UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period endedMay 31, 2007
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from __________ to __________
Commission File Number:000-52201
ITONIS INC.
(Exact name of small business issuer as specified in its charter)
| NEVADA | 20-3885298 |
| (State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
| organization) |
Klimentska 10, 110 00 Praque 1, Czech Republic
(Address of principal executive offices)
+420 296 578 180
Issuer's telephone number
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. Yes [X] No[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No[X]
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest
practicable date.73,111,853 shares of common stock as of July 12, 2007.
Transitional Small Business Disclosure Format (check one): Yes [ ] No[X]
ITONIS INC.
Quarterly Report On Form 10-QSB
For The Quarterly Period Ended
May 31, 2007
INDEX
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding our ability to achieve commercial levels of sales of our ITonis video solution, our ability to successfully market our ITonis video solution, our ability to continue development and upgrades to the ITonis video solution, availability of funds, government regulations, common share prices, operating costs, capital costs and other factors. Forward-looking statements are made, without limitation, in relation to our operating plans, our liquidity and financial condition, availability of funds, operating costs and the market in which we compete. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined below, and, from time to time, in other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited condensed consolidated interim financial statements of ITonis Inc. (the “Company”) are included in this Quarterly Report on Form 10-QSB:
- 1 -
ITONIS INC.
(Formerly Kenshou Inc.)
(A Development Stage Company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2007
US FUNDS
(Unaudited)
| ITonis Inc. | Statement 1 |
| (Formerly Kenshou Inc.) | |
| (A Development Stage Company) | |
| Interim Consolidated Balance Sheets | |
| US Funds |
| As at | As at | |||||
| May 31, | November 30, | |||||
| 2007 | 2006 | |||||
| ASSETS | (Unaudited) | (Audited) | ||||
| Current | ||||||
| Cash | $ | 2,880 | $ | 1,571 | ||
| Accounts receivable | 136,950 | 4,934 | ||||
| Prepaid expenses | 119,444 | 25,590 | ||||
| 259,274 | 32,095 | |||||
| Equipment | 82,209 | 47,859 | ||||
| $ | 341,483 | $ | 79,954 | |||
| LIABILITIES | ||||||
| Current | ||||||
| Accounts payable | $ | 764,251 | $ | 228,463 | ||
| Accrued liabilities | 40,337 | 62,668 | ||||
| Due to related parties | 212,954 | 183,831 | ||||
| 1,017,542 | 474,962 | |||||
| Going Concern | ||||||
| STOCKHOLDERS’ DEFICIENCY | ||||||
| Capital Stock | ||||||
| Common stock | ||||||
| Authorized: | ||||||
| 300,000,000 common shares with $0.001 par value | ||||||
| Issued, allotted and fully paid: | ||||||
| 72,111,853 common shares (68,781,981 – | ||||||
| November 30, 2006) | 72,112 | 68,782 | ||||
| Additional paid-in capital | 2,672,712 | 2,414,386 | ||||
| Preferred stock | ||||||
| Authorized: | ||||||
| 5,000,000 preferred shares with $0.001 par value | ||||||
| Issued and fully paid: Nil | - | - | ||||
| Accumulated Comprehensive Loss | (12,283 | ) | (9,420 | ) | ||
| Deficit– Accumulated during the development stage | (3,408,600 | ) | (2,868,756 | ) | ||
| (676,059 | ) | (395,008 | ) | |||
| $ | 341,483 | $ | 79,954 |
- See Accompanying Notes -
| ITonis Inc. | Statement 2 |
| (Formerly Kenshou Inc.) | |
| (A Development Stage Company) | |
| Interim Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) | |
| US Funds |
| Deficit | |||||||||||||||||
| Accumulated | Total | ||||||||||||||||
| Common Stock | Additional | During the | Accumulated | Stockholders' | |||||||||||||
| Paid-in | Development | Comprehensive | Equity | ||||||||||||||
| Shares | Amount | Capital | Stage | Loss | (Deficiency) | ||||||||||||
| Founder shares issued for cash at | |||||||||||||||||
| $0.001 per share on July 8, 2005 | 750,000 | $ | 750 | $ | (250 | ) | $ | - | $ | - | $ | 500 | |||||
| Shares issued for cash at $0.007 per | |||||||||||||||||
| share on September 14, 2005 | 12,000,000 | 12,000 | 68,000 | - | - | 80,000 | |||||||||||
| Shares issued for cash at $0.033 per | |||||||||||||||||
| share on November 16, 2005 | 4,466,289 | 4,466 | 144,410 | �� | - | - | 148,876 | ||||||||||
| Shares issued for acquisition of | |||||||||||||||||
| software at $0.015 per share on | |||||||||||||||||
| November 16, 2005 | 30,000,000 | 30,000 | 417,637 | - | - | 447,637 | |||||||||||
| Loss for the period | - | - | - | (566,478 | ) | - | (566,478 | ) | |||||||||
| Balance - November 30, 2005 | 47,216,289 | 47,216 | 629,797 | (566,478 | ) | - | 110,535 | ||||||||||
| Shares issued for acquisition of | |||||||||||||||||
| intellectual property at $0.083 per | |||||||||||||||||
| share on February 7, 2006 | 18,000,000 | 18,000 | 1,482,000 | - | - | 1,500,000 | |||||||||||
| Shares issued for cash at $0.083 per | |||||||||||||||||
| share on April 10, 2006 | 2,215,692 | 2,216 | 182,425 | - | - | 184,641 | |||||||||||
| Share allotted for consulting services at | |||||||||||||||||
| $0.083 per share | 150,000 | 150 | 12,350 | - | - | 12,500 | |||||||||||
| Shares issued for cash at $0.083 per | |||||||||||||||||
| share | 1,200,000 | 1,200 | 98,800 | - | - | 100,000 | |||||||||||
| Stock-based compensation | - | - | 9,014 | - | - | 9,014 | |||||||||||
| Loss for the period | - | - | - | (2,302,278 | ) | - | (2,302,278 | ) | |||||||||
| Foreign currency translation adjustment | - | - | - | - | (9,420 | ) | (9,420 | ) | |||||||||
| Balance – November 30, 2006 | 68,781,981 | 68,782 | 2,414,386 | (2,868,756 | ) | (9,420 | ) | (395,008 | ) | ||||||||
| Shares issued for cash at $0.083 per | |||||||||||||||||
| share | 1,355,364 | 1,355 | 111,592 | - | - | 112,947 | |||||||||||
| Shares issued for consulting services | |||||||||||||||||
| at $0.083 per share | 600,000 | 600 | 49,400 | - | - | 50,000 | |||||||||||
| Shares allotted for cash at $0.075 per | |||||||||||||||||
| share | 438,208 | 438 | 32,428 | - | - | 32,866 | |||||||||||
| Shares allotted for cash at $0.05 per | |||||||||||||||||
| share | 936,300 | 937 | 45,878 | - | - | 46,815 | |||||||||||
| Stock-based compensation | - | - | 19,028 | - | - | 19,028 | |||||||||||
