UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER000-50459
EXPLORATION DRILLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
NEVADA | 98-0396733 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Mendelstrasse 11, Technologiehof | |
D-48149, Muenster, Germany | |
(Address of principal executive offices) | (Zip Code) |
49-251-980-2030
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ ] | (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable
date:As of November 14, 2008, the Registrant had 123,487,724 shares of common stockoutstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results that can be expected for the year ending December 31, 2008.
As used in this Quarterly Report, the terms “we,” “us,” “our,” “EDI USA,” and the “Company” mean Exploration Drilling International Inc. and its subsidiaries, unless otherwise indicated. All dollar amounts in this Quarterly Report are expressed in U.S. dollars, unless otherwise indicated.
2
EXPLORATION DRILLING INTERNATIONAL INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2008
(Unaudited)
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
CONSOLIDATED BALANCE SHEETS |
(Expressed in U.S. Dollars) |
September 30, | December 31, | |||||
2008 | 2007 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Current Assets | ||||||
Cash | $ | 1,968 | $ | - | ||
Other receivables | 21,096 | 20,674 | ||||
Loans receivable -related parties (Note 8) | 7,210 | 9,610 | ||||
Prepaids | 8,445 | 24,942 | ||||
Deferred tax asset, less valuation allowance of $2,783,766 (2007 -$2,515,492) | - | - | ||||
Total Current Assets | 38,719 | 55,226 | ||||
Investment (Note 4) | 9,462 | - | ||||
Equipment (Note 5) | 150,380 | 210,587 | ||||
Patents (Note 5) | 222,882 | 204,770 | ||||
Total Assets | $ | 421,443 | $ | 470,583 | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||
Current Liabilities | ||||||
Bank indebtedness (Note 6) | $ | - | $ | 53,182 | ||
Accounts payable and accrued liabilities | 588,868 | 463,879 | ||||
Accounts payable and accrued liabilities –related parties (Note 8) | 125,836 | 117,501 | ||||
Loans payable -current (Notes 7 and 8) | 1,673,544 | 1,377,931 | ||||
Total Current Liabilities | 2,388,248 | 2,012,493 | ||||
Loans payable (Notes 8) | 74,683 | 129,920 | ||||
Total Liabilities | 2,462,931 | 2,142,413 | ||||
Commitments (Note 12) | ||||||
Stockholders’ Deficiency | ||||||
Common stock (Note 9) | ||||||
Authorized | ||||||
1,000,000,000 common shares, par value $0.001 | ||||||
Issued and outstanding | ||||||
September 30, 2008 -120,487,724 | ||||||
December 31, 2007 -112,567,396 | 120,487 | 112,567 | ||||
Additional paid-in capital | 11,087,468 | 8,438,228 | ||||
Accumulated other comprehensive loss: | ||||||
Foreign currency translation adjustment | (124,658 | ) | (162,044 | ) | ||
Deficit accumulated during the development stage | (13,124,785 | ) | (10,060,581 | ) | ||
Total Stockholders’ Deficiency | (2,041,488 | ) | (1,671,830 | ) | ||
Total Liabilities and Stockholders’ Deficiency | $ | 421,443 | $ | 470,583 |
The accompanying notes are an integral part of these consolidated financial statements,
F-2
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
(Expressed in U.S. Dollars) |
(Unaudited) |
Cumulative | |||||||||||||||
Amounts | Nine | Nine | Three | Three | |||||||||||
From Inception | Months | Months | Months | Months | |||||||||||
(December 7, 2004) | Ended | Ended | Ended | Ended | |||||||||||
to September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||
2008 | 2008 | 2007 | 2008 | 2007 | |||||||||||
REVENUE | $ | 66,287 | $ | 66,287 | $ | - $ | 43,782 | $ | - | ||||||
EXPENSES | |||||||||||||||
Amortization | $ | 207,816 | $ | 62,282 | $ | 47,309 $ | 20,194 | $ | 16,405 | ||||||
Management fees (recovery) | 1,157,286 | 102,811 | 278,350 | (8,730 | ) | 112,884 | |||||||||
Professional fees | 3,433,714 | 1,465,325 | 922,759 | 425,868 | 27,119 | ||||||||||
Selling, general and administrative | 2,975,918 | 271,726 | 746,913 | 72,590 | 225,293 | ||||||||||
Stock compensation expense | 4,937,238 | 1,255,994 | 2,110,772 | 333,882 | - | ||||||||||
Foreign currency loss (gain) | 7,292 | (3,187 | ) | 1,546 | (3,901 | ) | 939 | ||||||||
12,719,264 | 3,154,951 | 4,107,649 | 839,903 | 382,640 | |||||||||||
LOSS BEFORE OTHER ITEMS AND | |||||||||||||||
INCOME TAXES | (12,652,977 | ) | (3,088,664 | ) | (4,107,649 | ) | (796,121 | ) | (382,640 | ) | |||||
OTHER ITEMS | |||||||||||||||
Interest income | 22,706 | 885 | 6,535 | 112 | 1,496 | ||||||||||
Interest expense | (245,971 | ) | (74,768 | ) | (76,718 | ) | (25,931 | ) | (25,116 | ) | |||||
Loss on disposal of capital assets | (5,377 | ) | - | (2,963 | ) | - | - | ||||||||
Write down of patents | (237,953 | ) | - | - | - | - | |||||||||
Recovery (write down) of loans receivable | |||||||||||||||
–related parties (Note 8) | (5,213 | ) | 98,343 | - | - | - | |||||||||
LOSS BEFORE INCOME TAXES | (13,124,785 | ) | (3,064,204 | ) | (4,180,795 | ) | (821,940 | ) | (406,260 | ) | |||||
Provision for income taxes | - | - | - | - | - | ||||||||||
NET LOSS | (13,124,785 | ) | (3,064,204 | ) | (4,180,795 | ) | (821,940 | ) | (406,260 | ) | |||||
OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||||
Foreign currency translation adjustment | (124,658 | ) | 37,386 | (63,147 | ) | 156,144 | (72,430 | ) | |||||||
COMPREHENSIVE LOSS | $ | (13,249,443 | ) | $ | (3,026,818 | ) | $ | (4,243,942 | ) | $ | (665,796 | ) | $ | (478,690 | ) |
BASIC AND DILUTED NET LOSS PER SHARE | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.00 | ) | |||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||||
SHARES OUTSTANDING | 116,774,622 | 105,913,652 | 120.265,674 | 109,317,396 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Expressed in U.S. Dollars) |
(Unaudited) |
Cumulative | |||||||||
Amounts | Nine | Nine | |||||||
From Inception | Months | Months | |||||||
(December 7, 2004) | Ended | Ended | |||||||
to September 30, | September 30, | September30, | |||||||
2008 | 2008 | 2007 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
Net loss for the period | $ | (13,124,785 | ) | $ | (3,064,204 | ) | $ | (4,180,795 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | |||||||||
Amortization | 207,816 | 62,282 | 47,310 | ||||||
Stock compensation expense | 4,937,238 | 1,255,994 | 2,110,772 | ||||||
Loss on disposal of capital asset | 5,377 | - | 2,963 | ||||||
Write down of patents | 237,953 | - | - | ||||||
Write down (recovery) of loans receivable –related parties | 5,213 | (98,343 | ) | - | |||||
Issuance of capital stock for services | 1,965,000 | 1,245,000 | 720,000 | ||||||
Change in operating assets and liabilities: | |||||||||
Decrease (increase) in other receivables | 46,301 | (850 | ) | 40,929 | |||||
Increase in accrued interest receivable | (20,910 | ) | (272 | ) | (6,466 | ) | |||
Decrease (increase) in prepaid expenses | (5,578 | ) | 15,803 | 3,528 | |||||
Increase in accounts payable and accrued liabilities | 497,684 | 135,643 | 4,244 | ||||||
Increase in accounts payable and accrued liabilities –related parties | 118,001 | 10,830 | 30,229 | ||||||
Increase in accrued interest payable | 186,788 | 66,987 | 41,026 | ||||||
Net cash used in operating activities | (4,943,902 | ) | (371,130 | ) | (1,186,260 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Loans receivable | (61,903 | ) | 104,192 | 96,731 | |||||
Acquisition of equipment, net of disposal proceeds | (319,672 | ) | (889 | ) | (11,338 | ) | |||
Acquisition of patents | (409,537 | ) | (25,200 | ) | (56,339 | ) | |||
Investment in joint venture | (8,890 | ) | (8,890 | ) | - | ||||
Net cash provided by (used) in investing activities | (800,002 | ) | 69,213 | 29,054 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Bank indebtedness | - | (53,182 | ) | - | |||||
Cash acquired from Invision Capital, Inc. | 81,587 | - | - | ||||||
Issuance of capital stock for cash, net of issuance costs | 2,797,498 | 156,166 | 1,141,846 | ||||||
Contributed capital | 1,475,540 | - | - | ||||||
Loans payable | 1,475,251 | 212,125 | 21,414 | ||||||
Net cash provided by financing activities | 5,829,876 | 315,109 | 1,163,260 | ||||||
EFFECT OF FOREIGN CURRENCY TRANSLATION ON | |||||||||
CASH DURING THE PERIOD | (84,004 | ) | (11,224 | ) | (18,798 | ) | |||
NET DECREASE IN CASH | 1,968 | 1,968 | (12,744 | ) | |||||
CASH, BEGINNING OF PERIOD | - | - | 23,877 | ||||||
CASH, END OF PERIOD | $ | 1,968 | $ | 1,968 | $ | 11,133 |
Supplemental Disclosure with Respect to Cash Flows (Note 13)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
1. | HISTORY AND ORGANIZATION OF THE COMPANY |
Exploration Drilling International Inc. (the “Company”) was incorporated on January 24, 2003, under the Laws of the State of Nevada and was in the business of acquiring, exploring and developing mineral properties. Effective April 26, 2006, the Company acquired 100% of the issued and outstanding shares of EDI Exploration Drilling International GmbH (“EDI”), a company engaged in the distribution and maintenance of water exploration machinery and equipment and the provision of related services. The Company has abandoned its mineral property acquisition and exploration activities in order to focus its resources on the development and marketing of EDI’s proprietary technology. The Company is considered to be a development stage company, as it has not generated significant revenues from operations. | |
Effective April 26, 2006, the Company acquired 100% of the issued and outstanding shares of EDI from EDI Exploration International Drilling Holding GmbH (“EDI Holding”) in exchange for an aggregate of 50,000,000 shares of the Company’s common stock. In addition, Frank Rigney, a shareholder of the Company, transferred 20,000,000 shares of the Company’s common stock already issued and outstanding prior to the transaction to EDI Holding in exchange for $10,000. Completion of the acquisition resulted in the former sole shareholder of EDI holding the majority of the Company’s issued and outstanding common stock. As a result, the transaction was accounted for as a recapitalization of EDI. | |
The unaudited consolidated financial statements of the Company prior to April 26, 2006 are those of EDI. The Company’s date of incorporation is considered to be December 7, 2004, the date of inception of EDI. All significant inter-company balances have been eliminated on consolidation. | |
Effective October 16, 2006, the Company changed its name from Invision Capital, Inc. to Exploration Drilling International Inc. | |
These unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America for interim financial information. The accompanying unaudited consolidated financial statements do not include all information and footnote disclosures required for an annual set of financial statements prepared under United States of America generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows as at September 30, 2008 and for all periods presented, have been included. Interim results for the period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year as a whole. | |
2. | GOING CONCERN |
These unaudited consolidated financial statements have been prepared with the on-going assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. However, certain conditions noted below raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. |
F-5
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
2. | GOING CONCERN (continued) |
The operations of the Company have primarily been funded by the sale of common stock and loans received. Continued operations of the Company are dependent on the Company’s ability to complete equity financings or generate profitable operations in the future. Management’s plan in this regard is to secure additional funds through future equity financings. Such financings may not be available or may not be available on reasonable terms to the Company. | |
3. | SIGNIFICANT ACCOUNTING POLICIES |
The unaudited consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles in the United States of America and are stated in U.S. dollars. The significant accounting policies adopted by the Company are as follows: |
(a) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
(b) Foreign currency translation
The functional currency of the Company is the U.S. dollar. The Company’s subsidiary, EDI, uses the Euro as its functional currency. Accordingly, monetary assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the balance sheet date while non-monetary assets and liabilities are translated at historical rates. Revenue and expense items denominated in a foreign currency are translated at exchange rates prevailing when such items are recognized in the statement of operations. Exchange gains and losses arising on translation of foreign currency items are included in the statement of operations.
