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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10QSB
[ x ] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2003 | |
OR | |
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to |
COMMISSION FILE NUMBER 333-46886
C-CHIP TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA | 88-0467845 |
(State of other jurisdiction | (IRS Employer Identification |
of incorporation or organization) | Number) |
4710 St-Ambroise
Suite 227
Montreal, Quebec
Canada H4C 2C7
(Address of principal executive offices)
(514) 337-2447
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as ofSEPTEMBER 30, 2003: 31,026,990
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PART I.
ITEM 1. FINANCIAL STATEMENTS
C-Chip Technologies Corporation
(A Development Stage Company)
September 30, 2003
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| Index |
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| Balance Sheets |
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| F-1 | ||
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| Statements of Operations |
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| F-2 | |||
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| Statements of Cash Flows |
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| F-3 | |||
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| Notes to the Financial Statements |
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| F-4 | ||||
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C-Chip Technologies Corporation
(A Development Stage Company)
Balance Sheets
(Expressed in U.S. Dollars)
September 30 | June 30 | |
(unaudited) | (audited) | |
ASSETS | ||
Current Assets | ||
Cash | 264,030 | 8,505 |
Other current assets | 17,851 | 11,776 |
Total Current Assets | 281,881 | 20,281 |
Property and Equipment (Notes 3 and 4) | 56,369 | 59,855 |
Intangible Assets (Notes 3 and 5) | 569,015 | 609,645 |
Total Assets | 907,265 | 689,781 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
Current Liabilities | ||
Accounts payable | 70,578 | 73,342 |
Accrued liabilities | 10,000 | 41,500 |
Due to related parties (Note 6) | 281,359 | 233,566 |
Promissory Note (Notes 3 and 7(b)) | - | 500,000 |
Total Current Liabilities | 361,937 | 848,408 |
Debenture Payable (Notes 3 and 7(a)) | - | 922,700 |
Total Liabilities | 361,937 | 1,771,108 |
Contingencies (Note 1) | ||
Stockholders' Equity (Deficit) | ||
Common Stock, 100,000,000 shares authorized with a par value | ||
of $0.00001; 31,026,990 and 25,293,960 shares issued and | ||
outstanding, respectively (Note 7) | 310 | 253 |
Additional Paid-in Capital | 3,977,964 | 645,268 |
3,978,274 | 645,521 | |
Deficit Accumulated During the Development Stage | (3,432,946) | (1,726,848) |
Total Stockholders' Equity (Deficit) | 545,328 | (1,081,327) |
Total Liabilities and Stockholders' Equity | 907,265 | 689,781 |
F-1
(The Accompanying Notes are an Integral Part of these Financial Statements)
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C-Chip Technologies Corporation
(A Development Stage Company)
Statements of Operations
(Expressed in U.S. Dollars)
(Unaudited)
Accumulated from | |||
June 26, 2000 | |||
(Date of | |||
Inception) | For the Three Months ended | ||
to September 30, | September 30, | ||
2003 | 2003 | 2002 | |
Revenue | - | - | - |
Expenses | |||
Acquired in-process research and development | 650,000 | - | - |
Depreciation and amortization | 92,616 | 44,116 | - |
Bank charges and exchange | (15) | (12,459) | - |
Debenture accretion | 136,325 | 16,625 | - |
Debenture Interest | 27,397 | 2,397 | - |
Discount on conversion of debt | 1,418,451 | 1,418,451 | - |
General and administration | 113,396 | 37,414 | - |
Professional fees | 160,963 | 59,704 | - |
Research and development | 62,606 | 51,534 | - |
Salaries and benefits | 102,622 | 41,736 | - |
Stock based compensation | 65,979 | 46,579 | - |
Net Loss Before Discontinued Operations | (2,830,340) | (1,706,097) | - |
Loss from Discontinued Operations (Note 9) | (602,606) | - | (6,610) |
Net Loss for the Period | (3,432,946) | (1,706,097) | (6,610) |
Net Loss Per Share - Basic | |||
Net Loss before Discontinued Operations | (0.06) | (0.00) | |
Loss from Discontinued Operations | - | - | |
Net Loss for the Year | (0.06) | (0.00) | |
Weighted Average Shares Outstanding | 28,700,000 | 120,224,000 | |
(Diluted loss per share has not been presented as the result is anti-dilutive)
F-2
(The Accompanying Note are an Integral Part of these Financial Statements)
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C-Chip Technologies Corporation
(A Development Stage Company)
Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
For the three months | ||
2003 | 2002 | |
Cash Flows From Operating Activities | ||
Net loss | (1,706,097) | (6,610) |
Adjustment to reconcile net loss to cash | ||
Stock based compensation | 46,579 | - |
Discount on conversion of debt | 1,418,451 | - |
Depreciation and amortization | 44,116 | - |
Accretion of debenture | 16,625 | - |
Changes in operating assets and liabilities | ||
Increase (decrease) in related party payables | 47,793 | (1,426) |
(Increase) in other assets | (6,075) | - |
