agreed upon the by the Board of Directors or the Compensation Committee.

       The Equity Incentive Plan may be administered by the Board, or in the Board's sole discretion by the Compensation Committee of the Board or such other committee as may be specified by the Board to perform the functions and duties of the Committee under the Equity Incentive Plan. Subject to the provisions of the Equity Incentive Plan, the Committee and the Board shall determine, from those eligible to be participants in the Plan, the persons to be granted stock options, stock appreciation rights and restricted stock, the amount of stock or rights to be optioned or granted to each such person, and the terms and conditions of any stock option, stock appreciation rights and restricted stock.

Stock Option Policy

       Under our Equity Incentive Plan, each of our current directors received an option grant to purchase shares of our common stock. Directors generally receive options to purchase 100,000 shares of our common stock for serving on the board and further options to purchase 15,000 shares of our common stock for each committee on which they serve. Directors who are also our officers generally receive an option to purchase an additional 150,000 shares of our common stock. Directors who are also our employees may be granted a further "dollar-weighted" option to acquire common stock when first employed by us, whereby they receive an option to acquire one share of common stock per dollar of salary that they earn on an annualized basis. We may grant additional options to other directors commensurate with their roles and other subjective assessments of the compensation committee. We plan to make annual grants of options to purchase 25,000 shares of our common stock to directors who continue to serve, based on their anniversary date. Options are priced based on a 100% of their market value on the date of the grant.

       In a grant on December 1, 2003, Mr. Polman, our chief financial officer and a director, was granted an option to purchase 341,000 shares of common stock at a purchase price per share of $0.60. Of the option grant, 250,000 of these shares relate to his services as a director and officer and vested upon issuance, and a further 91,000 shares were issued "dollar weighted" commensurate with his employment, subject to monthly vesting over a period of twenty-four months.

       In a grant on June 28, 2004, Mr. Nosh was granted an option to purchase 550,000 shares of common stock at a purchase price of $1.10 of which 250,000 relate to his services as a director and officer and vested upon issuance. The remaining 300,000 shares relate to his employment and vest on a quarterly basis over a two-year period. Vesting of these options is contingent on Mr. Nosh being employed as contemplated and on his continued employment. The number of options granted to Mr. Nosh reflects his role as one of our founders.

       In a grant on June 28, 2004, Mr. Brynelsen was granted an option to purchase 400,000 shares of common stock at a purchase price of $1.10 of which 250,000 relate to his services as a director and vested upon issuance. The remaining 150,000 options relate to his employment and vest on a quarterly basis over a two-year period. Vesting of these options is contingent on Mr. Brynelsen being employed as contemplated and on his continued employment. The number of options granted to Mr. Brynelsen reflects his role as one of our founders

       In a grant on June 28, 2004, Mr. Freeke was granted an option to purchase 220,000 shares of common stock at a purchase price of $1.10 of which 100,000 relate to his services as a director and vested upon issuance. The remaining 120,000 options are "dollar weighted" and relate to his employment as Chief Engineer and vest on a quarterly basis over a two-year period. Vesting of these options is contingent on Mr. Freeke being employed as contemplated and on his continued employment. The number of options granted to Mr. Freeke reflects his close ties to the gearing industry, which is where we are focusing our efforts.

       In a grant on June 28, 2004, Mr. Anderson was granted an option to purchase 115,000 shares of common stock at a purchase price of $1.10 of which 100,000 relate to his services as a director and vested upon issuance. The remaining 15,000 options relate to his role serving on the audit committee and vested upon issuance.

Executive Compensation

The following table and discussions summarizes all plan and non-plan compensation earned by or paid to our chief executive officer and chief financial officer for our last two completed fiscal years. No other executive officer received total annual salary and bonus of at least $100,000 during those periods.

TABLE 1
           

SUMMARY COMPENSATION TABLE
           
         

Long Term Compensation
 

Annual Compensation

Awards

Payouts



Name and
Principal
Position              





Year




Salary
     ($)     




Bonus
   ($)   

Other
Annual
Compen-
sation
     ($)     


Restricted
Stock
Award(s)
     ($)     




Options/
SARs(#)



LTIP
Payouts
    ($)    



All Other
Compensa-
tion ($)

Laith I. Nosh, President & CEO

2004

$82,500

-0-

8,855

-0-

550,000

-0-

-0-

Laith Nosh, President & CEO

2003

-0-

-0-

-0-1

-0-

-0-

-0-

-0-

Richard Achron, past President & CEO

2003

-0-

-0-

-0-2

-0-

-0-

-0-

-0-

1 Mr. Nosh became President & CEO of Ikona Gear International, Inc. on October 27, 2003 when Oban Mining Inc. acquired Ikona Gear USA, Inc. Mr. Nosh received no compensation prior to this date for his services, except from Ikona Gear USA, Inc. Mr. Nosh received his compensation in the form of management fees paid to his consultancy, Diversified Sciences Limited.

2 Mr. Achron was our sole employee prior to the acquisition of Ikona Gear International, Inc. on October 27, 2003. Mr. Achron received no compensation for his services. Mr. Achron resigned as President and Chief Executive Officer on October 30, 2003, upon completion of the acquisition of Ikona Gear International, Inc. Mr. Achron resigned as director on January 22, 2004.

None of the current executive officers were either employed or served in an executive or employment capacity with us prior to assuming their duties for Ikona on October 28, 2003, subsequent to the last fiscal year of Ikona Gear. Upon acquiring Ikona Gear International, Inc., we adopted the fiscal year end of Ikona, being August 31, 2004. Prior to acquiring Ikona, our prior fiscal year end was December 31, 2002.

No executive officer will receive perquisites and other personal benefits which, in the aggregate, exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus paid during the fiscal year.

No options were granted during the last completed fiscal year to any of the named executive officers.

No options were exercised during the year ended August 31, 2004, and there were no unexercised options held by executive officers.

Employment Agreements

As part of the merger agreement with our predecessor company, we assumed a consulting services agreement with Mr. Laith I. Nosh, our President and Chief Executive Officer, dated November 1, 2002. The agreement continues until Mr. Nosh provides six months' notice or termination. Mr. Nosh is to receive $90,000 per annum or $7,500 per month and the salary is to be approved by the Board on November 1 of each year. There is no commitment to increase Mr. Nosh's salary, but his salary is subject to upward review only. We also provide to Mr. Nosh a car allowance of C$1,150 ($863) per month. While we have no obligation to provide for Mr. Nosh's retirement savings, we have agreed in his employment contract to contribute to a retirement savings plan at such time as the board of directors approves such a plan.

As part of the merger agreement with our predecessor company, we assumed a consulting agreement with 110980 Investments Ltd., for the services of Mr. Dal Brynelsen, our Executive Vice President, dated March 1, 2003, which continues for a term of one year. The agreement has been renewed and renews automatically on an annual basis until terminated with a 60-day notice requirement. Mr. Brynelsen is to receive C$90,000 per year. Mr. Brynelsen is also eligible to receive stock options.

Our consulting agreement with Raymond L. Polman, our Chief Financial Officer and one of our directors, is dated December 1, 2003. The agreement continues until we give three months' notice of termination to Mr. Polman. Mr. Polman is to receive $90,000 per year. There is no commitment to increase Mr. Polman's salary, but his salary is subject to upward review only.

Indemnification and Limitation on Liability of Directors

       Our Articles of Incorporation provide that we shall indemnify, to the fullest extent permitted by Nevada law, any director, officer, employee or agent of the corporation against any and all expenses or liability reasonably incurred by him in connection with any action, suit or proceeding to which he may be a party by reason of his being or having been a director, officer, employee or agent of the Corporation. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

Enforceability of Civil Liability

        Most of our of directors and executive officers are residents of Canada and a substantial portion of our assets and the assets of these persons are located outside of the United States. As a result, it may be difficult or impossible for U.S. investors to effect service of process within the United States upon us or such directors and officers, or any experts named in this prospectus located outside the United States, or to realize against them upon judgments of courts of the United States predicated upon the civil liabilities of our directors or officers, or any experts named in this prospectus located outside the United States, under U.S. federal securities laws or securities or blue sky laws of any state within the United States. We believe that a judgment of a U.S. court predicated solely upon the civil liability under the Securities Act and/or the Exchange Act would likely be enforceable in Canada if the U.S. court in which the judgment was obtained had a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. We cannot assure you that this will be the case. There is substantial doubt, however, whether an action could be brought in Canada in the first instance on the basis of liability predicated solely upon such laws.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Diversified Sciences Limited., a consulting firm that is 100% owned by our Chief Executive Officer, provides services to us including the services of Laith I. Nosh as President & CEO and in developing and executing our business plan. Total payments to Diversified Sciences Limited in the period September 1, 2002 to August 31, 2004 were $77,850, all of which was payment for Mr. Nosh's services.

       Ikona Gear (Canada) Inc. an engineering firm that is 100% owned by our Chief Executive Officer, provided engineering services to us including the services of Barrie Freeke, our most senior engineering resource. Total payments to Ikona Gear (Canada) Inc in the period September 1, 2002 to August 31, 2004 were $235,155. Effective November 1, 2003, all of the functions of Ikona Gear (Canada) Inc. were assumed by Ikona Gear Corp., a new British Columbia incorporated company and our wholly-owned subsidiary. We have not been invoiced by Ikona Gear (Canada) Inc. since October 31, 2003.

       110980 Investments Ltd., a consulting firm that is 100% owned by the spouse of our Executive Vice President, provides services to us, including the services of Mr. Dal Brynelsen, as Executive Vice President. Total payments to 110980 Investments Ltd. in the period September 1, 2002, to August 31, 2004 were $60,959, all of which was payment for Mr. Brynelsen's services.