| Loss for the period | - | - | - | (539,844 | ) | - | (539,844 | ) | |||||||||
| Foreign currency translation adjustment | - | - | - | - | (2,863 | ) | (2,863 | ) | |||||||||
| Balance – May 31, 2007(Unaudited) | 72,111,853 | $ | 72,112 | $ | 2,672,712 | $ | (3,408,600 | ) | $ | (12,283 | ) | $ | (676,059 | ) | |||
- See Accompanying Notes -
| ITonis Inc. | Statement 3 |
| (Formerly Kenshou Inc.) | |
| (A Development Stage Company) | |
| Interim Consolidated Statements of Operations | |
| (Unaudited) | |
| US Funds |
| From | |||||||||||||||
| For the | For the | For the | For the | Incorporation | |||||||||||
| Three Months | Three Months | Six Months | Six Months | July 5, | |||||||||||
| Ended | Ended | Ended | Ended | 2005 to | |||||||||||
| May 31, | May 31, | May 31, | May 31, | May 31, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | |||||||||||
| Sales | $ | 11,546 | $ | - | $ | 171,570 | $ | - | $ | 195,921 | |||||
| Cost of Sales | 33,372 | - | 149,890 | - | 159,314 | ||||||||||
| Gross Profit | (21,826 | ) | - | 21,680 | - | 36,607 | |||||||||
| General and Administrative | |||||||||||||||
| Expenses | |||||||||||||||
| Software development costs | 99,945 | - | 174,046 | 13,814 | 536,600 | ||||||||||
| Consulting | 76,451 | 10,768 | 105,958 | 21,436 | 141,294 | ||||||||||
| Salaries and wages | 41,324 | 48,638 | 99,348 | 107,783 | 165,929 | ||||||||||
| Auditing and accounting | 35,836 | 15,656 | 63,072 | 20,624 | 219,029 | ||||||||||
| Office | 31,892 | 11,718 | 37,632 | 16,652 | 92,579 | ||||||||||
| Depreciation | 10,413 | 5,477 | 19,067 | 8,997 | 39,757 | ||||||||||
| Stock-based compensation | 10,500 | - | 19,028 | - | 28,042 | ||||||||||
| Legal | 11,328 | 27,877 | 14,186 | 33,127 | 85,454 | ||||||||||
| Rent | 5,682 | - | 13,484 | - | 45,503 | ||||||||||
| Investor relations | 415 | - | 6,235 | - | 24,915 | ||||||||||
| Filing fees | 4,912 | 7,455 | 5,453 | 7,455 | 12,740 | ||||||||||
| Foreign exchange loss | 4,217 | - | 4,015 | - | 9,865 | ||||||||||
| Intellectual property | - | - | - | 1,500,000 | 1,947,637 | ||||||||||
| Marketing and distribution | - | 60,000 | - | 120,000 | 120,000 | ||||||||||
| Bad debt | - | - | - | - | 9,789 | ||||||||||
| 332,915 | 187,589 | 561,524 | 1,849,888 | 3,479,133 | |||||||||||
| Loss from Operations | (354,741 | ) | (187,589 | ) | (539,844 | ) | (1,849,888 | ) | (3,442,526 | ) | |||||
| Other Income | |||||||||||||||
| Other income | - | 4,517 | - | 21,750 | 33,926 | ||||||||||
| Loss for the Period | $ | (354,741 | ) | $ | (183,072 | ) | $ | (539,844 | ) | $ | (1,828,138 | ) | $ | (3,408,600 | ) |
| Loss per Share – Basic and | |||||||||||||||
| Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||
| Weighted Average Shares | |||||||||||||||
| Outstanding | 71,107,805 | 66,444,553 | 70,375,061 | 59,012,994 | |||||||||||
| Comprehensive Loss | |||||||||||||||
| Loss for the period | $ | (354,741 | ) | $ | (183,072 | ) | $ | (539,844 | ) | $ | (1,828,138 | ) | $ | (3,408,600 | ) |
| Foreign currency translation | |||||||||||||||
| adjustment | (4,497 | ) | 2,360 | (2,863 | ) | (491 | ) | (12,283 | ) | ||||||
| Total Comprehensive Loss | |||||||||||||||
| for the Period | $ | (359,238 | ) | $ | (180,712 | ) | $ | (542,707 | ) | $ | (1,828,629 | ) | $ | (3,420,883 | ) |
| Comprehensive Loss per | |||||||||||||||
| Share | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.03 | ) |
- See Accompanying Notes -
| ITonis Inc. | Statement 4 |
| (Formerly Kenshou Inc.) | |
| (A Development Stage Company) | |
| Interim Consolidated Statements of Cash Flows | |
| (Unaudited) | |
| US Funds |
| From | |||||||||
| Incorporation | |||||||||
| For the Six | For the Six | (July 5, 2005 | ) | ||||||
| Months Ended | Months Ended | to | |||||||
| May 31, | May 31, | May 31, | |||||||
| 2007 | 2006 | 2007 | |||||||
| Operating | |||||||||
| Loss for the period | $ | (539,844 | ) | $ | (1,828,138 | ) | $ | (3,408,600 | ) |
| Items not involving an outlay of cash: | |||||||||
| Bad debts | - | - | 9,789 | ||||||
| Depreciation | 19,067 | 8,997 | 39,757 | ||||||
| Stock-based compensation | 19,028 | - | 28,042 | ||||||
| Shares issued for services included in | |||||||||
| investor relations | 19,287 | - | 28,938 | ||||||
| Intellectual property | - | 1,500,000 | 1,947,637 | ||||||
| Changes in non-cash working capital items: | |||||||||
| Prepaid expenses | (63,141 | ) | (18,308 | ) | (85,882 | ) | |||
| Accounts receivable | (132,016 | ) | (9,789 | ) | (146,739 | ) | |||
| Accounts payable | 535,788 | 30,067 | 764,251 | ||||||
| Accrued liabilities | (22,331 | ) | (11,263 | ) | 40,337 | ||||
| Due to related parties | 29,123 | 89,938 | 212,954 | ||||||
| Net cash flows used in operations | (135,039 | ) | (238,496 | ) | (569,516 | ) | |||
| Investing | |||||||||
| Purchase of equipment | (51,789 | ) | (35,066 | ) | (115,191 | ) | |||
| Net cash flows from investing activities | (51,789 | ) | (35,066 | ) | (115,191 | ) | |||
| Financing | |||||||||
| Share issuances for cash | 192,628 | 184,641 | 706,645 | ||||||
| Net cash flows from financing activities | 192,628 | 184,641 | 706,645 | ||||||
| Effect of exchange rate translation adjustments | (4,491 | ) | (491 | ) | (19,058 | ) | |||
| Net Increase (Decrease) in Cash | 1,309 | (89,412 | ) | 2,880 | |||||
| Cash - Beginning of period | 1,571 | 164,550 | - | ||||||
| Cash - End of Period | $ | 2,880 | $ | 75,138 | $ | 2,880 | |||
| Income Taxes Paid | $ | - | $ | - | $ | - | |||
| Interest Paid | $ | - | $ | - | $ | - | |||
| Supplemental Schedule of Non-Cash | |||||||||
| Investing and Financing Transactions | |||||||||
| Shares issued for intellectual property | $ | - | $ | 1,500,000 | $ | 1,947,637 | |||
| Shares allotted for services | $ | 50,000 | $ | - | $ | 62,500 | |||
| Effect of exchange rate changes on equipment | $ | 1,628 | $ | - | $ | 6,775 |
- See Accompanying Notes -
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 1. | Organization and Going Concern |
Organization | |
ITonis Inc. (formerly Kenshou Inc.) (the "Company" or “ITonis”) was incorporated on July 5, 2005 as Kenshou Inc. under the laws of the State of Nevada. On December 2, 2005, the Company changed its name to ITonis Inc. | |