(Decrease) increase in accounts payable and accrued liabilities | (6,868) | 4,124 |
Net Cash Provided By (Used In) Operating Activities | (145,476) | (3,912) |
Cash Flows From Financing Activities | ||
Proceeds from issuance of common shares | 386,000 | - |
Proceeds from exercise of stock options | 15,001 | - |
Net Cash Provided By Financing Activities | 401,001 | - |
Net Increase (Decrease) in Cash | 255,525 | (3,912) |
Cash - Beginning of Period | 8,505 | 11,529 |
Cash - End of Period | 264,030 | 7,617 |
Non-Cash Financing and Investing Activities | ||
Issuance of common shares for interest on debenture | 27,397 | - |
Redemption of promissory note for common shares | 500,000 | - |
Conversion of debenture payable for common shares | 939,325 | - |
Supplemental Disclosures | ||
Interest paid | - | - |
Income taxes paid | - | - |
F-3
(The Accompanying Notes are an Integral Part of these Financial Statements)
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
1. Nature of Operations
The Company was incorporated in the State of Nevada on June 26, 2000 as Keystone Mines Limited. In June 2000 the Company purchased four mineral claims, situated in the Greenwood Mining Division in the Province of British Columbia, Canada. The Company's principal business plan was to acquire, explore and develop mineral properties and to ultimately seek earnings by exploiting the mineral claims. On December 23, 2002 the Company was advised that mineral properties held were not economically viable. On January 7, 2003 the Company acquired assets and intellectual property and changed its business focus to the development of C-Chip Technology (see Note 3). In February, 2003 the Company changed its name to C-Chip Technologies Corporation.
The Company was in the exploration stage since its formation in June 2000 and did not realize any revenues from its original planned operations. Effective December 23, 2002 the Company discontinued its mining operations to devote most of its activities to commercializing the C-Chip Technology and raising sufficient funds to further its new business plan. Planned principal activities have not yet commenced. The ability of the Company to emerge from the development stage with respect to any planned principal business activity is dependent upon its successful efforts to commercialize its development of products and patents, attaining profitable business operations, and/or raising additional equity financing.
The Company expects to fund itself in the next twelve months through issuance of shares or by loans from shareholders and/or directors. The Company also plans to raise funds through the sale of products and through cost re-imbursements. The Company's shares trade on the OTC Bulletin Board under the symbol CCHI. In November 2003 the Company closed a private placement consisting of 909,091 units for gross proceeds of $500,000. Refer to Note 10.
2. Summary of Significant Accounting Principles
a) Year End
The Company's year-end is June 30.
b) Basis of Accounting
These financial statements are prepared in conformity with accounting principles generally accepted in the United States and are presented in US dollars.
c) Cash and Cash Equivalents
F-4
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited )
Continued
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
d) Long-Lived Assets
Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" establishes a single accounting model for long-lived assets to be disposed of by sale including discontinued operations. SFAS 144 requires that these long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations.
e) Foreign Currency Transactions/Balances
The Company's functional currency is the Canadian dollar. Occasional transactions occur in U.S. dollars, and management has adopted SFAS No. 52, "Foreign Currency Translation". Monetary assets and liabilities denominated in foreign currencies are translated into US dollars at rates of exchange in effect at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average rates for the year are used to translate revenues and expenses.
f) Development Costs
The Company is in the development stage and all costs relating to research and development are charged to operations as incurred.
g) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-5
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
h) Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The requirements of SFAS No. 150 apply to issuers' classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpu blic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 expands the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The transition provisions did not have a material impact on the Company's consolidated financial position and results of operations. The disclosure provisions of SFAS No. 148 are effective for financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure requirements of SFAS No. 14 8 on January 1, 2003.
F-6
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company adopted SFAS No. 146 on January 1, 2003. The effect of adoption of this standard did not have a material effect on the Company's results of operations or financial position.
