EX-1 4 sep30if.htm SEPTEMBER 30, 2004 NINE MTHS. QUARTERLY FINANCIALS CONAME


















SHEP TECHNOLOGIES INC.
(A Development Stage Company)


CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars)

(Unaudited, Prepared by Management)


SEPTEMBER 30, 2004

 

 

 

 

 

 

 


_________________________________________________________________________________________________________________________________








NOTICE TO READER

Our auditors, Davidson & Company Chartered Accountants, have not reviewed these unaudited consolidated financial statements for the third financial quarter ended September 30, 2004. They have been prepared by SHEP Technologies Inc.'s management in conformity with accounting principles generally accepted in the United States, consistent with previous quarters and years. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003.






Page 2
_________________________________________________________________________________________________________________________________


SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Balance Sheets

(Expressed in United States Dollars)
As at September 30, 2004
(Unaudited, Prepared by Management)


September 30, 2004
(Unaudited)

December 31, 2003

ASSETS

Current

Cash and cash equivalents

$        10,422 

$        60,246 

Other amounts receivable, net of allowance of $Nil (2003 - $Nil)

52,365 

30,820 

Inventory

81,365 

101,897 

Prepaid expenses

331 

110,800 

Total current assets

144,483 

303,763 

Funds held in trust

-  

151,122 

Equipment (note 4)

40,571 

60,696 

Total assets

$      185,054 

$      515,581 

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities

Accounts payable and accrued liabilities

$      875,863 

$      742,963 

Accounts payable and accrued liabilities - related parties (note 7, 8)

764,346 

111,048 

Loans payable (note 5)

235,000 

100,000 

Total current liabilities

1,875,209 

954,011 

Stockholders' equity (deficiency)

Capital stock (note 6)

Authorized

100,000,000 common shares, without par value

Issued

2 26,255,571 common shares (2003 - 24,768,956)

26,256 

24,769 

Additional paid-in capital

5,482,508 

4,735,828 

Cumulative translation adjustment

(5,479)

(44,682)

Deficit accumulated during the development stage

(7,193,440)

(5,154,345)

Total stockholders' deficiency

(1,690,155)

(438,430)

Total liabilities and stockholders' deficiency

$      185,054 

$      515,581 

On behalf of the Board:


"Malcolm P. Burke",
Director




"Tracy A. Moore",
Director





The accompanying notes are an integral part of these consolidated financial statements.





Page 3
_________________________________________________________________________________________________________________________________


SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in United States Dollars)
For the Period Ended September 30, 2004
(Unaudited, Prepared by Management)

 


Cumulative
From Inception
on
January 6,
2000
to
September 30,
2004




Three Months Ended




Nine Months Ended

September 30,
2004

September 30,
2003

September 30,
2004

September 30,
2003

Sales

$       405,517 

$               -  

$                -  

$                -  

$                -  

Cost of goods sold

185,093 

-  

-  

-  

-  

Gross profit

220,424 

-  

-  

-  

-  

Expenses

   Research and development

1,729,689 

-  

280,316 

682,611 

400,609 

   Research and development - related parties
   (note 7)


326,505 


118,350 


-  


160,726 


-  

   Selling, general and administrative - (note 9)

2,784,661 

127,582 

296,906 

630,773 

795,877 

   Selling, general & administrative - related
   parties (notes 7, 9)


2,260,995 


126,789 


179,830 


424,349 


1,077,109 

   Depreciation

102,755 

6,841 

109,421 

23,097 

144,158 

   Intangible impairment loss

87,124 

-  

-  

-  

-  

7,291,729

379,562 

866,473 

1,921,556 

2,417,753 

Loss from operations

(7,071,305)

(379,562)

(866,473)

(1,921,556)

(2,417,753)


Other income (expense)

   Gain on wind-up of subsidiary

1,472 

-  

-  

1,472 

-  

   Interest income

4,878 

-  

2 

1,772 

211 

   Interest expense

(128,485)

(1,953)

(2,000)

(120,783)

(5,850)

(122,135)

(1,953)