As a full service video solution and backend platform service provider the Company will be making a shift in overall corporate strategy that will involve entry into the Chinese market that should occur over the next 120 days. The Company intends to offer a full range of IPTV services for television, film and sport entertainment programming including premium entertainment channels, video on demand movies, and television shows in foreign and Chinese languages. The future implementation of this proposed project based on current understanding and scope as defined in the MOU signed on the 16thof April, 2007 will allow for a full-scale deployment for millions of Chinese subscribers utilizing the Companies core technology. | |
Going Concern and Liquidity Considerations | |
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As at May 31, 2007, the Company has a working capital deficiency of $758,268, an accumulated deficit of $3,408,600 and has incurred an accumulated operating cash flow deficit of $569,516 since incorporation. The Company intends to continue funding operations through sales, debt, and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the next fiscal year. | |
Thereafter, the Company will be required to seek additional funds, either through sales, debt, and/or equity financing, to finance its long-term operations. The successful outcome of future activities cannot be determined at this time, and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. In response to these conditions, management intends to raise additional funds through future debt agreement and private placement offerings. | |
These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. | |
| 2. | Significant Accounting Policies |
Basis of Consolidation | |
On November 25, 2005 the Company incorporated a wholly owned subsidiary in the Czech Republic named ITonis CZ s.r.o. (“ITonis CZ”) for the purposes of operating the Company’s development offices. These unaudited interim consolidated financial statements include the accounts of both companies since their respective incorporation dates. All intercompany balances and transactions have been eliminated. |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 2. | Significant Accounting Policies-Continued |
Basis of Presentation | |
The accompanying unaudited interim consolidated financial statements have been prepared as at May 31, 2007 and for the six month period then ended, in accordance with accounting principles generally accepted in the United States of America relating to the preparation of financial statements for interim periods. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended May 31, 2007 are not necessarily indicative of the results that may be expected for the year ending November 30, 2007. | |
These interim consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements. These interim consolidated financial statements should be read in conjunction with the audited interim financial statements of the Company as at November 30, 2006. | |
Recently Adopted Accounting Standards | |
In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 allows the company 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 Company is currently evaluating the requirements of SFAS 159 and the potential impact on the Company’s financial statements. | |
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158”). SFAS 158 requires an employer that sponsors one or more single-employer defined benefit plans to (a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position, (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the year but are not recognized as components of net periodic benefit cost pursuant to SFAS 87, “Employers’ Accounting for Pensions”, or SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS 158 is effective for the Company’s fiscal year ending September 30, 2007. The adoption of SFAS 158 is not expected to have a material impact on the Company’s financial position, results of operation or cash flows. |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 2. | Significant Accounting Policies-Continued |
Recently Adopted Accounting Standards-Continued | |
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" ("SFAS 157"). The Statement provides guidance for using fair value to measure assets and liabilities. The Statement also expands disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurement on earnings. This Statement applies under other accounting pronouncements that require or permit fair value measurements. This Statement does not expand the use of fair value measurements in any new circumstances. Under this Statement, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. SFAS 157 is effective for the Company for fair value measurements and disclosures made by the Company in its fiscal year beginning on October 1, 2008. The adoption of SFAS 157 is not expected to have a material impact on the Company’s financial position, results of operation or cash flows. | |
On July 2006, the FASB issued FIN. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” (“FIN 48”) which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact of FIN 48, but it is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. | |
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”), which amends FASB Statement No. 140 (“SFAS No. 140”). SFAS 156 may be adopted as early as January 1, 2006, for calendar year-end entities, provided that no interim financial statements have been issued. Those not choosing to early adopt are required to apply the provisions as of the beginning of the first fiscal year that begins after September 15, 2006 (e.g., January 1, 2007, for calendar year-end entities). The intention of the new statement is to simplify accounting for separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, as well as to simplify efforts to obtain hedge- like accounting. Specifically, the FASB said FAS No. 156 permits a servicer using derivative financial instruments to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute, or fair value. The adoption of SFAS 156 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. | |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 3. | Equipment |
Details are as follows: |
| Net Book | Net Book | ||||||||||||
| Value | Value | ||||||||||||
| Accumulated | May 31, | November 30, | |||||||||||
| Cost | Depreciation | 2007 | 2006 | ||||||||||
| Office equipment and furniture | $ | 115,066 | $ | (39,632 | ) | $ | 75,434 | $ | 42,712 | ||||
| Effect of exchange rate | |||||||||||||