The FASB has also issued SFAS No. 145, 147 and 149 but they do not have any relationship to the operations of the Company therefore a description of each and their respective impact on the Company's operations have not been disclosed.
i) Financial Instruments
Financial instruments include cash and equivalents, accounts payable, accrued liabilities, and related party payables. The fair values approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The convertible debenture payable had a face value of $2,000,000 and was determined to have a fair value of $803,000 on the date of the asset purchase agreement (Note 3).
j) Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at September 30, 2003, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.
k) Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128, "Earning per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted net loss per share (EPS) on the face of the income statement. Basic net loss per share is computed by dividing the net loss for the year by the weighted average number of shares of common stock outstanding during the year. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potential common stock outstanding during the period, if dilutive.
F-7
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
l) Stock-Based Compensation
The Company has elected to apply the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price of the Company's employee stock options is less than the market price of the underlying common stock on the date of grant. Stock-based compensation for employees is recognized on the straight-line basis over the vesting period of the individual options. Stock options granted to non-employees are accounted for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value based method of accounting for stock-based awards, and recognizes compensation expense based on the fair market value of the stock award or fair market value of the goods and services received, whichever is more reliably measurable. Under the provisions of SFAS 123, comp anies that elect to account for stock-based awards in accordance with the provisions of APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method under SFAS 123.
During the three month period ended September 30, 2003, the Company granted 137,000 stock options pursuant to a non-qualified stock option plan at an exercise price of $0.00001 per share when the prevailing market price was $0.34 per share. These stock options vested immediately and were exercised in full during the quarter.
The fair value of the options granted during the period was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rate of 1.07%, expected volatility of 194%, an expected option life of one month and no expected dividends. The weighted average fair value of options granted was $0.34 per share. Had the Company determined compensation cost based on the fair value at the date of grant for its employee stock options, the net loss would have increased by $75,539 for the three months ended September 30, 2003. On April 22, 2003 the Company filed a Form S-8 Registration Statement with the US Securities and Exchange Commission to register 5,000,000 shares of common stock pursuant to the Company's 2003 Nonqualified Stock Option Plan (the "Plan"). The determination of those eligible to receive options under this Plan, and the amount, type, price and timing of each stock option and the terms and conditions shall rest at the sole discretion of the Company's Compensation Committee, subject to the provisions of the Plan.
During the three months ended September 30, 2003, the Company recognized stock-based compensation for non-employees in the amount of $46,579.
F-8
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
The following table illustrates the effect on net loss per share as if the fair value method had been applied to all outstanding and unvested awards in each period.
Three months ended | ||||
2003 | 2002 | |||
Net loss - as reported | (1,706,097) | (6,610) | ||
Add: Stock-based compensation expense included in net loss - as reported | 46,579 | - | ||
Deduct: Stock-based compensation expense determined under fair value method | (122,118) | - | ||
Net loss - pro forma | (1,781,636) | (6,610) | ||
Net loss per share (basic and diluted) - as reported | $ | (0.06) | $ | (0.00) |
Net loss per share (basic and diluted) - pro forma | $ | (0.06) | $ | (0.00) |
m) Revenue Recognition
The Company is still in the development stage and has not generated any commercial sales. The Company plans to recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured. The Company has developed prototypes for testing by potential customers which have been billed for a portion of the costs incurred. The Company records these cost recoveries when paid as a credit to the respective expense in the statement of operations.
n) Property and Equipment
Property and equipment are recorded at cost. Amortization is calculated on the declining balance method, except for the leasehold improvements where the straight-line method is used, at the following annual rates or period:
Computer equipment | 30% | |
Furniture | 20% | |
Leasehold improvements | 5 years | |
Machinery and equipment | 20% |
F-9
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
o) Purchased Intangible Assets
An acquired intangible asset that represents technology that has reached technological feasibility is capitalized at cost. Amortization will be calculated using the straight-line method over four years and recorded commencing in the first quarterly period following acquisition. Acquired in-process research and development is charged to operations on acquisition.
p) Reclassifications
Certain reclassifications have been made to the prior year's financial statements to conform to the current period's presentation.
Interim Financial Statements
These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.