The Company follows the current rate method of translation with respect to its subsidiary, EDI. Accordingly, assets and liabilities are translated into U.S. dollars at the period-end exchange rates while revenue and expenses are translated at the average exchange rates during the period. Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated other comprehensive income (loss).
(c) Cash
The Company considers cash held at banks and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
F-6
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
(d) Prepaid expenses
Prepaid expenses consist primarily of prepaid vehicle lease and travel expenses.
(e) Other receivables
Other receivables consist primarily of Value Added Tax in Germany.
(f) Investments
The Company accounts for investments in companies subject to significant influence (generally those companies in which interests ranging from 20% to 50% are held) on the equity basis. Investments in companies that the Company is unable to significantly influence are carried at cost.
Investments in which the Company holds a 51% or greater interest are consolidated, unless control does not exist due to the Company’s inability to determine the investees strategic operating, financing and investing policies.
(g) Equipment
Equipment is recorded at cost and consists of a well system, technical equipment and machinery and office and other equipment. Depreciation is calculated using the straight-line method over the useful lives of the assets. Maintenance and repairs are expensed as incurred while betterments or renewals are capitalized.
The Company provides for depreciation over the estimated life of each asset on a straight-line basis over the following periods:
Well system | 20 years | |
Technical equipment and machinery | 3-8 years | |
Office and other equipment | 3-10 years | |
Software | 20 years |
(h) Patents and trademarks
Patents and trademarks are recorded at cost. Capitalized amounts relate solely to legal and advisory costs incurred in registration of the patents and trademarks. Depreciation is calculated using the straight-line method over the useful lives of the patents granted ranging from 8-20 years. No depreciation is provided for patents that have not yet been awarded and/or begun to generate revenues. No depreciation is provided for trademarks as they have indefinite lives.
F-7
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
(i) Goodwill and intangible assets
The Company has adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Intangible Assets,” which requires that costs of internally developing, maintaining or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, be recognized as an expense when incurred. Intangible assets acquired for fair value having definite lives are amortized over their useful life.
(j) Accounting for the impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(k) Income taxes
A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expenses (benefits) result from the net change during the period of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
(l) Fair value of financial instruments
The Company's financial instruments consist of other receivables, loans receivable –related parties, bank indebtedness, accounts payable and accrued liabilities, accounts payable and accrued liabilities –related parties loans payable –current and loans payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.
(m) Stock-based compensation
The Company accounts for stock-based compensation issued to employees under the fair value method in accordance with the provisions of SFAS 123R,“Share-Based Payment.”
The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123,“Accounting for Stock-Based Compensation,” and the consensus in Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services.”
F-8
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
(n) Net loss per share
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share takes into consideration shares of common stock outstanding (computed under basic earnings per share) and potentially dilutive shares of common stock. As of September 30, 2008 and 2007, the Company’s potentially dilutive securities, stock options and warrants, have been excluded from the weighted average number of shares outstanding as they were anti-dilutive.
(o) Comprehensive income (loss)
The Company has adopted SFAS 130,“Reporting of Comprehensive Income,” which establishes guidelines for the reporting and display of comprehensive income (loss) and its components in financial statements. Comprehensive income (loss) includes foreign currency translation adjustments.
(p) Development stage
The Company is a development stage company as defined in SFAS 7,“Accounting and Reporting by Development Stage Enterprises,”as it is devoting substantially all of its efforts to establish a new business and planned principal operations have not yet commenced.
(q) Concentration of credit risk
Cash is the only financial instrument that potentially subjects the Company to concentration of credit risk. The Company maintains cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
(r) Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair Value Measurements”. SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year.
FASB Staff Position (“FSP”) 157-2 delayed the effective date of SFAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS 157 on January 1, 2008, and utilized the one year deferral for nonfinancial assets and nonfinancial liabilities that was granted by FSP 157-2. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements.
F-9
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
(r) Recent accounting pronouncements (continued)
In February, 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (revised—2007) ("SFAS No. 141(R)"). SFAS No. 141(R) is a revision to previously existing guidance on accounting for business combinations. The statement retains the fundamental concept of the purchase method of accounting, and introduces new requirements for the recognition and measurement of assets acquired, liabilities assumed and noncontrolling interests. SFAS No. 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact this statement will have on its financial position and results of operations and does not expect this statement to have a material impact on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements ("SFAS No. 160"). The Statement requires that noncontrolling interests be reported as stockholders equity, a change that will affect the Company's financial statement presentation of minority interests in its consolidated subsidiaries. The Statement also establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary as long as that ownership change does not result in deconsolidation. The statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS No. 160 and does not expect this statement to have a material impact on its financial position and results of operations.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”. SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect an entity’s operating results, financial position, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. Earlier adoption is permitted. The Company is currently reviewing the provisions of SFAS 161 and has not yet adopted the statement. However, as the provisions of SFAS 161 are only related to disclosure of derivative and hedging activities, the Company does not believe the adoption of SFAS 161 will have a material impact on its consolidated operating results, financial position, or cash flows.
(s) Reclassifications
Certain amounts reported in the prior periods have been reclassified to conform to the current period’s presentation.
F-10
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
4. | INVESTMENT |
In March 2008, EDI established a joint venture company in Turkey called EDI Sondaj Insaat Makine Sanayi Ticaret Anonim Sirketi (“EDI Turkey”) for consideration of Euro 6,551 (US $9,462). EDI owns a 25% interest in EDI Turkey. EDI Turkey will be utilized by the parties to seek out business opportunities in Turkey for EDI’s proprietary technologies. EDI Turkey is accounted for as an investment under the equity method as EDI has significant influence. As at September 30, 2008, EDI Turkey had not yet begun operations. | |
5. | EQUIPMENT AND PATENTS |
Equipment
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Well system | $ | 2,100 | $ | 2,105 | |||
Technical equipment and machinery | 302,966 | 302,900 | |||||
Office and other equipment | 28,986 | 29,058 | |||||
Software | 14,059 | 14,094 | |||||
348,111 | 348,157 | ||||||
Accumulated amortization | (197,731 | ) | (137,570 | ) | |||
Net book value | $ | 150,380 | $ | 210,587 |
Patents and trademarks
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Trademarks | $ | 91,226 | $ | 92,898 | |||
Patents | 135,688 | 113,783 | |||||
226,914 | 206,681 | ||||||
Accumulated amortization | (4,032 | ) | (1,911 | ) | |||
Net book value | $ | 222,882 | $ | 204,770 |
During the year ended December 31, 2007, the Company wrote down patents totaling $237,953 as the recoverability of the carrying amount of the assets was uncertain. During the nine months ended September 30, 2008 and 2007, the Company did not amortize $198,056 and $443,324 of its patents and trademarks as the patents have not yet been awarded and/or they have not begun to generate revenues and the trademarks have indefinite lives. Capitalized amounts relate solely to legal and advisory costs incurred in registration of the patents and trademarks.
F-11
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
6. | BANK INDEBTEDNESS |
At September 30, 2008 and December 31, 2007, the Company had a consolidated bank indebtedness of $0 and $53,182, respectively. EDI has an account overdraft limit of Euro 50,000 (US $72,223) which bears interest at 12.0% per annum. The overdraft bears interest at 15.0% per annum on any amounts exceeding the overdraft limit. | |
7. | LOANS PAYABLE –CURRENT |
During the nine months ended September 30, 2008, a loan was granted from a third party individual for Euro 15,100 (US $21,811). The loan bears interest at 4% per annum and is due April 15, 2009. | |
During the nine months ended September 30, 2008, a loan was granted from a third party individual for Euro 30,000 (US $43,334). The loan bears interest at 6.5% per annum and is due December 31, 2008. | |
During the nine months ended September 30, 2008, several loans and interest payable were assigned from a company with a shareholder related to an officer and director of the Company to a third party company totaling Euro 103,533 (US $149,549). The principal portion of the loans assigned total Euro 92,617 (US $133,782). The loans bear interest and are due as follows: |
Principal | Interest | Due Date |
Euro 23,517 (US $33,970) | 6% | December 31, 2008 |
Euro 11,600 (US $16,756) | 5% | November 30, 2008 |
Euro 57,500 (US $83,056) | 5% | January 29, 2009 |
During the nine months ended September 30, 2008, two loans were granted from a third party company for Euro 13,000 (US $18,778) and Euro 13,000 (US $18,788), respectively. The loans bear interest at 3% per annum and were due April 25, 2008 and July 1, 2008. The loans have been extended and are due December 31, 2008.
During the year ended December 31, 2007, two loans were granted from a third party individual for Euro 33,000 (US $47,667) and Euro 50,000 (US $72,223). The loans bear interest at 6% per annum and were due February 19, 2008 and March 14, 2008. The loans have been extended and are due December 31, 2008.
During the year ended December 31 2006, several loans were granted from a third party individual totaling Euro 400,000 (US $577,784). The loans earned interest at 6% per annum. During the year ended December 31, 2007, the total loans of Euro 400,000 (US $577,784) and interest of Euro 10,000 (US $14,445) was repaid. At September 30, 2008, Euro 31,273 (US $45,172) of interest was still outstanding.
During the year ended December 31, 2006, a loan was granted from a third party individual for Euro 23,000 (US $33,223). The loan bears interest at 7% per annum and was due July 7, 2007. The loan has been extended and is due December 31, 2008. The Company has the option of repaying the principal and interest by issuing 12,305 shares of the Company’s common stock if the lender is notified in writing one month before the due date.
F-12
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
7. | LOANS PAYABLE –CURRENT (continued) |
During the year ended December 31, 2006, several loans were granted from a third party individual totaling Euro 53,000 (US $76,556). During the year ended December 31, 2007, Euro 6,600 (US $10,255) of the first loan granted was repaid. During the nine months ended September 30, 2008, an additional Euro 12,600 (US $17,478) of the first loan granted was repaid. The loans bear interest at 5% per annum and were due December 31, 2006. The loans have been extended and are due as follows: |
Principal | Due Date |
Euro 800 (US $1,156) | December 31, 2008 |
Euro 15,000 (US $21,667) | December 31, 2008 |
Euro 18,000 (US $26,000) | December 31, 2008 |
During the year ended December 31, 2007, two loans were granted from a third party company for Euro 40,000 (US $57,778) and Euro 15,000 (US $21,667). The first loan bears interest at 5% per annum and was due September 28, 2007. The second loan bears interest at 6% per annum and was due December 31, 2007. The loans have been extended and are due December 31, 2008.
During the year ended December 31, 2006, two loans were granted from a third party company for Euro 30,000 (US $43,334) and Euro 25,000 (US $36,112). The loans bear interest at 5% per annum and were due November 2, 2007 and November 23, 2007, respectively. The loans have been extended and are due December 31, 2008.
During the nine months ended September 30, 2008, two loans were granted from a third party company for $1,800 and $1,000. The loans bear interest at 10% per annum, compounded annually and are due on demand.
During the year ended December 31, 2007, two loans were granted from a third party company for $20,000 and $25,000. The loans bear interest at 8% per annum, compounded annually and are due on demand.
During the year ended December 31, 2006, a loan was granted from a third party company for $100,000. During the year ended December 31, 2007, $16,700 was repaid. The loan bears interest at 8% per annum, compounded annually, and was due March 20, 2008. On March 20, 2008, the loan was verbally extended with the same terms and is due on demand.
F-13
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
8. | RELATED PARTY TRANSACTIONS Loans Receivable |
During the year ended December 31, 2006, a loan was granted to a former shareholder of EDI totaling Euro 990 (US $1,430). The loan bears interest at 3% per annum and was due January 5, 2008. On December 28, 2007, the loan was extended to July 31, 2008. On March 31, 2008, the loan of Euro 990 (US $1,430) and interest of Euro 69 (US $99) was repaid.
