See accompanying notes to financial statements.
See accompanying notes to financial statements.
NOTES TO 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 primary business objective of the Company is focused towards research and development, commercialization and market entry strategies for two separate and distinct technologies for which the Company has secured exclusive worldwide technology rights, such technologies with potential initial applications targeted at multiple “green” and environmental technology project requirements such as fluid heating, electricity generation and/or water treatment/purification.
Development Stage
The Company is devoting substantially all of its efforts on establishing the business and principal operations have not commenced. All losses accumulated since inception of the development stage have been considered as part of the Company’s development stage activities.
The Company re- entered the development stage effective November 1, 2009.
Interim Period Financial Statements
The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the Securities and Exchange Commission’s instructions. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for such interim period. The results reported in these interim 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 GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited interim financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report for the year ended October 31, 2012, as filed with the Securities and Exchange Commission on February 13, 2013.
Going Concern
The Company’s 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 generated any revenue since commencement of the development stage, has an accumulated deficit, and has had no positive cash flows from operations. As noted in Note 2 to these financial statements the Company acquired rights to certain intellectual property and it is the Company’s intention to raise additional equity to finance development of a market for its products until 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 financial statements do not include any adjustment that could result. Failure to obtain sufficient additional funding would necessitate the Company to reduce or limit its operating activities or even discontinue operations.
Basis of presentation
These financial statements have been prepared in accordance accounting principles generally accepted in the United States of America (“GAAP”).
Intangible Assets
Intangible assets consist of intellectual property. Intangible assets with definite lives or bases for productivity are recorded at cost and are amortized over the expected life or productivity base 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 or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company determined that there is no impairment of intangible assets for the three and six months ended April 30, 2013.
Advertising Expenses
Advertising costs are expensed as incurred. The Company did not incur any advertising costs during the three and six months ended April 30, 2013 and 2012.
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. For the three and six months ended April 30, 2013 and 2012, outstanding stock options and warrants are antidilutive because of net losses, and as such, their effect has not been included in the calculation of diluted net loss per share. Common shares issuable are considered outstanding as of the original approval date for purposes of earnings per share computations.
Comprehensive Income (Loss)
The Company has no components of other comprehensive income (loss) and accordingly, no statement of comprehensive income (loss) is included in the accompanying financial statements.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the fiscal year. The Company bases its estimates on historical experience, current conditions and on other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates and assumptions.
Financial Instruments
The Company has the following financial instruments: accounts payable, accrued expenses and compensation, and amounts due to stockholders. The carrying value of these financial instruments approximates their fair value due to their liquidity or their short-term nature.
Share-Based Compensation
The Company accounts for stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures.
Recent Accounting Pronouncements
The Company reviews recently adopted and proposed accounting standards on a continual basis. For the three and six months ended April 30, 2013 and 2012 no new pronouncements had a material impact on the Company’s financial statements.
Note 2. Intellectual Property
During the year ended October 31, 2012 the Company acquired exclusive worldwide technology rights for two heating technologies from a company (the “grantor”) controlled by the father of the sole officer and director of the Company. During the period, grantor and the Company filed application with the United States Patent and Trademark Office for patent protection and have been granted patent-pending status for each of the two heating technologies. The Company paid to grantor 1,000,000 shares of common stock of the Company, with an estimated fair value of $200,000, and fully-vested options to purchase 500,000 shares of common stock, until January 15, 2017, at an exercise price of $0.25 per share, with an estimated fair value on the grant date of $60,068, for the exclusive technology rights.
The Company will also pay, for an indefinite term, to the grantor a royalty of 3% of gross proceeds earned from sale or use of the technology.
Additionally, the Company has agreed over the next two years and on a best efforts basis, to provide funding for the grantor of up to $500,000 for the grantor to use for prototyping and commercialization of the technology. Upon successful best-efforts financing the Company then agrees to provide additional funding to the grantor, upon the grantor’s achievement of certain milestones. If at any point during the on-going development program by the grantor, it is determined that any of the technologies are not commercially viable, then any such further best efforts funding will no longer be provided to the grantor. A technology assessment will be completed for each and every $50,000 invested into the development efforts to monitor and ensure that mutually agreeable milestones and successes are being achieved before additional best efforts funding need continue.
During the three and six months ended April 30, 2013 and 2012 the Company did not incur any research and development costs related to this agreement.
Note 3. Term Loan
The foreclosure of the Company’s operations and assets relating to the business of manufacture, sales and installation of geo exchange heat products and technology on March 27, 2009 were in satisfaction of $2,413,070 owing to a secured lender. The Company still owes $491,299 to a secured lender. By agreement, the secured lender has agreed that there will be no further interest, penalties or fees charged and that the Company has until October 31, 2013 to negotiate a settlement of this debt with the secured lender. The debt is secured by a charge over all the assets of the Company.
Note 4. Related-Party Transactions and Balances
Advances due to Stockholders
During the six months ended April 30, 2013 and 2012 stockholders of the Company advanced $60,252 and $17,500, respectively. The balance owing as at April 30, 2013 of $67,897 is included in advances due to stockholders.
Accrued Remuneration and Services
During the six months ended April 30, 2013 and 2012 the Company’s president and sole director provided management services for which the amounts of $60,000 and $60,000 respectively have been accrued. The balance owing as at April 30, 2013 of $145,787 is included in accrued compensation.
An entity, related by common ownership to two shareholders of the Company, has provided consulting services in the amount of $30,000 and $7,500 during the six months ended April 30, 2013 and 2012, respectively. The balance owing, as at April 30, 2013, of $52,500 is included in accounts payable
Note 5. Share Capital
Preferred Stock
The Company’s authorized capital includes 500,000 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 April 30, 2013 and October 31, 2012.