Acquisition of Assets
The financial statements for September 30, 2003 reflect the January 7, 2003 purchase of all assets and intellectual property relating to C-Chip Technology and share restructuring related thereto. The C-Chip Technology acquired is a new patent-pending wireless communications set of tools that offers complete remote control and access over targeted equipment and services. It allows selective enabling, disabling and other commands from/to anywhere in the world. The Company's initial marketing effort will be focused on North America, with services expanded later to Europe and Asia. A valuation analysis was applied to determine the purchase price and its allocation in compliance with SFAS 141. The consideration paid was 5,000,000 restricted shares of common stock with a fair value of $25,000, a non-interest bearing promissory note in the amount of $500,000 due January 31, 2003, and a convertible debenture in the amount of $2,000,000 with a fair value of $803,000, maturing on January 15, 2008 and carrying a cou pon of 2.5% payable at the option of the holder in restricted shares of common stock. On July 25, 2003, the debenture, together with accrued interest to July 25, 2003, was converted into 3,910,120 restricted common stock at a 15% discount from market, using the face value of $2,000,000. As part of the asset purchase agreement the Company also paid the vendor $40,000 for-C-Chip development expenses incurred during the acquisition period bringing the total purchase price to $1,368,000. The payment of the promissory note was extended until September 2003 at which time it was applied to acquire 909,091 units of the private placement.
F-10
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
The purchase price was allocated to the following asset categories:
$ | ||
Property and equipment | 67,725 | |
Patents and trademarks | 75,990 | |
In-process research and development | 650,000 | |
C-Chip Technology | 574,285 | |
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1,368,000 | ||
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The in-process research and development was charged to operations on acquisition. The remaining intangible assets, patents and trademarks and C-Chip Technology, will be evaluated annually to determine their continuing value.
4. Property and Equipment
Cost | Accumulated Amortization |
| September 30, |
| June 30, | |
Computers | 21,940 | 4,690 | 17,250 | 18,650 | ||
Leasehold improvements | 5,075 | 762 | 4,313 | 4,567 | ||
Furniture | 11,642 | 1,688 | 9,954 | 10,478 | ||
Machinery and equipment | 29,068 | 4,216 | 24,852 | 26,160 | ||
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Total property and equipment | 67,725 | 11,356 | 56,369 | 59,855 | ||
Depreciation during the period | 3,486 |
F-11
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
5. Intangible Assets
Cost | Accumulated Amortization |
| September 30, |
| June 30, | |
C-Chip technology | 574,285 | 71,780 | 502,505 | 538,395 | ||
Patents and trademarks | 75,990 | 9,480 | 66,510 | 71,250 | ||
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Total other assets | 650,275 | 81,260 | 569,015 | 609,645 | ||
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Amortization during the period | 40,630 | |||||
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6. Related Party Transactions/Balances
As part of interim financing by shareholders, the Company has purchased management services from Capex Investments Limited, the vendor in the C-Chip asset purchase transaction. Capex also paid certain operations expenses directly and advanced funds for working capital. The amounts due are non-interest bearing, unsecured, and have no fixed terms of repayment. The amount due Capex at September 30, 2003 is $210,249 (June 30, 2003: $193,325). Amounts owing to officers of the Company of $71,110 (June 30, 2003: $40,241) are non-interest bearing, unsecured and have no fixed terms of repayment.
7. Common Stock
The Debenture Payable including accrued interest was converted into 3,910,120 restricted common shares at a 15% discount from market, using the face value of $2,000,000. This resulted in a discount on conversion of debt in the amount of $1,418,451, which is included in additional paid-in capital.
In August and September 2003 the Company issued 1,610,910 common shares for total cash proceeds of $386,000 and settlement of the $500,000 promissory note under a private placement of units consisting of one common share and one common share purchase warrant. The common shares purchase warrants expire in two years and have an exercise price of $1.00 per share. The Company's promissory note of $500,000 was redeemed for 909,091 units as part of this issue.
In July and August 2003 the Company issued 212,000 common shares for total proceeds of $15,001 from the exercise of stock options.
F-12
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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003
(Expressed in U.S. Dollars)
(Unaudited)
Continued
On January 7, 2003 the Company issued 5,000,000 common shares, in part for the assets acquired as described in Note 3. On the same date a total of 100,000,000 shares were returned to treasury and cancelled.
The Company declared a stock dividend of 19 shares of common stock for each 1 share outstanding. The record date for the stock dividend was January 20, 2003 and the shares began trading on a post-dividend basis on January 23, 2003. All per share amounts have been retroactively adjusted.
8. Discontinued Operations
Discontinued operations consist of the Company's former activities in mineral exploration. In December 2002 the Company's Board of Directors approved the termination of mining activity and the acquisition of C-Chip Technology (Note 3).
