Description Of Business
Acquisition of Power Grow System Ltd.
Pursuant to an agreement dated February 2, 2004 and completed on February 29,
2004, we acquired 100% of the issued and outstanding shares of Power Grow System
Ltd., a private British Columbia company. Pursuant to this agreement, Power Grow
System Ltd. became our wholly owned subsidiary. In consideration of the transfer
of all of the outstanding shares of Power Grow System Ltd., we issued a total of
3,000,000 shares of our common stock to the Power Grow shareholders of which
1,500,000 were issued to Mr. Bleuler and 1,500,000 to Mr. Brusatore. In
connection with the agreement, Mr. Bleuler was appointed to our Board of
Directors. Both Mr. Bleuler and Mr. Brusatore remained as directors of our
subsidiary. We also agreed to lend, without any fixed terms of repayment, the
sum of $6,000 to Power Grow System Ltd. in order to cover the costs associated
with obligations incurred relating to the closing of the agreement. We commenced
merged operation with our wholly owned subsidiary on February 29, 2004.
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The acquisition price for the shares of Power Grow System Ltd. was determined
during negotiations between Mr. Bleuler and Mr. Brusatore on Power Grow's
behalf, and Robert Hoegler, our president, on our behalf. At the time of
negotiations, there was no relationship between us, our directors and officers
and Power Grow System Ltd. and its principals. No third parties were involved in
the combination and no finder's fees, consulting remuneration or other
compensation was paid in connection with the transaction.
Power Grow System Ltd. was incorporated pursuant to the laws of British Columbia
on August 20, 2001 for the purpose of designing, manufacturing and marketing
sophisticated hydroponics plant growing equipment to be marketed in Canada and
the United States to nurseries, garden centers, specialized hydroponics
equipment shops, gardeners and home hobbyists who wish to grow their own fresh
fruits, flowers, herbs and vegetables, year round, faster than conventional
gardening, organically and free of outdoor pollutants, pests and weeds. Since
its formation in August 2001, Power Grow has been successfully manufacturing and
marketing three individual models of the hydroponics plant growing equipment.
Power Grow presently manufactures and markets an average of 13 hydroponics plant
growing equipment units (7 dual-600 systems, 3 Single-600 Flower, 3 Single-600
System) on a monthly basis. Every month, an average of three units are sold in
the Vancouver metropolitan area and ten in the United States.
PRODUCT DESCRIPTION
We presently manufacture and market three individual, self contained hydroponics
plant growing equipment models: the Single-600 Flower, the Single-600 System and
the Dual-600 system. All three systems can plug into a regular voltage wall
socket and are made from white powder-coated aluminum foil to avoid erosion and
allow for a maximum light reflection. The main components of each individual
hydroponics equipment unit (cabinet) consists of: (a) a high pressure sodium
lamp which generates heat and light for the contained plant growing chamber,
complete with a tempered glass shield that controls the amount of heat and light
delivered to the plants, (b) a water reservoir, mounted underneath the
equipment, which holds water mixed with necessary nutrients to be fed to the
growing plants, (c) water pump which delivers the water with the added nutrients
to the growing plant through a series of water lines and is located inside the
water reservoir, (d) ventilation system, mounted on the hood of the equipment,
composed of at least two six-inch fans, connected to a thermostat that regulates
temperature inside the chamber at desirable levels and intervals and (e)
electrical power unit, complete with digital timers, which provides electrical
power to the whole equipment. It can be preset to allow the water pump to
deliver water with added nutrients to the growing plants at predetermined
quantities and intervals. The cabinet shell, holding the hydroponics components,
is laser cut to dimensions from aluminum foil, machined in the desired shapes
and powder-coated in white paint for optimal light reflection. All the necessary
components, readily available from various electrical and mechanical parts
distributors, are mounted on the cabinet shell in our manufacturing warehouse
using basic assembly and manufacturing processes.
Fruits, vegetables, flowers or herbs are placed in a series of 3.5 inch
gardening pots located on the shelves of the system's growing chamber. High
porous rocks (hydroponics medium) are placed in the pots inside the growing
chamber to act as structural support for the plants' roots in the hydroponics
systems. These mediums are made of high porous rocks for high retention of air
and water necessary for healthy plant growth. Excessive water in the rocks is
drained back, for full recycling, in the water reservoir mounted under the
hydroponics unit. The elimination of waste-water and the absence of any
pesticide and insecticides in the controlled hydroponics equipment results in a
friendly product desirable to environmentally conscious end users.
Single-600 Flower: The single-600 Flower is a hydroponics equipment unit
specifically designed for vegetation and flowering, or growing plants to
maturity after they have been started and rooted from seed outside the unit. The
unit is a single shelf cabinet that stands four feet high, two feet wide and 2.5
feet deep. It is very light in weight and can be lifted and moved easily. It has
the capacity to hold twelve 3.5 inch pots in which plants can grow from root to
maturity. A 600 watt high pressure sodium lamp is mounted inside the growing
chamber. This lamp emanates needed light and heat, which are required for plant
growth. A tempered glass lens mounted in front of the lamp controls the amount
of light directed to the growing plant inside the chamber. Likewise, the
temperature inside the chamber, ideally three degrees Celsius above room
temperature, is controlled by a two six-inch fan airflow system mounted on the
hood of the equipment which, through a thermostat, regulates temperatures at
desirable levels by removing excessive volumes of hot air from inside the
chamber.