During the year ended December 31, 2006, a loan was granted to an individual related to an officer and director of the Company for Euro 15,400 (US $22,667). At the time of the grant, the officer and director of the Company was also a managing director of EDI. On December 31, 2007, Euro 641 (US $944) of accounts payable was offset against the principal of the loan receivable. The loan bears interest at 3% per annum and was due January 5, 2008. On April 17, 2007, the Company made an immediate demand for repayment and the loan was in default. On December 31, 2007, the Company wrote down the loan and interest receivable totaling Euro 15,702 (US $23,111) to the statement of operations. During the nine months ended September 30, 2008, the Company recovered the loan and interest receivable totaling Euro 15,702 (US $23,111) and included interest income of Euro 118 (US $184) in the statement of operations. The Company then offset the loan and interest receivable totaling Euro 15,820 (US $22,851) against a loan payable to EDI Holding.
During the year ended December 31, 2005, a loan was granted to a former shareholder of EDI for Euro 10,000 (US $14,445). On December 31, 2007, Euro 5,772 (US $8,337) of accounts payable was offset against the principal of the loan receivable. During the nine months ended September 30, 2008, Euro 726 (US $1,049) of accounts payable was offset against the principal of the loan receivable. The loan bears interest at 6% per annum and was due on December 31, 2006. During the year ended December 31, 2006, the loan was extended to June 30, 2007. During the year ended December 31, 2007, the loan was extended to August 31, 2008. During the nine months ended September 30, 2008, the loan was extended to April 30, 2009.
During the year ended December 31, 2005, a loan was granted to an individual related to an officer and director of the Company and a managing director of EDI, for Euro 115,000 (US $169,267). During the year ended December 31, 2007, Euro 72,000 (US $105,976) was repaid. The loan bears interest at 6% per annum and was due on December 31, 2006. On December 28, 2006, the loan was extended to June 30, 2007. On April 17, 2007, the Company made an immediate demand for repayment and the balance of the loan was in default. On December 31, 2007, the Company wrote down the remaining balance of loan and interest receivable totaling Euro 54,654 (US $80,445) to the statement of operations. During the nine months ended September 30, 2008, the Company recovered loan and interest receivable totaling Euro 51,113 (US $75,232) in the statement of operations. The Company then offset the recovered loan and interest receivable totaling Euro 23,340 (US $33,714) against a loan payable to EDI Holding and Euro 27,772 (US $40,120) against management fees payable to the former managing director of EDI.
F-14
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
8. | RELATED PARTY TRANSACTIONS (continued) |
Loans Payable –Current | |
During the nine months ended September 30, 2008, several loans were granted from EDI Holding totaling Euro 112,116 (US $161,948). The loans bear interest at 5% per annum and are due as follows: |
Principal | Due Date |
Euro 5,000 (US $7.222) | December 31, 2008 |
Euro 25,000 (US $36,112) | December 31, 2008 |
Euro 6,019 (US $8,695) | December 31, 2008 |
Euro 63,950 (US $92,373) | June 30, 2009 |
Euro 11,347 (US $16,390) | September 30, 2009 |
Euro 800 (US $1,156) | May 30, 2009 |
During the year ended December 31, 2007, several loans were granted from EDI Holding totaling Euro 290,744 (US $419,968). The loans bear interest at 5% per annum. During the nine months ended September 30, 2008, several of the loans were extended. The loans are due as follows:
Principal | Due Date |
Euro 21,000 (US $30,334) | December 31, 2008 |
Euro 39,160 (US $56,565) | December 31, 2008 |
Euro 1,800 (US $2,600) | December 31, 2008 |
Euro 6,000 (US $8,667) | December 31, 2008 |
Euro 40,000 (US $57,778) | March 31, 2009 |
Euro 10,000 (US $14,445) | March 31, 2009 |
Euro 15,000 (US $21,667) | March 31, 2009 |
Euro 35,000 (US $50,556) | March 31, 2009 |
Euro 33,000 (US $47,667) | March 31, 2009 |
Euro 24,000 (US $34,667) | March 31, 2009 |
Euro 12,000 (US $17,334) | March 31, 2009 |
Euro 9,400 (US $13,578) | December 31, 2008 |
Euro 15,000 (US $21,667) | December 31, 2008 |
Euro 29,384 (US $42,443) | December 31, 2008 |
F-15
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
8. | RELATED PARTY TRANSACTIONS (continued) |
Loans Payable –Current (continued)
During the year ended December 31, 2006, several loans were granted from EDI Holding totaling Euro 26,400 (US $38,134). During the year ended December 31, 2007, Euro 4,856 (US $7,014) of the first loan granted was repaid. During the year ended December 31, 2007, all of the loans were extended. The loans bear interest and are due as follows:
Principal | Interest | Due Date |
Euro 15,144 (US $21,875) | 5% | March 31, 2009 |
Euro 3,400 (US $4,911) | 6% | March 31, 2009 |
Euro 2,000 (US $2,889) | 5% | March 31, 2009 |
Euro 1,000 (US $1,445) | 6% | March 31, 2009 |
During the year ended December 31, 2005, a loan was granted from an officer and director of the Company and a managing director of EDI, for Euro 36,000 (US $52,001). During the year ended December 31, 2006, an additional loan for Euro 50,000 (US $72,223) was granted. On December 31, 2006, two loans receivable, including principal and interest, totaling Euro 29,446 (US $42,533) were posted as a payment against the second loan payable. The first loan bears interest at 6% per annum and was due December 31, 2007. During the year ended December 31, 2007, the loan was extended to July 31, 2008. On June 25, 2008, the loan was extended to March 31, 2009. The second loan bears interest at 6% and was due May 4, 2008. On May 2, 2008, the loan was extended to December 31, 2008.
During the year ended December 31, 2007, a loan was granted from a company with a shareholder related to an officer and director of the Company for Euro 57,500 (US $83,056). At the time of the grant, the officer and director of the Company was also a managing director of EDI. The loan bears interest at 5% per annum and was due February 5, 2008. On January 22, 2008, the loan was extended to January 28, 2009. On June 16, 2008, the loan and interest payable totaling Euro 60,933 (US $88,015) was assigned to a third party company effective April 1, 2008.
During the year ended December 31, 2006, two loans were granted from a company with a shareholder related to an officer and director of the Company for Euro 90,000 (US $130,001) and Euro 11,600 (US $16,756). At the time of the grants, the officer and director of the Company was also a managing director of EDI. On October 4, 2006 and during the year ended December 31, 2007, Euro 30,000 (US $43,334) and Euro 36,247 (US $52,357) of the first loan granted, respectively, were repaid. During the three months ended March 31, 2008, an additional Euro 235 (US $340) of the first loan granted was repaid. The first loan bears interest at 6% and was due March 31, 2007. The first loan has been extended and is due December 31, 2008. The second loan bears interest at 5% per annum and was due November 30, 2007. During the year ended December 31, 2007, the second loan was extended to November 30, 2008. On June 16, 2008, the loan and interest payable totaling Euro 42,600 (US $61,534) was assigned to a third party company effective April 1, 2008.
F-16
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
8. | RELATED PARTY TRANSACTIONS (continued) |
Loans Payable –Current (continued)
During the nine months ended September 30, 2008, a loan was granted from an individual related to an officer and director of the Company and a managing director of EDI for Euro 6,500 (US $9,389). The loan bears interest at 6% per annum and is due December 31, 2008.
During the year ended December 31, 2007, several loans were granted from an individual related to an officer and director of the Company and a managing director of EDI, totaling Euro 27,000 (US $39,000). The loans bear interest at 6%. The loans have been extended are due as follows:
Principal | Due Date |
Euro 10,000 (US $14,445) | March 31, 2009 |
Euro 12,000 (US $17,333) | December 31, 2008 |
Euro 5,000 (US $7,222) | December 31, 2008 |
During the year ended December 31, 2006, a loan was granted from an individual related to an officer and director of the Company and a managing director of EDI for Euro 12,000 (US $17,333). The loan bears interest at 6% per annum and was due December 31, 2006. The loan has been extended and is due March 31, 2009.
During the year ended December 31, 2005, a loan was granted from an individual related to an officer and director of the Company and a managing director of EDI, for Euro 5,000 (US $7,222). During the year ended December 31, 2007, Euro 3,000 (US $4,333) of the loan was repaid. The loan bears interest at 6% per annum and was due December 31, 2006. The loan has been extended and is due December 31, 2008.
Loans Payable
During the year ended December 31, 2006, a loan was granted from EDI Holding for Euro 75,000 (US $108,334). During the nine months ended September 30, 2008, the Company offset loans and interest receivable totaling Euro 39,160 (US $56,565) against the loan payable. The loan bears interest at 5% per annum and is due on December 21, 2009.
During the year ended December 31, 2004, a loan was granted from an individual related to an officer and director of the Company and a managing director of EDI, for Euro 8,000 (US $11,556). The loan bears interest at 6% per annum and is due on December 31, 2009.
F-17
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
8. | RELATED PARTY TRANSACTIONS (continued) |
Other
At September 30, 2008 and December 31, 2007, included in accounts payable and accrued liabilities –related parties is Euro 83,856 (US $121,127) and Euro 69,741 (US $102,651), respectively, owed to current and former managing directors of EDI for management fees and reimbursement of expenses. Amounts due to officers and directors are unsecured, non-interest bearing and due on demand.
At September 30, 2008 and December 31, 2007, included in accounts payable and accrued liabilities –related parties is Euro 0 (US $0) and Euro 10,089 (US $14,850), respectively, owed to a managing director of EDI for the company use of his private vehicle and reimbursement of expenses. Amounts due to officers and directors are unsecured, non-interest bearing and due on demand.
At September 30, 2008, included in accounts payable and accrued liabilities –related parties is $4,709 owed to an officer of the Company for consulting fees and reimbursement of expenses. Amounts due to officers and directors are unsecured, non-interest-bearing and due on demand.
Consulting fees paid to an officer of the Company for the nine and three months ended September 30, 2008 totaled $9,000 and $3,000, respectively. Consulting fees paid to an officer of the Company for the nine and three months ended September 30, 2007 totaled $9,000 and $3,000, respectively. The consulting fees are included in management fees on the statement of operations. Management fees paid (recovered) to (from) the managing directors of EDI for the nine and three months ended September 30, 2008 totaled Euro 61,200 (US $93,811) and Euro (7,800) (US ($(11,730)). Management fees paid to the managing directors of EDI for the nine and three months ended September 30, 2007 totaled Euro 200,000 (US $269,350) and Euro 80,000 (US $109,884), respectively.
F-18
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
9. | COMMON STOCK |
The Company’s articles of incorporation allow it to issue up to 1,000,000,000 shares of common stock, par value $0.001. Effective March 9, 2006, the Company effected a stock split of its common stock by issuing five new shares for every one old share. Except as otherwise stated to the contrary in these financial statements, all references to shares and prices per shares have been adjusted to give retroactive effect to the stock split.
On April 26, 2006, the Company acquired all the issued and outstanding stock of EDI, which was accounted for as a recapitalization of the Company (Note 1) in exchange for 50,000,000 shares of common stock. The issued number of shares of common stock is that of the Company with adjustments made for differences in par value between the Company and EDI. The pro-rata portion of the 50,000,000 shares has been calculated and applied to the equity contributions to EDI prior to the reverse merger to retroactively restate the exchange ratio.
On September 28, 2006, the Company issued 714,285 units at a price of $0.70 per unit in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant for total proceeds of $500,000. Each warrant entitled the holder to purchase an additional share of the Company’s common stock at a price of $0.70 per share for a period of one year from the date of closing (expired).
On April 2, 2007, the Company issued 1,736,111 units at a price of Euro 0.288 (US $0.383) per unit, for total proceeds of Euro 500,000 ($667,468) in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitled the holder to purchase one additional share of the Company’s common stock at a price of Euro 0.288 (US $0.383) per share for a period of one year from the date of closing (expired). A finder’s fee of 10% of the proceeds in cash was paid on closing of the private placement.
On May 4, 2007, the Company issued 1,875,000 units at a price of $0.32 per unit, for total proceeds of $600,000 in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitled the holder to purchase one additional share of the Company’s common stock at a price of US $0.32 per share for a period of one year from the date of closing (expired). A finder’s fee of 10% of the proceeds in cash was paid on closing of the private placement.
