Essential Innovations Technology (ESIV) 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2007

Commission File Number 333-106839

Essential Innovations Technology Corp.
(Exact name of small business issuer as specified in its charter)
Nevada	88-0492134
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
114 West Magnolia Street, Suite 400-142 Bellingham, WA 98225
(Address of principal executive offices)
360-392-3902
(Issuer’s telephone number)
n/a
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.

x     Yes     o     No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o     Yes     x     No

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:As of September 7, 2007, the issuer had one class of common stock, with a par value of $0.001, of which 43,753,190 shares were issued and outstanding.

Transitional Small Business Disclosure Format (Check one):

o     Yes     x     No

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1:	Financial Statements:
	Unaudited Consolidated Balance Sheet as at July 31, 2007	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2007 and 2006	4
	Unaudited Consolidated Statement of Stockholders’ Deficiency and Comprehensive Loss for the Nine Months Ended July 31, 2007	5
	Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended July 31, 2007 and 2006	6
	Notes to Consolidated Financial Statements	8
Item 2:	Management’s Discussion and Analysis or Plan of Operation	16
Item 3:	Controls and Procedures	18
	PART II—OTHER INFORMATION
Item 1:	Legal Proceedings	19
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 5:	Other Information	20
Item 6:	Exhibits	20
	Signatures	20

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ESSENTIAL INNOVATIONS TECHNOLOGY CORP.

Consolidated Balance Sheet
(Expressed in United States dollars)
July 31, 2007
(unaudited)

Assets
Current assets:
Cash	$	218,688
Accounts receivable, net		464,320
Costs and estimated earnings in excess of billings on uncompleted contracts		5,741
Inventory		183,991
Prepaid expenses		61,399
Total current assets		934,139
Property and equipment, net		95,103
Deposits		12,848
Intangible assets		507,313
Revenue producing assets under construction		37,677
Total assets	$	1,587,080
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	1,179,387
Accrued expenses		388,685
Accrued wages		8,551
Accrued payroll taxes		274,327
Billings in excess of costs and estimated earnings on uncompleted contracts		35,905
Loans payable, related parties		72,386
Due to shareholders		138,098
Current portion of long term debt		395,452
Total current liabilities		2,492,791
Long term liabilities:
Term loan, net of discount		1,072,155
Finance loans		699
Total liabilities		3,565,645
Stockholders’ Deficit
Preferred stock:
$0.001 par value, authorized 10,000,000 shares issued and outstanding nil shares		—
Common stock:
$0.001 par value, authorized 100,000,000 shares issued and outstanding 43,753,190 shares		43,752
Additional paid in capital		17,154,640
Accumulated deficit		(19,170,434	)
Accumulated other comprehensive loss		(5,823	)
Total stockholders’ deficit		(1,977,865	)
Total liabilities and stockholders’ deficit	$	1,587,780

See accompanying notes to consolidated financial statements.

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ESSENTIAL INNOVATIONS TECHNOLOGY CORP.

Consolidated Statements of Operations

(Expressed in United States dollars)

For the three and nine months ended July 31, 2007 and 2006

(unaudited)

		Three months ended July 31, 2007				Three months ended July 31, 2006				Nine months ended July 31, 2007				Nine months ended July 31, 2006
Revenue			$	1,015,312			$	857,330			$	2,396,257			$	1,537,020
Cost of Revenue				768,051				644,522				1,817,227				1,119,339
Gross Profit				247,261				212,808				579,030				417,681
Expenses:
	General and administrative			465,323				1,032,911				1,754,056				5,606,804
	Impairment loss			—				—				2,033,948				—
				465,323				1,032,911				3,788,004				5,606,804
				(218,062	)			(820,103	)			(3,208,974	)			(5,189,123	)
Other income and expense:
	Interest expense			(57,717	)			(71,695	)			(174,866	)			(111,402	)
	Interest expense, related parties			(2,125	)			(580	)			(8,056	)			(1,660	)
	Amortization of debt discount			(47,415	)			(47,415	)			(142,245	)			(470,025	)
	Financing costs			—				—				(3,911	)			(270,423	)
	Financing costs, related parties			—				(26,987	)			(40,387	)			(26,987	)
	Interest income			20				527				791				2,643
				(107,237	)			(146,150	)			(368,674	)			(877,854	)
Net Loss for the period			$	(325,299	)		$	(966,253	)		$	(3,577,648	)		$	(6,066,977	)
Net Loss per share - basic and diluted			$	(0.01	)		$	(0.04	)		$	(0.10	)		$	(0.26	)
Weighted average number of shares outstanding				39,040,794				27,372,003				35,193,858				22,974,384

See accompanying notes to consolidated financial statements.