       Nomadic Financial Corp., a consulting firm that is 100% owned by our Chief Financial Officer, provides services to us including the services of Raymond L. Polman, CA as CFO. Total payments to Nomadic Financial Corp. in the period September 1, 2003 to August 31, 2004 were $72,688, all of which was payment for Mr. Polman's services.

 

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

       The following table sets forth information with respect to beneficial ownership of our common stock by:
 

*

each person who beneficially owns more than 5% of the common stock;

 

*

each of our executive officers named in the Management section;

 

*

each of our Directors; and

 

*

all executive officers and Directors as a group.

The table shows the number of shares owned as of August 31, 2005 and the percentage of outstanding common stock owned as of August 31, 2005. Each person has sole voting and investment power with respect to the shares shown, except as noted.





Name and Address


Number of Shares
Of Common Stock Beneficially
     Owned (1)     


Percentage of Outstanding Shares Owned
Current
     (as of 5/31/2005) (2)     

Laith Nosh
1041 Millstream Road
West Vancouver, BC
Canada V7S2C6

6,550,000(3)

 

 

 

27.2

Mr. Dal Brynelsen
5825 San Soucie Road, RR 1, S11
Halfmoon Bay, BC
Canada

1,993,416(4)

 

 

 

8.3

Raymond Polman
2492 West 45th Avenue
Vancouver, BC
V6M 2J8 Canada

341,000(5)

1.4

Mr. Simon Anderson
609 Granville Street, Suite 880, Vancouver, BC,
Canada, V7Y 1G5

490,000(6)

2.0

     

Nicola Simon
2115 Ferndale Ave
Vancouver, BC, Canada
V5L 1Y3

Joe Vosburgh
10766 - 164B Street
Surrey, BC V4N 5J3

120,000(7)

 

100,000(8)

  

0.0




0.0
         

All Officers and Directors as a Group
(6 persons)

9,594,416

 

 

 

38.1

________________

(1)

Beneficial ownership is based on information provided to us, and the beneficial owner has no obligation to inform us of or otherwise report any changes in beneficial ownership. Except as indicated, and subject to community property laws when applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
   

(2)

The percentages shown are calculated based upon 25,149,292 shares of common stock outstanding on August 31, 2005. In calculating the percentage of ownership, unless as otherwise indicated, all shares of common stock that the identified person or group had the right to acquire within 60 days of the date of this Prospectus upon the exercise of options and warrants are deemed to be outstanding for the purpose of computing the percentage of shares of common stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person.
   

(3)

Mr. Nosh is a director and our President and Chief Executive Officer. Of the 6,550,000 shares, 3,250,000 are held directly by Mr. Nosh; an aggregate of 2,725,000 shares are held by Diversified Sciences Limited, a controlled corporation of Mr. Nosh; and an aggregate of 25,000 shares are held of record by Ikona Gear Technologies, Inc., also a controlled corporation of Mr. Nosh. This includes 550,000 shares of common stock that are subject to an option. Of the shares subject to an option, 362,500 are fully vested and could be purchased within 60 days from prospectus date.
   

(4)

Mr. Brynelsen would be deemed the beneficial owner of an aggregate of 1,993,416 shares of our common stock. Of those shares, 900,000 are held directly by Mr. Brynelsen; and an aggregate of 693,416 shares are held by Mr. Brynelsen's spouse Ms. Denise Broderick. This includes 400,000 shares of common stock that are subject to an option. Of the shares subject to an option, 362,500 are fully vested and could be purchased within 60 days from prospectus date.

   

(5)

Mr. Polman is a director and Chief Financial Officer. This represents shares of common stock that are subject to option. An option to purchase 100,000 shares is fully vested and may be exercised in whole or in part at any time before December 1, 2010. An option to purchase up to 241,000 is subject to monthly vesting provisions between December 1, 2003 and December 1, 2005. Of the shares subject to an option, 280,750 are fully vested and could be purchased within 60 days from prospectus date
   

(6)

Mr. Anderson is a director and Secretary. Represents 115,000 shares of common stock that are subject to an option, and 375,000 shares beneficially owned by Mr. Anderson through MCSI Capital Corp. in which Mr. Anderson is a 50% partner. All of the options may be exercised in whole or in part within 60 days from prospectus date.

(7)

Includes 20,000 shares of common stock owned directly by Ms. Simon, and options exercisable to purchase 100,000 shares at an exercise price of $.75 per share..

(8)

Consists of options exercisable to purchase 100,000 shares at an exercise price of $0.50 per share.

 

SELLING SECURITYHOLDERS

       The Selling Securityholders are offering to sell 1,046,667 shares of our common stock. None of the Selling Securityholders has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates, except as noted.

       Of the securities being offered:
 

*

1,046,667 related to 1,046,667 units sold in March 2005 for $0.75 per unit, comprising 1,046,667 shares and 1,046,667 warrants to purchase stock at $1.00 per share if exercised on or before March 31, 2006, or $1.40 per share if exercised from April 1, 2005 to March 31, 2007.

       The following table lists the Selling Securityholders eligible to sell shares of common stock under this Prospectus, the number of shares beneficially owned by each Selling Securityholder prior to this offering, and the maximum number of shares each Selling Securityholder may sell under this Prospectus. We will not receive any of the proceeds from the sale of our common stock by the Selling Securityholders. The number of shares owned by each Selling Securityholder after the offering will depend upon the number of shares actually sold by each Selling Securityholder.

Number of
Shares
Beneficially
Owned Prior to
Offering(1)(2)


Maximum
Number of
Shares to be Sold in
  Offering  

Number of
Shares
Beneficially
Owned after
  Offering 






Percent(3)

Petrus Funds(4)

1,333,334

666,667

666,667

2.7%

Greg Pendura

50,000

25,000

25,000

0.1%

ING Bank (Suisse) SA(5)

200,000

100,000

100,000

0.4%

Banque Piguet et Cie SA(6)

400,000

200,000

200,000

0.8%

Union Bancaire Privee(7)

60,000

30,000

30,000

0.1%

Rathbone Nominees Limited(8)

       50,000

       25,000

      25,000

0.1%
         
 

2,093,334

1,046,667

1,046,667

4.2%

___________________

(1)

The number of shares indicated includes shares acquired directly from us by the Selling Securityholders and includes shares which are issuable upon the exercise of warrants held by the Selling Securityholders.
   

(2)

Beneficial ownership is based on information provided to us, and the beneficial owner has no obligation to inform us of or otherwise report any changes in beneficial ownership. Except as indicated, and subject to community property laws when applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
   

(3)

The percentages shown are calculated based upon 25,149,292 of common stock outstanding on May 31, 2005. In calculating the percentage of ownership, unless as otherwise indicated, all shares of common stock that the identified person or group had the right to acquire within 60 days of the date of this prospectus upon the exercise of options and warrants are deemed to be outstanding for the purpose of computing the percentage of shares of common stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person.
   

(4)

Voting and investment power is exercised by Mr. Pierre Moncheur.
   

(5)

Voting and investment power is exercised by Andre Heudorf
   

(6)

Voting and investment power is exercised by Jaques Pitschi
   

(7)

Voting and investment power is exercised by F. Rossi
   

(8)

Voting and investment power is exercised by Mr. Anthony Webster

       We will pay all expenses to register the shares, except that the Selling Securityholders will pay any underwriting and brokerage discounts, fees and commissions, specified attorneys' fees and other expenses to the extent applicable to them.

       We have agreed to indemnify the Selling Securityholders and certain affiliated parties against specified liabilities, including liabilities under the Securities Act, as amended, in connection with this offering. The Selling Securityholders have agreed to indemnify us and our directors and officers, as well as any persons controlling us, against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors or officers, or persons controlling us, we have been advised that in the opinion of the SEC this kind of indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

USE OF PROCEEDS

       We will not receive any proceeds when Selling Securityholders sell shares of common stock under this Prospectus. We have previously received proceeds from the sale of the common stock. We are registering this stock because we committed to do so at The time we sold the underlying units.

 

PLAN OF DISTRIBUTION

       This Prospectus covers the sale of shares of common stock by the Selling Securityholders of shares of our common stock which they have already purchased from us. We are not registering the resale of the warrants by the Selling Securityholders.

       Selling Securityholders may sell their shares of common stock either directly or through a broker-dealer or other agent at prices related to prevailing market prices or negotiated prices, in one or more of the following kinds of transactions:
 

*

A block trade in which a broker or dealer will attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transaction.
     
 

*

Purchases by a broker or dealer as principal and resale by a broker or dealer for its account.
     
 

*

Ordinary brokerage transactions and transactions in which a broker solicits a buyer.
     
 

*

In privately negotiated transactions not involving a broker or dealer.
     
 

*

Transactions in the over-the-counter market;
     
 

*

Transactions on a stock exchange that lists our common stock, or transactions negotiated between Selling Securityholders and purchasers, or otherwise.

       Broker-dealers or agents may purchase shares directly from a Selling Securityholder or sell shares to someone else on behalf of a Selling Securityholder. Broker-dealers may charge commissions to both Selling Securityholders selling common stock, and purchasers buying shares sold by a Selling Securityholder. If a broker buys shares directly from a Selling Securityholder, the broker may resell the shares through another broker, and the other broker may receive compensation from the Selling Securityholder for the resale.

       To the extent required by laws, regulations or agreements we have made, we will file a Prospectus supplement during the time the Selling Securityholders are offering or selling shares covered by this Prospectus in order to add or correct important information about the plan of distribution for the shares.  We will file a Prospectus supplement when, for example, a successor to the named selling securityholder wishes to sell under this prospectus, identifying the successor as a selling securityholder.

       In addition to any other applicable laws or regulations, Selling Securityholders must comply with regulations relating to distributions by Selling Securityholders, including Regulation M under the Securities Exchange Act of 1934, as amended. Regulation M prohibits Selling Securityholders from offering to purchase or purchasing our common stock at certain periods of time surrounding their sales of shares of our common stock under this Prospectus.