On June 28, 2007, the Company issued 3,000,000 units at a price of $0.24 per unit, for consulting services with an aggregate value totaling $720,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.30 per share for a period of one year from the date of closing (expired). The consulting services are included in professional fees on the statement of operations.
F-19
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
9. | COMMON STOCK (continued) |
On November 12, 2007, the Company issued 3,250,000 units at a price of Euro 0.20 (US $0.29) per unit, for total proceeds of Euro 650,000 (US $953,778) in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.35 per share for a period of two years from the date of closing.
On February 27, 2008, the Company issued 3,000,000 units at a price of $0.27 per unit, for consulting services with an aggregate value totaling $810,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.34 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations.
On February 27, 2008, the Company issued 250,000 units at a price of $0.20 per unit, for consulting services with an aggregate value totaling $50,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.25 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations.
On March 14, 2008, the Company issued 384,615 units at a price of Euro 0.13 (US $0.20) per unit, for total proceeds of Euro 50,000 (US $77,833) in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of Euro 0.17 (US $0.25) per share for a period of one year from the date of closing.
On July 4, 2008, the Company issued 500,000 units at a price of $0.11 per unit, for consulting services with an aggregate value totaling $55,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of $0.14 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations.
On July 4, 2008, the Company issued 3,000,000 units at a price of $0.11 per unit, for consulting services with an aggregate value totaling $330,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of $0.14 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations.
On July 8, 2008, the Company issued 714,285 units at a price of Euro 0.07 (US $0.11) per unit, for total proceeds of Euro 50,000 (US $78,333) in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of Euro 0.09 (US $0.13) per share for a period of two years from the date of closing. A finder’s fee of 10% of the proceeds equal to 71,428 shares of the Company’s common stock was issued on closing of the private placement.
F-20
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
10. | STOCK OPTIONS AND WARRANTS |
Stock Options
On May 5, 2006, the Company adopted a stock incentive plan (the “2006 Stock Option Plan”) to provide incentives to employees, directors and consultants. The Stock Plan provides for the issuance of up to 11,000,000 options with a maximum term of five years. The maximum aggregate number of shares that may be optioned and sold under the 2006 Stock Option Plan will be increased effective the first day of each of the Company’s fiscal quarters, beginning with the fiscal quarter commencing May 1, 2006, by an amount equal to the lesser of 10% of the total increase in the number of outstanding shares during the previous fiscal quarter and a lesser number of shares as may be determined by the Board of Directors of the Company. Vesting periods are determined at the discretion of the Board of Directors.
Weighted | |||||||
Number | Average | ||||||
Exercise Price | |||||||
Options outstanding, December 31, 2007 | 10,300,000 | $ | 0.93 | ||||
Granted | 100,000 | 0.19 | |||||
Exercised | - | - | |||||
Expired | - | - | |||||
Options outstanding, September 30, 2008 | 10,400,000 | $ | 0.92 | ||||
Options exercisable, September 30, 2008 | 6,265,000 | $ | 0.94 |
On May 5, 2006, the Company granted stock options to officers, directors and consultants under the 2006 Stock Option Plan, to acquire a total of 11,000,000 shares of common stock exercisable at a price of $1.00 per share for a term expiring on the date that is five years after the date such options become vested and exercisable.
On September 11, 2007, the Company granted stock options to an employee and a consultant under the 2006 Stock Option Plan, to acquire a total of 1,250,000 shares of common stock exercisable at a price of $0.45 per share for a term expiring on the date that is five years after the date such options become vested and exercisable.
On September 12, 2007, the Company granted stock options to an employee under the 2006 Stock Option Plan, to acquire a total of 50,000 shares of common stock exercisable at a price of $0.45 per share for a term expiring on the date that is five years after the date such options become vested and exercisable.
On July 4, 2008, the Company granted stock options to an employee under the 2006 Stock Option Plan, to acquire a total of 100,000 shares of common stock exercisable at a price of $0.19 per share for a term expiring on the date that is five years after the date such options become vested and exercisable.
F-21
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
10. | STOCK OPTIONS AND WARRANTS (continued) |
Stock Options (continued)
A summary of stock options outstanding at September 30, 2008 is as follows:
Outstanding Options | Exercisable Options | ||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||
Average | Weighted | Average | Weighted | ||||||||||||||||
Remaining | Average | Remaining | Average | ||||||||||||||||
Exercise | Contractual | Exercise | Contractual | Exercise | |||||||||||||||
Price | Number | Life | Price | Number | Life | Price | |||||||||||||
$ 1.00 | 200,000 | 7.58 | $ 1.00 | 100,000 | 7.58 | $ 1.00 | |||||||||||||
$ 1.00 | 6,390,000 | 6.58 | $ 1.00 | 3,840,000 | 6.58 | $ 1.00 | |||||||||||||
$ 1.00 | 1,380,000 | 5.58 | $ 1.00 | 620,000 | 5.58 | $ 1.00 | |||||||||||||
$ 1.00 | 1,030,000 | 3.58 | $ 1.00 | 1,030,000 | 3.58 | $ 1.00 | |||||||||||||
$ 0.45 | 1,000,000 | 5.75 | $ 0.45 | 500,000 | 5.75 | $ 0.45 | |||||||||||||
$ 0.45 | 250,000 | 6.75 | $ 0.45 | 150,000 | 6.75 | $ 0.45 | |||||||||||||
$ 0.45 | 50,000 | 6.95 | $ 0.45 | 25,000 | 6.95 | $ 0.45 | |||||||||||||
$ 0.19 | 100,000 | 5.00 | $ 0.19 | - | - | $ 0.00 |
The aggregate intrinsic value for options vested and unvested as of September 30, 2008 and December 31, 2007 is $Nil.
On May 5, 2006, the Company used the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:
Risk-free interest rate | 5.03% | |
Dividend yield rate | 0.00% | |
Price volatility | 89.35% | |
Weighted average expected life of options | 5 years |
On September 11, 2007, the Company used the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:
Risk-free interest rate | 4.07% | |
Dividend yield rate | 0.00% | |
Price volatility | 155.55% | |
Weighted average expected life of options | 5 years |
F-22
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
10. | STOCK OPTIONS AND WARRANTS (continued) |
Stock Options (continued)
On September 12, 2007, the Company used the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:
Risk-free interest rate | 4.11% | |
Dividend yield rate | 0.00% | |
Price volatility | 155.59% | |
Weighted average expected life of options | 5 years |
On July 4, 2008, the Company used the Black-Scholes option pricing model to compute estimated fair value, based on the following assumptions:
Risk-free interest rate | 3.28% | |
Dividend yield rate | 0.00% | |
Price volatility | 223.42% | |
Weighted average expected life of options | 5 years |
There remains a total of $2,778,590 compensation costs for unvested options which will be expensed in future periods.
Warrants
Weighted | |||||||
Average | |||||||
Number | Exercise Price | ||||||
Warrants outstanding, December 31, 2007 | 9,861,111 | $ | 0.34 | ||||
Granted | 7,848,900 | 0.22 | |||||
Exercised | - | - | |||||
Expired | 6,611,111 | 0.35 | |||||
Warrants outstanding, September 30, 2008 | 11,098,900 | $ | 0.26 | ||||
Warrants exercisable, September 30, 2008 | 11,098,900 | $ | 0.26 |
A summary of warrants outstanding at September 30, 2008, is as follows:
Date | Issued | Outstanding | Exercise Price | Expiry Date | ||||||||
November 12, 2007 | 3,250,000 | 3,250,000 | $ 0.35 | November 12, 2009 | ||||||||
February 27, 2008 | 3,000,000 | 3,000,000 | $ 0.34 | February 27, 2009 | ||||||||
February 27, 2008 | 250,000 | 250,000 | $ 0.25 | February 27, 2009 | ||||||||
March 14, 2008 | 384,615 | 384,615 | Euro 0.17 (US $0.25) | March 14, 2009 | ||||||||
July 4, 2008 | 500,000 | 500,000 | $ 0.14 | July 4, 2009 | ||||||||
July 4, 2008 | 3,000,000 | 3,000,000 | $ 0.14 | July 4, 2009 | ||||||||
July 8, 2008 | 714,285 | 714,285 | Euro 0.09 (US $0.11) | July 8, 2010 |
F-23
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
11. | SEGMENT INFORMATION |
The Company’s operations following the acquisition of EDI are conducted in one reportable segment, being the distribution and maintenance of water exploration machinery and equipment and the provision of related services in Germany. All the Company’s equipment, patents and trademarks are in Germany. | |
12. | COMMITMENTS |
On March 28, 2008, EDI entered into a Technology License Agreement (the “EDI Turkey License Agreement”) with EDI Turkey whereby EDI granted a license to EDI Turkey for the exclusive use of its proprietary technologies, known as the EDI Fluid Finder, EDI Medium Changer, EDI Water Save and EDI Suspension, in Turkey for a period of two years. In consideration of this license grant, EDI Turkey agreed to pay EDI $50,000 within two years of entering into the EDI Turkey License Agreement, with minimum instalment payments of $2,000 per month. The EDI Turkey License Agreement calls for additional payments equal to 10% of net profits, if any, from any drilling projects undertaken by EDI Turkey. If EDI Turkey fails to secure any drilling projects utilizing EDI Germany’s technologies within one year after the date the agreement was executed, its license rights will become non- exclusive. | |
On October 1, 2007, EDI entered into a lease agreement for office space that requires monthly lease payments of Euro 862 (US $1,245). | |
On August 1, 2007, EDI entered into a managing service contract with a managing director of EDI effective August 1, 2007 to pay monthly management fees of Euro 10,000 (US $14,445). The contract may be terminated by giving written notice of twelve months and ends without notice at the end of the month in which the managing director turns 65 years of age. In August 2008, the managing director agreed to decrease the monthly management fee to Euro 5,300 (US $7,656) effective January 1, 2008. | |
On August 1, 2006, EDI entered into a lease agreement for office space on a month-to-month basis that requires monthly lease payments of Euro 1,260 (US $1,820). The lease agreement was cancelled effective November 1, 2007. | |
On July 1, 2005, EDI entered into a consulting agreement with an individual effective July 1, 2005 to pay monthly consulting fees at Euro 100 (US $144) per hour. The contract terminated on December 31, 2007. | |
On July 1, 2005, EDI entered into a consulting agreement with an individual effective July 1, 2005 to pay monthly consulting fees at Euro 100 (US $144) per hour. The contract terminated on December 31, 2007. | |
On July 1, 2005, EDI entered into a lease agreement for tenancy of office space that may be terminated with written notice of three months. The lease agreement requires monthly lease payments of Euro 600 (US $867) plus taxes. The lease agreement was cancelled in August 2007 and the written notice of three months was waived. |
F-24
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
12. | COMMITMENTS (continued) |
On July 1, 2005, EDI entered into a freelance agreement with an individual effective July 1, 2005, to pay monthly consulting fees of Euro 8,000 (US $11,556). The contract may be terminated at the end of each calendar quarter by giving written notice of six months. The agreement has been terminated by a settlement agreement dated July 2, 2007. EDI is required to pay a total of Euro 6,000 (US $8,667) per month under the terms of two settlement agreements for a period of two years beginning August 1, 2007. | |
On January 1, 2005, EDI entered into a managing service contract with a managing director of EDI effective July 1, 2005, to pay monthly management fees of Euro 10,000 (US $14,445) and a management bonus of 5% of the annual net income of EDI under German law, due one month following the approval of the annual financial statements by a meeting of the shareholders. The contract may be terminated at the end of each calendar quarter by giving written notice of six months and ends without notice at the end of the month in which the managing director turns 65 years of age. On March 20, 2006, the contract was amended to increase the monthly management fee to Euro 19,000 (US $27,445) for the months, April 2006 to September 2006. Effective October 1, 2006, the managing director agreed to decrease the monthly management fee back to Euro 10,000 (US $14,445) per month. Effective January 1, 2007, the managing director agreed to decrease the monthly management fee to Euro 1,500 (US $2,167). | |
On January 1, 2005, EDI entered into a managing service contract with a managing director of EDI effective July 1, 2005, to pay monthly management fees of Euro 10,000 (US $14,445) and a management bonus of 5% of the annual net income of EDI under German law, due one month following the approval of the annual financial statements by a meeting of the shareholders. The contract may be terminated at the end of each calendar quarter by giving written notice of six months and ends without notice at the end of the month in which the managing director turns 65 years of age. On March 20, 2006, the contract was amended to increase the monthly management fee to Euro 16,000 (US $23,111) for the months, April 2006 to September 2006. Effective October 1, 2006, the managing director agreed to decrease the monthly management fee back to Euro 10,000 (US $14,445) per month. Effective January 1, 2008 the contract was terminated effective immediately. | |
13. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS |
Cumulative | ||||||||||
Amounts from | Nine | Nine | ||||||||
Inception | Months | Months | ||||||||
(December 7, 2004) | Ended | Ended | ||||||||
to September 30, | September 30, | September 30, | ||||||||
2008 | 2008 | 2007 | ||||||||
Cash paid for: | ||||||||||
Interest | $ | 55,754 | $ | 4,556 | $ | - | ||||
Income taxes | $ | - | $ | - | $ | - |
F-25
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
13. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (continued) |
Non-cash Transactions | |
Investing and financing activities that do not have an impact on current cash flows are excluded from the statement of cash flows. | |
During the period from inception (December 7, 2004) to June 30, 2008, the Company issued 50,000,000 common shares for the acquisition of EDI. | |
During the nine months ended September 30, 2008, 3,000,000 units were issued for consulting services with an aggregate value totaling $810,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.34 per share for a period of one year from the date of closing. | |
During the nine months ended September 30, 2008, 250,000 units were issued for consulting services with an aggregate value totaling $50,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of US $0.25 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations. | |
During the nine months ended September 30, 2008, 500,000 units were issued for consulting services with an aggregate value totaling $55,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of $0.14 per share for a period of one year from the date of closing. | |
During the nine months ended September 30, 2008, 3,000,000 units at were issued for consulting services with an aggregate value totaling $330,000. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of $0.14 per share for a period of one year from the date of closing. The consulting services are included in professional fees on the statement of operations. | |
During the nine months ended September 30, 2008, 71,428 shares of the Company’s common stock were issued for a finder’s fee equal to 10% of the total number of units issued in a private placement transaction. |
F-26
EXPLORATION DRILLING INTERNATIONAL INC. |
(A Development Stage Company) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
(Expressed in U.S. Dollars) |
September 30, 2008 |
(Unaudited) |
14. | SUBSEQUENT EVENTS |
On October 17, 2008, the Company granted stock options to officers, directors and consultants under the 2008 Stock Option Plan (adopted October 2, 2008), to acquire a total of 2,175,000 shares of common stock exercisable at a price of $0.11 per share for a term expiring on the date that is five years after the date such options become vested and exercisable. | |
On October 27, 2008, the Company granted stock options to an employee and consultants under the 2008 Stock Option Plan (adopted October 2, 2008), to acquire a total of 450,000 shares of common stock exercisable at a price of $0.11 per share for a term expiring on the date that is five years after the date such options become vested and exercisable. | |
On October 27, 2008, the Company issued 3,000,000 units at a price of Euro 0.05 (US $0.06) per unit, for total proceeds of Euro 150,000 (US $189,203) in a private placement transaction. Each unit consists of one share of the Company’s common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock at a price of Euro 0.0625 (US $0.09) per share for a period of two years from the date of closing. |
F-27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q constitute "forward-looking statements.” These statements, identified by words such as “plan,” "anticipate,” "believe,” "estimate,” "should,” "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under the caption "Part II, Item 1A. Risk Factors,” and elsewhere in this Quarterly Report. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the “SEC”), particularly our periodic reports filed with the SEC pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”).