Single-600 System: The single-600 System is a turnkey perpetual system
containing three chambers, standing seven feet tall, two feet wide and 2.5 feet
deep. A "turnkey perpetual system" allows the end user to produce the complete
genetic plant cycle from clipping to rooted plant to mature plant ready for
harvest without the need for any additional equipment. The first chamber
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located on the bottom of the unit holds up to three mature plants. Clippings can
be taken from the mature plant and moved into the second cloning (rooting)
chamber where the plants can root. The light needed for this step is reflected
up into the cloning (rooting) chamber, creating an environment that accelerates
plants to root rapidly. Once rooted, the plants are moved into the top flowering
chamber to grow the fruit or vegetable to mature plant form ready for harvest.
The flowering chamber is the hydroponic chamber that can hold twelve 3.5" pots
to maturity under a 600 watt high pressure sodium bulb. To control light and
temperature levels, a tempered glass lens and a three six-inch fan airflow
system keeps the temperature inside the machine three degrees warmer than
ambient temperature around the machine.
Dual-600 system: The Dual 600 hydroponics equipment unit produces the highest
growth rates and yields. It stands 48 inches wide 72 inches high and 34 inches
deep and can be plugged into a regular wall electrical socket and has a very low
power consumption of about $22 per month. It comes complete with two 600 watt
high pressure sodium lamps creating 200,000 lumens of foot-candle power, a nine
fan airflow ventilation system and a tempered glass lens mounted below the lamps
to control temperature and light levels inside the chamber. This equipment has
the capacity to grow 24 rooted plants to maturity for harvest.
Upon receipt of a client's purchase order, we purchase all the electrical and
mechanical parts required to manufacture the specific hydroponics equipment from
various suppliers located in the Vancouver metropolitan area. All electrical
components used in the manufacturing of the equipment are approved for use by
the Canadian Standards Association (CSA), a government agency that regulates the
standards of electrical equipment and accessories sold to the general public in
Canada, and by Underwriters Laboratories (UL), a government agency that
regulates the same standards in the USA. The parts are gathered and assembled
into hydroponics plant growing equipment in our Coquitlam, British Columbia
manufacturing plant, which covers 4,200 square feet of office, manufacturing and
warehousing space, under the supervision of Nick Brusatore, who is in charge of
the systems' designing, engineering and manufacturing. Once assembled, the
hydroponics equipment is tested for defects and functionality, flat packed in a
cardboard box and shipped to the client via courier within fifteen days of the
purchase order. Instructions for the assembly, which require only the effort of
inserting some screws into the aluminum panels that will shape the cabinet, are
provided for the benefit of the end user. All parts and components needed to
manufacture the equipment are readily available from various local suppliers.
Our primary suppliers are Allie's Wholesale for pumps, pots, drip lines and
connectors; D.G. McClaughlin for cam locks; Cam-Am Castors for castors; Stollco
Industries for aluminum, bending and laser cutting; Photon Powder Coating for
powder coating; Form-It Plastics for plastic reservoirs and trays; Custom
Gaskets for weather stripping and spacers; Great Little Box for custom boxes;
and Torbram Electric Supply for all of our electrical supply needs. All of these
suppliers are based in the Greater Vancouver area.
The systems require very little attention and labor, making it a simple and
efficient controlled growing environment. The users, with very little gardening
experience, can produce their own fruit, vegetables, flowers and herbs at home
in a shorter growing cycle than traditional gardening.
The parts required to manufacture the hydroponics equipment are supplied to us,
on an as needed basis, by a number of suppliers located in the Vancouver area.
We believe that if we were to lose any of the sources of the supplies, a number
of other firms in our area would be available to replace these suppliers at
competitive prices. We do not presently have alternate arrangements with any
other suppliers. Therefore, if we lose one of our present parts suppliers, our
operation may be temporarily disrupted. In such event, the manufacturing and
delivery of one or more hydroponics equipment could be delayed for up to two
weeks. In addition, our cost of parts may increase slightly, but we do not
believe that such increase would be material.
At the time of the acquisition, our subsidiary manufactured and sold an average
of thirteen hydroponics plant growing units per month. Of these units sold, ten
are typically sold in the United States and three are sold in the Vancouver
area. We engage established international courier firms to deliver our
hydroponics equipment units outside of the Vancouver area. There are no formal
arrangements with these courier firms for the delivery of our hydroponics
equipment to our clients and these firms provide their services to us at
competitive rates. The units sold in the Vancouver area are being picked up at
our Coquitlam warehouse by the clients or delivered to them by us.