       Some states may require that registration, exemption from registration or notification requirements be met before Selling Shareholders may sell their common stock. Some states may also require Selling Securityholders to sell their common stock only through broker-dealers.

DESCRIPTION OF SECURITIES

Common Stock

       We are authorized to issue 100,000,000 shares of common stock, with par value of $0.00001. Except as otherwise expressly provided by law, the common stock have voting rights on all matters requiring a vote of stockholders, voting together with the holders of preferred stock, as one class. Each share of common stock issued and outstanding shall be identical in all respects, and no dividends shall be paid on any shares of common stock unless the same is paid on all shares of common stock outstanding at the time of such payment.

       There are no limitations under the laws of the State of Nevada, in the charter, or any other of our constituent documents on the right of foreigners to hold or vote our shares. However, under the provisions of the Investment Canada Act, when control of a Canadian business is acquired by a non-Canadian, the transaction may be reviewable in certain circumstances by Investment Canada, an agency of the federal government of Canada. Reviewable transactions are those in which a non-Canadian acquires the assets of a Canadian business or the voting shares of a Canadian corporation the value of which assets or shares exceeds C$5 million. Also, certain transactions are specifically exempted from review.

       There is no cumulative voting with respect to the election of Directors, with the result that the holders of more than 50% of the shares voting for the election of Directors can elect all of the Directors. The holders of common stock are entitled to receive dividends if declared by the Board of Directors out of funds legally available for them. Generally, cash dividends paid by Canadian corporations to non-resident stockholders are subject to a withholding tax of 25 percent. However, pursuant to Article X[2] of the Canada-United States tax treaty, dividends paid to a resident are only subject to a 15 percent withholding tax. Further, if the United States resident is a company which owns 10 percent or more of the voting shares of the Canadian company paying the dividends, the withholding tax is reduced to 5 percent. In addition to dividend withholding, interest paid to United States residents is subject to a 10 percent withholding tax pursuant to Article XI[2] of the Canada-United States tax treaty.

       In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of shares of common stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock.

Warrants

       We have outstanding warrants exercisable to purchase up to 2,319,016 shares of our common stock at a weighted average exercise price of $1.00 per share through 2006, and $1.40 during 2007. Holders of the Warrants do not possess any rights as our stockholders. Holders of the Warrants have no voting, preemptive, liquidation or other rights of shareholders, and no dividends will be paid on the Warrants or the shares underlying the Warrants. In the event of our liquidation, dissolution or winding up, the holders of the Warrants will not be entitled to participate in the distribution of our assets. The principal terms of the outstanding warrants are:

 


Number

2006
Exercise Price

2007
Exercise Price


Expiry Date

310,332

$1.00

$1.40

February 28, 2005

677,469

$1.00

$1.40

March 29, 2005

231,215

$1.00

$1.40

April 30, 2005

3,333

$1.00

$1.40

July 31, 2005

1,046,667

$1.00

$1.40

March 31, 2008

     50,000

$0.75

$0.75

March 31, 2010

2,319,016

      

Transfer Agent

       Our transfer agent is Signature Stock Transfer, One Preston Park, 2301 Ohio Drive - Suite 100, Plano, Texas, USA, 75093. Their telephone numbers are 972-612-4120 (voice), 972-612-4122 (fax).

Reports to Shareholders

       We intend to furnish annual reports to shareholders which will include audited financial statements reported on by our certified public accountants. In addition, we may issue unaudited quarterly or other interim reports to shareholders as we deem appropriate. We will comply with the periodic reporting requirements imposed by the Securities Exchange Act of 1934.

LEGAL MATTERS

       The validity of the issuance of the common stock offered hereby will be passed upon for us by Clifford L. Neuman, P.C. of Boulder, Colorado.

EXPERTS

       Our consolidated financial statements for the years ended August 31, 2004 and 2003 have been included herein in reliance on the report of Dohan and Company, P.A., CPA's independent certified public accountants, appearing elsewhere herein, given upon the authority of that firm as experts in auditing and accounting.

 

ADDITIONAL INFORMATION

       We file annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy any document we file at the Commission's Public Reference Room in Washington, D.C. Please call the Commission at 1-800-SEC-0330 for further information on the Public Reference Rooms. You can also obtain copies of our Commission filings by going to the Commission's Website at http://www.sec.gov.

       We have filed with the Commission a Registration Statement on Form SB-2 to register the shares of our common stock and common stock warrants to be sold by the Selling Securityholders and issued pursuant to the exercise of the warrants. This Prospectus is part of that Registration Statement and, as permitted by the Commission's rules, does not contain all of the information set forth in the Registration Statement. For further information about us or our common stock, you may refer to the Registration Statement and to the exhibits filed as part of the Registration Statement. You can review a copy of the Registration Statement and its exhibits at the public reference rooms maintained by the Commission and on the Commission's Website as described above.

 

IKONA GEAR INTERNATIONAL, INC.
(A Development Stage Company)

Consolidated Financial Statements
(Expressed in United States Dollars)

May 31, 2005
(Unaudited)

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
(Unaudited)

May 31,
2005
   

     ASSETS

 
   

Current:

  

     Cash

$  750,905 

     Refundable tax credits

11,374 

     Prepaid expenses

18,591 

     Deferred taxes, net of valuation allowance of $1,039,523

                - 

          Total current assets

780,870 

     Property and equipment (Note 5)

161,574 

          Total assets

$ 942,444 

 
     LIABILITIES AND STOCKHOLDERS' EQUITY   

Current liabilities:

  

     Accounts payable and accrued liabilities

$    95,543 

     Due to related parties (Note 6)

      14,885 

          Total current liabilities

   110,428 

     Commitments and contingencies (Notes 2 and 11)

  
   

Stockholders' equity

  

     Common stock (Note 7)

  

     Authorized

  

          100,000,000 common shares, each with par value of $0.00001

  

          Issued and outstanding

  

          25,149,292 common shares

251 

     Additional paid-in capital

3,851,785 

     Accumulated deficit during the development stage

(3,020,020)

     Total stockholders' equity

    832,016 

Total liabilities and stockholders' equity

$  942,444 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)

Cumulative Amounts From Inception (August 16, 2001) to 
May 31, 2005

Three Months
Ended
May 31,

Three Months
Ended
May 31,





Nine Months
Ended
May 31,





Nine Months
Ended
May 31,

             2005

              2004

             2005

             2004

REVENUES

          

     Engineering services

$   211,755 

$          11,567 

$        33,645 

$        14,666 

$     114,106 
           

EXPENSES

          

     Amortization and
         depreciation

121,244 

21,090 

8,017 

60,587 

16,767 

     Business development

547,671 

67,844 

55,288 

204,411 

163,980 

     Corporate finance

233,496 

32,255 

22,324 

81,055 

50,338 

     Foreign exchange (gain)
           loss

(7,705)

1,600 

- 

(7,705)

- 

     General and administrative

188,947 

20,041 

19,757 

83,036 

46,271 

     Investor relations (Note 8)

358,064 

85,402 

9,135 

251,879 

61,143 

     Listing and filing fees

16,546 

1,227 

6,435 

5,066 

10,393 

     Professional fees

199,629 

21,733 

19,124 

53,520 

87,907 

     Rent

90,949 

16,969 

10,151 

53,844 

24,683 

     Research and development

1,122,520 

173,192 

65,228 

447,843 

204,122 

     Travel and related

      184,333 

           30,329 

         38,954 

          60,193 

        67,268 

  (3,055,694)

(471,682)

(254,413)

(1,293,729)

(732,872)

OTHER INCOME(EXPENSE)

     Interest income

7,682 

2,610 

1,256 

6,426 

1,256 

     Impairment of patents and
          trademark

      (183,763)

                    - 

                    - 

                    - 

                    - 

      (176,081)

            2,610 

             1,256 

            6,426 

             1,256 

Loss before income taxes

(3,020,020)

(457,505)

(219,512)

(1,272,637)

(617,510)

Income taxes

                   - 

                    - 

                    - 

                    - 

                    - 

Net loss for the period

$ (3,020,020)

$(457,505)

$     (219,512)

$   (1,272,637)

$     (617,510)

Basic and diluted net loss
     per share

                     

$          (0.02)

$          (0.01)

$           (0.05)

$           (0.03)

Weighted average number of common shares outstanding

                     

   24,792,332 

   23,743,684 

   24,326,899 

   22,814,079 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)

Cumulative Amounts From Inception (August 16, 2001) to 
May 31, 2005

Nine Months Ended
May 31,

2005

2004

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$   (3,020,020)

$  (1,272,637)

$     (617,510)

Adjustments to reconcile net loss to net cash used in operating activities:

      

     Amortization and depreciation

121,244 

60,587 

16,767 

     Investor relations fees paid by stock options

65,964 

27,206 

24,602 

     Consulting fees paid by common stock

160,077 

124,192 

- 

     Corporate finance fees paid by common stock 
         (Note 7)

7,995 

7,995 

- 

     Gain on disposal of assets

(114)

- 

- 

     Impairment of patents and trademark

183,763 

- 

- 

Change in operating assets and liabilities:

      

     Refundable tax credits

(11,374)

2,898 

(18,257)

     Prepaid expenses

(18,591)

(1,769)

(11,974)

     Advances to related party

- 

- 

35,805 

     Accounts payable and accrued liabilities

95,543 

(2,683)

41,785 

     Due to related party

           14,885 

          14,724 

                   - 

     Cash used in operating activities

(2,400,628)

   (1,039,487)

(528,782)

CASH FLOWS FROM FINANCING ACTIVITIES

     Advances received from the Company
          prior to recapitalization

155,000 

- 

155,000 

     Due to related parties

(121,100)

- 

(83,710)

     Issuance of common stock, net of issuance costs

      3,353,000 

      730,050 

    1,873,398 

     Cash provided by financing activities

      3,386,900 

      730,050 

    1,944,688 

CASH FLOWS FROM INVESTING ACTIVITIES

     Property and equipment acquired for cash

(237,302)

(65,457)

(47,356)

     Proceeds on disposal of assets

             1,935 

- 

- 

     Cash used in investing activities

       (235,367)

       (65,457)

        (47,356)

NET INCREASE (DECREASE) IN CASH

750,905 

(374,894)

1,368,550 

CASH AT BEGINNING OF PERIOD

- 

    1,125,799 

            2,226 

CASH AT END OF PERIOD

$      750,905 

$    750,905 

$  1,370,776 

CASH PAID FOR:

     Interest

$                 - 

$               - 

$                 - 

     Income taxes

$                 - 

$               - 

$                 - 

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
May 31, 2005

Note 1 - The Company and Nature of Operations

Ikona Gear International, Inc. (the "Company") was incorporated in the State of Nevada on September 20, 2000. The Company is in business to develop and commercialize a unique, patented gearing technology. The Company is commercializing its patented technology in applications it establishes through developing joint development alliances and entering into licensing agreements with strategic partners in vertical industrial markets. The Company is considered to be a development stage company as it has not generated significant revenues from operations.