Common Stock
The Company is authorized to issue 500,000,000 shares of common stock, par value of $0.001.
On September 18, 2009, the Board of Directors approved the consolidation of the issued and outstanding common stock on the basis of one new share for each 20 shares, effective upon approval of the regulatory authorities. The Company’s common stock was consolidated effective as of March 21, 2011 and the anthorized number of shares of common stock reduced to 25,000,000.
On May 3, 2012 the Board of Directors approved the immediate increase in authorized shares of common stock to 500,000,000 shares with a par value of $0.001 per share.
The application of this stock consolidations to share and per share amounts has been shown retroactively in these financial statements.
No shares of common stock were issued during the six months ended April 30, 2013.
Stock Purchase Warrants
At April 30, 2013, the Company had reserved shares of common stock for the following outstanding warrants to purchase 244,557 shares of the Company’s common stock:
| Number of warrants | | | Exercise Price | | | Expiry | |
| | 66,494 | | | $ | 0.02 | | | 2050 | |
| | 178,063 | | | | 2.00 | | | 2013 | |
| | 244,557 | | | | | | | | |
No warrants were issued in the six months ended April 30, 2013.
Options
A summary of the Company’s stock options as of April 30, 2013 is as follows:
| | | Number of Options | | | Weighted Average Exercise Price | |
| Outstanding at October 31, 2011 | | | 101,250 | | | | 17.41 | |
| Options expired | | | (101,250 | ) | | | (17.41 | ) |
| Options issued | | | 500,000 | | | | 0.25 | |
| Outstanding at October 31, 2012 and April 30, 2013 | | | 500,000 | | | $ | 0.25 | |
The following table summarizes stock options outstanding at April 30, 2013:
| Exercise Price | | Number Outstanding at April 30, 2013 | | Average Remaining Contractual Life (Years) | | Number Exercisable at April 30, 2013 |
| $0.25 | | 500,000 | | 3.6 | | 500,000 |
As at April 30, 2013 500,000 shares of common stock were reserved for outstanding options. The Company’s policy is to issue new shares as settlement of options exercised. There were no options exercised during the six months ended April 30, 2013. The intrinsic value of stock options both outstanding and exercisable as of April 30, 2013 is $295,000.
Note 6. Subsequent Events
Subsequent to April 30, 2013 the Company
| ● | entered into a agreement for strategic advisory services with the agreed remuneration being 50,000 fully paid and non-assessable shares of common stock, with a fair value of $40,000 and an option to purchase 50,000 shares of common stock until April 30, 2015 at an exercise price of $0.75 per share. |
| ● | entered into a consulting agreement with the agreed remuneration being cash payments totalling $12,500 and 20,000 fully paid and non-assessable shares of common stock with a fair value of $16,000. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements for the three and six-month periods ended April 30, 2013 and 2012, and for the period from commencement of development stage, November 1, 2009, to April 30, 2013 and our annual report on Form 10-K for the year ended October 31, 2012, including the consolidated 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.
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.
Introduction
During the three and six-month periods ended April 30, 2013 the Company has continued to establish the business aspects of its technology.
Results of Operations
Comparison of the Three and Six Months Ended April 30, 2013,
with the Three and Six Months Ended April 30, 2012
We had no gross revenue for the three and six- month periods ended April 30, 2013 and 2012
Our general and administrative expenses from continuing operations for the three and six months ended April 30, 2013, were $67,694 and $147,330 compared to $42,500 and $80,000 for the comparable periods ended April 30, 2012, an increase of 59.3% and 84.2%. The increase is primarily due to increased professional fees with the completion of the Company’s registration and costs related to developing markets for our technology.
During the three and six months ended April 30, 2013 we had marketing expenses of $nil and $nil, respectively, as compared to $213,000 and $1,041,000 for the respective three and six-months ended April 30, 2012. The decrease is due to the expensing of marketing-related consulting contracts in the three and six-months ended April 30, 2012
Overall, we have a net loss from operations of $73,894 and $159,973 for the respective three and six-months ended April 30, 2013, as compared to a net loss from operations of $206,745 and $1,078,628 in the corresponding three and six-months of the preceding year.
We had 1 part-time employee as of April 30, 2013.
Liquidity and Capital Resources
As of April 30, 2013, our current assets were $483, as compared to $146 at October 31, 2012. As of April 30, 2013, our current liabilities were $1,117,674, as compared to $957,364 at October 31, 2012.
Operating activities used net cash of $59,915 for the six months ended April 30, 2013, as compared to use of $15,000 for the six months ended April 30, 2012.
Net cash of $60,252 was provided by financing activities during the six months ended April 30, 2013, as compared to $17,500 net cash provided by financing activities during the comparable six months ended April 30, 2012.
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this quarterly report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers (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 of April 30, 2013, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of April 30, 2013, our disclosure controls and procedures were not effective.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended April 30, 2013, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 5. OTHER EVENTS
Not applicable
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 | | |
| | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14 | | Attached |
| | | | | |
| Item 32 | | Section 1350 Certifications | | |
| | 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) and (Chief Financial Officer) | | Attached |
| | | | | |
| Item 101 | | Interactive Data File | | |
| 101 | | Interactive Data File | | 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
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.
| | Registrant |
| | |
| | ESSENTIAL INNOVATIONS TECHNOLOGY CORP. |
| | | |
| | | |
| Date: June 11, 2013 | By: | /s/ JASONMCDIARMID |
| | | Jason McDiarmid |
| | | President, Chief Executive Officer, Chief Financial Officer, Treasurer and Director |
| | | (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
| | | |
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