9. Income Tax
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 as of its inception. The Company has incurred net operating losses. Pursuant to SFAS 109 the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
10. Subsequent Event
In November 2003 the Company closed a private placement of 909,091 units at a price of $0.55 per unit for gross proceeds of $500,000. Each unit consists of one common share and one common share purchase warrant exercisable at $1.00 per share with an expiration date of two years from issuance.
F-13
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ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward Looking Statements
Certain information in this report including statements made in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-QSB contains "forward-looking statements". All statements other than statements of historical fact are "forward-looking statements", including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may", "will", "expects", "plans", "anticipates", "estimates", "potential", or "continue", or the negative thereof or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual resu lts, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Overview of our Business
Prior to our acquisition of the assets related to the C-Chip, our Company had been engaged in the exploration and acquisition of mineral properties. Since our inception on June 26, 2000, our Company has not generated any revenues from it mineral properties or from its newly acquired technology. In the most recent quarter ended September 30, our Company proceeded with the delivery of number of units of the C-Chip CREDIT MANAGER. We recorded no revenue as the limited sales were accounted as a cost recovery against marketing and sales costs.
The technology that we acquired is a new patent-pending wireless communications set of tools that offers complete remote control and access over targeted equipment and services. Our Company is now engaged in the development and the marketing of products and services that integrates wireless communications technology, transaction processing, software applications and the Internet, and when location is required, Global Positioning System (GPS) technology to enable users to efficiently access, control and manage remote assets.
Our products and services are designed to be easy-to-use and cost-effective. Our products and services allow users to selectively enable, disable (on/off) targeted equipment, or send other commands at will, from anywhere to almost anywhere in North America. We believe our technology provides significant value to business users by increasing the efficiency of their operations and lowering their costs.
We have targeted our initial products and services to the large automotive sector, but our basic technology has applications to a variety of assets which span several business sectors including industrial equipment, office equipment and consumer electronic products.
Our product offerings are within the "Telematics" industry. Telematics refers to the ability to remotely access, control and manage different products or services. The telematics sector is a new and emerging industry poised for explosive growth over the next 3-5 years. Available and planned applications include location-based and navigation services, info-tainment services, automatic emergency callout in event of accident, security and anti-theft systems, remote diagnostics and repair, logistics and fleet management, and office applications.
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The basic system elements of our technology include a sensor embedded in target devices. This includes a radio frequency receiver and microprocessor, web-based applications and database management. Other required components include access to wireless networks and Internet access. The processor is addressable through a unique electronic serial number that corresponds to the individual sensor. The processor accepts an input signal and compares it to a number of criteria to determine if the current operating condition should be maintained or modified. Additional components to the basic unit include GPS technology for location and tracking, mapping software to enable users to easily view location of their assets and a host of additional monitoring features.
To process the commands of authorized users and to enable our users to manage their own database of sensor embedded devices from a central point using the Web, we have built our own Secure Data Management Center. This eliminates the need for our users to make a substantial investment in acquiring and supporting capital equipment, such as hardware, software and data networking equipment, to use our services.
Our technology efforts focus on creating new services and enhancing the reliability, availability and features of our products and services while maintaining a scalable and cost effective architecture. Our proprietary technologies are designed to work with technologies from other companies, including our partners, competitors, and other third parties. Similarly, our services are designed to operate with a variety of wireless communications protocols. We expect to continue to develop additional proprietary technology where feasible and to purchase or license technology where cost-effective
Our core technology is readily applicable to the credit, asset, and security management industries. Because there is a large, readily available market for telematics applications for automotive products, management has positioned its initial product development effort toward this industry. We are currently beginning to market a comprehensive offering to the automotive sector with solutions encompassing the credit, asset and security management industry. Our current products are:
1) The Credit Manager: The Credit Manager is a unidirectional communication benefit-denial receiver which can be incorporated into any vehicle. It offers the credit grantor, using a simple web-based application, the ability to "turn on" / "turn off" leased or financed vehicles through connecting a C-Chip sensor to the starter. The retail price for the Credit Manager is currently $185 and has no service fees. This product is currently distributed by Pay Technologies LLC ("PayTeck") in the U.S. under a private label agreement and is known as the WebTeckTM Account Manager. Recently, our Company added resources to increase its distribution network for products and services geared toward credit management applications. With the indebtness of consumers at all time high and the quality of credit diminishing, we believe there are significant opportunities for credit management solutions that are non-intrusive for consumers and, at the same time, ensure credit granters the ability to enforce schedule of payments. Results of our efforts to increase our distribution network within this market are expected within the coming months. Yet, just with PayTeck as our distributor to the US market, we expect sizeable volume for the Credit Manager alone.