Effective October 30, 2003, the Company consummated an Agreement and Plan of Reorganization (the "Agreement") pursuant to which it acquired 100% of the issued and outstanding shares of common stock of Ikona Gear USA, Inc. ("Ikona USA"). Under the terms of the Agreement, the shareholders of Ikona USA received, pro rata, an aggregate of 15,041,633 shares of common stock of the Company in exchange for 100% of the outstanding shares of Ikona USA. A principal shareholder of the Company surrendered for cancellation 14,500,000 shares of common stock, which resulted in the Ikona USA shareholders acquiring shares representing approximately 70% of the total issued and outstanding shares of the Company. As a result, the transaction was accounted for as a recapitalization of Ikona USA.

The consolidated statements of operations, stockholders' equity (deficiency) and cash flows of the Company prior to October 30, 2003, are those of Ikona USA. The Company's consolidated date of incorporation is considered to be August 16, 2001, the date of inception of Ikona USA.

On October 31, 2003, the Company incorporated a wholly-owned subsidiary, Ikona Gear Corp., a British Columbia Corporation.

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America for interim financial information. The accompanying consolidated financial statements do not include all information and footnote disclosures required for an annual set of financial statements prepared under United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows as at May 31, 2005, and for all periods presented, have been included. Interim results for the nine-month period ended May 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year as a whole.

Note 2 - Going Concern

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America with the on-going assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. However, certain conditions noted below currently exist which raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

The operations of the Company have primarily been funded by the issuance of capital stock and advances from related parties. Continued operations of the Company are dependent on the Company's ability to complete additional equity financings or generate profitable operations in the future. Management's plan in this regard is to secure additional funds through future equity financings. Such financings may not be available or may not be available on terms reasonable to the Company.


May 31,
     2005
   

Accumulated deficit during the development stage

$(3,020,020)

Working capital

$     670,442 

Note 3 - Significant Accounting Policies

Stock-Based Compensation

Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based employee compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount employees are required to pay for the stock.

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123 and the consensus in Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services" ("EITF 96-18").

The Company generally grants stock options with exercise prices equal to, or in excess of, the quoted market price at the date of the stock option grant. The Company calculates non-employee stock-based compensation expense using the Black-Scholes model to estimate the fair value of options granted to non-employees. The Company classifies non-employee expense according to the nature of services provided.

The following table illustrates the effect on loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

Cumulative
Amounts
From
Inception
(August 16,
2001) to
May 31,
2005





Nine Months
Ended
May 31,
2005





Nine Months
Ended
May 31,
2004

Net loss, as reported

$(3,020,020)

$(1,272,637)

$   (617,510)

Deduct:
     Total stock-based employee compensation expense
     determined under fair value based method for all
     awards, net of related tax effects




(1,055,570)




(287,989)




(120,563)

Pro-forma net loss

$(4,075,590)

$(1,560,626)

$   (738,073)

Basic and diluted net loss per share, as reported

 

$         (0.05)

$        (0.03)

Basic and diluted net loss per share, pro-forma

 

$         (0.06)

$        (0.03)

A summary of stock-based compensation expenses related to non-employee stock-based compensation consultants recorded as at May 31, 2005, is as follows:

 

Cumulative
Amounts
From
Inception
(August 16,
2001 to
May 31,
           2005)





Three Months
Ended
May 31,
               2005





Three Months
Ended
May 31,
               2004





Nine Months
Ended
May 31,
              2005





Nine Months
Ended
May 31,
             2004

Net loss before non-cash compensation
expenses




$(2,821,869)




$   (391,069)




$   (194,910)




$  (1,113,244)




$   (592,908)

Less:

          

Non-Cash Compensation Expenses recorded as:

          

Corporate finance

$         7,995 

$         7,995 

$                 - 

$           7,995 

$      24,602 

Research and development

124,192 

52,605

- 

124,192 

24,602 

Investor relations

65,964 

5,836 

- 

27,206 

-   

Total non-cash
compensation expenses


$     198,151 


$        66,436 


$       24,602 


$     159,393 


$      24,602 
           

Net loss for the period

$(3,020,020)

$     (457,505)

$   (219,512)

$(1,272,637)

$   (617,510)

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153") which amends Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" 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. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.

In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, "Share Based Payment" ("SFAS 123R"). SFAS 123R supersedes APB 25 and its related implementation guidance by requiring entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions) and revises SFAS 123 as follows:

i)        Public entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value and nonpublic entities may elect to measure their liabilities to employees incurred in share-based payment transactions at their intrinsic value whereas under SFAS 123, all share-based payment liabilities were measured at their intrinsic value.

ii)       Nonpublic entities are required to calculate fair value using an appropriate industry sector index for the expected volatility of its share price if it is not practicable to estimate the expected volatility of the entity's share price.

iii)      Entities are required to estimate the number of instruments for which the requisite service is expected to be rendered as opposed to accounting for forfeitures as they occur.

iv)       Incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification whereas SFAS 123 required that the effects of a modification be measured as the difference between the fair value of the modified award at the date it is granted and the award's value immediately before the modification determined based on the shorter of (1) its remaining initially estimated expected life or (2) the expected life of the modified award.

SFAS 123R also clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF 96-18. SFAS 123R also does not address the accounting for employee share ownership plans which are subject to Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first annual reporting period that begins after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005.

The adoption of these new pronouncements are not expected to have a material effect on the Company's consolidated financial position or results of operations.

Comparative figures

Certain of the prior periods figures were re-classified to conform with the presentation adopted in the current period.

Note 4 - Patents and Trademark Rights

In September 2001, the Company acquired patent and trademark rights (the "Acquired Technology") from Diversified Sciences Limited ("Diversified") and Ikona Technologies Inc. ("Technologies"), companies related by virtue of a common director, officer and significant shareholder. The patent rights relate to planetary gearing technology and consist of a United States patent, a Canadian patent and a European patent applicable in France, Germany, Italy, Great Britain and Sweden. The US patent has a term of 17 years from the issue date and expires on November 11, 2015. The Canadian patent has a term of 20 years from the filing date and expires on July 29, 2014. The remaining patents have terms of 20 years from the date of filing the European patent and expire on July 26, 2015. The trademark acquired by the Company provides for the exclusive assignment of rights, title and interest in the "IKONA Gear TM" Canadian Trademark.

The patent acquisition agreement with Diversified required the Company to issue 2,180,000 shares of common stock at a value of $109,000 to Diversified and pay $63,000 (C$100,000) less Diversified's tax credit recoveries of $18,900 (C$30,000) relating to the patents.

The trademark acquisition agreement with Technologies required the Company to issue 20,000 shares of common stock at a value of $1,000 to Technologies, pay $62,000 to Technologies and repay amounts owing of $15,000 on behalf of Technologies.

The Acquired Technology was recorded by the Company at a cost of $231,100.

Note 4 - Patents and Trademark Rights (continued)

There is significant uncertainty regarding future revenue to be generated from intangible assets due to the fact that this is a new business with a developing technology and there are currently no comparable businesses in the intended market segments for which any reliable predictions for future revenue generation can be based.

Due to the uncertainties related to expected future undiscounted cash flows, management has concluded that the carrying value of intangible assets had been materially impaired and has written-down the entire value of intangible assets resulting in a charge of $183,763 to operations in August 2004.

Note 5 - Property and Equipment

 

                        May 31, 2005                        
 


Cost

Accumulated
Depreciation

Net
Book Value
       

Computers and Software

$      60,745

$      34,352

$      26,393

Furniture

29,542

5,391

24,151

Research and Development Equipment

70,830

13,774

57,056

Leasehold Improvements

74,182

20,208

53,974
       
 

$    235,299

$     73,725

$    161,574

Note 6 - Related Party Transactions

As of May 31, 2005, amounts due to (from) related parties consisted of the following:
 

May 31,
2005
   

Due to Directors

$     14,885

The Company entered into the following transactions with related parties during the nine months period ending May 31, 2005:
 

a)

Paid or accrued business development fees of $54,795 (2004 - $38,999) to a company controlled by a relative of a director of the Company.
 

b)

Paid or accrued business development fees of $82,798 (2004 - $42,216) to a company controlled by a director of the Company.

 

c)

Paid or accrued corporate finance fees of $73,060 (2004 - $42,838) to a company related to a director of the Company.

These transactions are in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

Note 7 - Capital Stock

In September 2001, the Company issued 2,725,000 common shares at a value of $0.04 per share for $109,000 as partial consideration on acquisition of patent rights (Note 4).

In September 2001, the Company issued 25,000 common shares at a value of $0.04 per share for $1,000 as partial consideration on acquisition of a trademark (Note 4).