INTRODUCTION
Through our wholly owned subsidiary, EDI Exploration Drilling International GmbH (“EDI Germany”), we are in the business of providing well drilling, well construction and well maintenance services using certain proprietary technologies developed by EDI Germany. Currently we are seeking to earn revenues from the provision of those services and from the leasing of equipment based on our technologies and provided in connection with those services. In the future, we may explore licensing opportunities for our technologies.
The following summarizes our plan of operation for our 2008 fiscal year and our results of operation for the three and nine months ended September 30, 2008. The discussion provided in this Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007.
RECENT CORPORATE DEVELOPMENTS
The following significant corporate developments have occurred since the end of our second fiscal quarter ended June 30, 2008:
1. | On July 4, 2008, we completed a private placement of 3,500,000 units at a purchase price of $0.11 per unit. Each unit issued consisted of one share of our common stock and one share purchase warrant entitling the holder to purchase one additional share of our common stock at a price of $0.14 per share for a period of one year from the date of issuance. The units were issued pursuant to the provisions of Regulation S promulgated under the Securities Act of 1933 (the “Securities Act”) on the basis of representations made by the investors that they were not US persons and that they were not acquiring the units for the account or benefit of a US person. No directed selling efforts were made in the United States in connection with this offering. |
2. | On July 8, 2008, we completed a private placement of 714,285 units at a price of EUR 0.07 per unit for total proceeds of EUR 50,000. Each unit issued consisted of one share of our common stock and one share purchase warrant, entitling the holder to purchase one additional share of our common stock at a price of EUR 0.09 per share for a period ending two years from the date of issuance. This private placement was completed pursuant to the provisions of Regulation S. We did not engage in any directed selling efforts in the United States in connection with this offering. The investor represented that he was not a US person as defined in Regulation S and that he was not acquiring the units for the account or benefit of a US person. |
We also issued 71,428 shares of our common stock (the “Commission Shares”) to a finder in connection with this private placement. The Commission Shares were issued to the finder pursuant to the provisions of Regulation S on the basis that the finder is not a US person. | |
3. | On October 2, 2008, our Board of Directors resolved that no further options are to be granted under our 2006 Stock Option Plan (the “2006 Plan”). The 2006 Plan will be terminated once all of the outstanding options previously granted under that plan have been exercised, have expired or have otherwise been terminated. We will continue to honor the terms of any outstanding options granted under the 2006 Plan. |
3
4. | On October 2, 2008, our Board of Directors adopted a new 2008 Stock Option Plan (the “2008 Plan”). The 2008 Plan allows us to grant options to its officers, directors and employees. In addition, we may grant options to individuals who act as consultants to us, so long as those consultants do not provide services connected to the offer or sale of our securities in capital raising transactions and do not directly or indirectly promote or maintain a market for our securities. A total of 12,000,000 shares of our common stock are available for issuance upon the exercise of options granted under the 2008 Plan. After January 1, 2009, our Board of Directors may increase the number of shares that may be issued under the 2008 Plan, provided that the maximum aggregate number of shares that may be optioned and sold under the 2008 Plan cannot, at any time, exceed 10% of the total number of shares of our common stock outstanding. The exercise price for options granted under the 2008 Plan cannot be less than 75% of the fair market value of our common stock as determined under the 2008 Plan. |
5. | On October 17, 2008, we granted options to purchase an aggregate of 2,175,000 shares of our common stock under the 2008 Plan. The options granted are exercisable at a price of $0.11 per share and expire five years after the options vest. 1,975,000 of the options granted may be exercised immediately, with the remaining options granted vesting on August 1, 2009. Included with this grant were options to purchase 500,000 shares of our common stock to John Boschert, our Secretary. The options granted to Mr. Boschert are exercisable immediately at a price of $0.11 per share. |
6. | On October 27, 2008, we granted options to acquire an additional 450,000 shares of our common stock to various consultants and employees under the 2008 Plan. The options are exercisable at a price of $0.11 per share. 225,000 of the options granted may be exercised immediately and expire October 31, 2013. The remaining 225,000 options granted vest on November 1, 2008 and expire October 31, 2014. |
7. | On October 27, 2008, we completed a private placement of 3,000,000 units at a price of EUR 0.05 per unit for total proceeds of EUR 150,000. Each unit is comprised of one share of our common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one additional share of our common stock at a price of EUR 0.0625 per share for a period ending two years from the date of issuance of the Units. This private placement was completed pursuant to the provisions of Regulation S. We did not engage in a distribution of this offering in the United States. The investor represented that it was not a US person as defined in Regulation S and that it was not acquiring the units for the account or benefit of a US person. |
PLAN OF OPERATION
During our 2008 fiscal year, we will continue to seek to gain market penetration for our products and processes within the drilling industry. In order to do so, we will seek to use our business contacts and will obtain the assistance of business consultants with local and international connections. Over the next year, we will focus on developing relationships and contacts in Germany, Southeastern Europe, the Middle East, Asia and Southern Africa.
(a) | Germany: The water supply market, and the corresponding market for well drilling projects, is fragmented by nature and will require us to establish contacts with a number of regional water suppliers, and, in certain cases, with private utility companies. Through the business contacts of our management, we have begun to establish open dialogues with private and public water supply companies in an effort to promote our products. We are currently participating in two public invitations to submit tender offers for water supply contracts. We will also continue our attempts to develop a market for technologies for use in geothermal energy projects. If necessary, we may seek to enter into cooperation agreements with academic institutions to adapt and develop our technologies to geothermal energy processes. |
In March 2008, we conducted a geothermal drilling project for a planned construction project in Southern Germany. No significant adaptations were required to our existing technologies for this project. Following the completion of this project, EDI Germany received numerous inquiries regarding the use of our drilling technologies to exploit near surface geothermal resources. Although no contracts have been signed, we now intend to offer one-stop services for the planning and execution of near-surface geothermal projects. This would include identification of thermal energy requirements, installation planning, measuring geothermal gradients of the subsoil, and the possible exploitation of groundwater and thermal water resources. |
4
As a result of our efforts, we have managed to secure four drilling projects in Germany that we expect to perform in the first half of 2009. These expected projects include establishing water supplies, underground pollution hazard assessments, and near surface geothermal drilling. | |
(b) | Southeast Europe: We are seeking to enter into negotiations with government authorities in Southeastern Europe. With the help of these government authorities, we hope to explore licensing opportunities with local industry representatives and consultants within the market. |
(c) | The Middle East: The Middle East contains some of the most arid environments in the world. For example, 97% of Egypt is covered by desert. As a result, there is a distinct market for groundwater pumping and irrigation projects. Within these markets, we will attempt to offer our services as a general contractor and sub-contractor for well drilling projects. We have formed relationships with drilling companies in the Middle East and will seek to parlay these contacts into drilling contracts. |
(d) | Turkey: In Turkey’s largest city, the water supply infrastructure is currently inadequate to sustain the growth of its population. In March 2008, our wholly owned subsidiary, EDI Exploration Drilling International GmbH (“EDI Germany”) formed EDI Turkey, a joint venture company, with influential members of Turkey’s drilling and water supply industries. EDI Germany owns a 25% interest in EDI Turkey. EDI Turkey will seek out business opportunities in Turkey for EDI’s proprietary technologies. |
(e) | Africa: The West African Country of Namibia has one of the most arid climates in the world. 83% of the rainfall experienced in Namibia evaporates soon after it falls. In Namibia, there are currently 150,000 water wells in operation; however, 75% of these do not pump drinking quality water. Supplying drinking water for household consumption has become an important goal for the Government of Namibia. As a result of the drilling project we completed in February 2007, the Namibian Ministry of Agriculture, Water and Forestry commissioned us and a local drilling company to work together on three additional drilling projects. These projects involved exploratory boreholes, drilled for the purpose of geological analysis. Drilling on these projects was commenced at the end of February 2007 and completed in May 2007. As a result of the successful completion of these projects, we secured an additional six drilling projects in Namibia. After the completion of four drilling projects, our management reassigned our drilling team to the Coca Cola Pakistan project. We expect to return to Namibia to conduct additional drilling projects in 2009. |
In July 2008, we were commissioned by the non-denominational human rights and aid organization “Hoffnungszeichen e.V. Sign of Hope” to implement the planning for a drinking water exploration project in Southern Sudan. For this project, we will test the water quality of existing wells and the possible hazards presented by neighboring oil fields as part of an extensive capacity and risk assessment operation. In the past, the region being tested has had problems with the contamination of individual wells by salts, strontium and nitrates. We will carry out preliminary tests on the region’s geology, hydrology and underground deposits. The extent and exact location of ground water aquifers and oil deposits will need to be clarified before a large scale drinking water exploration project can be started. | |
(f) | Southern Asia: India is one of the most populous countries in the world and is an emerging industrial giant. With the increase in development, India’s demands for water supplies continue to grow. In 2006, we conducted two sample drilling operations in India. These drilling operations were conducted as demonstrations of our technologies and methods and were completed by us at no charge. We have not yet secured any drilling contracts in India; however, we are continuing to explore business opportunities in that country. |
We secured a drilling contract from Coca-Cola Pakistan to drill a total of four water exploration holes. The purpose of the drilling projects was to obtain and analyze water samples from two locations around Karachi that will be used to assist Coca-Cola Pakistan in deciding where to locate a large-scale bottling facility. Drilling was originally scheduled to begin in the Fall of 2007, but was delayed by Coca Cola Pakistan due to their ongoing negotiations with third parties regarding land ownership issues. Four test boreholes have be drilled in two different locations and analyzed locally. The first drilling project was completed in September 2008 and included surveying existing ground water sources and evaluating their quality, quantity and sustainability for beverage production. Additional projects are planned for Pakistan in 2009. |
In addition, we will explore opportunities for our products and services in other international markets, focusing primarily on countries where there is an established need for water well drilling technologies and services.