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2) The Tracking Manager: This product has the same capabilities as the Credit Manager, but adds two-way communication as well as GPS location / tracking and other monitoring features. Additional options include notification of excess speed, direction, notification in case of theft, starter and fuel pump interrupt, doors unlock and navigation aid - all requests are charged to users on a pay-per-use basis. This unit is very small - about half the size of a cigarette pack and is one of the lowest cost tracking devices available on the market today. Our Company is currently in discussions with wireless carriers to establish distribution partnerships whereby our tracking solution would be offered through the distribution networks of wireless carriers under original equipment manufacturers (OEM) agreements. Wireless carriers with whom our Company is having discussions are currently proceeding with extensive testing of our tracking solutions and we expect partnerships to materialize within the coming months. Ou r tracking solution, The Tracking Manager, offers significant opportunities as a credit, security and asset management solutions.
3) The Access Manager: This product is a wireless anti-theft device for motorized vehicles that uses RFID technology to identify authorized users. RFID technology enables the identification of authorized users through the use of radio frequency. A transponder is carried by the authorized user and it is that transponder that talks to wireless kill switches. If the transponder does not talk to the switches, the car simply will not start. Switches can be installed to the starter, fuel pump, transmission, ignition, doors lock, or any combination. As wireless links are used, they are virtually impossible to locate since they can be installed almost anywhere in the vehicle. The Access Manager is believed to be one of the most effective and cost efficient anti-theft device on the market today. In the coming months, we intend to devote increased efforts to market the Access Manager in North America, Europe and Asia.
4) The Hawk: Launched this November, The Hawk is also an anti-theft device that uses RFID technology to identify authorized users, but it has specifically designed for motorcycles and recreational vehicles. The Hawk is very small fitting in the palm of a hand and can be hidden easily. The Hawk 100 has many features that make it unique. First, the unit is completely transparent to the end user who only has to have an active transponder in his possession to activate and deactivate the system. Without the transponder, the vehicle will simply not operate. Secondly, the system draws no current in the standby mode - a problem encountered with competitive products. Finally, the very small size of the completely weatherproof unit makes it easy to install and thus invisible to thieves or indeed, any unauthorized user. Our Company has already attracted significant attention of major aftermarket distributors in the industry and is currently negotiating agreements for distribution in North America and Asia. Our Compa ny is also entertaining preliminary discussions to establish for European distribution.
With the initial development of our first line of products for the automotive industry now essentially completed, we expect that the development cycle to adapt our technology to other products will be shortened significantly. In the future, while continuing product development for the automotive sector, our Company anticipates product development of different credit, security and asset management solutions touching various products, including but not limited to: tractors, forklifts and business machines.
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With some of key products and services now available for commercialization and some completing pre-commercialization tests, management is now instituting a comprehensive sale and marketing strategy. We are now making the transition from being a company focusing almost solely on product development and testing, to an entity to be driven by sales and marketing. Management has already identified what is believed to be large markets that remain underserved but would be logical, potentially keen candidates given an appropriate product and service offering at the right price.
Until our newly acquired assets become self-funding, we will to continue to fund our operations through the issuance of common stock as well as with the issuance of short and long term debt, and loans from shareholders and Directors. A private placement of $1.4 million is in now completed and this should allow our Company to further implement our revised business plan.
With this acquisition, we have set for ourselves the goal to be recognized as a leading provider of credit, security and asset management solutions for financial institutions, leasing companies and car rental companies.
Financial Condition, Liquidity and Capital Resources
Since our acquisition of all of the assets related to the C-Chip technology ("C-Chip") from Capex Investments Limited ("Capex") on January 7, 2003, our Company has been engaged in the development and the marketing of products and services that integrates wireless communications technology, transaction processing, software applications and the Internet, and when location is required, Global Positioning System (GPS) technology to enable users to efficiently access, control and manage remote assets.
Our products and services are designed to be easy-to-use and cost-effective. We allow our customers to use our website to remotely access, control, locate and monitor different types of equipment or services. Our products and services allow users to selectively enable, disable (on/off) targeted equipment, or send other commands at will, from anywhere to almost anywhere in North America. We believe our technology provides significant value to business users by increasing the efficiency of their operations and lowering their costs.