(1,998)

(117,539)

(5,639)

Loss for the period

(7,193,440)

(381,515)

(868,471)

(2,039,095)

(2,423,392)

Other comprehensive income (loss)

    Foreign currency translation adjustment

(5,479)

3,335

(24,036)

39,203

1,244

Comprehensive loss for the period

$  (7,198,919)

$      (378,180)

$     (892,507)

$  (1,999,892)

$   2,422,148)

Basic and diluted loss per share

$          (0.01)

$          (0.04)

$          (0.08)

$          (0.11)

Weighted average number of shares of
common stock outstanding

26,255,571

24,351,899

25,682,747

22,948,518



The accompanying notes are an integral part of these consolidated financial statements.

 

 

Page 4
_________________________________________________________________________________________________________________________________

 

SHEP TECHNOLOGIES INC.
(A Development Stage Company)

Consolidated Statements of Stockholders' Equity (Deficiency)
(Expressed in United States Dollars)

Common Stock

Additional Paid-in Capital

Cumulative Translation Adjustment

Deficit Accumulated During the Development Stage

Total

Number of Shares

Amount

Balance, January 6, 2000 (date of inception)

- 

$            - 

$            - 

$            - 

$            - 

$            - 

Common stock issued in January 2000 for cash at $0.1309 per share

4,000,000 

4,000 

519,532 

- 

- 

523,532 

Loss for the period

- 

- 

- 

- 

(323,760)

(323,760)

Balance, December 31, 2000

4,000,000 

4,000 

519,532 

- 

(323,760)

199,772 

Cumulative translation adjustment

- 

- 

- 

(5,618)

- 

(5,618)

Loss for the year

- 

- 

- 

- 

(413,349)

(413,349)

Balance, December 31, 2001

4,000,000 

4,000 

519,532 

(5,618)

(737,109)

(219,195)

Assumption of liabilities on acquisition of subsidiary

- 

- 

(325,267)

- 

- 

(325,267)

Forgiveness of debt

- 

- 

166,177 

- 

- 

166,177 

Common stock issued in August 2002 for settlement of debts at $0.0764 per share

6,600,000 

6,600 

497,691 

- 

- 

504,291 

Common stock issued in September 2002 on recapitalization

9,747,948 

9,748 

(131,983)

- 

- 

(122,235)

Common stock issued in October 2002 at a price of $0.75 per share

1,289,332 

1,289 

965,711 

- 

- 

967,000 

Issuance of stock options for consulting fees

- 

- 

86,000 

- 

- 

86,000 

Cumulative translation adjustment

- 

- 

- 

(28,125)

- 

(28,125)

Loss for the year

- 

- 

- 

- 

(1,125,506)

(1,125,506)

Balance, December 31, 2002

21,637,280 

$      21,637 

$   1,777,861 

$       (33,743)

$  (1,862,615)

$     (96,860)



- Continued -



The accompanying notes are an integral part of these consolidated financial statements.





Page 5
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SHEP TECHNOLOGIES INC.
(A Development Stage Company)

Consolidated Statements of Stockholders' Equity (Deficiency)
(Expressed in United States Dollars)

Common Stock

Additional Paid-in Capital

Cumulative Translation Adjustment

Deficit Accumulated During the Development Stage

Total

Number of Shares

Amount

Balance, December 31, 2002

21,637,280 

$      21,637 

$    1,777,861

$    (33,743)

$ (1,862,615)

$   (96,860)

Common stock issued in February 2003 for cash at $0.75 per share

245,667 

246 

170,187 

- 

- 

170,433 

Common stock issued in April 2003 for cash at $0.85 per share

588,235 

588 

434,412 

- 

- 

435,000 

Common stock issued in May 2003 for cash at $0.57 per share

438,597 

439 

217,061 

- 

- 

217,500 

Common stock issued in June 2003 as consideration for consulting services at $0.69 per share