| changes on equipment | 8,686 | (1,911 | ) | 6,775 | 5,147 | ||||||||
| $ | 123,752 | $ | (41,543 | ) | $ | 82,209 | $ | 47,859 |
| 4. | Software Costs | |
| a) | By agreement dated October 1, 2005, the Company acquired from an unrelated party (“Onyx”), the TV Everywhere Technology (“intellectual property”) by issuing 30,000,000 common shares. This resulted in Onyx owning approximately 64% of the Company. The value assigned to the 30,000,000 common shares was $447,637 being the historical cost to Onyx. This is in accordance with SAB Topic 5G as Onyx has retained a substantial indirect interest in the technology that was transferred. This amount was expensed, as it does not meet the criteria for capitalization as set out in SFAS No. 86. | |
| b) | By agreement dated January 31, 2006, the Company acquired from an unrelated party, all rights, title and interest in and to the intellectual property relating to FTH Broadband technology known as the “NVE Fiber Middleware Administration Architecture” in exchange for 18,000,000 common shares of the Company. The intellectual property right was assigned to the Company on February 7, 2006. The value assigned to the 18,000,000 common shares was $1,500,000 being equal to the most recent share transaction of the Company of $0.083 per share. This amount was expensed, as it does not meet the criteria for capitalization as set out in SFAS No. 86. | |
| 5. | Commitments | |
| a) | The Company entered into a two-year marketing and distribution consulting service agreement dated January 1, 2006 with a company (the “Agent”) with a significant interest in the Company. Under the terms of the agreement, the Company granted the Agent the exclusive rights in Denmark and non-exclusive rights in Europe and Greenland to market and distribute the Company’s services and products. The Agent also agreed to provide the Company the services of one of its employees for the duration of this agreement, to act as Commercial Director of the Company and to provide such services to the Company in accordance with a job description to be agreed in writing between the parties. The Company agreed to pay the Agent the greater of 40% of the net profits resulting from the sale of services and products or $30,000 per month for the Commercial Director. As at May 31, 2007, $120,000 has been accrued in these consolidated financial statements for marketing and distribution fees payable under this agreement (Note 7b). | |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 5. | Commitments -Continued |
During the prior year, the Company executed a letter agreement with the Agent confirming that the provision of the agreement relating to the services of the Commercial Director has been terminated and the only obligation in respect of such services is the $120,000 previously accrued. No further payments are required under the agreement except for payment of the 40% commission based on sales as the agreement remains in effect until December 31, 2007. | ||
| b) | By agreement dated August 17, 2006, the Company entered into a Supply Services Contract with an unrelated party for investor relations services ended December 31, 2006. The consideration for the services includes $12,000 in cash payments and 150,000 common stock of the Company. The amount of $6,000(accrued)and 75,000 common shares were payable on August 25, 2006, the execution date, and the balance of $6,000 and 75,000 common shares are due within 90 days from the execution date. These 150,000 shares were allotted as at November 30, 2006 at $0.083 per share and will be issued in fiscal 2007. | |
Upon agreement of both parties, the contract will continue on a month-to-month basis requiring a payment of $4,000 per month. Specific services that are outside the terms of the contract will be charged at $200 per hour or $1,500 per full workday. Termination of the contract will occur upon written notice to either party by the other party. | ||
| 6. | Segmented Information |
Details on a geographic basis as at May 31, 2007 are as follows: |
| Eastern | ||||||||||
| Europe | U.S.A. | Total | ||||||||
| Assets | $ | 265,320 | $ | 76,163 | $ | 341,483 | ||||
| Revenue | $ | 171,570 | $ | - | $ | 171,570 | ||||
| Loss for the year | $ | (374,401 | ) | $ | (165,443 | ) | $ | (539,844 | ) |
Details on a geographic basis as at November 30, 2006 are as follows:
| Eastern | ||||||||||
| Europe | U.S.A. | Total | ||||||||
| Assets | $ | 73,623 | $ | 6,331 | $ | 79,954 | ||||
| Revenue | $ | 24,351 | $ | - | $ | 24,351 | ||||
| Loss for the year | $ | (437,093 | ) | $ | (1,865,185 | ) | $ | (2,302,278 | ) | |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 7. | Related Party Balances and Transactions | ||
Related party transactions not disclosed elsewhere in these financial statements are as follows: | |||
| a) | During the year ended November 30, 2005, the Company issued 250,000 founder shares to a former director of the Company for cash proceeds of $500. | ||
| b) | The amount due to related parties consists of | ||
| i) | $120,000 of non-interest bearing, due on demand accrued fees owing to a separate company that holds a significant interest in the Company. | ||
| ii) | $39,830 (860,800 CZK) loan from a director and officer of the Company. The loan is evidenced by a promissory note, is unsecured and non-interest bearing and payable on demand. | ||
| iii) | $1,444 (30,405 CZK) payable from a Company with a director in common. The payable was incurred during the normal course of business transactions and has been paid subsequent to year end. | ||
| iv) | $51,690 (1,087,968 CZK) of accrued salaries owed to directors or officers of the Company. | ||
| c) | During the period ended May 31, 2007, consulting fees of $Nil (May 31, 2006 - $16,273) were charged to a separate company who has a director in common with the Company. Of this, $Nil (May 31, 2006 - $9,789) is still unpaid at period end. | ||
| d) | During the period ended May 31, 2007, the Company paid $Nil (May 31, 2006 - $13,814) for software development costs to a separate company that has a director in common with the Company. | ||
| e) | During the period ended May 31, 2007, $60,942 (1,285,962 CZK) (May 31, 2006 - $Nil) was paid to two directors in salary. | ||
These transactions were incurred in the normal course of operations and were measured at the exchange amount of consideration established and agreed to by the related parties. | |||