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ESSENTIAL INNOVATIONS TECHNOLOGY CORP.

Consolidated Statement of Stockholders’ Deficiency and Comprehensive Loss
(Expressed in United States dollars)
For the nine months ended July 31, 2007
(unaudited)

	Common stock			Additional paid-in capital			Accumulated deficit			Accumu- lated other compre- hensive loss			Total stockholders’ deficiency
	Number of Shares	Amount
Balance October 31, 2006	31,247,886	$	31,247	$	16,006,205		$	(15,592,786	)	$	(18,638	)		$	426,028
Loss for the period	—		—		—			(3,577,648	)		—				(3,577,648	)
Foreign currency translation	—		—		—			—			12,815				12,815
Comprehensive loss															(3,564,833	)
Common stock and warrants issued for cash received
three months ended July 31, 2007	7,560,000		7,560		370,440			—			—				378,000
Common stock issued to related parties for services received
three months ended January 31, 2007	319,520		320		79,560			—			—				79,880
three months ended July 31, 2007	3,946,400		3,946		489,354			—			—				493,300
Common stock issued to settle account payables and accrued expenses
three months ended January 31, 2007	214,040		214		47,621			—			—				47,835
Common stock issued for services received
three months ended January 31, 2007	25,000		25		7,475			—			—				7,500
three months ended July 31, 2007	390,344		390		48,403			—			—				48,793
Common stock issued for rights
three months ended January 31, 2007	50,000		50		14,950			—			—				15,000
Options issued to related parties for services received
three months ended January 31, 2007	—		—		16,309			—			—				16,309
Options issued for services received
three months ended January 31, 2007	—		—		29,161			—			—				29,161
Options issued for rights
three months ended January 31, 2007	—		—		10,064			—			—				10,064
Warrants issued to related parties for services received
three months ended January 31, 2007	—		—		40,387			—			—				40,387
Warrants issued for financings
three months ended April 30, 2007	—		—		3,911			—			—				3,911
Financing costs	—		—		(9,200	)		—			—				(9,200	)
Balance July 31, 2007	43,753,190	$	43,752	$	17,154,640		$	(19,170,434	)	$	(5,823	)		$	(1,977,865	)

See accompanying notes to consolidated financial statements.

5

ESSENTIAL INNOVATIONS TECHNOLOGY CORP.

Consolidated Statement of Cash Flows

(Expressed in United States dollars)

For the nine months ended July 31, 2007 and 2006

(unaudited)

	Nine months ended July 31, 2007				Nine months ended July 31, 2006
Cash provided by (used in):
Operating:
Net loss for the period		$	(3,577,648	)		$	(6,066,977	)
Adjustment to reconcile net loss for the period to net cash used in operating activities:
Depreciation of property and equipment			61,459				22,554
Amortization of intangible assets			—				41,563
Amortization of debt discount			142,245				470,025
Gain on tenant inducements			(25,830	)			(7,733	)
Common stock issued for services			56,293				543,616
Common stock issued to related parties for services			573,180				1,101,329
Options issued for services			29,161				253,510
Options issued to related parties for services			16,309				1,170,600
Warrants issued for financings			3,911				270,423
Warrants issued to related parties for services			40,387				446,311
Warrants issued in settlement of loans and consulting fees			—				47,360
Impairment charge			2,033,948				—
Foreign exchange on loan payable			—				5,770
Changes in assets and liabilities
Accounts receivable			232,974				55,957
Cost and estimated earnings in excess of billings			97,242				—
Inventory			60,988				(74,626	)
Prepaid expenses			57,535				(57,666	)
Accounts payable			16,776				171,207
Accrued expenses and wages			141,884				471,815
Billings in excess of costs and estimated earnings			(211,398	)			(191,846	)
Net cash used in operating activities			(250,584	)			(1,326,808	)
Investing:
Purchase of property and equipment, net			8,480				(50,263	)
Deposits			—				(22,291	)
Additional costs of revenue producing assets, net			(14,680	)			—
Cash component to acquire subsidiaries			—				(952,897	)
Net cash used in investing activities			(6,200	)			(1,025,451	)
Financing:
Issuance of common stock			378,000				872,513
Proceeds received from exercise of options			—				6,250
Proceeds of term loan			—				2,000,000
Proceeds of short term loan			—				258,000
Repayment of short term loan			—				(258,000	)
Payout of subsidiary loans on acquisition			—				(548,900	)
Repayment of term loan			(58,029	)			(12,500	)
Financing costs			(9,200	)			—
Tenant inducements received			22,635				—
Advances from shareholders			62,242				134,858
Repayment of finance loans			(12,039	)			(4,249	)
Repayment of loan payable			—				(30,450	)
Net cash provided by financing activities			383,609				2,417,522
Increase in cash during the period			126,825				65,263
Foreign exchange effect on cash			15,320				(17,759	)
Cash at beginning of the period			76,543				2,307
Cash at end of the period		$	218,688			$	49,811

See accompanying notes to consolidated financial statements.