50,000 

50 

34,450 

- 

- 

34,500 

Common stock issued in June 2003 for cash at $0.57 per share

614,036 

614 

304,386 

- 

- 

305,000 

Common stock issued in June 2003 on the exercise of warrants at $1.25 per share

133,333 

133 

166,533 

- 

- 

166,666 

Cashless exercise of stock options in June 2003

227,193 

227 

647,273 

- 

- 

647,500 

Common stock issued in July 2003 for cash at $1.30 per share

384,615 

385 

437,115 

- 

- 

437,500 

Common stock issued in September 2003 for cash at $1.00 per share

400,000 

400 

354,600 

- 

- 

355,000 

Common stock issued in December 2003 for settlement of debt at $0.60 per share

50,000 

50 

29,950 

- 

- 

30,000 

Issuance of stock options for consulting fees

- 

- 

162,000 

- 

- 

162,000 

Cumulative translation adjustment

- 

- 

- 

(10,939)

- 

(10,939)

Loss for the year

- 

- 

- 

- 

(3,291,730)

(3,291,730)

Balance, December 31, 2003

24,768,956 

$      24,769 

$ 4,735,828

$    (44,682)

$  (5,154,345)

$ (438,430)



- Continued -



The accompanying notes are an integral part of these consolidated financial statements.




Page 6
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SHEP TECHNOLOGIES INC.
(A Development Stage Company)

Consolidated Statements of Stockholders' Equity (Deficiency)
(Expressed in United States Dollars)
(Unaudited, Prepared by Management)

 

Common Stock

Additional Paid-in Capital

Cumulative Translation Adjustment

Deficit Accumulated During the Development Stage

Total

Number of Shares

Amount

Balance, December 31, 2003

24,768,956 

$     24,769 

$ 4,735,828 

$     (44,682)

$  (5,154,345)

$   (438,430)

Issuance of 500,000 financing warrants in February 2004

- 

- 

142,000 

- 

- 

142,000 

Issuance of 100,000 finder's fee warrants in February 2004

- 

- 

39,800 

- 

- 

39,800 

Value attributable to the conversion feature of a convertible debenture issued in February 2004

- 

- 

164,000 

- 

- 

164,000 

Issuance of common stock on conversion of the convertible debenture in March 2004 at $0.41 per share

1,221,615 

1,222 

202,895 

- 

- 

204,117 

Issuance of stock options for consulting fees

- 

- 

132,000 

- 

- 

132,000 

Common stock issued in June 2004 for settlement of debt at $0.25 per share

240,000 

240 

59,760 

- 

- 

60,000 

Common stock issued in June 2004 for legal services at $0.25 per share

25,000 

25 

6,225 

- 

- 

6,250 

Cumulative translation adjustment

- 

- 

- 

39,203 

- 

39,203 

Loss for the period

- 

- 

- 

- 

(2,039,095)

(2,039,095)

Balance, September 30, 2004

26,255,571 

$       26,256 

$   5,482,508 

$        (5,479)

$  (7,193,440)

$  (1,690,155)



The accompanying notes are an integral part of these consolidated financial statements.

 

Page 7
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SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows

(Expressed in United States Dollars)
For the Period Ended September 30, 2004
(Unaudited, Prepared by Management)

Cumulative
From
Inception on January 6, 2000




Three Months Ended,




Nine Months Ended,

 

To
September 30, 2004

September 30,
2004

September 30,
2003

September 30,
2004

September 30,
2003

CASH FLOWS FROM OPERATING ACTIVITIES

   Loss for the period

$  (7,193,440)

$    (381,515)

$    (868,471)

$   (2,039,095)

$   (2,423,392)

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

      Depreciation

102,755 

6,841 

109,421 

23,097 

144,158 

      Gain on wind-up of subsidiary

(1,943)

- 

- 

(1,943)

- 

      Intangible impairment loss

87,124 

- 

- 

- 

- 

      Inventory valuation adjustment

85,383 

- 

- 

- 

- 

      Cashless exercise of stock options

647,500 

- 

- 

- 

- 

      Consulting fees paid by issuance of stock
      options

380,000 

- 

- 

132,000 

- 

      Expenses paid by issuance of common stock

40,750 

- 

- 

6,250 

- 

      Interest paid by issuance of common stock

114,917 

- 

- 

114,917 

- 

      Stock-based compensation

- 

- 

80,000 

- 

794,000 

   Changes in non-cash working capital items:

      Increase in GST and VAT recoverable

- 

- 

(16,059)

- 

(16,407)

      (Increase) decrease in other amounts
      receivables

(49,997)

(19,088)

- 

(21,617)

- 

      Decrease (increase) in inventory

(149,598)

- 

(93)

22,042 

13,247 

      Decrease (increase) in prepaid expenses

8,144 

5,188 

(43,852)

113,085 

(51,836)

      Increase (decrease) in accounts payable and
      accrued liabilities


1,508,639 


350,882 


181,573 


852,886 


114,729 

   Net cash used in operating activities

(4,419,766)

(37,692)

(557,481)

(798,378)

(1,425,501)

CASH FLOWS FROM INVESTING ACTIVITIES

   Funds held in trust

- 

- 

(141,636)

151,122 

(141,636)

   Acquisition of capital assets

(122,954)

- 

- 

(1,927)

- 

   Acquisition of patents and designs

(80,321)

- 

- 

- 

- 

   Net cash used in investing activities

(203,275)

- 

(141,636)

149,195 

(141,636)

CASH FLOWS FROM FINANCING ACTIVITIES

   Capital stock issued for cash

2,660,631

- 

792,500 

- 

2,098,416 

   Net proceeds on issuance of debt

435,000 

- 

- 

435,000 

- 

   Cash acquired on recapitalization and acquisitions

- 

- 

- 

- 

   Advances received from the Company prior to
   recapitalization


452,439 


- 


- 


- 


- 

   Loans payable

235,000 

- 

- 

135,000 

- 

   Amounts received from related parties

494,900 

- 

- 

- 

- 

   Cash acquired on recapitalization and acquisition

382,586 

- 

   Net cash provided by financing activities

4,660,556 

- 

792,500 

570,000 

2,098,416 

   Effect of exchange rate changes on cash

(27,093)

(226)

(27,992)

29,370 

(270)

Change in cash and cash equivalents
for the period


10,422 


(37,918)


65,391 


(49,824)


571,549 

Cash and equivalents, beginning of period

- 

48,340 

510,411 

60,246 

4,253 

Cash and cash equivalents, end of period

$         10,422 

$         10,422 

$      575,802 

$         10,422 

$       575,802 

Cash paid during the period for:

   Interest expense

$                    - 

$                    - 

$                    - 

$                    - 

$                    - 

   Income taxes

$                    - 

$                    - 

$                    - 

$                    - 

$                    - 



Supplemental disclosure with respect to cash flows (note 11)


The accompanying notes are an integral part of these consolidated financial statements.





Page 8
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SHEP TECHNOLOGIES INC.
(A Development Stage Company)

Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Period Ended September 30, 2004
(Unaudited, Prepared by Management)

 

 

1. Basis of Presentation

The accompanying unaudited consolidated financial statements do not include all information and footnote disclosures required for an annual set of financial statements under accounting principles generally accepted in the United States. 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 September 30, 2004 and for all periods presented, have been included. Interim results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year as a whole.

The unaudited consolidated balance sheets, statements of operations and statements of cash flows include the accounts of the Company and its direct and indirect wholly-owned subsidiaries: SHEP Limited, an Isle of Man corporation; SHEP Technology, Inc., a Maine corporation; SHEP Technologies (UK) Limited, an England and Wales corporation; and SHEP Technologies, Inc., a Delaware corporation. These financial statements have been prepared in conformity with United States generally accepted accounting principles for interim financial information. The accounting principles used in these financial statements are those used in the preparation of the Company's audited financial statements for the year ended December 31, 2003.

These financial statements should be read in conjunction with the audited annual financial statements and related notes, as included in the Company's annual report for the fiscal year ended December 31, 2003. These consolidated financial statements also comply, in all material respects, with Canadian generally accepted accounting principles with respect to recognition, measurement and presentation.