To close on the acquisition of the C-Chip technology, we agreed to pay Capex as follows: 1) a Promissory Note of $500,000 bearing no interest payable in full on January 30, 2003; 2) 5,000,000 restricted shares of our common stock; and, 3) a convertible Debenture of $2,000,000 maturing on January 15, 2007 and carrying a coupon of 2.5% payable at the option of the holder in restricted shares of our common stock, the said Debenture being convertible at anytime at the option of the holder in restricted shares of our common stock at a discount of 15% to its market price. The company also paid $40,000 for expenses related to the transaction.
On January 3, 2003, we declared a stock dividend of 19 shares of common stock for each 1 share outstanding. The record date for the stock dividend was January 20, 2003 and the shares began trading on a post-dividend basis on January 23, 2003. As of that date, we had a total of 25,223,960 common shares outstanding post-dividend. Also early in the year, to better reflect the nature of the Company's newly acquired assets, shareholders approved on February 28, 2003 to change the name of our Company from Keystone Mines Limited to C-Chip Technologies Corporation.
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In July, 2003, Capex opted to proceed with the conversion of its convertible debenture of $2,000,000 maturing on January 15, 2007. As per the initial Agreement with Capex, the debenture was converted at discount of 15% to the market price. As a result, including accrued interest, our Company issued to Capex a total of 3,910,120 restricted shares of its common stock.
In July and August, our Company granted 137,000 options at an exercise price of $0.00001 per common share to different consultants in lieu of a cash payment. These vested options were immediately exercised.
In August and September, the Company issued 1,610,910 restricted shares of its common stock under a private placement of Units priced at $0.55 per Unit. Each Unit includes one common share and one common share purchase warrant enabling the holder to purchase one additional common share at price of $1.00 for a period of two years. At the option of the Company, the common share purchase warrant may be redeemed upon a 30-day notice to the holder. As part of this issue, the Promissory Note of $500,000 held by Capex was redeemed for a total of 909,091 Units. Subsequent to September 30, 2003, the Company issued a further 909,091 Units under the same terms and conditions to raise an additional $500,000 bringing total proceeds from the private placement to $1,386,000, including the conversion of a promissory note of $500,000 held by Capex.
As of September 30, 2003, the Company's principal capital resources had been acquired through a combination of short and long term debt, and the issuance of our common stock. The Company does not have a credit line available at any banks at this time. Our ability to emerge from our current development stage with respect to our planned business activity is dependent upon our successful efforts to commercialize our current and future products, thus attaining profitable business operations, and/or to raise additional equity financing. Until our Company is able to generate sufficient cash flow to sustain its on going business activity, management plans to seek additional capital through a private placement of its common stock. In the interim, the Company expects to fund itself in the next twelve months from operations, from the issuance of its common stock and/or loans from shareholders or Directors. There is no guarantee that the Company will be able to complete any of the above objectives.
On September 30, 2003, we had negative working capital of ($80,056) compared to a negative working capital of ($828,127) at June 30, 2003. The improvement in working capital was due to our recent equity financing and the conversion of the promissory note of $500,000 held by Capex.
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As part of interim financing provided by shareholders, directors and officers, the Company has purchased management services from Capex, the vendor of the C-Chip technology. From time to time, Capex also pays directly certain operations expenses directly and provides funds for working capital to our Company. The amounts due to Capex are non-interest bearing, unsecured, and have no fixed terms of repayment. At September 30, 2003, the amount due to Capex was $210,249 compared to $193,325 at June 30, 2003. As of September 30, 2003, amounts owing to officers of the Company stood at $71,110 compared to $40,241 at June 30, 2003. The amounts owed by our Company to its officers are non-interest bearing, unsecured and have no fixed terms of repayment.