5
We anticipate that we will require approximately EUR 1,000,000 ($1,444,460) to complete our plan of operation over the next twelve months. The majority of this amount will be spent on financing our business operations, marketing presentations, product demonstrations, and legal and other consulting fees associated with establishing our presence in international markets. In addition, we anticipate that we will require an additional $50,000 for general administrative purposes and to pay for the legal and accounting fees we expect to incur in meeting ongoing reporting obligations under United States securities laws.
RESULTS OF OPERATIONS
Nine Months and Three Months Summary
Nine Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||
September 30 | Increase / | September 30 | Increase / | |||||||||||||||
2008 | 2007 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||
Revenue | $ | 66,287 | $ | - | n/a | $ | 43,782 | $ | - | n/a | ||||||||
Expenses | (3,154,951 | ) | (4,107,649 | ) | (23.2)% | (839,903 | ) | (382,640 | ) | 119.5% | ||||||||
Other Items | 24,460 | (73,146 | ) | (133.4)% | (25,819 | ) | (23,620 | ) | 9.3% | |||||||||
Net Loss | $ | (3,064,204 | ) | $ | (4,180,795 | ) | (26.7)% | $ | (821,940 | ) | $ | (406,260 | ) | 102.3% |
Revenue
For the first time since our inception, we have recognized revenue from our operations. The amounts recognized by us as revenue represent amounts charged by us in respect of a drilling project completed for Coca Cola Pakistan and for certain small drilling projects completed in Germany. Included in revenues for the nine months ended September 30, 2008 are $22,505 previously recorded and classified during the six months ended June 30, 2008 as miscellaneous income.
We currently have a number of projects planned for 2009 and hope to earn additional revenue from those projects. However, we are still a development stage company and are still in the process of establishing ourselves in the marketplace. There is no assurance that we will be successful in our future efforts to earn revenue and, even if we are successful in earning revenues, those revenues are likely to be subject to significant fluctuations and will be difficult to reliably predict.
Expenses
Our major components of our expenses for the nine months ended September 30, 2008 and 2007 consisted of the following:
Nine Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||
September 30 | Increase / | September 30 | Increase / | |||||||||||||||
2008 | 2007 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||
Amortization | $ | 62,282 | $ | 47,309 | 31.6% | $ | 20,194 | $ | 16,405 | 23.1% | ||||||||
Management Fees | 102,811 | 278,350 | (63.1)% | (8,730 | ) | 112,884 | (107.7)% | |||||||||||
Professional Fees | 1,465,325 | 922,759 | 58.8% | 425,868 | 27,119 | 1,470.4% | ||||||||||||
Selling, General and | 271,726 | 746,913 | (63.6)% | 72,590 | 225,293 | (67.8)% | ||||||||||||
Administrative | ||||||||||||||||||
Stock Compensation Expense | 1,255,994 | 2,110,772 | (40.5)% | 333,882 | - | n/a | ||||||||||||
Foreign Currency Loss | (3,187 | ) | 1,546 | (306.1)% | (3,901 | ) | 939 | (515.4)% | ||||||||||
Total Operating Expenses | $ | 3,154,951 | $ | 4,107,649 | (23.2)% | $ | 839,903 | $ | 382,640 | 119.5% |
Management Fees
Management fees paid during the period are comprised of amounts paid or earned by our officers and directors and the executive officers of EDI Germany during the nine months ended September 30, 2008 and 2007. Management fees paid during the nine months ended September 30, 2008 decreased from amounts paid during
6
the comparable period in 2007. This is primarily due to the fact that Rainer Rotthaeuser, our Chief Executive Officer and a member of our Board of Directors, resigned as a managing director of EDI Germany, and no longer collects a management fee, and to the fact that Guenter Thiemann, our Chief Financial Officer and also a member of our Board of Directors, agreed to reduce his management fee to EUR 1,500 per month commencing on January 1, 2008.
During the three months ended September 30, 2008, we recognized a net recovery of $8,730 as a result of one of the managing directors of EDI Germany agreeing to reduce his management fees from EUR 10,000 per month to EUR 5,300 per month retroactive to January 1, 2008. The reduction resulted in a recovery of EUR 37,800 ($56,544).
Professional Fees
Professional fees for the three months and nine months ended September 30, 2008 and 2007 consisted of the following:
Nine Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||
September 30 | Increase / | September 30 | Increase / | |||||||||||||||
2008 | 2007 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||
Accounting and Tax Fees | $ | 44,501 | $ | 62,920 | (29.3)% | $ | 14,167 | $ | 6,384 | 121.9% | ||||||||
Consulting Fees | 1,306,166 | 786,421 | 66.1% | 389,730 | 6,536 | 5,862.8% | ||||||||||||
Legal Fees | 114,658 | 73,418 | 56.2% | 21,971 | 14,199 | 54.7% | ||||||||||||
Total | $ | 1,465,325 | $ | 922,759 | 58.8% | $ | 425,868 | $ | 27,119 | 1,470.4% |
Accounting and tax fees are comprised of amounts paid to independent auditors, accountants and tax consultants for the preparation and audit of our financial statements and for general tax advice. Accounting and tax fees decreased in the quarter because reversals were made to accounting accruals for the three months ended September 30, 2007 and less funds were spent on general tax advice.
Consulting fees include amounts paid to outside consultants for services provided in connection with investor relations activities, preparing marketing and promotional materials, developing international business contacts and business opportunities and improving our technologies. Consulting fees have increased relative to the comparative periods in 2007 as we have increased our business development efforts in the current fiscal year.
Legal fees include amounts paid in connection with meeting our reporting obligations under the Exchange Act and for general legal services related to the operation of our business. The legal fees we incurred during the nine months ended September 30, 2008 were significantly more than the legal fees we incurred during the same period in 2007. Additional legal fees incurred during 2008 were primarily related to general legal services provided in connection with our business development activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and nine months ended September 30, 2008 and 2007 consisted of the following major components:
Nine Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||
September 30 | Increase / | September 30 | Increase / | |||||||||||||||
2008 | 2007 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||
Marketing and Promotion | $ | 6,373 | $ | 46,291 | (86.2)% | $ | (8,270 | ) | $ | 7,166 | (215.4)% | |||||||
Travel | 88,603 | 68,240 | 29.8% | 21,079 | 28,607 | (26.3)% | ||||||||||||
Wages and Benefits | 103,016 | 295,689 | (65.2)% | 48,173 | 78,089 | (62.2)% | ||||||||||||
Miscellaneous | 73,734 | 336,693 | (78.1)% | 11,608 | 111,431 | (89.6)% | ||||||||||||
Total | $ | 271,726 | $ | 746,913 | (63.6)% | $ | 72,590 | $ | 225,293 | (67.8)% |
7
Miscellaneous expenses decreased significantly from the nine month period ended September 30, 2007 as we closed our office in Austria. Wages and benefits decreased primarily as a result of the termination of two employees associated with the closing of our office in Austria.
Other Items
Nine Months Ended | Percentage | Three Months Ended | Percentage | |||||||||||||||
September 30 | Increase / | September 30 | Increase / | |||||||||||||||
2008 | 2007 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||
Interest Income | $ | 885 | $ | 6,535 | (86.5)% | $ | 112 | $ | 1,496 | (92.5)% | ||||||||
Interest Expense | (74,768 | ) | (76,718 | ) | (2.5)% | (25,931 | ) | (25,116 | ) | 3.2% | ||||||||
Loss on Disposal of Capital Asset | - | (2,963 | ) | n/a | - | - | n/a | |||||||||||
Recovery of Loans Receivable | 98,343 | - | n/a | - | - | n/a | ||||||||||||
Total | $ | 24,460 | $ | (73,146 | ) | (133.4)% | $ | (25,819 | ) | $ | (23,620 | ) | 9.3% |
Interest income during the nine months ended September 30, 2008 and 2007 is primarily made up of interest accrued from loans made by EDI Germany to certain of its former shareholders, to certain of its officers and directors, and to persons related to officers and directors of EDI Germany prior to our acquisition of that company.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital | |||
Percentage | |||
At September 30, 2008 | At December 31, 2007 | Increase / (Decrease) | |
Current Assets | $ 38,719 | $ 55,226 | (29.9)% |
Current Liabilities | (2,388,248) | (2,012,493) | 18.7% |
Working Capital Deficit | $ (2,349,529) | $ (1,957,267) | 20.0% |
Cash Flows | ||||||
Nine Months Ended | Nine Months Ended | |||||
September 30, 2008 | September 30, 2007 | |||||
Cash Flows from (used in) Operating Activities | $ | (371,130 | ) | $ | (1,186,260 | ) |
Cash Flows from (used in) Investing Activities | 69,213 | 29,054 | ||||
Cash Flows from Financing Activities | 315,109 | 1,163,260 | ||||
Effects of Foreign Currency Translations | (11,224 | ) | (18,798 | ) | ||
Net Decrease in Cash During Period | $ | 1,968 | $ | (12,744 | ) |
The increase in our working capital deficit is primarily a result of the fact that we had no only limited revenues and limited sources of financing during the nine months ended September 30, 2008.
Financing during the period was provided by private placements of our equity securities and from related party and third party loans.
Private Placement Financings
During the fiscal quarter ended September 30, 2008, we completed one private placement of 3,500,000 units for proceeds of $385,000 and a private placement of 714,285 units for proceeds of EUR 50,000 ($74,794). Subsequent to our September 30, 2008 fiscal quarter, we completed another private placement of 3,000,000 units for proceeds of EUR 150,000 ($224,382). See “Recent Corporate Developments” above.
Loan Financings
During the three months ended September 30, 2008, we received a loan for EUR 11,346 ($16,388) from EDI Exploration Drilling International Holding GmbH, our majority stockholder, as follows:
8
Principal | Interest Rate | Grant Date | Due Date |
EUR 11,346 | 5% | September 30, 2008 | September 30, 2009 |
During the three months ended September 30, 2008, we also received loans totaling EUR 45,100 ($65,145) from third parties as follows:
Principal | Interest Rate | Grant Date | Due Date |
EUR 15,100 | 5% | August 8, 2008 | April 14, 2009 |
EUR 30,000 | 6.5% | September 9, 2008 | December 31, 2008 |
As security for the EUR 15,100 loan, Guenter Thiemann, our Chief Financial Officer and a managing director of EDI Germany pledged his rights to any payments from EDI Germany, including management fees or wages. For the EUR 30,000 loan, EDI Germany granted a security interest in certain equipment.
Financing Requirements
Currently, we do not have sufficient financial resources to complete our plan of operation for the next twelve months or to pay our current debt obligations when they come due. Although we have begun to earn small amounts of revenue from our operations, there is no assurance that our revenues will increase or that we will be able to generate any revenues in the future. As such, our ability to complete our plan of operation and to meet our short-term debt obligations is expected to be dependent upon our ability to obtain substantial financing in the near term.