Comparative figures have been reclassified where applicable to conform with the presentation used in the current period.

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 been primarily funded by the issuance of capital stock and debt. Continued operations of the Company are dependent on the Company's ability to complete additional equity and debt financings. 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 reasonable terms.

 

Page 9
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September 30,
2004

December 31,
2003

 

 

 

Deficit accumulated during the development stage

$(7,193,440)

$(5,154,345)

Working capital (deficiency)

(1,730,726)

(650,248)

 

3. Stock-based compensation

Statement 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 compensation for employees, directors and officers using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation cost for relevant stock options issued in the period 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 an employee is 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".

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

 

From
Inception on January 6,
2000 to



Three Months Ended
September 30



Nine Months Ended
September 30

 

September 30,
2004

2004

2003

2004

2003

Loss, as reported

$  (7,193,440)

$    (381,515)

$    (868,471)

$  (2,039,095)

$  (2,423,392)

Add:

 

 

 

 

 

Total stock-based employee compensation expense included in loss, as reported determined under APB 25, net of related tax effects




   -   




-   




80,000 




-   




759,500 

Deduct:

 

 

 

 

 

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




(932,000)




(10,000)




(45,000)




(58,000)




(60,000)

 

 

 

 

 

 

Pro-forma loss

$ (8,125,440)

$    (391,515)

$   (833,471)

$ (2,097,095)

$ (1,723,892)

 

 

 

 

 

 

Loss per common share, basic and diluted

 


$         (0.01)


$         (0.04)


$         (0.08)


$         (0.11)

 

 

 

 

 

 

Pro forma loss per common share, basic and diluted



$         (0.01)


$         (0.04)


$         (0.08)


$         (0.11)

 

4. Equipment

 

 


September 30,
2004

 

 

 


December 31, 2003

 

 


Cost

Accumulated
Depreciation

Net
Book Value

 


Cost

Accumulated
Depreciation

Net
Book Value

Plant and equipment

$    146,653

$     106,082

$         40,571

$     147,887

$         87,191

$         60,696

 

5. Loans Payable

September 30,
2004

December 31,
2003

Loan bearing interest at 8% per year, unsecured and due on the earlier of January 31, 2004 or on the date the Company received debt or equity financing of at least $1,000,000.



$ 60,000



$ 60,000

Loan for which the lender has not executed final documents. The Company has accrued interest based on a draft loan agreement that provides for terms that are the same as for the $60,000 loan.



40,000



40,000

Amounts received by the Company that are expected to be converted to equity. The amounts do not bear interest and have no specific terms of repayment.



135,000



-

$ 235,000

$ 100,000

 

6. Capital Stock

Common stock

The common stock of the Company is all of the same class, is voting and entitles stockholders to receive dividends. In the event of liquidation, dissolution or winding up, the common stockholders are entitled to receive equal distributions of net assets or any dividends that may be declared.

In February 2004, the Company completed a convertible debenture financing and received gross proceeds of $500,000. The convertible debenture bore interest at 6% per year and could be converted to the Company's common stock at a 25% discount to market price, with a minimum conversion price of $0.30 per share of common stock and a maximum conversion price of $1.00 per share of common stock. As part of this financing, the Company also issued warrants to purchase 500,000 shares of common stock at $1.00 per share on or before February 12, 2006. The Company incurred $65,000 in share issuance costs associated with the offering and issued warrants to purchase 100,000 shares of common stock at $1.00 per share on or before February 12, 2006 as a finder's fee. The value of the 100,000 finder's fee warrants, calculated using the Black-Scholes method, was $39,800; the value of the 500,000 financing warrants, calculated using the Black-Scholes method, was $142,000; and the value associated with the beneficial conversion feature was $164,000. The aggregate cost associated with the financing was $410,800.

On March 29, 2004, the holder of the debenture elected to convert the debenture, resulting in the issuance of 1,212,121 shares of common stock and an interest charge of $3,917 which was paid through the issuance of a further 9,494 shares of common stock. Of the $410,800 in total financing cost, $111,000 was allocated to interest expense and the balance applied to accumulated paid-in capital as a stock issuance cost.