6

ESSENTIAL INNOVATIONS TECHNOLOGY CORP.

Consolidated Statement of Cash Flows (continued)
(Expressed in United States dollars)
For the nine months ended July 31, 2007 and 2006
(unaudited)

Supplementary Information:

	2007		2006
Interest paid	$	182,922	$	113,062
Income taxes paid		—		—
Non-cash transactions:
Common shares issued to settle accrued wages and consulting fees		—		185,685
Common shares issued for geo-site rights		—		225
Common shares issued to acquire subsidiaries		—		504,132
Warrants issued to secure term loan		—		960,000
Common shares issued to related parties to repay loans and advances		—		133,323
Common shares issued to repay loans and consulting fees		—		66,000
Common shares issued for acquisition of automobile		—		15,339
Common shares issued to settle accounts payable and accrued expenses		47,835		—
Common shares issued for rights		15,000		—
Options issued for rights		10,064		—

See accompanying notes to consolidated financial statements.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Summary of Significant Accounting Policies

Organization

Essential Innovations Technology Corp. (the “Company”) was incorporated under the laws of the state of Nevada on April 4, 2001. The Company’s subsidiary, Essential Innovations Corporation, is engaged in the manufacturing, installation, and distribution of the “EI Elemental Heat Energy System” family of geo exchange heat products and technology in North America, though its sales to date are primarily in western Canada. On March 6, 2006, the Company acquired all of the issued and outstanding shares of Pacific Geo Exchange Inc., and its wholly owned subsidiary, Earth Source Energy Inc., which is engaged in the design and installation of geo exchange systems in western Canada. Until January 31, 2005, the Company was in the development stage and substantially all of the Company’s efforts had been directed towards product and distribution chain development primarily in western Canada. Effective as of February 1, 2005, the Company had sales of these products and management determined that the Company had emerged from the development stage.

Future Operations

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet generated significant positive cash flows from operations. It is the Company’s intention to raise additional equity to finance the further development of a market for its products until significant positive cash flows can be generated from its operations. However, there can be no assurance that such additional funds will be available to the Company when required or on terms acceptable to the Company. Such limitations could have a material adverse effect on the Company’s business, financial condition, or operations, and these consolidated financial statements do not include any adjustment that could result. Failure to obtain sufficient additional funding would necessitate the Company reduce or limit its operating activities.

Basis of Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, with the instructions to Form 10-QSB and with Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for such interim period. The results reported in these interim consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and note disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2006.

These consolidated financial statements include the accounts of Essential Innovations Technology Corp. and its wholly owned subsidiaries, Essential Innovations Asia Limited, Essential Innovations Corporation, Pacific Geo Exchange Inc., and Earth Source Energy Inc. All significant inter-company balances and transactions have been eliminated.

8

Cash

Cash consists of checking accounts held at financial institutions in the United States, Canada, and Hong Kong.

Accounts Receivable

Accounts receivable result primarily from installation contracts and the sale of geothermal products and are recorded at their principal amounts. Receivables are considered past due after 30 days. When necessary, the Company provides an allowance for doubtful accounts that is based on a review of outstanding receivables, historical collection information, and current economic conditions. There is an allowance for doubtful accounts of $68,045 at July 31, 2007. Receivables are generally unsecured.

Accounting for Construction Contracts

Revenues from construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because management considers total cost to be the best available measure of progress on contracts. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used may change in the near term. If estimated costs to complete long-term contracts indicate a loss, provision is made in the current period for the total anticipated loss. The lives of contracts entered into are typically twelve months or less, but performance may require two construction seasons.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in advance of amounts billed. Conversely, the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents amounts billed in advance of revenues recognized.

Goodwill

Goodwill arose upon the acquisition of Pacific Geo Exchange Inc. and represents the excess of cost of acquisition over the fair value of the identifiable assets acquired less liabilities assumed. The Company’s policy is to review the carrying value of goodwill on at least an annual basis and between annual tests if indicators of potential impairment exist and record any impairment at that time.

During the nine months ended July 31, 2007, the Company reorganized the operations of its Pacific Geo Exchange subsidiary, which was acquired in March 2006. In the opinion of the Company’s management, the value of the goodwill recorded upon the acquisition of the subsidiary has been eroded and the Company has recorded a non-cash impairment charge of $2,033,948 against operations representing a write-off of all goodwill.