Revenues
We generate revenues from selling our three hydroponics equipment models to
nurseries, garden centers, specialized hydroponics equipment shops and some home
hobbyists who wish to grow their own fresh fruits, flowers, herbs and vegetables
year round in a manner that is faster than conventional gardening as well as
organic and free of outdoor pollutants, pests and weeds. We receive $2,195 for
each sale of one of our Single 600 Flower System, $2,995 for each sale of a
Single-600 System and $3,995 for each sale of a Dual-600 System. We anticipate
selling an average of nine hydroponics plant
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growing units every month for the next 12 months and earning average gross
monthly revenue of $27,000. Our sales for the three-month period ended May 31,
2004 totaled $78,695. The cost of sales during the period was $53,150, resulting
in gross profit of $25,545. This was further offset by our administrative
expenses of $74,229, resulting in a net loss of $48,773 after taking a $89
foreign exchange loss into account.
Hydroponics Technology Overview
The term "hydroponics" is derived from the Latin words "hydro" and "pomos"
meaning "water working". It is the technology of growing plants in a controlled
environment in nutrient solutions (water with the added fertilizers) with or
without the need of mediums (soil, sand, peat moss) to provide mechanical
support for the growing plants roots. Liquid Hydroponics has no mediums for
supporting plant roots. Roots are suspended in air in a controlled environment
and necessary nutrients for growth are fed to the plants' roots through water
mist.
Aggregate Hydroponics has solid mediums (fibers or porous rocks for high
retention of air and water), which act as structural support for plant roots. In
this case, necessary nutrients are delivered directly to the plant roots in
water flowing through the medium. All of the hydroponics systems that we sell
are aggregate systems.
In hydroponics systems, plants can be grown closer together than in open fields,
increasing yields and number of crops. They are grown in controlled environments
eliminating outdoor pollutants, weeds and pests. In soil, plants have to break
down the dirt to get needed nutrients for growth and waste a lot of energy
developing long roots in search of needed nutrients. In hydroponics systems, the
required nutrients are added to water, which are automatically delivered
directly to the growing plants roots at required intervals. Energy normally lost
developing long roots is redirected to growing more plant volume. Lamps and
ventilation systems inside the hydroponics growing chambers maintain the light
and temperature to ideal and constant levels creating conditions whereby
hydroponics plants will grow faster, bigger and healthier than those in soil.
Unlike outdoor conditions where crops will grow only once a year, hydroponics
technology will allow vegetation crops to be produced economically a number of
times every year. Hydroponics technology eliminates the use of harmful chemicals
such as pesticides, herbicides, insecticides and fumigants, which are employed
in open field cultivation. Hydroponics cultivation popularity is due to the
ability to grow healthier, more nutritious quality produce than soil-grown
varieties in clean and controlled environment free of harmful chemicals. It has
also become a necessity in industrialized countries of the world where available
fertile soil is diminishing as land space is used for building new industries,
housing and highways and both in cold and arid areas of the world where either
fertile soil or water are non-existent or in short supply.
The Hydroponics Industry
Hydroponics has become the most widespread method of growing fruits, flowers,
herbs and vegetables in commercial quantities in many countries of the world in
large greenhouses and in self contained units without the utilization of soil.
In traditional gardening, plants get root support, nutrients, water, and oxygen
from the soil. In hydroponics systems, water with the added essential nutrients
that normally would be available in a very fertile soil is infused to the plant
in a controlled environment and quantities. Plants, like all living things, have
certain requirements that need to be met for them to grow and thrive. These
include water, nutrients, light, air, and structural support for the roots.
Hydroponics culture requires only basic agriculture skills. Production takes
place inside enclosures designed to control air and root temperatures, light,
water, plant nutrition and adverse climate. The controlled environment also
eliminates outdoor pollutants, pests and weeds that are present in soil. This is
called Controlled Environment Agriculture or CEA. Hydroponics systems
drastically reduce the amount of time needed to produce good plants, crops and
fruit, allowing quicker turnaround to market. Countries with lack of arable land
and water such as Iran, Mexico, Australia and certain Middle East nations are
employing and researching the technology extensively. Likewise, systems are
being used and researched in U.S. nuclear submarines, Russian space stations,
various offshore drilling rigs, and by NASA in outer space to provide astronauts
with fresh fruit and vegetables. ("History of Hydroponics" by Gary V. Deutschman
Sr.)
The commercial hydroponics industry, largely greenhouse based, is centered in
the affluent countries of the world such as the Netherlands, Spain, Canada,
Japan, the United Kingdom, the USA, Italy, New Zealand and Australia. A 2001
study, "HYDROPONICS as an Agriculture Production System," conducted by Hassal &
Associates Pty Ltd. for the Rural Industries Research & Development Corporation
of Australia reports that these affluent countries account for over 19,000
hectares of the world wide (estimated to be 25,000 hectares) commercial
hydroponics production area. Tomatoes, cucumbers, lettuce, peppers, herbs and
flowers are the most important crops grown. In the same year, the total global
value was estimated at $6 to $8 billion. The United States and Canada have a
combined 2,400 hectares of hydroponics greenhouse crop production. This is small
in comparison to that of the Netherlands, which has in excess of 10,000 acres.