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 8. | Income Taxes |
The Company has accumulated net operating losses for U.S. federal income tax purposes of approximately $655,597, which may be carried forward until 2026 and used to reduce taxable income of future years and net operating losses for Czech income tax purposes of approximately $547,371, which may be carried forward until 2012 and used to reduce taxable income of future years. In addition, the Company has $1,947,637 of intellectual property costs deductible for tax purposes at $130,000 per year. Details of deferred income tax assets: |
| May 31, | November 30, | ||||||
| Deferred income tax assets: | 2007 | 2006 | |||||
| Non-capital losses | $ | 1,573,082 | $ | 1,018,672 | |||
| Intellectual property costs deductible for tax | 1,764,566 | 1,829,487 | |||||
| purposes | |||||||
| 3,337,648 | 2,848,159 | ||||||
| Effective US and CZ corporate tax rates | 29% | 30% | |||||
| Deferred income tax asset | 968,081 | 854,451 | |||||
| Valuation allowance | (968,081 | ) | (854,451 | ) | |||
| $ | - | $ | - |
The potential future tax benefits of these losses have not been recognized by the Company in these financial statements due to uncertainty of their realization. When the future utilization of some portion of the carryforwards is determined not to be “more likely than not,” a valuation allowance is provided to reduce the recorded tax benefits from such assets. | ||
| 9. | Capital Stock | |
| a) | Effective June 15, 2006, the board of directors approved the consolidation of the Company’s issued and outstanding shares of common stock on the basis of one new share of common stock for each old two shares of common stock of the Company. Pursuant to SAB Topic 4c, all common share information presented in these financial statements is retroactively presented on a post-consolidation basis, including all share amounts and per share prices. | |
| b) | During the year ended November 30, 2006, the Company entered into a five-month investor relations consulting agreement with an unrelated party for consideration of $12,000 and 150,000 common shares, valued at $12,500. | |
| c) | During the year ended November 30, 2006, the Company negotiated a subscription agreement (signed December 12, 2006) with a private investor for the purchase of 1,200,000 shares at $0.083 per share, for total cash proceeds of $100,000 (received October 12, 2006). The subscriber had until March 31, 2007 to purchase up to an additional 10,800,000 shares at $0.083. | |
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 9. | Capital Stock -Continued | |
| d) | On December 20, 2006, the Company negotiated a subscription agreement with a private investor for the purchase of 155,364 shares at $0.083 per share, for total cash proceeds of $12,947. | |
| e) | On January 12, 2007, the Company negotiated a subscription agreement with a private investor for the purchase of 1,200,000 shares at $0.083 per share, for total cash proceeds of $100,000. | |
| f) | On February 1, 2007, the Company entered into a consulting agreement with Westport Strategic Partners Inc. to provide investor and public relations services for a total consideration of $100,000 plus the issuance of 600,000 common shares at $0.083 per share. Of the share amount, $16,438 was expensed during the period, and the remaining $33,562 was classified as prepaid expense, which will be expensed as incurred during subsequent periods. | |
| g) | On March 8, 2007, the board of directors approved the consolidation of the Company’s issued and outstanding shares of common stock on the basis of three new shares of common stock for one share of old common stock of the Company. All common share information presented in these interim financial statements is retroactively presented on a post-consolidation basis, including all share amounts and per share prices. | |
| h) | On April 11, 2007, the Company negotiated a subscription agreement with a private investor for the purchase of 438,208 shares at $0.075 per share for total proceeds of $32,866. These shares were issued subsequent to May 31, 2007. | |
| i) | On May 18, 2007, the Company negotiated a subscription agreement with a private investor for the purchase of 936,300 shares at $0.050 per share for total proceeds of $46,815. These shares were issued subsequent to May 31, 2007. | |
| j) | Share Purchase Options | |
The Company has established a share purchase option plan whereby the board of directors may, from time to time, grant options to directors, officers, employees or consultants. Options granted must be exercised no later than ten years from the date of grant or such lesser period as determined by the Company’s board of directors, and are subject to vesting provisions unless the directors of the Company determine otherwise. The exercise price of an option is equal to or greater than 85% of the fair market value of the common stock on the grant date. | ||
On June 16, 2006, the Company granted employees of the Company options to purchase up to 1,500,000 common shares of the Company at an exercise price of $0.267 per share on or before June 16, 2009. These options have an estimated value of $30,875 on the grant date. | ||
On December 29, 2006, the Company granted employees of the Company options to purchase up to 1,500,000 common shares of the Company at an exercise price of $0.267 per share on or before June 16, 2009. These options had an estimated value of $20,714 on the grant date. | ||
The options granted during the period ended May 31, 2007 were valued at $20,714 using the Black-Scholes option pricing model with the following assumptions: | ||
| ITonis Inc. |
| (Formerly Kenshou Inc.) |
| (A Development Stage Company) |
| Notes to Interim Consolidated Financial Statements |
| May 31, 2007 |
| (Unaudited) |
| US Funds |
| 9. | Capital Stock -Continued |
| j) | Share Purchase Options-Continued |
| Expected dividend yield | 0.00% |
| Expected stock price volatility | 83% |
| Risk-free interest rate | 4.82% |
| Expected life of options | 1.92 years |
Because the shares of the Company have not begun trading on any recognized stock exchange when the options were granted, there is no trading history to establish the expected volatility. The Company has used the average volatility for three companies in the same industry or considered to be comparable.