On June 30, 2004, the Company issued 240,000 shares of stock at $0.25 per share and warrants to purchase up to 240,000 shares of common stock at a price of $0.50 per share on or before June 30, 2006. The stock and warrants were issued to settle $60,000 of accounts payable to companies owned by certain directors and officers of the Company.

On June 30, 2004, the Company issued 25,000 shares of stock at $0.25 per share in respect of legal services.

As discussed below, the Company entered into a letter of intent to acquire Marshalsea Hydraulics Ltd., a company in which two officers (one of which is also a director) own an interest. The letter of intent, as amended, could have resulted in the issuance of 500,000 shares of common stock to the shareholders of Marshalsea Hydraulics Ltd. as a deposit against the purchase of that company. The conditions precedent for the issuance of the shares were not met and the stock was not issued.

Warrants

A summary of share purchase warrant activity during nine months ended September 30, 2004 and 2003 follows:

2004

2003

Number of Warrants

Weighted Average Exercise Price

Number of Warrants

Weighted Average Exercise Price

Warrants outstanding, beginning of the period

1,846,907 

$ 1.28 

511,333 

$ 1.25 

Issued

840,000 

0.86 

943,269 

1.25 

Exercised

-   

-   

-   

-   

Expired

(1,320,590)

1.29 

-   

-   

Warrants outstanding, end of the period

1,366,317 

$ 1.01 

1,454,602 

$ 1.25 

 

A summary of share purchase warrants outstanding at September 30, 2004 follows:

 

Exercise
Price

Number
Outstanding

Expiration
Date

$1.25

219,299

May 23, 2005

$1.25

307,018

June 11, 2005

$1.00

600,000

February 12, 2006

$0.50

240,000

June 30, 2006

1,366,317

 

Stock Options

On October 8, 2002, the Company adopted a stock incentive plan (the "2002 Stock Plan") to provide incentives to employees, directors and consultants. At the Company's annual general meeting, held November 22, 2002, the Company's shareholders approved the 2002 Stock Plan which provides for the issuance of up to 2,200,000 options of common stock with the maximum term of ten years. At the Company's annual general meeting held June 29, 2004, the Company's shareholders approved an increase of the total authorization under the 2002 Stock Plan from 2,200,000 to 5,000,000 shares. The board of directors has the exclusive power over the granting of options and their vesting provisions.

As of September 30, 2004, the Company had granted 1,975,000 options to employees, directors, officers and consultants of which 1,075,000 are still outstanding. The options have six-year terms and vest in varying amounts at the discretion of the board of directors. After taking account of the proposed increase in the total authorization under the 2002 Stock Plan, the directors may award rights that could result in the issuance of a further 3,575,000 shares of capital stock. The fair value of options granted to consultants and non-directors of the Company recognized during the three and nine months ended September 30, 2004 was $nil and $132,000 respectively, which amounts have been recorded as consulting fees in the period.

On June 24, 2003, an officer and director of the Company exercised his 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise price was $1.00 per share, resulting in an issuance of 227,193 shares and stock-based compensation expense of $647,500.

A summary of the 2002 Stock Plan activity during the nine months ended September 30, 2004, with comparative figures for 2003, is as follows:

 

2004

 

2003

 


Number
of
Options

Weighted
Average
Exercise
Price

 


Number
of
Options

Weighted
Average
Exercise
Price

Options outstanding at January 1

1,525,000 

1.00

1,000,000 

$  1.00

Granted

100,000 

0.75

875,000 

1.00

Exercised

-   

(350,000)

1.00

Forfeited

(550,000)

1.00

-   

-

Options outstanding at September 30

1,075,000 

0.98

1,525,000 

$ 1.00

Options exercisable at September 30

1,075,000 

0.98

816,666 

$ 1.00

A summary of stock options outstanding at September 30, 2004 is as follows:

 

Outstanding Options

 

Exercisable Options





Exercise Price





Number

Weighted
Average
Remaining
Contractual
Life


Weighted
Average
Exercise
Price

 