Canada has the third largest commercial hydroponics industry, and is currently
expanding at 25% per annum farm gate value. Over 40% of greenhouses
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in Canada and the USA employ hydroponics in their food production and this
figure is rising annually. Their produce is sold in most supermarket stores
throughout North America and Europe to consumers seeking natural, pesticide-free
vegetation. According to the same study, hydroponics is the most popular method
of growing vegetables in glasshouses in Canada, and in 1998, greenhouse
vegetation production accounted for almost 25% of total vegetable production.
The hydroponics retail industry developed as a result of the commercial
hydroponics industry growth and the consumers' preference for fresh, organically
grown, and natural foods. The hydroponics retail market ranges from small
independent retailers to well-established chain stores that manufacture,
distribute and retail hydroponics equipment and supplies. Consumers can buy a
number of parts and hydroponics supplies (lamps, water pumps, irrigation
systems, cabinets, pots, fertilizers, root mediums, plastic sheets, glass, etc.)
to build their own do-it-yourself hydroponics plant growing equipment.
Hydroponics parts and supplies are available from a myriad of retail outlets in
Canada and the USA: hardware stores, nurseries, garden equipment suppliers,
plumbers' suppliers, greenhouses suppliers, lighting outlets, indoor plant
suppliers, hydroponics parts suppliers, etc. For those consumers and hobbyists
who may not have the time and knowledge to build their own hydroponics equipment
from parts, they can purchase self-contained, ready to operated units. These
units can be purchased from a number of retailers (hydroponics shops, gardening
shops and nurseries) and directly from hydroponics plant growing equipment
manufacturers and distributors. As a result of consumer trends toward fresh,
organically grown and environmentally friendly food products, there is
confidence that this industry will continue to grow and thrive.
Purchasers Profile
The typical purchasers of our hydroponics plant growing equipment are nurseries
and gardening shops. We also sell our hydroponics plant growing equipment to
specialized hydroponics retail outlets, which in turn retail to the consumers
along with a variety of hydroponics parts and supplies. One equipment
distributor and six retail businesses, all of which are located in the United
States, account for approximately 60% of all of our sales. Five of these
customers each account for about 10% of our business, with the other two
accounting for about 5% each. Other smaller retailers in Canada and the United
States account for an additional 25% of our business.
Gardeners and home hobbyists who purchase directly from us or from retail
outlets account for the remaining 15% of the purchases of our hydroponics
equipment. They purchase our equipment to grow year round fresh fruits,
vegetables, flowers and herbs for their own personal consumption or, in case of
gardeners, for resale to groceries and produce retailers. A poll conducted by
Ipso-Reid on behalf of City Farmer, Canada's Office of Urban Agriculture, found
that 40% of people living in Greater Toronto and 44% of people living in Greater
Vancouver, a total of approximately 2.5 million people, live in households that
produce some of their own food. City Farmer also conducted its own survey in
2000 and found that 91 out of 100 people polled considered themselves urban
(living in a city). Of this number, 79 stated that they grow some of their
vegetables and herbs.. According to Gary V. Deutschman Sr. in "History of
Hydroponics", there are over 1,000,000 household hydroponics soilless culture
units operating in the USA for the production of food alone. Inner suburban
professionals, singles and couples living in apartments and tinkerers of all age
groups with little space, time, patience, and in some cases without a suited
climate for traditional gardening, have made hydroponics their method of choice
to grow their own fresh, organic and healthy vegetation. Researchers, educators
and students conducting controlled experiments in schools, colleges and
universities can be included in our hydroponics equipment retail market. The
average purchaser of our hydroponics plant growing equipment pays an average of
$3,061 for one of our hydroponics units.
Future Development
At present we sell our Single 600 Flower for $2,195, Single-600 System for
$2,995 and Dual-600 System for $3,995 We anticipate selling an average of 13
hydroponics plant growing units every month for the next 12 months and earning
average gross revenues of $39,800 every month over the same period. There were
no revenues received from inception on December 23, 2003 to February 29, 2004,
the date of closing of the acquisition agreement whereby we purchased a 100%
interest in Power Grow System Ltd.
From the date of the acquisition of our subsidiary on February 29, 2004 through
April 30, 2004, we have generated $80,356 in gross revenues and, during this
period, sold twenty eight hydroponics equipment units in the United States and
seven in the Vancouver area. Our net revenue from operation for the month of
March and April 2004 was $2,679. During the month of March and April 2004, we
incurred an additional $2,400 in professional and accounting fees in conjunction
with the preparation of this registration statement. As a result, our net gain
for the period from March 1 to April 30, 2004 was $279.