The weighted average fair value of the options granted was $0.05.
Option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
| 10. | Subsequent Events |
On June 11, 2007, the Company issued for cash 1,000,000 restricted units comprised of 1,000,000 shares at $0.25 and 1,000,000 share purchase warrants exercisable at $0.25 for two years from date of issuance. | |
Item 2. Management’s Discussion and Analysis or Plan of Operation
The following discussion of our financial condition, changes in financial condition and results of operations for the six months ended May 31, 2007 should be read in conjunction with our unaudited consolidated interim financial statements and related notes for the six months ended May 31, 2007.
Overview of our Business
We are the owner of a suite of proprietary software applications that we refer to as the “ITonis video solution”. We are engaged in the business of commercializing the ITonis video solution. The ITonis video solution enables the on-demand delivery of video content, including television channels and videos, to consumers via broadband Internet for viewing on the consumer’s television.
Our business plan is to market and sell the ITonis video solution as a technology solution that will enable the on-demand delivery of video content via the Internet. The ITonis video solution is one of three components that are essential to the on-demand delivery of video content via broadband Internet, namely:
the intellectual property rights to distribute the video content;
a set-top box located near the consumer’s television that is connected to broadband Internet; and
a technology solution that enables the on-demand delivery of the video content to the consumer’s television via the set top box.
We do not have any plans to engage in the business of acquiring intellectual property rights to distribute video content or manufacturing and selling set top boxes for televisions. Our focus will be on the marketing and sale of the ITonis video solution in circumstances where other parties will be responsible for the provision of the intellectual property rights to distribute the video content and the necessary set-top boxes.
The ITonis video solution is comprised of the following components, each of which will be achieved by the installation of our software applications on computer servers that are used to implement our video solution:
the ITonis media acquisition system that allows the upload of video content onto media storage servers;
ITonis media storage servers that provide for the storage of video and other media content;
ITonis media streamers that provide for the streaming of video content in real time to the end consumer via the Internet;
an ITonis television portal (“IPTV”) application server that provides the interface between the computer system and the ultimate consumer; and
an ITonis service server that performs automatic maintenance tasks on the solution.
We have developed the basic functionality of ITonis video solution and have demonstrated the solution in a laboratory environment. We have not deployed the ITonis video solution as a whole in any commercial operations to date. However, we have delivered a single component of our ITonis video solution that has been deployed in a larger video on demand solution. We are now attempting to secure pilot projects for the demonstration of the ITonis video solution in “real world” operations. We are also planning to continue additional development of the ITonis video solution in order to extend the functionality of the solution.
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Although sales and marketing activities have been initiated, we have earned minimal revenues to date and, as such, we are presently a development stage company. We presently have limited funds with which to pursue our plan of operations. While we have completed private placement financings as part of our corporate organization, we will require additional funding in order to pursue our plan of operations over the next twelve months. We currently have no arrangements for any additional financing and there is no assurance that any additional financing will be obtained.
Corporate Organization
Incorporation
We were incorporated on July 5, 2005 as Kenshou Inc. under the laws of the state of Nevada. We changed our name to ITonis Inc. on December 5, 2005 to reflect our acquisition of certain intellectual property underlying the ITonis video solution and our new business focus.
We commenced the process of incorporating a wholly owned Czech subsidiary called “ITonis CZ” on November 25, 2005. The incorporation process was formally completed under Czech law on January 4, 2006.
Principal Executive Offices
Our principal executive offices and the offices of Itoniz CZ are located in leased premises at Klimentska 10, 110 00 Prague 1, Czech Republic. We refer to this facility as our research and development facility as this is where we carry out the research, development and testing of our ITonis video solution.
Three for One Forward Stock Split
On March 20, 2007 (the “Record Date”), we completed an increase in the number of shares of our authorized share capital and correspondingly increase the number of its issued and outstanding common shares, in each case on a three (3) new shares for one (1) old share basis (the “Forward Stock Split”) in accordance with Section 78.207 of the Nevada Revised Statutes: Chapter 78, as amended.
The forward stock split was implemented taking into account our authorized share capital and number of issued and outstanding shares of common stock as of the Record Date. As such, our authorized common share capital increased from 100,000,000 shares to 300,000,000 shares, and our issued and outstanding common stock increased from 23,129,115 shares to 69,387,345 shares, with a par value of $0.001 per share. There was no change to our authorized preferred share capital of 5,000,000 shares, with a par value of $0.001 per share. No shares of preferred stock of the Company are currently issued and outstanding. All share numbers presented in this annual report are on a post-split basis.