As of September 30, 2003, our Company's total assets were $907,265. This compares with our Company's assets of $689,781 at June 30, 2002. The increase in the Company's total assets was attributable to the equity financing that our Company concluded in the latest period
Results of Operations
On the acquisition of all of the assets related to the C-Chip technology the Company discontinued its mineral exploration business and has allocated related expenses, totaling $602,606 to Loss from Discontinued Operations. Although we have shipped products in the quarter ended September 30, 2003, our Company has not recorded any revenue from its newly acquired technology. Although shipments of product have occurred and we have invoiced clients, our Company still records this as cost recoveries with a reduction in the respective expense in the statement of operations. As shipments of our first product, the Credit Manager, is ramping up, we expect to begin to account for actual revenue in the current quarter,
Our Company posted losses of $1,706,097 for the three months ending September 30, 2003, including $46,579 of expenses relating to stock based compensation and $1,418,451 relating to the discount on conversion of the Debenture held by Capex. Since inception on June 26, 2000, we have posted losses of $3,432,946, including $602,606 from discontinued operations. The principal component of the loss before discontinued operations is $650,000 of acquired in process research and development related to the acquisition of the C-Chip technology which was amortized immediately and the above mentioned discount on conversion of debt.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to revenue recognition. The Company uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates.
ITEM 3. CONTROLS AND PROCEDURES
Quarterly evaluation of our disclosure controls and internal controls
Within the 90 days prior to the date of this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" (Disclosure Controls), and our "internal controls and procedures for financial reporting" (Internal Controls). This evaluation (the Controls Evaluation) was done under the supervision and with the participation of our management, including our chief executive officer (CEO) and chief financial officer (CFO). Our CEO performs the same functions as a principal executive officer and our CFO performs the same functions as a principal financial officer. Rules adopted by the SEC require that in this section of the quarterly report we present the conclusions of our CEO and our CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.
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CEO and CFO certifications
Appearing immediately following the signatures section of this quarterly report there are two separate forms of "Certifications" of the CEO and the CFO. The first form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of the quarterly report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Disclosure controls and internal controls
Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting p rinciples.
Limitations on the effectiveness of controls
Our management, including our CEO and CFO, confirm that the control systems are at the "reasonable assurance" level, however, management does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud as a control system. No matter how well conceived and operated, they cannot provide absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. However, upon discovery that the controls are inadequate, they will be changed.
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Scope of the controls evaluation
Our CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, the controls' implementation by us and the effect of the controls on the information generated for use in this quarterly report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. Our Internal Controls are also evaluated on an ongoing basis by our independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in our Internal Controls, or whether we had identified any acts of fraud involving personnel who have a significant role in our Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board's Audit Committee and to our independent auditors and to report on related matters in this section of the quarterly report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition wh ere the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, our CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that, our Disclosure Controls are effective to ensure that material information relating to us and our subsidiary is made known to management, including our CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.
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PART II
ITEM 2. CHANGES IN SECURITIES
(c)
The following are securities sold by us without registration during the period from July 1, 2003 to September 30, 2003:
On July 25, 2003, Capex Investments Limited converted an outstanding debenture to 3,910,120 restricted shares of common stock.
On August 22, 2003 we issued 250,000 restricted shares of common stock to Oleg Kharlanov in consideration of $137,500.
On August 26, 2003 we issued 70,000 restricted shares of common stock to VP Bank in consideration of $38,500.
On September 10, 2003, Capex Investments Limited converted an outstanding promissory note to 909,091 restricted shares of common stock.
On September 12, 2003 we issued 109,091 restricted shares of common stock to Oleg Kharlanov in consideration of $60,000.
On September 18, 2003 we issued 90,910 restricted shares of common stock to Oleg Kharlanov in consideration of $50,000.
On September 25, 2003 we issued 181,818 restricted shares of common stock to Prospect Fund L.P. in consideration of $100,000.
All of the foregoing transactions were exempt from registration under the Securities Act of 1933 (the "Act") pursuant to the exemptions available in section 4(2) of the Act or Reg. S promulgated under the Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| Exhibit No. | Document |
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-15(a) and Rule 15d-15(a), promulgated under the Securities Exchange Act of 1934, as amended |
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| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-15(a) and Rule 15d-15(a), promulgated under the Securities Exchange Act of 1934, as amended |
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| 32.1 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Executive Officer) |
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| 32.2 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Financial Officer) |
Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter:
On July 16, 2003, we filed a Form 8-K reporting the following events:
On June 30, 2003, we entered into an agreement with Capex Investments to extend the due date of our promissory note in the amount of $500,000 from May 31, 2003 to December 31, 2003 or to the date of the closing of our private placement, which ever occurs first.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 18th day of November, 2003.
| C-CHIP TECHNOLOGIES CORPORATION | |
| BY: | /s/ Stephane Solis |
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| Stephane Solis, President, Principal Executive Officer and a member of the Board of Directors. |
| BY: | /s/ Benjamin Leboe |
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| Benjamin Leboe, Principal Financial Officer |
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