In October 2001, the Company issued 8,713,416 shares to the founders of the Company at a price of $0.00001 per share for cash proceeds of $70.

In November 2001, the Company issued 263,665 common shares at a price of $0.20 per share for cash proceeds of $52,733.

In February 2002, the Company issued 1,286,335 common shares at a price of $0.20 per share for cash proceeds of $257,266.

In May 2002, the Company issued 393,750 common shares at a price of $0.20 per share for cash proceeds of $78,750.

In November 2002, the Company issued 336,250 common shares at a price of $0.20 per share for cash proceeds of $67,250.

In November 2002, the Company issued 85,800 common shares at a price of $0.20 per share for corporate finance fees of $17,160.

In January 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 67,625 common shares at a price of $0.20 per share for corporate finance fees of $13,525.

In July 2003, the Company issued 526,792 common shares at a price of $0.20 per share for cash proceeds of $105,358.

In July 2003, the Company issued 7,500 common shares at a price of $0.20 per share for corporate finance fees of $1,500.

In August 2003, the Company issued 251,250 common shares at a price of $0.40 per share for cash proceeds of $100,500.

In August 2003, the Company issued 9,250 common shares at a price of $0.40 per share for corporate finance fees of $3,700.

In October 2003, the Company acquired all the issued and outstanding capital stock of Ikona USA, which was accounted for as a recapitalization of the Company (Note 1). The issued number of shares of common stock is that of the Company with adjustments made for differences in par value between the Company and Ikona USA.

In January 2004, the Company cancelled 500,000 common shares at a par value of $0.00001 per share.

In January 2004, the Company issued 290,000 common shares at a price of $0.50 per share for cash proceeds of $145,000.

In February 2004, the Company issued 620,666 units at a price of $0.75 per unit for cash proceeds of $436,275 (gross proceeds of $465,500 net of finders' fees of $29,225). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In March 2004, the Company issued 1,354,933 units at a price of $0.75 per unit for cash proceeds of $964,926 (gross proceeds of $1,016,201 net of finders' fees of $51,275). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In April 2004, the Company issued 462,427 units at a price of $0.75 per unit for cash proceeds of $334,197 (gross proceeds of $346,822 net of finders' fees of $7,000). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In July 2004, the Company issued 3,333 units at a price of $0.75 per unit for cash proceeds of $5,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In March 2005, the Company issued 1,046,667 units at a price of $0.75 per unit for cash proceeds of $730,050 (gross proceeds of $785,000 net of finders' fees of $54,950). Each unit consists of one share of common stock and one- non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.00 per share for a period of one year.

In Apri1 2005, the Company issued 12,300 shares of common stock for services at a price of $0.65 per share in payment of corporate finance consulting fees of $7,995.

In March 2005, the Company issued 50,000 warrants at a price of $0.75 per warrant in payment of investor relations consulting fees.

Note 8 - Stock Options

Stock Options

On October 28, 2003, the Company adopted a stock incentive plan (the "2003 Stock Plan") to provide incentives to employees, directors and consultants. On October 28, 2003, the Company's stockholders approved the 2003 Stock Plan which provides for the issuance of up to 4,400,000 options with a maximum term of ten years. The board of directors has the exclusive power over the granting of options and their vesting provisions.

May 31, 2005

Number of Options

Weighted Average Exercise Price

Options outstanding, beginning of the year

1,974,000 

$      1.01 

     Issued

270,250 

0.79

     Exercised

-   

-

     Expired

      (125,000)

       (1.16)

Options outstanding, end of the period

     2,119,250 

$      0.97 

Options exercisable, end of the period

     1,531,437 

$      0.96 

Weighted average fair value of options granted in
     the year


$      0.36 

A summary of stock options outstanding at May 31, 2005, is as follows:

 


Outstanding Options

  


Exercisable Options





Exercise Price





Number

Weighted
Average
Remaining
Contractual
Life


Weighted
Average
Exercise
Price

  





Number


Weighted
Average
Exercise
Price

$0.50

65,250

2.63 years

$  0.50

  

18,124

$  0.50

$0.52

55,000

1.63 years

$  0.52

  

55,000

$  0.52

$0.60

341,000

5.50 years

$  0.60

  

280,750

$  0.60

$0.66

50,000

1.84 years

$  0.66

  

50,000

$  0.66

$1.00

50,000

0.51 years

$  1.00

  

112,500

$  1.00

$1.10

1,558,000

5.08 years

$  1.10

  

1,090,063

$  1.10

The Company uses the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:

Risk-free interest rate

4.25 %

Dividend yield rate

0.00 %

Price volatility

148.2 %

Weighted average expected life of options

4.80 years

Note 9 - Warrants

On February 28, 2005, the board of directors approved an extension and re-pricing of the outstanding warrants. The revised summary of warrants outstanding is as follows:



Issuances



Issued



Outstanding

2006
Exercise
Price

2006
Exercise
Price


Expiry
Date

February 29, 2004

310,332

310,332

$1.00

$1.40

February 29, 2007

March 29, 2004

677,469

677,469

$1.00

$1.40

March 29, 2007

April 30, 2004

231,215

231,215

$1.00

$1.40

April 30, 2007

July 31, 2004

3,333

3,333

$1.00

$1.40

July 31, 2007

March 31, 2005

1,046,667

1,046,667

$1.00

$1.40

March 31, 2008

March 31, 2005

       50,000

       50,000

$0.75

$0.75

March 31, 2010
           

Total outstanding

  2,319,016

  2,319,016

      

Note 10 - Segment Information

The Company's operations were conducted in one reportable segments, being the development and commercialization of a unique patented gearing technology, primarily in Canada and USA. Total revenue includes other income.

Nine Months
Ended
May 31, 2005

Nine Months
Ended
May 31, 2005

Nine Months
Ended
May 31, 2005

           .S.A.

           Canada

               Total

REVENUES

$     12,398 

$         8,694 

$        21,092 

EXPENSES

       (6,701)

   (1,287,028)

   (1,293,729)

NET INCOME

$       5,697 

$(1,294,121)

$  (1,272,637)

NET ASSETS

$              - 

$     832,016 

$       832,016 

Note 11- Commitments

The Company amended a consulting agreement with a director, officer and significant shareholder of the Company effective April 1, 2004, to pay monthly management fees totaling approximately $8,500 (C$11,333) (2003 $5,370 (C$7,500)). This agreement can be terminated with six months advance notice.

On June 9, 2004, the Company entered into a premises lease for office and workshop facilities for a period of 36 months commencing August 1, 2004. The premises lease commits the Company to a net annual rental expense of $36,969 (C$49,623) and additional operating costs estimated at $14,048 (C$18,857) for a period of three years with an option to extend the period to a further three years. The Company provided a deposit of three months of rent equaling $9,242 (C$12,406) of which two of the three months will be applied to rent in the final two months of the three-year lease term.

 

IKONA Gear International, Inc.
(A Development Stage Company)

Consolidated Financial Statements
(Expressed in United States Dollars)

August 31, 2004 and 2003

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Ikona Gear International, Inc.

We have audited the accompanying consolidated balance sheets of Ikona Gear International, Inc. (A Development Stage Company) (the Company) as of August 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

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 is in the development stage, has suffered recurring losses from operations, has used, rather than provided, cash from operations and has an accumulated deficit during the development stage of $1,747,383 that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

                                                                               /s/ Dohan and Company, P.A., CPA's

Miami, Florida
October 15, 2004

 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
As at August 31

 

2004

2003

ASSETS

   

Current:

    

     Cash

$  1,125,799 

$      2,226 

     Accounts receivable

14,272 

- 

     Prepaid expenses

16,822 

2,000 

     Advances to related party (Note 6)

- 

28,467 

     Deferred taxes, net of valuation allowance of $594,100 (2003 - $248,300)
       (Note 11)

                   - 

                - 

total current assets

1,156,893 

32,693 

Property and equipment (Note 5)

156,704 

- 

Patents and trademark rights (Note 4)

                   - 

198,086 

Total assets

$  1,313,597 

$   230,779 

LIABILITIES AND STOCKHOLDERS' EQUITY

   

Current liabilities:

    

     Accounts payable and accrued liabilities

$       98,226 

$               - 

     Due to related parties (Note 6)

              161 

       83,710 

     Total current liabilities

         98,387 

      83,710 

Commitments (Note 14)

    

Stockholders' equity

    

     Common stock (Note 7)

    

     Authorized

    

          100,000,000 common shares, each with par value of $0.00001

    

     Issued and outstanding

    

     24,090,325 common shares (2003 - 12,033,306 shares)

241 

120 

     Additional paid-in capital

2,962,352 

877,692 

     Accumulated deficit during the development stage

  (1,747,383)

   (730,743)

     Total stockholders' equity

   1,215,210 

    147,069 

Total liabilities and stockholders' equity

$ 1,313,597 

$  230,779 

 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Statements of Operations

Cumulative Amounts
From Inception
(August 16, 2001) to August 31, 2004

Year Ended August 31,

2004

2003

REVENUES

      

     Engineering services

$      197,089 

$     152,782 

$       44,307 

EXPENSES

      

     Amortization and depreciation

60,657 

27,643 

16,507 

     Business development

343,260 

223,616 

60,959 

     Corporate finance

152,441 

72,688 

73,138 

     General and administrative

91,533 

64,965 

11,919 

     General consulting

13,122 

- 

1,354 

     Investor relations (Note 8)

106,185 

106,185 

- 

     Listing and filing fees

11,480 

11,480 

- 

     Professional fees

146,109 

140,609 

3,000 

     Rent

37,105 

23,546 

13,559 

     Research and development

674,677 

216,329 

218,600 

     Travel and related

124,140 

98,598 

14,574 

     Impairment of patents and trademark

         183,763 

        183,763 

                   - 

      1,944,472 

     1,169,422 

413,610 

Loss before income taxes

(1,747,383)