Recent Developments
On July 2, 2007, by a written consent resolution of our board of directors, Mr. Thomas Neal Roberts was appointed as our director, president, chief executive officer, chief financial officer and secretary. Concurrent with the appointments of Mr. Roberts, Mr. Nicolas Lavaud resigned as our director, president, chief executive officer, chief financial officer and secretary of the Company. As a result, Mr. Lavaud is no longer a director or officer of the Company.
Our new management has determined to shift to our efforts for commercialization of our ITonis video solution from the European market to the Chinese market. As a result of this determination, the Company plans to reduce its operations in the Czech Republic during this current fiscal quarter.
On April 16, 2007, we entered into a memorandum of understanding with iOcean Media Limited (“iOcean”) for the launch of a joint venture project to provide Internet Protocol Television services in the
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People’s Republic of China. Under terms of the memorandum of understanding, we have agreed with iOcean to enter into good faith negotiations towards the execution of a formal joint venture agreement and a license agreement that will govern the joint venture project. The definitive agreements will be based on the terms of the memorandum of understanding. The definitive agreement is to be executed within three months of the date of the memorandum of understanding. To date, we have progressed with negotiations for the execution of the formal joint venture agreement but no agreement has been executed.
The memorandum of understanding contemplates that we and iOcean will jointly develop and operate an IP Television and Video on Demand service in the province of Shandong in the People’s Republic of China (the “Project”). The IPTV solution would be based on our ITonis delivery platform and backend solutions which we would license to the joint venture as a non-exclusive, non-transferable license with a term of 20 years. The legal set-up of the joint venture and its management and financing post-pilot rollout would be the responsibility of iOcean. Profits under the joint venture would be split 51% in favour of iOcean and 49% to us.
iOcean is a sino/foreign company that is engaged in the business of developing solutions and forming partnerships for the delivery of Internet Protocol Television services in the People’s Republic of China.
Formation of the joint venture will be subject to the execution of definitive agreements. There is no assurance that definitive agreements will be executed within the time frame contemplated by the memorandum of understanding.
This summary of certain material provisions of the memorandum of understanding is qualified by the full text of the memorandum of understanding, a copy of which has been filed asExhibit 10.1 to our current report on Form 8-K filed with the SEC on April 24, 2007, which investors should read in full.
Our Plan of Operations
Our plan of operations for the next twelve months is to complete the following objectives within the time periods and within the budgets specified, subject to our achieving the requisite financing:
| 1. | We plan to carry on the development of the ITonis video solution from our research and development facility in Prague. Our general administrative overhead cost for our Prague office is approximately $50,000 per month. This amount includes salaries, computer hardware, rent and other general expenses associated with our Prague office. If we are successful in securing initial commercial sales of our ITonis video solutions, then we anticipate that these expenses may increase to $80,000 per month by the end of the second quarter of fiscal 2007, subject to financing. This increase in cost would be attributable to adding additional personnel to our development team and to put in place a team of employees to provide customer support services. |
| 2. | We plan to carry out sales and marketing of our ITonis video solution over the next twelve months with the objective of securing sales to several clients. Our direct marketing activities will be carried out by our employees from our Prague office. As such, the expense for these marketing activities will be within our general and administrative expenses for the Prague office, as outlined above. In addition, ITonis distributors (Nordic IPTV Company ApS and Sofia Digital) undertake those activities for which we pay a percentage of the sales. |
| 3. | We plan to launch an operation pilot scale solution for an Internet service provider ISP. The purpose of the pilot project would be to allow us to complete the testing of our ITonis video solution in a live environment and to enable us to have an operating solution that we can use for demonstration purposes in connection with our marketing activities. We anticipate that it would cost approximately $10,000 in additional expenses to launch this operation. |
| 4. | We plan to deploy a small scale commercial solution for an Internet service provider in China that will offer the basic functionality of the ITonis video solution. We anticipate that this installation would cost approximately $50,000. This cost would cover the hardware and software for the |
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solution. Implementation will be performed by ITonis CZ. This component of our plan of operations is contingent upon us securing a joint venture with a local partner. | |
| 5. | We anticipate spending approximately $4,000 in ongoing general, legal and administrative expenses per month for the next twelve months, for a total anticipated expenditure of $48,000 over the next twelve months. These general, legal and administrative expenses are external expenses that we anticipate incurring and are in addition to the general and administrative expense of the Prague office discussed above. |
| 6. | We anticipate spending approximately $53,000 in complying with our obligations as a reporting company under theSecurities Exchange Act of1934. These expenses will consist primarily of professional fees relating to the preparation of our financial statements and completing our annual report, quarterly report, current report and proxy statement filings with the SEC. |
| 7. | We anticipate spending $120,000 to pay the accrued liability in connection with the services provided to us by John Marienhof pursuant to our reseller and consulting agreement with Nordic IPTV and $39,830 to repay the loan made to us by our former chief executive officer described below under the heading “Liquidity and Capital Resources”. |
As at November 30, 2006, we had cash reserves of $1,571 and working capital of deficit of $442,867. As at May 31, 2007, our cash reserves had increased to $2,880 and our working capital deficit had increased to $758,268. Our planned expenditures over the next twelve months are approximately $1,000,000. Accordingly, we anticipate that we will require financing in the amount of approximately $1,760,000 in order to carry out our plan of operations for the next twelve months.
During the twelve month period following the date hereof, we anticipate that we will not generate revenues that exceed our operating costs. We anticipate based on our current cash and working capital and our planned expenses that we will be able to continue our plan of operations over the next one month without additional financing. This projection does not account for any revenues that we may earn from licensing sales of components to our ITonis video solution. We believe that we will require additional financing in order to commercialize our ITonis video solution in order to earn revenues that exceed our operating expenses.