In order to become profitable, we must expand our operations by increasing our
production and distribution in the United States and Vancouver area to an
average of 20 hydroponics plant growing equipment units every month and generate
gross
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revenues from operation of approximately $61,200 every month. We must also
complete the development of a new, self contained and compact hydroponics plant
growing equipment model, presently under development, to be called the F400 that
will be ready for manufacturing and marketing in October 2004. The development
of the new F400 was as a result of existing retailers' feedback and interest in
a new compact hydroponics plant growing equipment model that offers similar
benefits as our Single 600 Flower but will be 30% smaller with a 400watt sodium
bulb and the capacity of holding four plants to maturity. We must also secure
additional retail outlets and end users to purchase our hydroponics plant
growing equipment units in order to achieve the projected $61,200 per month
gross revenue level to be profitable. Initially, along with the marketing of our
websites, we will rely on our directors and officers to contact additional
retail outlets regarding the possibility of purchasing and marketing our
hydroponics units. As our operations expand and we generate significant revenue,
we intend to hire sales personnel for the purpose of securing additional sales.
At present we have no plans to expand the production and distribution of our
products outside of United States and Canada. Depending on our success in
implementing our plan of operation in the existing area of production and
distribution, we would evaluate the possibility of expansion, into Europe, the
Middle East and Asia,.
Competition
The manufacturing and marketing of hydroponics plant growing equipmentis very
competitive and there can be no assurance that we will be successful in
generating significant revenue from our operations. We have conducted minimal
internal research on the hydroponics retail industry and, although limited
information is available concerning the industry, we were able to identify at
least 11 competitors in Canada and USA who manufacture and market hydroponics
products similar to ours. These competitors also produce controlled environment
hydroponics plant growing equipment and use promotional and marketing strategies
similar to us. Their products, like ours, are marketed, to a number of retail
outlets (nurseries, garden shops, specialty hydroponics outlets) and end users
in Canada and United States through their websites and by advertising in
industry related publications. We are not aware of the total number of
manufacturers, distributors and retailers of similar types of hydroponics
equipment in Canada and the United States. We will also compete with a variety
of retail outlets (hardware stores, nurseries, garden equipment suppliers,
plumbers' suppliers, greenhouses suppliers, lighting outlets, indoor plant
suppliers) and specialty hydroponics retailers who offer end users with a range
of parts and accessories to build a variety of do-it-yourself hydroponics
equipment and with self contained and ready to operate hydroponics equipment
units. Furthermore, we do not possess information relating to the total number
of controlled environment hydroponics equipment units manufactured and marketed
in Canada and United States. The lack of this information will make it difficult
for us to assess, identify and penetrate new markets.
Competitive advantage
We do not have at our disposal the vast material and financial resources to
undertake mass promotional and marketing campaigns. Our strategy, therefore,
will be to focus on serving our established retail outlets and to market our
hydroponics units directly to the end users through their places of operation.
Over the last three years, our hydroponics equipment has become a
well-recognized product within the hydroponics retail industry for its compact
size, efficiency and reliability. Our on-line technical assistance has been well
accepted by end users and the retail outlets that we serve. Other competitive
advantages that we offer to our clients are: (a) timely manufacturing and
delivery of our equipment which is delivered within 15 days of purchase order,
(b) one-year unlimited warranty on all the electrical components of our
hydroponics units with guarantee of no-cost replacement, (c) all the electrical
components in our equipment are CSA and UL approved making our equipment users
friendly and an insurance compliant appliance, similar to a fridge or stove, (d)
we offer three individual, turn-key, controlled environment hydroponics
equipment models each designed to meet different requirements of any end user,
and (e) the water reservoir in our equipment is located outside the plant
growing chamber eliminating water vapors created by heat inside the chambers
that would affect the controlled temperature and create root rot. Assuring
timely production and delivery of our hydroponics equipment and offering
personalized customer service to both the retail outlets and the end users that
we serve provides an arena for the future success of our products. Although we
do not have any formal contracts with the retail outlets that purchase and
resell our hydroponics units, due to our personalized, prompt and professional
service, we have been able to maintain their loyalty.
We are aware of other manufacturers of controlled environment hydroponics
equipment in Canada and the United States. Nonetheless, we have been able to
establish our products within the hydroponics retail industry. Our chief
competitive threat, therefore, would be from existing and potential new
hydroponics equipment manufacturers.
Website
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We currently own two websites and domain names www.powergrowcanada.com and
www.powergrowusa.com . These two websites are complete with detailed corporate
and product information. Our three hydroponics plant growing equipment models,
along with the parts, accessories and nutrient solutions that we market, are
listed on the websites for easy access to potential purchasers. On-line
technical support is provided to people who may already own our equipment or who
may want to educate themselves on the hydroponics technology with the view of
purchasing our equipment or learn about the technology and the hydroponics
components to build their own and to learn about the needed nutrient solutions
which will be required to hydroponically grow vegetation. On-line credit is also
available for people who decide to purchase our products while visiting our
sites. In addition, directly through our websites, we promote retail locations
that market our hydroponics equipment to end users creating inner industry
relationships and dealership network's loyalty.