Number


Weighted
Average
Exercise
Price

$0.75

100,000

5.4 years

$ 0.75

 

100,000

$ 0.75

$1.00

975,000

4.4 years

$ 1.00

 

975,000

$ 1.00

 

The Company uses the Black-Scholes option-pricing model to compute estimated fair value. The assumptions employed to quantify the fair value of options granted in the current fiscal year are:

Risk-free interest rate

4.9%

Dividend yield rate

-  %

Price volatility

116%

Weighted average expected life of options

6 years

 

7. Related Party Transactions

The Company's consolidated results of operations include paid or accrued expenses, to companies with which related parties have an interest, as summarized below:

For the nine months ended September 30, 2004:

Fees

Material Purchases

Rent

Total

Balco Holdings Inc.

$       31,530

$            -   

$              -   

$        31,530

Bravo Alpha Enterprises

339

-   

339

Marshalsea Hydraulics Ltd.

156,194

160,726

-   

316,920

MCSI Consulting Services Inc.

133,565

-   

-   

133,565

Primary Ventures Corp.

83,000

-   

19,721

102,721

Total

$     404,628

$    160,726

$       19,721

$       585,075

For the nine months ended September 30, 2003:

Fees

Rent

Total

Balco Holdings Inc.

$               25,450

$                    -   

$            25,450

Ifield Technologies

104,550

-   

104,550

Marshalsea Hydraulics Ltd.

67,500

-   

67,500

MCSI Consulting Services Inc.

136,088

-   

136,088

Primary Ventures Corp.

51,750

22,535

74,285

SOPO Investments

22,500

-   

22,500

Total

$             407,838

$             22,535

$          430,373

Fees include management and consulting fees.

In May 2004, the Company signed a letter of intent to acquire the issued shares of Marshalsea Hydraulics Ltd. for cash consideration of GBP1,300,000 (approximately $2,400,000). The terms of the purchase were amended but, on October 15, 2004, the letter of intent lapsed. There are no plans to recommence purchase discussions.

In June 2004, the Company settled certain amounts due to companies owned by certain directors and shareholders of the Company, as described in note 6.

Except for the proposed purchase of Marshalsea Hydraulics Ltd., 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.

  1. Balco Holdings Inc. and Bravo Alpha Enterprises are management services companies owned by a former director of the Company.

  2. Ifield Technologies is an engineering services company owned by a director of the Company.

  3. Marshalsea Hydraulics Ltd. is a pump manufacturing company in which two officers of the Company (one of which is also a director) hold an equity interest.

  4. MCSI Consulting Services Inc. is a corporate finance consulting company owned by a director and an officer of the Company.

  5. Primary Ventures Corp. and SOPO Investments are companies owned by an individual who is a director and officer of the Company.

 

 

 

8. Accounts payable - related parties, as at September 30, 2004:

 

September 30,
2004

December 31,
2003

Balco Holdings Inc.

$ 30,423

$ 3,799

Bravo Alpha Enterprises

353

-   

Ifield Technology Ltd.

102,012

34,788

Marshalsea Hydraulics Ltd.

437,422

64,140

MCSI Consulting Services Inc.

114,939

17,925

Primary Ventures Corp.

79,197

3,098

 

 

 

 

$ 764,346

$ 123,750

9. Selling, General and Administrative Expenses

 


Cumulative
Amounts
From Inception on
January 6, 2000 to
September 30,








Three Months Ended
September 30








Nine Months Ended
September 30

2004

2004

2003

2004

2003

 

 

 

 

 

 

Advertising and promotion

$ 52,164

$ 225

$ 2,393

$ 962

$ 17,241

Business development

110,227

15,000

40,047

50,000

40,047

Contractor and consulting fees

626,860

5,496

7,219

184,800

112,972

Exchange loss (gain)

64,722

8,154

-   

32,035

-   

Listing, filing and transfer agent fees

27,640

3,131

-   

10,381

-   

Inventory write-down

85,383

-   

-   

-   

-   

Investor relations

431,645

41,579

24,360

88,807

139,873

Management fees

1,356,370

114,530

140,023

374,321

345,139

Office and general

273,718

18,422

(6,704)