(1,016,640)

(369,303)

Income taxes

                     - 

                    - 

                    - 


Net loss for the period

$  (1,747,383)

$  (1,016,640)

$     (369,303)
       

Basic and diluted net loss per share

  

$           (0.05)

$           (0.03)

Weighted average number of common shares outstanding

  

    21,660,390 

    11,029,572 

IKONA GEAR INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficiency)

Common Stock

      
 

Number of
Shares

Amount

Additional
Paid-in
Capital

Total

Balance at August 16, 2001 (inception)

-

$      -

$             - 

$               - 

$-   

Net Loss for the period

               -

         -

-   

               (5)

(5)

Balance at August 31, 2001

               -

$      -

$             - 

$             (5)

$(5)

Issuance of common shares on acquisition of patents at $0.04 per share, September 2001

2,725,000

$   27

$ 108,973 

$               - 

$109,000

Issuance of common shares on acquisition of trademark at $0.45 per share, September 2001

25,000

-

1,000 

- 

1,000

Issuance of common shares to founders at $0.00001 per share, October 2001

8,713,416

87

(17)

- 

70

Issuance of common shares for cash at $0.20 per share, November 2001

263,665

3

52,730 

- 

52,733

Issuance of common shares for cash at $0.20 per share, February 2002

1,286,335

13

257,253 

- 

257,266

Issuance of common shares for cash at $0.20 per share, May 2002

393,750

4

78,746 

- 

78,750

Net Loss for the year

               -

         -

              - 

    (361,435)

(361,435)

Balance at August 31, 2002

13,407,166

$ 134

$  498,685 

$  (361,440)

$137,379

Issuance of common shares for cash at $0.20 per share, November 2002

336,250

$    3

$    67,247 

$                - 

$67,250

Issuance of common shares for corporate finance fees at $0.20 per share, November 2002

85,800

1

17,159 

- 

17,160

Issuance of common shares for cash at $0.20 per share, January 2003

175,000

2

34,998 

- 

35,000

Issuance of common shares for cash at $0.20 per share, May 2003

175,000

2

34,998 

- 

35,000

Issuance of common shares for corporate finance fees at $0.20 per share, May 2003

67,625

1

13,524 

- 

13,525

Issuance of common shares for cash at $0.20 per share, July 2003

526,792

5

105,353 

- 

105,358

Issuance of common shares for corporate finance fees at $0.20 per share, July 2003

7,500

-

1,500 

- 

1,500

Issuance of common shares for cash at $0.40 per share, August 2003

251,250

2

100,498 

- 

100,500

Issuance of common shares for corporate finance fees at $0.40 per share, August 2003

9,250

1

3,699 

- 

3,700

Net loss for the year

                 -

         -

               - 

     (369,303)

(369,303)

Balance at August 31, 2003

15,041,633

$  151

$  877,661

$  (730,743)

$147,069

 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficiency)
--Continued--

      


Common Stock

  




 
 

Number of
Shares

Amount

Additional
Paid-in
Capital

Total

Recapitalization, October 2003

6,814,000 

$    68 

$   154,932

$                 

$   155,000 

Shares cancelled, January 2004

(500,000)

(5)

5

- 

- 

Issuance of common shares for cash at $0.50 per share, January 2004

290,000 

3 

144,997

- 

145,000 

Issuance of common shares for cash at $0.75 per share (gross proceeds $465,500, net of issuance costs of $29,225), February 2004

620,666 

6 

436,269

- 

436,275 

Issuance of common shares for cash at $0.75 per share (gross proceeds $1,016,201, net of issuance costs of $51,275), March 2004

1,354,933 

14 

964,912

- 

964,926 

Issuance of common shares for cash at $0.75 per share (gross proceeds $346,822, net of issuance costs of $7,000), April 2004

462,427 

4 

339,818

- 

339,822 

Issuance of common shares for cash at $0.75 per share, July 2004

6,666 

- 

5,000

- 

5,000 

Stock based compensation expense

- 

- 

38,758

- 

38,758 

Net loss for the year

               - 

          - 

                -

  (1,016,640)

   (1,016,640)

Balance at August 31, 2004

24,090,325 

$   241 

$2,962,352

$(1,747,383)

$  1,215,210 

 

Ikona Gear International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows

Cumulative Amounts
From Inception
(August 16, 2001) to August 31, 2004

Year Ended August 31,

2004

2003

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

$    (1,747,383)

$    (1,016,640)

$      (369,303)

Adjustments to reconcile net income to net cash used in operating activities:

      

     Amortization and depreciation

60,657 

27,643 

16,507 

     Investor relations fees paid by stock options

38,758 

38,758 

- 

     Consulting fees paid by common stock

35,885 

- 

35,885 

     Gain on disposal of assets

(114)

(114)

- 

     Impairment of patents and trademark

183,763 

183,763 

- 

Change in operating assets and liabilities:

      

     Accounts receivable

(14,272)

(14,272)

- 

     Prepaid expenses

(16,822)

(14,822)

(2,000)

     Advances to related party

- 

28,467 

(9,348)

     Accounts payable

98,226 

98,226 

- 

     Due to related party

                   161 

                  161 

                       -

     Cash used in operating activities

        (1,361,141)

         (668,830)

         (328,259)

CASH FLOWS FROM FINANCING ACTIVITIES

    

     Advances received from the Company
     prior to recapitalization

155,000 

155,000

- 

     Due to related parties

(121,100)

(83,710)

(16,332)

     Issuance of common stock, net of issuance costs

         2,622,950 

        1,891,023 

           343,108 

     Cash provided by financing activities

         2,656,850 

        1,962,313 

           326,776 

CASH FLOWS FROM INVESTING ACTIVITIES

    

     Property and equipment acquired for cash

(171,845)

(171,845)

- 

     Proceeds on disposal of assets

                1,935 

              1,935 

                       - 

     Cash used in investing activities

          (169,910)

        (169,910)

                       - 

Net increase (decrease) in cash

1,125,799 

1,123,573 

(1,483)

Cash at beginning of period

                       - 

2,226 

                3,709 

CASH AT END OF PERIOD

$      1,125,799 

$    1,125,799 

$              2,226 

CASH PAID FOR:

      

     Interest

$                    - 

$                   - 

$                     - 

     Income taxes

$                    - 

$                   - 

$                     - 

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
___________________________________________________________________________________

Note 1 - The Company and Nature of Operations

Ikona Gear International, Inc. (previously Oban Mining, Inc.) (the "Company") was incorporated in the State of Nevada on September 20, 2000. The Company is in business to develop and commercialize a unique, patented gearing technology. The Company is commercializing its patented technology in applications it establishes through developing joint ventures and entering into licensing agreements with strategic partners in vertical industrial markets. The Company is considered to be a development stage company as it has not generated significant revenues from operations.

Effective October 30, 2003, the Company consummated an Agreement and Plan of Reorganization (the "Agreement") pursuant to which it acquired 100% of the issued and outstanding shares of common stock of Ikona Gear USA, Inc. (formerly Ikona Gear International, Inc.)("Ikona USA"). Under the terms of the Agreement, the shareholders of Ikona USA received, pro rata, an aggregate of 15,041,633 shares of common stock of the Company in exchange for 100% of the outstanding shares of Ikona USA. A principal shareholder of the Company surrendered for cancellation 14,500,000 shares of common stock, which resulted in the Ikona USA shareholders acquiring shares representing approximately 70% of the total issued and outstanding shares of the Company. As a result, the transaction was accounted for as a recapitalization of Ikona USA.

The consolidated statements of operations, stockholders' equity (deficiency) and cash flows of the Company prior to October 30, 2003, are those of Ikona USA. The Company's consolidated date of incorporation is considered to be August 16, 2001, the date of inception of Ikona USA. Following the acquisition, the Company changed its name from Oban Mining, Inc. to Ikona Gear International, Inc.

On October 31, 2003, the Company incorporated a wholly-owned subsidiary, Ikona Gear Corp., a British Columbia Corporation.

Note 2 - Going Concern

These financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America with the on-going assumption that the Company will be able to

realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. However, certain conditions noted below currently exist which raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

The operations of the Company have primarily been funded by the issuance of capital stock and advances from related parties. Continued operations of the Company are dependent on the Company's ability to complete additional equity financings or generate profitable operations in the future. Management's plan in this regard is to secure additional funds through future equity financings. Such financings may not be available or may not be available on terms reasonable to the Company.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
___________________________________________________________________________________

     Note 2 - Going Concern (continued)

 


2004


2003
     

Accumulated deficit during the development stage

$ (1,747,383)

$ (730,743)

Working capital (deficiency)

$  1,058,506 

$   (51,017)

Note 3 - Significant Accounting Policies

The significant accounting policies adopted by the Company are as follows:

(a) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

(b) Property and Equipment

Property and equipment consist of computers and software, furniture, research and development equipment and leasehold improvements. Equipment is recorded at cost less accumulated depreciation, and depreciation is calculated over its useful life of between two and five years using the straight-line method. Leasehold improvements are recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the three year term of the lease.

(c) Long-Lived or Disposal of Assets

The Company follows FASB Statement No. 144 (SFAS 144), "Accounting for the Impairment of Long-Lived Assets." SFAS 144 requires that long-lived assets to be held and use be reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003

___________________________________________________________________________________

Note 3 - Significant Accounting Policies (continued)

(d) Intangible Assets

Intangible assets, consisting of patent applications, are recorded at cost and amortized using the straight-line method over the life of the patent which is twenty years from the date of the application of the patent or seventeen years from the date of grant, which ever is longer.

The carrying value of intangible assets is evaluated for potential impairment on an annual basis or more often if conditions warrant. In order to determine whether an impairment exists, management considers the undiscounted cash flows expected to be generated by intangible assets as well as market related values, among other things. If the carrying value of intangible assets exceeds fair value, the carrying value of intangible assets will be written down to fair value in the year the impairment occurs.