Compliance with Government Regulation
The production and marketing of hydroponics equipment and parts is not regulated
in Canada and the USA. However, some Canadian legislators are calling for
legislation, similar to that of Australia, to regulate the commercial and retail
hydroponics industries. The legislation would establish guidelines and policies
for the manufacturing, marketing and operation of hydroponics plant growing
equipment both in the commercial production and distribution of hydroponically
grown vegetation and in the manufacturing and marketing of hydroponics
equipment, parts and nutrient solutions. New laws and regulations may impact our
ability to manufacture and market our hydroponics plant growing equipment,
parts, accessories and nutrient solutions and to generate revenue in the future.
However, we are not aware of any pending or contemplated laws or regulations in
Canada or the USA that would have an impact on our business.
Employees
We have no employees other than the officers and directors described above.
Power Grow has an agreement with Nick Brusatore and N.B. Machine Ltd., a private
British Columbia company wholly owned by Mr. Brusatore, for the following
services: design and engineering of our hydroponics equipment, management of our
wholly owned subsidiary's operation and the supervision of our manufacturing
plant. Pursuant to the terms and conditions of this agreement, he and his
company have agreed to provide his management, administrative, engineering and
quality control consulting services to us. For his services, Mr. Brusatore and
his company are paid a total of $3,333 per month and is reimbursed for
reasonable expenses incurred by him in relation to the performance of his
duties. We also provide him with a leased vehicle while he acts in his capacity
as our subsidiary's office manager and manufacturing plant supervisor. The
agreement commenced on January 1, 2003 and will remain in effect until January
30, 2006, unless terminated earlier. It may be renewed for an additional
unspecified term with the mutual agreement of all parties. Either party may
terminate the agreement for cause upon 30 days' notice. Mr. Brusatore acts as a
director of our wholly owned subsidiary and intends to dedicate approximately
80% of his business time working on our business.
Power Grow also has an agreement with Mr. Jason Bleuler and CC&B Concept and
Communication Business Inc., a private British Columbia company wholly owned by
Mr. Bleuler, for sales and marketing services. Pursuant to the terms and
conditions of this agreement, he and his company have agreed to provide his
services to us as an exclusive sales and marketing agent for our hydroponics
equipment. For his services, Mr. Bleuler and his company are paid a total of
$3,333 per month and are reimbursed for reasonable expenses incurred by him in
relation to the performance of his duties. We also reimburse him for vehicle's
expenses while he acts in his capacity as our exclusive sales and marketing
agent for our hydroponics plant growing equipment. The agreement commenced on
January 1, 2003 and will remain in effect until January 30, 2006, unless earlier
terminated. It may be renewed for an additional six month term with the mutual
agreement of all parties. Either party may terminate the agreement for cause
upon 30 days' notice. Mr. Bleuler acts as our Director and President, Chief
Executive Officer and as a director of our wholly owned subsidiary and dedicates
approximately 80% of his business time working on our business.
All manual labor required for the assembly of our hydroponics plant growing
equipment is outsourced to local manufacturing laborers on a part-time basis and
as needed. These individuals, no more than two in any given day, provide us with
the manual labor of assembling all electrical and mechanical parts and
hydroponics components into a turnkey hydroponics equipment. We have no written
agreement with these workers for their labor. We believe that if we were to lose
the services of one or both of these individual workers, a number of other
similar qualified workers in our area would be available to replace them at
competitive labor rates. We do not presently have an alternate arrangement in
case we lose one or both of these workers. Therefore, if such an event were to
occur whereby we lose one or both of these workers, our operations would be
temporarily disrupted. In such circumstances, the completion of a specific
hydroponics model being manufactured could be delayed for up to one week. In
addition, our labor cost may increase slightly, but we believe that such
increase would be minimal. Administrative functions and collection of revenues
is contracted out on a part-time basis to one individual.
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Research and Development Expenditures
We have not incurred any research or development expenditures since our
incorporation.
Subsidiaries
We own a 100% interest in Power Grow System Ltd. a private British Columbia
company. Our subsidiary manufactures and markets hydroponics plant growing
equipment in the Vancouver metropolitan area and in the United States. We do not
own any interest in any other subsidiary or entities.
Patents and Trademarks
We do not own, either legally or beneficially, any patents or trademarks.
Plan Of Operations
Our plan of operations for the twelve months following the date of this
registration statement is to expand our business by attempting to:
1. Complete the development and initiate the
manufacturing and marketing of an additional, self
contained and ready to operate, hydroponics plant
growing equipment model to be called F400. We
anticipate that this new compact model, presently
under development, should be ready for marketing in
October 2004. We estimate that we will incur
approximately $7,000 in expenses to complete the
development and testing of the new F400 hydroponics
equipment model.