Intangible Assets

Intangible assets consist of geo-site rights, intellectual property, and option rights agreements. Intangible assets with definite lives or bases for productivity are recorded at cost and are amortized over the expected life of the asset. Intangible assets with indefinite lives are not amortized but are evaluated periodically for impairment. Management tests intangible assets for impairment at least annually.

9

Revenue Recognition

Revenues from the sales of geo exchange products are recognized as the sales are made, the price is fixed and determinable, collectibility is probable, and no significant Company obligations with regard to the products remain.

Revenues from design and installation contracts are recognized on the percent of completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used may change in the near term. If estimated costs to complete a contract indicate a loss based on management analysis, provision is made in the current period for the total anticipated loss. The lives of these contracts are typically twelve months or less, but performance may occur in different fiscal years.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. Diluted loss per share takes into consideration common shares outstanding (computed under basic loss per share) and potentially dilutive securities. The potentially dilutive equity instruments outstanding are anti-dilutive due to the Company’s losses. Common shares issuable are considered outstanding as of the original approval date for purposes of earnings per share computations.

Comprehensive Loss

Statement of Financial Accounting Standards (“SFAS”) No. 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Other comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. To date, the Company has not had any significant transactions that are required to be reported in other comprehensive income (loss), except for foreign currency translation adjustments.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the fiscal year. Actual results may differ from those estimates.

Foreign Operations and Currency Translation

The Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in U.S. dollars, at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Gains or losses from these translations are reported as a separate component of other comprehensive income (loss) until all or a part of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in general and administrative expenses.

10

Note 2. Uncompleted Contracts

Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:

Costs incurred on uncompleted contracts	$	541,467
Estimated earnings		468,765
		1,010,232
Billings to date		(980,068	)
	$	(30,164	)
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	5,741
Billings in excess of costs and estimated earnings on uncompleted contracts		(35,905	)
	$	(30,164	)

Note 3. Intangible Assets

Geo-Site Rights

During 2005, the Company acquired the exclusive rights to provide a geo-field operating lease and to supply its heating and cooling units to a new residential subdivision in Westbank, British Columbia. The total cost of $392,080 will be amortized on a pro rata per-unit basis as residential units are sold. As of July 31, 2007, no amortization has been incurred.

Intellectual Property

In 2005 the Company acquired certain proprietary information that provides the basis for the effective implementation and operation of the geo-utility business concept by issuing common stock and options. These have been recorded at the fair value of $57,496. In addition, the vendor is entitled to a royalty of 2.5% from gross revenue of geo-utility projects in which the Company is directly involved and 0.5% of gross fees from geo-utility projects when the Company provides project management. The Company has not earned any gross revenue from geo-utility projects and, accordingly, no royalty expense is included in these consolidated financial statements. This intangible asset has an indefinite life. Management evaluates the asset for impairment on at least an annual basis and recorded an impairment loss of $41,378 during the fourth quarter of 2006.

Option Rights Agreement

During 2005, the Company obtained the exclusive rights to acquire a new technology within the geothermal heating and cooling and any other heating, ventilating, and air conditioning related application from a director of the Company and his partner, who is the father of the Company’s Chief Executive Officer. This agreement was modified in April 2006 to reduce the cost to exercise the option. The Company paid for this option by issuing 50,000 fully paid and non-assessable shares of its common stock, with a fair value of $25,000 and options to acquire 50,000 shares of the Company’s common stock at a price of $0.75 per share exercisable for five years. These have been recorded at the fair value of $55,156. The Company has determined not to exercise this option, which expires in September 2007. The cost has been amortized in full.

11

Technology Agreement

During the nine months ended July 31, 2007, the Company entered into an agreement for the exclusive rights to distribute and use certain proprietary technology processes for the installation of geo exchange systems. The Company paid for these exclusive rights by the issuing of 50,000 fully paid and non-assessable shares of its common stock, with a fair value of $15,000, and options to acquire 50,000 shares of the Company’s common stock at a price of $0.50 per share exercisable for five years. These options have been recorded at the fair value of $10,064. In addition, the agreement calls for the payment of royalties of 18% of the overall project value on commercial or institutional projects and 10% of the overall project value on residential projects.

Note 4. Related-Party Transactions and Balances

Loans Payable, Related Parties

During 2003, a director and officer of the Company made an unsecured loan to the Company in the amount of $30,600, due on demand, payable monthly as to interest only at 8%, with the principal to be repaid in full on or before April 1, 2004. In connection with this loan, options were granted which entitle the holder to purchase 50,000 shares of common stock of the Company until 2012: 25,000 at $0.25 per share and 25,000 at $0.50 per share. The fair value of the options of $37,978 was recorded as interest expense during 2003. During 2004, the loan was extended and the Company agreed to pay an additional $6,511 in refinancing costs. The balance remaining at July 31, 2007, is $11,195.