(e) Fair Value of Financial Instruments

The Company's financial instruments consist of cash, accounts receivable, prepaids, accounts payable and accrued liabilities, and due to related parties. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.

(f) Revenue Recognition

Revenues from engineering services is recognized when the service has been provided and collection is reasonably assured.

(g) Research and Development Expenses

Costs incurred for research and development are expensed as incurred.

(h) Stock-Based Compensation

Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based employee compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount employees are required to pay for the stock.

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123 and the consensus in Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
___________________________________________________________________________________

Note 3 - Significant Accounting Policies (continued)

(h) Stock-Based Compensation (continued)

The following table illustrates the effect on loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

Cumulative
Amounts
From
Inception
(August 16,
2001) to
August 31,
2004





Year
Ended
August 31,
2004





Year
Ended
August 31,
2003

Loss, as reported

$(1,747,383)

$(1,016,640)

$   (369,303)
       

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects




      (767,581)




     (767,581)




                  - 
       

Pro-forma loss

$(2,514,964)

$(1,784,221)

$   (369,303)
       

Basic and diluted loss per share, as reported

  

$         (0.05)

$         (0.03)

Basic and diluted loss per share, pro-forma

  

$         (0.07)

$         (0.03)

(i) Loss per share

Basic loss per share is computed by dividing the loss for the period attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share takes into consideration shares of common stock outstanding (computed under basic loss per share) and potentially dilutive shares of common stock. Diluted loss per share is not presented separately from loss per share since there are no potentially dilutive shares of common stock outstanding. At August 31, 2004, the total number of potentially dilutive shares of common stock excluded from basic net loss per share was 3,171,349 (August 31, 2003 - Nil).

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003

_________________________________________________________________________________

Note 3 - Significant Accounting Policies (continued)

(j) Income Taxes

A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expenses (benefits) result from the net change during the period of deferred tax assets and liabilities.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

(k) Foreign Currency Translation

Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Non-monetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in the statement of operations. Revenues and expenses are translated at the rates of exchange prevailing on the dates such items are recognized in the statement of operations. Foreign exchange gains (losses) of $3,217 (2003 - $0) are included in the operating statement within the "General and administrative" expenses account

(l) Recent Accounting Requirements

In January 2003, FASB issued Financial Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46") (revised in December 17, 2003). The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of lass from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 are required in financial statements of public entities that have interests in variable interest entities for periods ending after December 15, 2003. The consolidation requirements for all other types of entities are required in financial statements for periods ending after March 15, 2004.

The adoption of this new pronouncement is not expected to have a material effect on the Company's consolidated financial position or results of operations.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003_________________________________________________________________________________

Note 3 - Significant Accounting Policies (continued)

(m) Comparative Figures

Certain comparative figures have been reclassified to conform with the current year's presentation.

Note 4 - Patents and Trademark Rights

In September 2001, the Company acquired patent and trademark rights (the "Acquired Technology") from Diversified Sciences Limited ("Diversified") and Ikona Technologies Inc. ("Technologies"), companies related by virtue of a common director, officer and significant shareholder. The patent rights relate to planetary gearing technology and consist of a United States patent, a Canadian patent and a European patent applicable in France, Germany, Italy, Great Britain and Sweden. The US patent has a term of 17 years from the issue date and expires on November 11, 2015. The Canadian patent has a term of 20 years from the filing date and expires on July 29, 2014. The remaining patents have terms of 20 years from the date of filing the European patent and expire on July 26, 2015. The trademark acquired by the Company provides for the exclusive assignment of rights, title and interest in the "IKONA Gear TM" Canadian Trademark.

The patent acquisition agreement with Diversified required the Company to issue 2,180,000 shares of common stock at a value of $109,000 to Diversified and pay $63,000 (C$100,000) less Diversified's tax credit recoveries of $18,900 (C$30,000) relating to the patents.

The trademark acquisition agreement with Technologies required the Company to issue 20,000 shares of common stock at a value of $1,000 to Technologies, pay $62,000 to Technologies and repay amounts owing of $15,000 on behalf of Technologies.

The Acquired Technology was recorded by the Company at a cost of $231,100.

There is significant uncertainty regarding future revenue to be generated from intangible assets due to the fact that this is a new business with a developing technology and there are currently no comparable businesses in the intended market segments for which any reliable predictions for future revenue generation can be based.

Due to the uncertainties related to expected future undiscounted cash flows, management has concluded that the carrying value of intangible assets had been materially impaired and has written-down the entire value of intangible assets resulting in a charge of $183,763 to operations.

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 5 - Property and Equipment

   

August 31,
2004

  
 



                Cost


Accumulated
Depreciation

Net
Book
Value
       

Computers and Software

$      54,542

$     10,460

$     44,082

Furniture

17,184

1,062

16,122

Research and Development Equipment

23,935

1,616

22,319

Leasehold Improvements

         74,181

                 -

      74,181
       
 

$     169,842

$     13,138

$  156,704

Note 6 - Related Party Transactions

In September 2001, the Company entered into an agreement with Ikona Gear (Canada) Inc. ("Ikona Canada"), a company controlled by a common director, officer and significant shareholder, whereby Ikona Canada provides certain research and development and related services to the Company. Under this agreement, the Company compensated Ikona Canada for all direct expenses plus a 5% profit margin. During the fiscal year ended August 31, 2004, total expense amounted to $132,162 (2003 - $100,232). During the year ended August 31, 2004, Ikona Canada received research and development tax credits of $108,905. The Company received $88,124 from Ikona Canada to settle previous overpayments of $28,467 of the Company and as a result of the research and development tax credits, after deducting the 5% profit margin. As of November 1, 2003, operations were discontinued and assumed by Ikona Gear Corp.

As of August 31, 2004, amounts due to (from) related parties consisted of the following:

August 31,
2004

August 31,
2003
     

Directors

$161

$            -

Diversified

-

21,862
 

       -

      61,848
     

$161

$   83,710

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 6 - Related Party Transactions (continued)

The Company entered into the following transactions with related parties during the year ended August 31, 2004:

a) Paid the balance of $61,848 owing to Technologies pursuant to the purchase of the "IKONA Gear TM" Canadian Trademark (Note 4).

b) Paid or accrued business development fees of $55,762 (2003 - $60,959) to a company controlled by a relative of a director of the Company.

c) Paid or accrued business development fees of $71,545 (2003 - $0) to a company controlled by a director of the Company.

e) Paid or accrued corporate finance fees of $65,188 (2003 - $0) to a company related to a director of the Company.

f) Pair or accrued general and administrative fees of $0 (2003 - $15,240) to a company controlled by a director of the Company

g) Paid or accrued corporate finance fees of $0 (2003 - $37,253) to a company controlled by a director of the Company.

h) Paid or accrued research and development expenses of $0 (2003 - $54,592) to a company controlled by a director, officer and significant shareholder of the Company.

These transactions are in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

Note 7 -Capital Stock

In September 2001, the Company issued 2,725,000 common shares at a value of $0.04 per share for $109,000 as partial consideration on acquisition of patent rights (Note 4).

In September 2001, the Company issued 25,000 common shares at a value of $0.04 per share for $1,000 as partial consideration on acquisition of a trademark (Note 4).

In October 2001, the Company issued 8,713,416 shares to the founders of the Company at a price of $0.00001 per share for cash proceeds of $70.

In November 2001, the Company issued 263,665 common shares at a price of $0.20 per share for cash proceeds of $52,733.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 7 - Capital Stock (continued)

In February 2002, the Company issued 1,286,335 common shares at a price of $0.20 per share for cash proceeds of $257,266.

In May 2002, the Company issued 393,750 common shares at a price of $0.20 per share for cash proceeds of $78,750.

In November 2002, the Company issued 336,250 common shares at a price of $0.20 per share for cash proceeds of $67,250.

In November 2002, the Company issued 85,800 common shares at a price of $0.20 per share for corporate finance fees of $17,160.

In January 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 67,625 common shares at a price of $0.20 per share for corporate finance fees of $13,525.

In July 2003, the Company issued 526,792 common shares at a price of $0.20 per share for cash proceeds of $105,358.

In July 2003, the Company issued 7,500 common shares at a price of $0.20 per share for corporate finance fees of $1,500.

In August 2003, the Company issued 251,250 common shares at a price of $0.40 per share for cash proceeds of $100,500.


In August 2003, the Company issued 9,250 common shares at a price of $0.40 per share for corporate finance fees of $3,700.

In October, 2003, the Company acquired all the issued and outstanding capital stock of Ikona USA, which was accounted for as a recapitalization of the Company (Note 1). The issued number of shares of common stock is that of the Company with adjustments made for differences in par value between the Company and Ikona USA.

In January 2004, the Company cancelled 500,000 common shares at a par value of $0.00001 per share.

In January 2004, the Company issued 290,000 common shares at a price of $0.50 per share for cash proceeds of $145,000.

In February 2002, the Company issued 1,286,335 common shares at a price of $0.20 per share for cash proceeds of $257,266.

In May 2002, the Company issued 393,750 common shares at a price of $0.20 per share for cash proceeds of $78,750.

In November 2002, the Company issued 336,250 common shares at a price of $0.20 per share for cash proceeds of $67,250.

In November 2002, the Company issued 85,800 common shares at a price of $0.20 per share for corporate finance fees of $17,160.

In January 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 175,000 common shares at a price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 67,625 common shares at a price of $0.20 per share for corporate finance fees of $13,525.

In July 2003, the Company issued 526,792 common shares at a price of $0.20 per share for cash proceeds of $105,358.

In July 2003, the Company issued 7,500 common shares at a price of $0.20 per share for corporate finance fees of $1,500.