2. In conjunction with the completion of development of
the new hydroponics equipment model F400, we need to
secure additional retail outlets and end users to
purchase our hydroponics units while increasing the
number of our current hydroponics units to be sold
every month to at least 20. We anticipate that
revenue that we receive from the sale of the F400
models will be sufficient to cover the cost of the
mechanical and electrical parts that comprise each
unit..
Our objective is to obtain these operational milestones during the next 12
months. However, we cannot make any assurances that we will be able to reach
these goals. We intend to continue with our business strategy of maintaining our
present equipment production and marketing base. We will also attempt to secure
additional sales with retail outlets and end users by promoting the benefits of
our controlled environment hydroponics plant growing equipment units and
educating them on the benefits of consuming healthy and organic vegetation grown
in their own homes.
While we are attempting to expand our business and increasing the number of
hydroponics equipment units we distribute, we will continue to place importance
on the collection of revenues from the sales of the equipment. Based on
historical accounting, we collect 40% upon delivery of the equipment, 30% within
30 days of delivery and 30% within 90 days of delivery. In the future, we are
going to attempt to expedite the payment process so that we will receive 80% of
revenue collections within 30 days of invoicing and the remainder 20% within 60
days of invoicing.
We anticipate that our hydroponics manufacturing and marketing operations will
be financially self-supporting in the future. Our chief costs are expected to be
related to our expansion, general and administrative expenses incurred in
connection with the filing of this registration statement and the quarterly and
annual filings that must be undertake once we are a reporting company under the
Securities Act of 1934.
Nick Brusatore is responsible for building our internal administrative and
managerial organization, streamlining our manufacturing plant procedures and
developing new hydroponics models, while we attempt to keep overhead costs low
by minimizing the hiring of full-time employees and by hiring employees on a
part-time and as needed basis. With additional revenues, we plan to retain
staffing levels sufficient to achieve our expansion goals. This additional
staffing may include full-time and part-time sales staff, casual labor and
administrative consultants. Without sufficient revenues, we will continue
limiting our employees to our directors, officers and present part-time
employees.
We expect the expenses of the offering to be approximately $26,500. In addition,
in connection with our proposed plan of operation, we anticipate that we will
incur the following expenses per month:
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Payments to management and sales staff $ 6,666
Casual labor $ 1,450
Office rent $ 2,447
Computer, office equipment and supplies $ 700
General & administrative $ 1,074
Telephone $ 476
Advertising $ 4,000
Total per month $ 16,813
In addition, to the above monthly expenses, we expect to incur the following
expenses, per month, for compliance with future filing requirements under the
Securities Act of 1934:
Accounting and Auditing Fees $ 1,500
Legal Fees $ 600
EDGAR Fees $ 200
Other Administrative Fees $ 250
TOTAL PER MONTH $ 2,550
Accordingly, our total expenses for the next 12-month period are estimated to be
$265,856, including the above-noted product completion costs, offering costs,
monthly administration expenses and monthly regulatory compliance costs. At May
31, 2004, we had cash on hand of $42,362 and accounts receivable of $19, 368.
Our cash reserves are not sufficient to meet our obligations for the next
twelve-month period. As a result, we will need to seek additional funding in the
near future. We currently do not have a specific plan of how we will obtain such
funding; however, we anticipate that additional funding will be in the form of
equity financing from the sale of our common stock. We may also seek to obtain
short-term loans from our directors, although no such arrangement has been made.
At this time, we cannot provide investors with any assurance that we will be
able to raise sufficient funding from the sale of our common stock or through a
loan from our directors to meet our obligations over the next twelve months. We
do not have any arrangements in place for any future equity financing.
The foregoing represents our best estimate of our cash needs based on current
planning and business conditions. In the event we are not successful in
generating significant revenue from our operations, additional funds may be
required in order for us to proceed with our business plan to execute our plan
of operation. In such circumstances, we would likely seek additional financing
to support the continued operation of our business. We have no such financing
arranged at the present time and no guarantee that we will be able to secure
such financing.
We anticipate that depending on market conditions and our plan of operations, we
could incur operating losses in the foreseeable future. We base this
expectation, in part, on the fact that we may not be able to generate enough
revenue from sales of our hydroponics plant growing equipment to cover all of
our operating and administrative expenses. Our revenues will depend on how we
secure additional purchasers, as well as keeping the costs of manufacturing and
marketing to reasonable levels. We are not aware of any known trends, events,
demand, commitments and uncertainties that are reasonably likely to have
material effect on our financial condition or operating performance in the
future.
Results Of Operations For Period Ending May 31, 2004
Since inception, our activities have been financed exclusively from the proceeds
of share subscriptions. While we are currently generating some revenue, we do
not anticipate earning additional significant revenues until such time as our
subsidiary can execute a major portion of its expansion program. There is no
assurance that we will be able to reach the projected expansion.