Although we have, from time to time, obtained short-term loans in order to meet our short-term capital needs, we do not expect to be able to satisfy our long-term capital needs through debt financing. In addition, there are no assurances that we will be able to obtain additional short-term debt financing when needed. We have not been able to repay most of the short term loans granted to us when they have come due. As a result, we have had to rely on our lenders agreeing to extend the due dates of the loans granted. There is no assurance that our creditors will continue to grant us extensions. Continuing to rely on short-term debt financing may decrease our ability to obtain additional financing in the future. Any long-term financing that we obtain is expected to come from sales of our equity securities. There is no assurance that we will be able to obtain equity financing in amounts sufficient to meet our short-term or long-term capital needs. In addition, because of our limited financial resources, we have, on occasion used the issuance of our equity securities to pay for services provided to us, and we may do so again in the future. If we are successful in completing any equity financings, of which there is no assurance, or if we issue equity securities in payment for the goods or services provided to us, our existing shareholders will experience a dilution of their interest in our company.
If we are not successful in raising sufficient financing, we will not be able to complete our current plan of operation and we may not be able to continue as a going concern. We do not have any specific alternatives to our current plan of operation and have not planned for any such contingency. If we are not able to raise sufficient financing, our business may fail and our shareholders may lose all or part of their investment.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
9
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amount 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. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain.
Our significant accounting policies are disclosed in the notes to our audited consolidated financial statements for the year ended December 31, 2007 included in our Annual Report on Form 10-K filed with the SEC on April 15, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2008 (the “Evaluation Date”). This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the Evaluation Date as a result of the material weaknesses in internal control over financial reporting discussed below.
Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Notwithstanding the assessment that our internal control over financial reporting was not effective and that there were material weaknesses as identified in this report, we believe that our financial statements contained in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008 fairly present our financial condition, results of operations and cash flows in all material respects.
Material Weaknesses
Management assessed the effectiveness of the Company’s internal control over financial reporting as of Evaluation Date and identified the following material weaknesses:
Insufficient Resources:We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Insufficient Written Policies & Procedures:We have insufficient written policies and procedures for accounting and financial reporting.
Inadequate Financial Statement Closing Process:We have an inadequate financial statement closing process.
10
Lack of Audit Committee & Outside Directors on the Company’s Board of Directors:We do not have a functioning audit committee and outside directors on the Company’s Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
Changes in Internal Control Over Financial Reporting
As of the Evaluation Date, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2008 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
The following are some of the important factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in our forward-looking statements. We may encounter risks in addition to those described below. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also impair or adversely affect our business, financial condition or results of operation.
Need For Financing
We do not currently have the financial resources to complete our plan of operation for the next twelve months. We anticipate that we will require financing in the amount of EUR 1,000,000 ($1,444,460) in order to fund our plan of operation over the next twelve months. We presently do not have any financing arrangements in place and there is no assurance that we will be able to obtain sufficient financing on terms acceptable to us or at all. If further financing is not available or obtainable, our ability to meet our financial obligations and pursue our plan of operation will be substantially limited and investors may lose a substantial portion or all of their investment.
Development Stage Business
We are a development stage business in that we have yet to earn significant revenues. Potential investors should be aware of the difficulties normally encountered by a developing enterprise and the high rate of failure of such enterprises. The potential for future success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the development of a business in the area in which we intend to operate and in connection with a developing business in general. These include, but are not limited to, unanticipated problems relating to research and development programs, marketing, approvals by government agencies, competition and additional costs and expenses that may exceed current estimates. There is no history upon which to base any assumption as to the likelihood that our business will prove successful, and there can be no assurance that we will be able to generate significant revenues in the future or ever achieve profitable operations.
Our Operations May Be Subject To Extensive Government Regulations
Well drilling is an inherently dangerous activity. As such, we expect that any well projects that we participate in will be subject to a number of government safety and environmental regulations. Obtaining any necessary permits and/or governmental approvals may be a lengthy and costly process. As we currently do not have any drilling contracts in place and are seeking to market our products and services in a number of countries, the full extent of these regulations is not yet fully known. There are no assurances that we will be able to obtain the necessary government approvals or that the costs associated with obtaining those approvals will be affordable to us.
11
Competition Is Intense And We May Be Unable To Achieve Market Acceptance
EDI Germany competes directly with traditional well drilling contractors. The market for well drilling contractors and equipment providers is mature and well established. As such, the business environment in which we operate is highly competitive. Currently, there exist a number of established methods, products and technologies used in the well drilling process and we expect to experience competition from a number of established companies involved this industry. Many of our potential competitors will have greater technical, financial, marketing, sales and other resources than we will.
Our ability to compete within this industry is dependent upon our ability to differentiate our processes, products and technologies from those already existing in the marketplace and our ability to create public awareness of the advantages those processes, products and technologies present. Although our management has experience in the well drilling industry, as an entity, we are new entrants to that industry and our technologies have not yet gained marketplace acceptance. We are unable to provide assurances that our target customers and markets will accept our technologies or will purchase our products and services in sufficient quantities to achieve profitability. If a significant market fails to develop or develops more slowly than we anticipate, we may be unable to meet our operational expenses. Acceptance of our products will depend upon a number of factors, including the cost competitiveness of our products, customer reluctance to try new products or services, regulatory requirements or the emergence of more competitive or effective products.
Rapid Technological Changes In Our Industry Could Make Our Products Obsolete
If new technologies, products and industry standards develop at a rapid pace, they could make our products obsolete. Our future success will depend upon our ability to develop and introduce product enhancements to address the needs of customers. Material delays in introducing product enhancements may cause customers to forego purchases of our product and purchase those of competitors.
Asserting And Defending Intellectual Property Rights May Impact Results Of Operations
The success of our business may depend on our ability to protect our proprietary processes and technology from competitors. A number of international patent applications have been filed with respect to our technologies. We were granted patents or similar rights with respect to our EDI Medium Changer, EDI Water Save and EDI Suspension technologies in some of the jurisdictions in which we filed applications, while applications in other jurisdictions were still pending. In early 2008, in order to focus our business resources, our management decided to abandon our patents and/or patent applications for the EDI Medium Changer and EDI Water Save technologies. As a result, interested competitors could copy those technologies. Our management has not yet made a determination with respect to the patents and/or patent applications filed for our EDI Suspension technology; however, our management could decide to abandon those patents and/or applications as well.
Patent applications have been filed with respect to our EDI Fluid Finder Technology. However, if we are not able to obtain patents for this technology, we will only be able to protect our products and technological processes by maintaining the secrecy of those products and processes.
Even if we are able to obtain patents for our technologies, we may be required to defend our intellectual property rights through litigation. The financial cost of such litigation could have a material impact on our financial condition even if we are successful in developing and marketing products and in defending any of our intellectual property rights, of which there is no assurance. Furthermore, an adverse outcome in any litigation or interference proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. In addition, a finding that any of our intellectual property rights are invalid could allow competitors to more easily and cost-effectively compete. Thus, an unfavorable outcome in any patent litigation or interference proceeding could have a material adverse effect on our business, financial condition and results of operations.
Dependence On Key Personnel
Our success will largely depend on the performance of our directors and officers and the managers of EDI Germany. Our success will also depend on our ability to attract and retain highly skilled technical, research, management, regulatory compliance, sales and marketing personnel. Competition for such personnel is intense.
12
The loss of the services of such personnel or the inability to attract and retain other key personnel could impair the development of our business, operating results and financial condition.
Dependence On Key Suppliers
The majority of our drilling equipment is machined by a single supplier located in Dorsten, Germany, close to our offices in Muenster, Germany. This supplier assists us in machining our drilling equipment and installations and works closely with our own experts to make improvements to our technologies. The loss of this supplier could be damaging to our business. Although we believe that we would be able to use the services of other machining companies, switching machining companies could cause delays as we would be required to educate the new supplier on our needs and requirements. In addition, a new supplier may be less conveniently located than our current supplier, which could increase travel time and shipping costs.
Political Instability
We are seeking to develop a market for our drilling products and processes in a number of developing countries. The political environment in many of these countries is unstable. This instability could cause delays to our drilling projects and could make the development of our business more difficult. In particular, our drilling projects scheduled for Pakistan could be significantly delayed because of the current political instability in that country. Furthermore, if the political situation in Pakistan worsens, those projects could be abandoned altogether.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
See “Recent Corporate Developments” at Part I, Item 2 of this Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit | ||
Number | Description of Exhibit | |
3.1 | Articles of Incorporation.(1) | |
3.2 | Certificate of Change to Authorized Capital.(2) | |
3.3 | Certificate of Amendment to Articles of Incorporation – name change to Exploration Drilling International Inc.(6) | |
3.4 | Amended and Restated Bylaws.(5) | |
4.1 | Specimen Common Stock Certificate.(1) | |
10.1 | 2006 Stock Option Plan.(3) | |
10.2 | Joint Operating Agreement Between A. Abuynayyan Trading Corporation and EDI Germany.(4) | |
10.3 | Loan Agreement for EUR 8,000 with interest at 7% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower), providing for interest at a rate of 6% per annum dated |
13
Exhibit | ||
Number | Description of Exhibit | |
December 13, 2004 (translated from German to English).(7) | ||
10.4 | Managing Director Contract between EDI Germany and Guenter Thiemann dated effective as of January 1, 2005 (translated from German to English).(7) | |
10.5 | Managing Director Contract between EDI Germany and Rainer Rotthaeuser dated effective as of January 1, 2005 (translated from German to English).(7) | |
10.6 | Loan Agreement for EUR 5,000 with interest at 6% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated May 30, 2005 (translated from German to English).(7) | |
10.7 | Addendum to Loan Agreement for EUR 5,000 dated May 30, 2005 between Dieter Thiemann (as lender) and EDI Germany (as borrower), extending due date to December 31, 2007, dated December 26, 2006 (translated from German to English).(7) | |
10.8 | Addendum to Loan Agreement for EUR 5,000 dated May 30, 2005 between Dieter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to December 31, 2008, dated December 26, 2007 (translated from German to English).(11) | |
10.9 | Loan Agreement for EUR 36,000 without interest between Guenter Thiemann (as lender) and EDI Germany (as borrower) dated June 8, 2005 (translated from German to English).(7) | |
10.10 | Addendum to Loan Agreement for EUR 36,000 dated June 8, 2005 between Guenter Thiemann (as lender) and EDI Germany (as borrower), providing for interest at a rate of 6% per annum, dated July 1, 2006 (translated from German to English).(7) | |
10.11 | Addendum to Loan Agreement for EUR 36,000 dated June 8, 2005 between Guenter Thiemann (as lender) and EDI Germany (as borrower), extending due date to December 31, 2007, dated April 22, 2007 (translated from German to English).(7) | |