During 2006, two related parties made unsecured loans to the Company totaling $61,191, due September 30, 2006, with interest at 15%. The Company also granted options to purchase 195,000 shares of common stock of the Company until 2011 at $0.30 per share. The fair value of the warrants of $69,787 was recorded as interest expense during 2006.

Due to Shareholders

Amounts due to shareholders at July 31, 2007, are unsecured, without specific terms of repayment and non-interest-bearing. The balance remaining due at July 31, 2007, is $138,098.

Other Related Party Transactions

• During the nine months ended July 31, 2007 and 2006, the Company incurred consulting fees and related expenses to a company controlled by an officer and director of the Company in the amount of $102,500 and $112,500, respectively. During the nine months ended July 31, 2007, $102,500 was converted into 770,000 shares of common stock. In addition, warrants to purchase 50,000 shares of common stock of the Company at $0.25 per share until 2011 were also issued as part of one of the conversions. The balance owing as at July 31, 2007, is nil.

• During the nine months ended July 31, 2007, certain management and directors of the Company converted $450,300 of accrued wages into 3,417,400 shares of common stock of the Company. In addition, warrants to purchase 191,000 shares of common stock of the Company at $0.25 per share until 2011, valued at $32,007, were also issued as part of the conversion. No gain or loss was recorded on these conversions.

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Note 5. Term Loan

During 2006, the Company arranged term financing of $2 million to complete the acquisition of Pacific Geo Exchange Inc. and Earth Source Energy Inc. This loan is secured against all assets of the Company and bears interest, payable monthly, at the rate of prime plus 3%, with a minimum interest rate of 8%. During the six months ended April 30, 2007, the principal repayments were renegotiated and the new principal payments are $30,000 per month from May 2007 to November 2007; $37,500 per month from December 2007 to May 2008; and $62,500 per month from June 2008 until the loan is paid in full. In addition to the monthly payments, the Company is required to pay 30% of annual positive cash flow as additional principal payments. At July 31, 2007, the Company was delinquent in interest payments of $33,209 and principal payments of $90,000.

The Company has recorded a discount against the loan based on the relative fair value of related warrants to purchase 2,919,496 shares of common stock related to the $2 million term loan in the amount of $960,000. As the lender has agreed not to hold more than 4.99% of the Company’s stock at any one time, only that portion of the debt discount equivalent to the exercising of warrants that would equate to 4.99% of the Company’s outstanding stock as of the date of funding has been expensed as interest in the amount of $391,000 in these financial statements. The balance of the debt discount is being amortized over 36 months, and related interest expense of $148,579 for the nine months ended July 31, 2007, is included in these consolidated financial statements.

The following represents payments due under the term loan as renegotiated:

	Principal due			Less discount			Net
July 31, 2008		$	560,000		$	189,660		$	370,340
July 31, 2009			750,000			110,655			639,345
July 31, 2010			432,110			—			432,110
		$	1,742,110		$	300,315		$	1,441,795

Note 6. Share Capital

Preferred Stock

The Company’s authorized capital includes 10,000,000 shares of preferred stock of $0.001 par value. The designation of rights including voting powers, preferences, and restrictions shall be determined by the Board of Directors before the issuance of any shares. No shares of preferred stock are issued and outstanding as of July 31, 2007.

Common Stock

During the nine months ended July 31, 2007, the Company:

• Issued 7,560,000 shares of common stock of the Company and warrants to purchase 7,560,000 shares of common stock of the Company at $0.10 per share for total proceeds of $378,000. The proceeds allocated to warrants were $157,500.

• Issued 244,520 shares of common stock of the Company and warrants to purchase 241,000 shares of common stock of the Company at $0.25 per share to related parties for services with a fair value of $61,130.

• Issued 3,946,400 shares of common stock of the Company at $0.125 per share to related parties for services with a fair value of $493,300.

• Issued 60,000 shares of common stock of the Company in settlement of $15,000 of amounts owing to a consultant.

• Issued 20,270 shares of common stock of the Company for payment of services received with a fair value of $6,081.

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• Issued 75,000 shares of common stock of the Company to employees for services with a fair value of $18,750.

• Issued 25,000 shares of common stock to a consultant for services received with a fair value of $7,500.

• Issued 390,344 shares of common stock to consultants for services received with a fair value of $48,793.

• Issued 50,000 shares of common stock of the Company as part consideration for a third party to provide the Company with an agreement for exclusive rights to its technology.