In August 2003, the Company issued 251,250 common shares at a price of $0.40 per share for cash proceeds of $100,500.


In August 2003, the Company issued 9,250 common shares at a price of $0.40 per share for corporate finance fees of $3,700.

In October, 2003, the Company acquired all the issued and outstanding capital stock of Ikona USA, which was accounted for as a recapitalization of the Company (Note 1). The issued number of shares of common stock is that of the Company with adjustments made for differences in par value between the Company and Ikona USA.

In January 2004, the Company cancelled 500,000 common shares at a par value of $0.00001 per share.

In January 2004, the Company issued 290,000 common shares at a price of $0.50 per share for cash proceeds of $145,000.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003

_________________________________________________________________________________

Note 7 - Capital Stock (continued)

In February 2004, the Company issued 620,666 units at a price of $0.75 per unit for cash proceeds of $436,275 (gross proceeds of $465,500 net of finders' fees of $29,225). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In March 2004, the Company issued 1,354,933 units at a price of $0.75 per unit for cash proceeds of $964,926 (gross proceeds of $1,016,201 net of finders' fees of $51,275). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In April 2004, the Company issued 462,427 units at a price of $0.75 per unit for cash proceeds of $334,197 (gross proceeds of $346,822 net of finders' fees of $7,000). Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

In July 2004, the Company issued 3,333 units at a price of $0.75 per unit for cash proceeds of $5,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $3.00 per share for a period of one year.

Note 8 - Stock Options and Warrants

Stock Options

On October 28, 2003, the Company adopted a stock incentive plan (the "2003 Stock Plan") to provide incentives to employees, directors and consultants. On October 28, 2003, the Company's stockholders approved the 2003 Stock Plan which provides for the issuance of up to 4,400,000 options with a maximum term of ten years. The board of directors has the exclusive power over the granting of options and their vesting provisions.

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 8 - Stock Options and Warrants (continued)

Stock Options (continued)

2004

Number of Options

Weighted Average Exercise Price

Options outstanding, beginning of the year

-   

$       -  

   Issued

1,974,000

1.01

   Exercised

-   

-  

   Expired

            -   

         -  

   Options outstanding, end of the period

1,974,000

$   1.01

Weighted average fair value of options granted in the year

$   1.00

The fair value of 50,000 options with an exercise price of $1.00 granted on December 1, 2003, and 25,000 granted on August 1, 2004 with an exercise price of $1.00, both issued to a consultant, were recognized during the current period of $38,758 (2003 - $ nil ) has been recorded as investor relations fees in the consolidated statement of operations. The Company did not issue any stock options prior to December 1, 2003.

A summary of stock options outstanding at August 31, 2004, is as follows:
 

Outstanding Options

Exercisable Options





Exercise Price





Number

Weighted
Average
Remaining
Contractual
Life


Weighted
Average
Exercise
0





Number


Weighted
Average
Exercise
Price

$0.60

341,000

6.25 years

$  0.60

190,375

$  0.60

$1.00

75,000

3.38 years

$  1.00

75,000

$  1.00

$1.10

1,558,000

5.83 years

$  1.10

733,000

$  1.10

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 8 - Stock Options and Warrants (continued)

The Company used the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:

Risk-free interest rate

4.25 %

Dividend yield rate

0.00 %

Price volatility

106.20 %

Weighted average expected life of options

5.84 years

Warrants


Issuances


Issued


Outstanding

Exercise
Price

Expiry
Date

February 29, 2004

310,332

310,332

$3.00

February 29, 2005

March 29, 2004

677,469

677,469

$3.00

March 29, 2005

April 30, 2004

231,215

231,215

$3.00

April 30, 2005

July 31, 2004

3,333

3,333

$3.00

July 31, 2005
         

Total outstanding

1,222,349

1,222,349

    

Note 9 - Revenue

Revenues are generated from royalties and the provision of engineering services to two clients, Magna Advanced Technologies ("MAT"), and Aircast Inc. ("Aircast").

The Company entered into an agreement dated April 8, 2003, with MAT whereby the Company will allow MAT, on a sole and exclusive basis, to examine and develop automotive applications for the Acquired Technology owned by the Company. Under phase 1 of the agreement, MAT will engage in development, prototyping and testing commencing May 1, 2003, to April 30, 2004, then extended to August 31, 2004. The Company receives a monthly engineering fee of approximately $10,750 (C$15,000) during phase 1. MAT may elect to proceed to phase 2 to continue developing the technology with the intent to commercialize automotive applications. The terms of the license agreement would include royalties of between 1% to 6% of the gross selling price of automotive gearing products incorporating the technology. Subsequent to year end, the agreement with MAT was amended (note 15).

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 9 - Revenue (continued)

Aircast has agreed under Licensing Agreement to provide royalties on a calendar quarterly basis. This year Aircast has provided two royalty payments , the first being of $270 on May 11, 2004, the second being $1,685 on August 3, 2004.

Note 10 - Supplemental Disclosure With Respect to Cash Flows

The significant non-cash transactions for the year ended August 31, 2004, consisted of:
 

-

the Company recorded impairment of the Acquired Technology at a value of $183,763,

 

-

the Company disposed of assets with accumulated depreciation of $183.

The significant non-cash transaction for the year ended August 31, 2003, consisted of the Company issuing 136,140 shares of common stock at a value of $35,885 for corporate finance fees.

Note 11 - Income Taxes

A reconciliation of income taxes at statutory rates with the reported taxes is as follows:
 

2004

2003
     

Loss before income taxes

$(1,016,640)

$   (369,303)
     

Expected income tax benefit

$    345,660 

$    125,500 

Unrecognized benefit of operating loss carryforwards

     (345,660)

    (125,500)

     Income tax benefit

$                -   

$               -   

 

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 11 - Income Taxes (continued)

Significant components of the Company's deferred tax assets based on statutory tax rates are as follows:

Significant components of the Company's deferred tax assets based on statutory tax rates are as follows:
 

2004

2003
     

Deferred tax assets:

    

     Tax effect of operating loss carryforwards

$      594,100 

$     248,300 

     Valuation allowance

      (594,100)

      (248,300)

           Net deferred tax assets

$                 -   

$                -   

The Company has approximately $1,750,000 of net operating loss carryforwards which expire beginning in 2023.

The Company has provided a valuation allowance against its deferred tax assets given that it is in the development stage and it is more likely than not that these benefits will not be realized.

Note 12 - Segment Information

The Company's operations were conducted in one reportable segment, being the development and commercialization of a unique patented gearing technology, primarily in Canada.

Note 13 - Financial Instruments

a) Fair Value

The Company's financial instruments consist of cash, advances to related party accounts payable and accrued liabilities due to related parties. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.

b) Currency Risk

Currency risk is the risk arising from fluctuations and changes in foreign currency exchange rates. The Company does not use any derivative instruments to reduce its exposure to fluctuations in foreign currency exchange rates.

Ikona Gear International, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
August 31, 2004 and 2003
_________________________________________________________________________________

Note 13 - Financial Instruments (continued)

c) Credit Risk

The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced losses in such accounts. Management believes the Company is not exposed to any significant credit risk on cash in such bank deposit accounts.

Note 14 - Commitments

The Company amended a consulting agreement with a director, officer and significant shareholder of the Company effective April 1, 2004, to pay monthly management fees totaling approximately $8,500 (C$11,333) ( 2003 $5,370 (C$7,500)). This agreement can be terminated with six months advance notice.

On June 9, 2004, the Company entered into a premises lease for office and workshop facilities for a period of 36 months commencing August 1, 2004. The premises lease commits the Company to a net annual rental expense of $36,969 (C$49,623) and additional operating costs estimated at $14,048 (C$18,857) for a period of three years with an option to extend the period to a further three years. The Company provided a deposit of three months of rent equaling $9,242 (C$12,406) of which two of the three months will be applied to rent in the final two months of the three-year lease term.

Note 15- Subsequent Events

In September 2004, the Company agreed with Magna Advanced Technologies to proceed to commercialize automotive applications and demonstrate prototypes to divisions within Magna and to Magna's OEM and partner network. Ikona agreed to waive the requirement for Magna to pay C$20,000 (US$15,400) monthly engineering fees as entertained in the original phase 1 agreement between Ikona and Magna. Ikona also has agreed to waive the mandatory lump sum C$1 million (US$770,000) advance royalty, instead Magna and Ikona have agreed to negotiate financial and royalty details on an application-by-application basis. These amendments had no impact on revenues earned from Magna Advanced Technologies in the years ended August 31, 2003 or August 31, 2004.

In September 2004, the Company entered into a number of short-term investor relations agreements. The Company has committed in these agreements to issue a total of 100,000 stock options at prices between $1.00 and $1.40.

You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell common stock and is not soliciting an offer to buy common stock in any state where the offer or sale is not permitted.

 

Until November 5, 2005, all dealers effecting transactions in the shares offered by this prospectus whether or not participating in the offering may be required to deliver a copy of this prospectus. Dealers may also be required to deliver a copy of this prospectus when acting as underwriters and for their unsold allotments or subscriptions.

You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell common stock and is not soliciting an offer to buy common stock in any state where the offer or sale is not permitted.

 

Ikona Gear International, Inc.

1,046,667 Shares of Common Stock

 
     

TABLE OF CONTENTS

    
 

Page

  

Prospectus Summary

2

  

Risk Factors

4

  

Certain Market Information

11

  

Dividend Policy

11

____________________________

Forward-Looking Statements

12

  

Capitalization

14

Prospectus

Selected Financial Data

15

____________________________

Management Discussion

16

  

Business

23

  

Management

30

  

Certain Transactions

36

October 11, 2005

Principal Stockholders

36

  

Selling Securityholders

39

  

Use of Proceeds

41

  

Plan of Distribution

41

  

Description of Securities

43

  

Legal Matters

44

  

Experts

44

  

Additional Information

44