72,967

66,034

Professional fees

516,031

21,088

133,579

110,764

231,217

Rent

84,514

5,852

5,773

17,024

18,408

Salaries and benefits

402,832

17,223

25,778

82,689

74,128

Stock based compensation

647,500

-   

80,000

-   

759,500

Travel and related

366,050

3,671

24,268

30,372

68,427

 

 

 

 

 

 

Total selling, general and administrative expenses


$ 5,045,656


$ 254,371


$ 476,736


$1,055,122


$1,872,986

 

 

 

Financial Statement Presentation:

 



Cumulative
Amounts
From Inception on
January 6, 2000








Three Months Ended








Nine Months Ended

 

To
September 30, 2004

September 30,
2004

September 30,
2003

September 30,
2004

September 30,
2003

 

 

 

 

 

 

Incurred with non-related parties

$ 2,784,661

$ 127,582

$ 296,906

$ 630,773

$ 795,877

Incurred with related parties

2,260,995

126,789

179,830

424,349

1,077,109

 

 

 

 

 

 

Total selling, general and administrative expenses


$ 5,045,656


$ 254,371


$ 476,736


$1,055,122


$ 1,872,986

 

 

 

10. Segment Information

The Company operates in one business segment being the development of stored hydraulic energy propulsion technology. The Company's operations are conducted in three geographic segments being the United Kingdom ("UK"), the United States of America ("USA") and Canada. The Company did not generate any sales in the nine months ended September 2004 or in the comparative period.

 


Three Months Ended


Nine Months Ended

 

September 30, 2004

September 30, 2003

September 30, 2004

September 30, 2003

 

 

 

 

 

Depreciation

 

 

 

 

Canada

$         173

$             -

$          748

$               -  

UK

6,668

109,171

19,757

143,408

USA

            -   

           250

         2,592

            750

 

 

 

 

 

 

$       6,841

$  109,421

$    23,097

$   144,158

 

 

 

 

 

Income (loss)

 

 

 

 

Canada

$ (167,989)

$ (287,263)

$ (851,348)

$(1,407,183)

UK

(211,938)

(513,254)

(1,176,771)

(921,391)

USA

   (1,588)

   (67,954)

    (10,976)

   (94,818)

 

 

 

 

 

 

$ (381,515)

$ (868,471)

$(2,039,095)

$(2,423,392)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,
2004

December 31,
2003

Total assets

 

 

 

 

Canada

 

 

$   25,443

$   45,853

UK

 

 

166,782

467,130

USA

 

 

         329

      2,598

 

 

 

 

 

 

 

 

$ 192,554

$ 515,581

 

 

 

 

11. Supplemental Disclosure With Respect to Cash Flows

Significant non-cash transactions for the period ended September 30, 2004 consisted of:

    1. The Company issued warrants to purchase 500,000 shares of common stock in conjunction with a convertible debenture. The estimated value of these warrants was $142,000.

    2. The Company issued warrants to purchase 100,000 shares of common stock as a finder's fee. The estimated value of these warrants was $39,800.

    3. The Company issued a convertible debenture that included a provision to convert to common stock at a discount to the prevailing trading price at the time of conversion. The estimated value of this conversion feature was $164,000.

    4. In June, 2004, the Company settled $60,000 of accounts payable through the issuance of 240,000 shares of common stock at a price of $0.25 per share and warrants to purchase 240,000 shares of capital stock at $0.50 per share.

Significant non-cash transactions for the period ended September 30, 2003 consisted of:

    1. In June 2003, the Company issued 50,000 shares of common stock as compensation to a consultant in consideration for services rendered at a price of $0.69 per shares, for a total of $34,500 in consulting expenses.

    2. In June 2003, an officer and director of the Company exercised 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per shares, and his exercise price was $1.00 per shares, resulting in the issuance of 227,192 shares and stock-based compensation expense of $647,500.