• Issued 133,770 shares of common stock of the Company in settlement of $26,754 of amounts owing to a supplier.

Stock Purchase Warrants

At July 31, 2007, the Company had outstanding warrants to purchase 18,272,338 shares of the Company’s common stock as follows:

Number of warrants	Exercise Price	Expiry
100,000	$0.35	2007
75,000	0.75	2010
75,000	1.00	2010
417,500	0.40	2010
270,000	0.50	2010
967,400	0.25	2011
4,831,732	0.30	2011
15,000	0.35	2011
373,750	0.40	2011
317,460	0.63	2011
7,610,000	0.10	2012
300,000	0.01	2011
2,919,496	0.001	2050

At July 31, 2007, 18,272,338 shares of common stock were reserved.

Note 7. Stock-Based Compensation

Although the Company does not have a formal stock option plan, during the nine months ended July 31, 2007, the Company issued stock options to directors, employees, advisors, and consultants.

A summary of the Company’s stock options is as follows:

	Number of Options		Weighted Average Exercise Price
Outstanding at October 31, 2006		10,744,887		$0.63
Options issued to employees		75,000		0.25
Options issued to consultants		150,000		0.67
Options issued for exclusive rights		50,000		0.50
Outstanding at July 31, 2007		11,019,887		0.63

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The following table summarizes stock options outstanding at July 31, 2007:

Exercise Price	Number Outstanding at July 31, 2007	Average Remaining Contractual Life (Years)	Number Exercisable at July 31, 2007
$0.25	389,750	0.74	389,750
0.26	75,000	4.25	75,000
0.30	2,279,887	3.71	2,279,887
0.37	90,000	3.75	90,000
0.40	125,000	3.60	125,000
0.50	1,237,250	2.92	1,237,250
0.53	1,250,000	3.75	1,250,000
0.63	250,000	3.67	250,000
0.75	1,835,500	4.20	1,835,500
1.00	3,063,750	2.99	3,063,750
1.25	87,500	3.11	87,500
1.50	320,000	2.62	320,000
2.00	16,250	3.08	16,250
	11,019,887		11,019,887

The fair value of each option granted is estimated at the date of grant using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of the options granted were risk-free interest rate of 5.0%, a 4 to 5-year expected life, a dividend yield of 0.0%, and a stock price volatility factor of 50% to 163%.

Note 8. Subsequent Events

Subsequent to July 31, 2007, the Company received notice from the holder of 2,919,496 warrants, with an exercise price of $0.001 per share, that it would like to exercise 1,589,614 warrants, on a cashless basis, for 1,557,822 shares of common stock of the Company. These shares will be issued as soon as reasonably practicable in accordance with the Company’s standard procedures.

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Note 9. Segmented Information

The Company views its operations in two businesses – manufacturing and geo exchange design and installation. Summarized financial information by segment for the three and nine months ended July 31, 2007 and 2006, as taken from the internal management reports, is as follows:

	Three months ended July 31,						Nine months ended July 31
	2007			2006			2007			2006
Revenue
Manufacturing	$	118,680		$	113,857		$	302,066		$	277,843
Design and installation		896,632			743,473			2,094,191			1,259,177
	$	1,015,312		$	857,330		$	2,396,257		$	1,537,020
Loss
Manufacturing	$	(78,608	)	$	(156,802	)	$	(339,795	)	$	(615,709	)
Design and installation		(40,844	)		14,355			(2,433,877	)		9,095
Corporate		(205,847	)		(823,806	)		(803,976	)		(5,460,363	)
	$	(325,299	)	$	(966,253	)	$	(3,577,648	)	$	(6,066,977	)
Assets
Manufacturing	$	776,400
Design and installation		727,791
Corporate		82,889
	$	1,587,080

Item 2. Management’s Discussion and Analysis or Plan of Operation

          The following discussion should be read in conjunction with the accompanying condensed unaudited consolidated financial statements for the three- and nine-month periods ended July 31, 2007 and 2006, and our annual report on Form 10-KSB for the year ended October 31, 2006, including the financial statements and notes thereto.

Forward-Looking Information May Prove Inaccurate

          This report contains statements about the future, sometimes referred to as “forward-looking” statements. Forward-looking statements are typically identified by the use of the words “believe,” “may,” “could,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar words and expressions. Statements that describe our future strategic plans, goals, or objectives are also forward-looking statements. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

          Readers of this report are cautioned that any forward-looking statements, including those regarding our management’s current beliefs, expectations, anticipations, estimations, projections, proposals, plans, or intentions, are not guarantees of future performance or results of events and involve risks and uncertainties. The forward-looking information is based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. The forward-looking statements included in this report are made only as of the date of this report. We are not obligated to update such forward-looking statements to reflect subsequent events or circumstances.