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From our inception on December 23, 2003 to May 31, 2004, we realized $78,695 in
sales of our products. The concurrent cost of sales was $53,150, resulting in
gross profit from operations of $25,545. During the same period, we incurred
general and administrative expenses in the amount of $84,912These expenses
consisted of $22,243 in consulting fees, $18,766 in audit fees, $8,189 in
advertising fees, $7,295 in the write off of bad debts, $7,049 in rent, $5,009
in office and general costs, $4,935 in automobile expenses, $2,965 in salaries
and benefits, $2,390 in legal fees, $1,921 in travel costs, $1,882 in telephone
expense, $1,155 in bank charges and interest and $1,113 in investor relations
costs. During the period we gained $153 in foreign exchange conversion.
Therefore for the period commencing on December 23, 2003 to May 31, 2004 we had
total net loss of $59,214.
There were no revenues or incurred direct costs on our merged financial
statements from our operations from our inception through February 29, 2004, the
date of the closing of the acquisition agreement whereby the company purchased
100% of the shares in the capital stock of its wholly owned subsidiary.
We have not attained profitable operations and are dependent upon obtaining
financing to continue and to expand our existing business operations. For these
reasons our auditors stated in their report that they have substantial doubt
that we will be able to continue as a going concern.
Our operations, to a significant extent, are influenced by trends and
uncertainties in the hydroponics industry. Government legislation regarding the
sale and use of hydroponics equipment may impact our sales.
As of May 31, 2004, we had assets recorded on our consolidated financial
statements at $172,570 consisting of cash of $42,362, accounts receivable of
$19,368, inventory of $16,752, $3,936 in prepaid expenses and deposits and
$90,152 in goodwill. Our liabilities on May 31, 2004 totaled $171,590,
consisting of $105,759 in accounts payable and accrued liabilities, $53,879 due
to related parties and $11,952 in loans payables.
The portrayal of our financial condition, to a certain extent, is impacted by
certain accounting policies upon which we rely. These include the following:
º We record sales revenue when a hydroponics unit has been shipped and
collection of the payment price isreasonably assured.
º We provide a one-year warranty on all hydroponics units we sell. We do not
have a history of warranty claims andwe do not believe that such claims
will be significant in the future. Accordingly, we have not made any
provision inour financial statements for future warranty costs.
º We use Canadian dollars as our functional currency in operating our
business, but our reporting currency is U.S.dollars. Our current assets and
liabilities are translated at the exchange rate in effect at the date of
our balancesheets. Capital assets, stockholders' equity, revenues and
expenses are translated at the exchange rates in effect atthe date of the
transaction.
º We record goodwill on our balance sheets. Goodwill are not amortized but
are annually tested for impairment. Thedetermination of any impairment
includes a comparison of the estimated future operating cash flows
anticipatedduring the remaining life for the net carrying value of the
asset as well as a comparison of the fair value to the bookvalue.
Power Grow System Ltd.
In its fiscal year ended February 29, 2004, our wholly owned subsidiary, Power
Grow System Ltd., realized $517,161 in revenue from sales with a cost of sales
for $373,579, for gross profit from operations of $143,582. The company also
incurred $245,634 in administrative expenses consisting of $108,000 in
consulting fees, $24,471 in salaries and benefits, $21,433 in automobile
expenses, $21,280 in advertising costs, $16,546 in general and administrative
expenses, $14,490 in rent, $12,582 in the write off of bad debts, $7,381 in
credit card discounts, $6,445 in interest and bank charges, $5,367 in travel and
promotion costs, $4,370 in telephone expenses, $3,000 in equipment rental costs,
$179 in legal and professional fees and $90 in accounting fees.
Sales in fiscal 2004 decreased by $561,556 from fiscal 2003 primarily due to a
decrease in media attention that Power Grow System Ltd. had realized during
Canada's legalization of marijuana for medical use. In fiscal 2003, many media
outlets
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contacted Power Grow System Ltd. regarding its products in connection with the
Canadian government's legislation. The media attention resulted in a substantial
increase in product orders for a short time. In fiscal 2004, sales decreased to
traditional levels as the medicinal marijuana issue was no longer of media
interest. As well, when it became apparent that the government's legislation
greatly limited the scope of marijuana cultivation, the Company again proceeded
to focus our marketing exclusively on hobby gardening kits. All mention of use
of our products for marijuana cultivation was removed.
Administrative expenses decreased from $273,015 in fiscal 2003 to $245,634 in
fiscal 2004 primarily due to a decrease in consulting fees and advertising
costs.
Description Of Property
Our executive offices are located at 595 Howe Street, Suite 323, Vancouver,
British Columbia, Canada. Mr. Robert Hoegler, our President and Chief Executive
Officer, leases these premises to us for $300 per month. We do not have a
written agreement with Mr. Hoegler regarding this arrangement.
Our hydroponics manufacturing plant and offices, rented for $2,447 per month,
are located at 1533 Broadway Street, Suite 108, in Coquitlam, British Columbia.
Our rental agreement concerning the premises commenced in September 2001 and
will terminate on August 31, 2004. Both our executive offices and manufacturing
plant are fully equipped and functional. We do not expect that we will need to
expand our facilities for either location in the foreseeable future.
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