10.12 | Addendum to Loan Agreement for EUR 36,000 dated June 8, 2005 between Guenter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 25, 2007 (translated from German to English).(11) | |
10.13 | ||
10.14 | Loan Agreement for EUR 25,000 with interest at 6% per annum between EDI Germany (as lender) and Guenter Thiemann (as borrower) dated December 23, 2005 (translated from German to English).(7) | |
10.15 | Loan Agreement for EUR 115,000 with interest at 6% per annum between EDI Germany (as lender) and Magdalena Rotthaeuser (as borrower) dated December 23, 2005 (translated from German to English).(7) | |
10.16 | Addendum to Loan Agreement for EUR 115,000 dated December 23, 2005 between EDI Germany (as lender) and Magdalena Rotthaeuser (as borrower), extending due date to June 30, 2007, dated December 28, 2006 (translated from German to English).(7) | |
10.17 | Loan Agreement for EUR 15,400 with interest at 3% per annum between EDI Germany (as lender) and Magdalena Rotthaeuser (as borrower) dated January 3, 2006 (translated from German to English).(7) | |
10.18 | Loan Agreement for EUR 90,000 with interest at 6% per annum between DTB Patente GmbH (as lender) and EDI Germany (as borrower) dated March 2, 2006 (translated from German to English).(7) | |
10.19 | Addendum to Loan Agreement for EUR 90,000 dated March 2, 2006 between DTB Patente GmbH (as lender) and EDI Germany (as borrower), extending the due date to September 30, 2007, dated January 4, 2007 (translated from German to English).(7) | |
10.20 | Addendum to Loan Agreement for EUR 90,000 dated March 2, 2006 between DTB Patente GmbH (as lender) and EDI Germany (as borrower) extending the due date to March 31, 2008, dated September 25, 2007 (translated from German to English).(9) | |
10.21 | Addendum to Loan Agreement for EUR 90,000 dated March 2, 2006 between DTB Patente GmbH (as lender) and EDI Germany (as borrower) extending the due date to December 31, |
14
Exhibit | ||
Number | Description of Exhibit | |
2008, dated February 2, 2008 (translated from German to English).(13) | ||
10.22 | Loan Agreement for EUR 50,000 without interest between Guenter Thiemann (as lender) and EDI Germany (as borrower) dated May 4, 2006 (translated from German to English).(7) | |
10.23 | Addendum to Loan Agreement for EUR 50,000 dat+ed May 4, 2006 between Guenter Thiemann (as lender) and EDI Germany (as borrower) dated July 1, 2006 (translated from German to English).(7) | |
10.24 | Addendum to Loan Agreement for EUR 50,000 dated May 4, 2006 between Guenter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to December 31, 2008, dated May 2, 2008 (translated from German to English).(12) | |
10.25 | Addendum to Loan Agreement for EUR 115,000 dated December 23, 2005 between EDI Germany (as lender) and Magdalena Rotthaeuser (as borrower), extending due date to December 31, 2006, dated June 25, 2006 (translated from German to English).(7) | |
10.26 | Loan Agreement for EUR 20,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated July 15, 2006 (translated from German to English).(7) | |
10.27 | Addendum to Loan Agreement for EUR 20,000 dated July 15, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to December 31, 2007, dated July 15, 2007 (translated from German to English).(8) | |
10.28 | Addendum to Loan Agreement for EUR 20,000 dated July 15, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 28, 2007 (translated from German to English).(11) | |
10.29 | Addendum to Loan Agreement for EUR 20,000 dated July 15, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to March 31, 2009, dated June 28, 2008 (translated from German to English).(13) | |
10.30 | Loan Agreement for EUR 12,000 with interest at 5% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated September 20, 2006 (translated from German to English).(7) | |
10.31 | Addendum to Loan Agreement for EUR 12,000 dated September 20, 2006 between Dieter Thiemann (as lender) and EDI Germany (as borrower), extending due date to March 22, 2007, dated December 18, 2006 (translated from German to English).(7) | |
10.32 | Addendum to Loan Agreement for EUR 12,000 dated September 20, 2006 between Dieter Thiemann (as lender) and EDI Germany (as borrower), extending due date to December 31, 2007, dated June 26, 2007 (translated from German to English).(8) | |
10.33 | Addendum to Loan Agreement for EUR 12,000 dated September 20, 2006 between Dieter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 26, 2007 (translated from German to English).(11) | |
10.34 | Addendum to Loan Agreement for EUR 12,000 dated September 20, 2006 between Dieter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to March 31, 2009, dated June 22, 2008.(13) | |
10.35 | Loan Agreement for EUR 11,600 with interest at 5% per annum between DTB Patente GmbH (as lender) and EDI Germany (as borrower) dated October 28, 2006 (translated from German to English).(7) | |
10.36 | Addendum to Loan Agreement for 11,600 dated October 28, 2006 between DTB Patente GmbH (as lender) and EDI Germany (as borrower) extending the due date to November 30, 2008, dated November 1, 2007 (translated from German to English).(11) | |
10.37 | Loan Agreement for EUR 3,400 with interest at 6% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated October 28, 2006 (translated from German to English).(7) | |
10.38 | Addendum to Loan Agreement for EUR 3,400 dated October 28, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to June 30, 2008, dated September 1, 2007 (translated from German to English).(9) | |
10.39 | Addendum to Loan Agreement for EUR 3,400 dated October 28, 2006 between EDI Holding (as |
15
Exhibit | ||
Number | Description of Exhibit | |
lender) and EDI Germany (as borrower) extending the due date to March 31, 2009, dated May 28, 2008 (translated from German to English).(13) | ||
10.40 | Loan Agreement for EUR 75,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated December 19, 2006 (translated from German to English).(7) | |
10.41 | Loan Agreement for EUR 2,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated December 29, 2006 (translated from German to English).(7) | |
10.42 | Addendum to Loan Agreement for EUR 2,000 dated December 29, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 28, 2007 (translated from German to English).(11) | |
10.43 | Addendum to Loan Agreement for EUR 2,000 dated December 29, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to March 31, 2009, dated June 28, 2008 (translated from German to English).(13) | |
10.44 | Loan Agreement for EUR 1,000 with interest at a rate of 6% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated December 29, 2006 (translated from German to English).(7) | |
10.45 | Addendum to Loan Agreement for EUR 1,000 dated December 29, 2006 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 28, 2007 (translated from German to English).(11) | |
10.46 | Addendum to Loan Agreement for EUR 1,000 dated December 29, 2008 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to March 31, 2009, dated June 26, 2008 (translated from German to English). | |
10.47 | Loan Agreement for EUR 21,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated January 19, 2007 (translated from German to English).(7) | |
10.48 | Addendum to Loan Agreement for EUR 21,000 dated January 19, 2007 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to December 31, 2008, dated January 20, 2008 (translated from German to English).(11) | |
10.49 | Loan Agreement for EUR 57,500 with interest at 5% per annum between DTB Patente GmbH (as lender) and EDI Germany (as borrower) dated January 28, 2007 (translated from German to English).(7) | |
10.50 | Addendum to Loan Agreement for 57,500 dated January 28, 2007 between DTB Patente GmbH (as lender) and EDI Germany (as borrower) extending the due date to January 28, 2009, dated January 22, 2008 (translated from German to English).(11) | |
10.51 | Loan Agreement for EUR 10,000, with interest at 6% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated February 2, 2007 (translated from German to English).(7) | |
10.52 | Addendum to Loan Agreement for EUR 10,000 dated February 2, 2007 between Dieter Thiemann (as lender) and EDI Germany (as borrower), extending the due date to December 31, 2007, dated June 28, 2007 (translated from German to English).(8) | |
10.53 | Addendum to Loan Agreement for EUR 10,000 dated February 2, 2007 between Dieter Thiemann (as lender) and EDI Germany (as borrower) extending the due date to July 31, 2008, dated December 28, 2007 (translated from German to English).(11) | |
10.54 | Addendum to Loan Agreement for EUR 10,000 dated February 2, 2007 between Dieter Thiemann (as lender) and EDI Germany (as borrower), extending the due date to March 31, 2009, dated June 18, 2008 (translated from German to English).(13) | |
10.55 | Loan Agreement for EUR 39,160 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated February 23, 2007 (translated from German to English).(7) | |
10.56 | Addendum to Loan Agreement for EUR 39,160 dated February 23, 2007 between EDI Holding |
16
Exhibit | ||
Number | Description of Exhibit | |
(as lender) and EDI Germany (as borrower) extending the due date to December 31, 2008, dated February 20, 2008 (translated from German to English).(11) | ||
| ||
10.57 | Loan Agreement for EUR 1,800 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated February 23, 2007 (translated from German to English).(7) | |
| ||
10.58 | Addendum to Loan Agreement for EUR 1,800 dated February 23, 2007 between EDI Holding (as lender) and EDI Germany (as borrower) extending the due date to December 31, 2008, dated February 23, 2008 (translated from German to English).(11) | |
| ||
10.59 | Loan Agreement for EUR 12,000 with interest at 6% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated July 16, 2007 (translated from German to English).(8) | |
| ||
10.60 | Loan Agreement for EUR 5,000 with interest at 6% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated August 5, 2007 (translated from German to English).(8) | |
| ||
10.61 | Loan Agreement for EUR 40,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated August 9, 2007 (translated from German to English).(11) | |
| ||
10.62 | Addendum to Loan Agreement for EUR 40,000 dated August 9, 2007 between EDI Holding (as lender) and EDI Germany (as borrower), extending the due date to March 31, 2009, dated August 4, 2008 (translated from German to English).(13) | |
| ||
10.63 | Loan Agreement for EUR 10,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated August 12, 2007 (translated from German to English).(9) | |
| ||
10.64 | Addendum to Loan Agreement for EUR 10,000 dated August 12, 2007 between EDI Holding (as lender) and EDI Germany (as borrower), extending the due date to March 31, 2009, dated August 4, 2008 (translated from German to English).(13) | |
| ||
10.65 | Loan Agreement for EUR 15,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated August 20, 2007 (translated from German to English).(9) | |
| ||
10.66 | ||
| ||
10.67 | Loan Agreement for EUR 35,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated August 30, 2007 (translated from German to English).(9) | |
| ||
10.68 | ||
| ||
10.69 | Loan Agreement for EUR 33,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated September 11, 2007 (translated from German to English).(9) | |
| ||
10.70 | ||
| ||
10.71 | Loan Agreement for EUR 24,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated September 19, 2007 (translated from German to English).(9) | |
| ||
10.72 | ||
| ||
10.73 | Loan Agreement for EUR 12,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated September 26, 2007 (translated from German to |
17
Exhibit | ||
Number | Description of Exhibit | |
English).(9) | ||
10.74 | ||
10.75 | Loan Agreement for EUR 9,400 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated October 12, 2007 (translated from German to English).(11) | |
10.76 | Loan Agreement for EUR 15,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated November 16, 2007 (translated from German to English).(11) | |
10.77 | Loan Agreement for EUR 6,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated November 23, 2007 (translated from German to English).(11) | |
10.78 | Loan Agreement for EUR 29,383 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated December 30, 2007 (translated from German to English).(11) | |
10.79 | Loan Agreement for EUR 6,500 with interest at 6% per annum between Dieter Thiemann (as lender) and EDI Germany (as borrower) dated January 18, 2008 (translated from German to English).(11) | |
10.80 | Loan Agreement for EUR 25,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated February 8, 2008 (translated from German to English).(12) | |
10.81 | Loan Agreement for EUR 5,000 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated February 8, 2008 (translated from German to English).(12) | |
10.82 | Consulting Agreement dated February 13, 2008 between the Company and Jesko Beck.(10) | |
10.83 | Technology License Agreement between EDI Germany and EDI Turkey, dated effective as of March 28, 2008.(11) | |
10.84 | Loan Agreement for EUR 6,019.41 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated March 30, 2008 (translated from German to English).(12) | |
10.85 | Loan Agreement for EUR 63,950 with interest at 5% per annum between EDI Holding (as lender) and EDI Germany (as borrower) dated July 1, 2008 (translated from German to English).(13) | |
10.86 | 2008 Stock Option Plan.(14) | |
10.87 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 |
Notes: | |
(1) | Filed as an exhibit to our Registration Statement on Form 10-SB originally filed with the SEC on November 5, 2003. |
(2) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 27, 2006. |
(3) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on May 11, 2006. |
(4) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 28, 2006. |
(5) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on August 28, 2006. |
(6) | Filed as an exhibit to our Quarterly Report on Form 10-QSB filed with the SEC on November 14, 2006. |
(7) | Filed as an exhibit to our Annual Report on Form 10-KSB filed with the SEC on May 16, 2007. |
18
(8) | Filed as an exhibit to our Quarterly Report on Form 10-QSB filed with the SEC on August 20, 2007. |
(9) | Filed as an exhibit to our Quarterly Report on Form 10-QSB filed with the SEC on November 19, 2007. |
(10) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 20, 2008. |
(11) | Filed as an exhibit to our Annual Report on Form 10-K filed with the SEC on April 15, 2008. |
(12) | Filed as an exhibit to our Quarterly Report on Form 10-Q filed with the SEC on May 20, 2008. |
(13) | Filed as an exhibit to our Quarterly Report on Form 10-Q filed with the SEC on August 19, 2008. |
(14) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on October 9, 2008. |
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EXPLORATION DRILLING INTERNATIONAL INC. | ||||
Date: | November 18, 2008 | By: | /s/ Rainer Rotthaeuser | |
RAINER ROTTHAEUSER | ||||
Chief Executive Officer and President | ||||
(Principal Executive Officer ) | ||||
Date: | November 18, 2008 | By: | /s/ Guenter Thiemann | |
GUENTER THIEMANN | ||||
Chief Financial Officer and Treasurer | ||||
(Principal Accounting Officer) | ||||
Date: | November 18, 2008 | By: | /s/ John Boschert | |
JOHN BOSCHERT | ||||
Secretary |