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Introduction

          Management believes the most significant features of our financial condition is that our working capital deficiency continues to increase and that we have renegotiated the principal repayment schedule of our term loan, which delayed principal payments to May 2007 and reduced principal payments extending the total repayment term; however, we have not made any principal payments and, as of September 7, 2007, are delinquent in principal payments totaling $120,000 and interest payments totaling $50,086. Our payment obligations under this term loan, which are currently $30,000 per month and escalate to $62,500 a month in June 2008, make it more difficult for us to meet our working capital requirements, as does the requirement that we pay 30% of our annual positive cash flow, if any, as additional principal payments.

          We have significantly reduced operating costs through the restructuring of our subsidiary, Earth Source Energy, which has seen a significant reduction in the number of employees and the use of more subcontractors to provide services to our clients. This restructuring has necessitated a review of the carrying value of the goodwill associated with the acquisition of Earth Source Energy and we have charged operations with a non-cash impairment loss of $2,033,948.

Results of Operations

Comparison of the Three and Nine Months Ended July 31, 2007,
with the Three and Nine Months Ended July 31, 2006

          We have generated gross revenue of $2,396,257 and $1,015,312 with related costs of revenue of $1,817,227 and $768,051 in the nine- and three-month periods ended July 31, 2007, respectively, as compared to gross revenues of $1,537,020 and $857,330 and costs of revenue of $1,119,339 and $644,522 for the nine and three months ended July 31, 2006, respectively. This is primarily due to our inclusion of Earth Source Energy Inc. for the full nine and three months ended July 31, 2007, whereas the comparative periods ended July 31, 2006, only included Earth Source for the period of ownership being March 7, 2006, to July 31, 2006.

          Our operating expenses for the nine and three months ended July 31, 2007, were $1,754,056 and $465,323, as compared to $5,606,804 and $1,032,911 for the comparable periods in 2006, a decrease of 69% and 55% respectively. This reflects a reduction of investor relations costs of $nil for each of the nine and three months ended July 31, 2007, as compared to $732,317 and $108,503 for the nine and three months ended July 31, 2006, respectively; a reduction of financing costs related to financings to $3,911 for each of the nine and three months ended July 31, 2007, as compared to $998,317 and $126,987 for the nine and three months ended July 31, 2006, respectively; and a reduction to $48,778 and $nil for the nine and three months ended July 31, 2007, as compared to $1,436,507 and $1,057,694 for the nine and three months ended July 31, 2006, respectively, for employee option and stock costs pursuant to SFAS 123(R). During the nine months ended July 31, 2007, we have recorded an impairment loss related to the write-off of goodwill related to the acquisition of Earth Source Energy of $2,033,948.

          Overall, we sustained a net loss of $325,299 and $3,577,648 for the three- and nine-month periods ended July 31, 2007, respectively, as compared to net losses of $966,253 and $6,066,977 in the corresponding periods of the preceding year.

          We had 12 full-time employees as of July 31, 2007, as compared to 32 full-time employees at July 31, 2006.

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Liquidity and Capital Resources

          As of July 31, 2007, our current assets stood at $934,139, as compared to $1,240,733 at October 31, 2006. As of July 31, 2007, our current liabilities were $2,492,791, as compared to $2,759,806 at October 31, 2006. As at July 31, 2007, our long-term liabilities were $1,072,854, as compared to $771,293 at October 31, 2006. Operating activities had a net cash outflow of $250,584 for the nine months ended July 31, 2007, as compared to net cash outflow of $1,326,808 for the nine months ended July 31, 2006.

          Net cash spent on investing activities was $6,200 for the nine months ended July 31, 2007, as compared to $1,025,451 during the nine months ended July 31, 2006. Included in investing activities for the nine months ended July 31, 2007, is net proceeds of $35,872 from the revenue producing assets whereas the nine months ended July 31, 2006, included the cash component of $952,897 for acquisition of subsidiaries.

          Net cash of $383,609 provided by financing activities during the nine months ended July 31, 2007, consists of proceeds of cash received for subscriptions of shares in the amount of $378,000; net advances from shareholders of $62,242; less repayment of term loan and finance loans of $70,068. This is compared to net cash of $2,417,522 during the comparable period ending July 31, 2006, which consisted of proceeds from the term loan of $2 million; the issuance of common stock for $872,513; net advances from stockholders of $134,858; less repayment of financial obligations of Pacific Geo Exchange Inc in the amount of $548,900.

          Our current balances of cash will not meet our working capital and capital expenditure needs for the whole of the current year. Because we are not currently generating sufficient cash to fund our operations, we will need to rely on external financing to meet future capital and operating requirements. Any projections of future cash needs and cash flows are subject to substantial uncertainty. Our capital requirements depend upon several factors, including the rate of market acceptance, our ability to get to production and generate revenues, our level of expenditures for production, marketing and sales, purchases of equipment, and other factors. We can make no assurance that financing will be available in amounts or on terms acceptable to us, if at all. Further, if we issue equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences, or privileges senior to those of existing holders of common stock, and debt financing, if available, may involve restrictive covenants that could restrict our operations or finances. If we cannot raise funds, when needed, on acceptable terms, we may not be able to continue our operations, grow market share, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, all of which could negatively impact our business, operating results, and financial condition.

Item 3. Controls and Procedures

          We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of July 31, 2007, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of July 31, 2007, our disclosure controls and procedures were effective.

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          There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

          On July 6, 2007, our subsidiary, Earth Source Energy Inc, filed a lawsuit in the Supreme Court of British Columbia against Groundlink Systems Ltd., Barry Kosturos, and Ian Hopper. Kosturos and Hopper were employees of Earth Source when they formed Groundlink Systems with the express intent of performing installation and servicing of geoexchange systems directly in competition with Earth Source despite noncompetition covenants in their employment agreements with Earth Source. The suit alleges that the defendants appropriated proprietary information belonging to Earth Source, solicited Earth Source’s customers, and made false statements concerning Earth Source’s continued viability. Earth Source’s lawsuit seeks unspecified monetary damages, return of its proprietary information, and an injunction prohibiting defendants from using its confidential and proprietary information and soliciting the business of its customers.

          On July 16, 2007, our subsidiary, Earth Source Energy Inc, filed a lawsuit in the Supreme Court of British Columbia against Lynn Mueller, Mark McCooey, and Free Energy Solutions, Inc. The suit alleges that Mueller, a former vice president of Earth Source, and McCooey, a former consultant to Earth Source, breached their noncompetition agreements with Earth Source and their fiduciary obligations to it, either wrongfully or dishonestly assisted by Free Energy Solutions. Earth Source’s lawsuit seeks unspecified monetary damages, a return of its proprietary information, and an injunction prohibiting defendants from using its confidential and proprietary information and soliciting the business of its customers.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          In May 2007, we agreed to issue an aggregate of 7,560,000 shares of our common stock to three purchasers for $378,000, or $0.05 per share. No general solicitation was used and the transaction was negotiated directly with our executive officers. The recipients of the common stock represented in writing that they were not residents of the United States, acknowledged in writing that the securities constituted restricted securities, and consented to a restrictive legend on the certificates to be issued. These transactions were made in reliance on Regulation S.

          In July 2007, we issued an aggregate of 3,946,400 shares of our common stock to certain management in payment of accrued wages and fees in the amount of $493,300, or $0.125 per share. At the same time, we issued an aggregate of 250,400 shares of our common stock to certain consultants in payment of accrued fees in the amount of $31,293, or $0.125 per share. The recipients of the common stock represented in writing that they were not residents of the United States, acknowledged in writing that the securities constituted restricted securities, and consented to a restrictive legend on the certificates to be issued. These transactions were made in reliance on Regulation S. An additional 140,000 shares of our common stock were issued to our consultant who is a resident of the United States in payment of accrued fees in the amount of $17,500, or $0.125 per share. No general solicitation was used and the transaction was negotiated directly with our executive officers. The consultant acknowledged in writing that the securities were restricted securities and consented to a restrictive legend on the certificates to be issued. This transaction was made in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering.

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Item 5. Other Information

          In May 2007, we agreed to issue an aggregate of 7,560,000 shares of our common stock, and in July 2007, we issued an additional 4,336,500 shares of our common stock. See Part II, Item 2: Unregistered Sales of Equity Securities.

Item 6. Exhibits

          The following exhibits are filed as a part of this report:

Exhibit Number*	Title of Document	Location
Item 31	Rule 13a-14(a)/15d-14(a) Certifications
31.01	Certification of Principal Executive Officer Pursuant to Rule 13a-14	Attached
31.02	Certification of Principal Financial Officer Pursuant to Rule 13a-14	Attached
Item 32	Section 1350 Certifications
32.01	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)	Attached
32.02	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)	Attached

• All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document.

SIGNATURES

          In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Registrant
	ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
Date: September 7, 2007	By:	/s/ Jason McDiarmid
		Jason McDiarmid, President and
		Chief Executive Officer
Date: September 7, 2007	By:	/s/ Kenneth G.C. Telford
		Kenneth G.C. Telford
		Chief Financial Officer

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