We have reduced our operating costs to a minimum in order to preserve our available cash and working capital so that we can continue to sustain our operations. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. We presently have no arrangements in place for any additional equity financings. In the absence of such additional financing, we may not be able to continue our plan of operations beyond the next month and our business plan may fail. If we do not obtain the required additional financing, we will initially scale back our business operations and may ultimately be forced to abandon our plan of operations and our business activities.
Critical Accounting Policies
Development Stage Company
We are a development stage company as defined by Financial Accounting Standards No. 7. We are presently devoting all of our present efforts to establishing a new business. All losses accumulated since inception have been considered as part of our development stage activities.
Revenue Recognition
We recognize revenue when all of the following criteria have been met: persuasive evidence for an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collection is reasonably assured. Upfront contract payments received from the sale of services not yet earned are initially recorded as deferred revenue on the balance sheet.
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Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price, long-term service or development contracts is recognized over the contract term based on the percentage of services that are provided during the period compared with the total estimated services to be provided over the entire contract. Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent. Payment terms vary by contract.
Foreign Currency Translations
Our functional currency is the Czech Koruna (“CZK”), and our reporting currency is the U.S. dollar. All transactions initiated in other currencies are re-measured into the functional currency as follows:
| i) | Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date, | |
| ii) | Non-monetary assets and liabilities, and equity at historical rates, and | |
| iii) | Revenue and expense items at the average rate of exchange prevailing during the period. |
Gains and losses on re-measurement are included in determining net income for the period
Translation of balances from the functional currency into the reporting currency is conducted as follows:
| i) | Assets and liabilities at the rate of exchange in effect at the balance sheet date, | |
| ii) | Equity at historical rates, and | |
| iii) | Revenue and expense items at the average rate of exchange prevailing during the period. |
Translation adjustments resulting from translation of balances from functional to reporting currency are accumulated as a separate component of shareholders’ equity as a component of comprehensive income or loss. Upon sale or liquidation of the net investment in the foreign entity the amount deferred will be recognized in income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts and timing of revenues and expenses, the reported amounts and classification of assets and liabilities, and disclosure of contingent assets and liabilities. These estimates and assumptions are based on the Company's historical results as well as management's future expectations. The Company's actual results could vary materially from management's estimates and assumptions.
Software Costs
Effective March 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant). Before March 1, 2006, the Company accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and complied with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company adopted SFAS 123(R) using the modified prospective method, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, financial statements for the periods prior to March 1, 2006 have not been restated to reflect the fair value
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method of expensing share-based compensation. Adoption of SFAS 123(R) does not change the way the Company accounts for share-based payments to non-employees, with guidance provided by SFAS 123 (as originally issued) and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Results Of Operations – Six months ended May 31, 2007 and 2006
References to the discussion below to fiscal 2007 are to our current fiscal year which will end on November 30, 2007. References to fiscal 2006 is to our fiscal year ended November 30, 2006.References to the first six months of fiscal 2006 are to the six month period ended May 31, 2006 and references to the first six months of fiscal 2007 are to the six month period ended May 31, 2007.
| For the | From | ||||||||||||||
| Three | For the | For the | For the | Incorporation | |||||||||||
| Months | Three Months | Six Months | Six Months | July 5, | |||||||||||
| Ended | Ended | Ended | Ended | 2005 to | |||||||||||
| May 31, | May 31, | May 31, | May 31, | May 31, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | |||||||||||
| Sales | $ | 11,546 | $ | - | $ | 171,570 | $ | - | $ | 195,921 | |||||
| Cost of Sales | 33,372 | - | 149,890 | - | 159,314 | ||||||||||
| Gross Profit | (21,826 | ) | - | 21,680 | - | 36,607 | |||||||||
| General and | |||||||||||||||
| Administrative | |||||||||||||||
| Expenses | |||||||||||||||
| Software development | |||||||||||||||
| costs | 99,945 | - | 174,046 | 13,814 | 536,600 | ||||||||||
| Consulting | 76,451 | 10,768 | 105,958 | 21,436 | 141,294 | ||||||||||
| Salaries and wages | 41,324 | 48,638 | 99,348 | 107,783 | 165,929 | ||||||||||
| Auditing and accounting | 35,836 | 15,656 | 63,072 | 20,624 | 219,029 | ||||||||||
| Office | 31,892 | 11,718 | 37,632 | 16,652 | 92,579 | ||||||||||
| Depreciation | 10,413 | 5,477 | 19,067 | 8,997 | 39,757 | ||||||||||
| Stock-based compensation | 10,500 | - | 19,028 | - | 28,042 | ||||||||||
| Legal | 11,328 | 27,877 | 14,186 | 33,127 | 85,454 | ||||||||||
| Rent | 5,682 | - | 13,484 | - | 45,503 | ||||||||||
| Investor relations | 415 | - | 6,235 | - | 24,915 | ||||||||||
| Filing fees | 4,912 | 7,455 | 5,453 | 7,455 | 12,740 | ||||||||||
| Foreign exchange loss | 4,217 | - | 4,015 | - | 9,865 | ||||||||||
| Intellectual property | - | - | - | 1,500,000 | 1,947,637 | ||||||||||
| Marketing and | |||||||||||||||
| distribution | - | 60,000 | - | 120,000 | 120,000 | ||||||||||
| Bad debt | - | - | - | - | 9,789 | ||||||||||
| 332,915 | 187,589 | 561,524 | 1,849,888 | 3,479,133 | |||||||||||
| Loss from Operations | (354,741 | ) | (187,589 | ) | (539,844 | ) | (1,849,888 | ) | (3,442,526 | ) | |||||
| Other Income | |||||||||||||||
| Other income | - | 4,517 | - | 21,750 | 33,926 | ||||||||||
| Loss for the Period | $ | (354,741 | ) | $ | (183,072 | ) | $ | (539,844 | ) | $ | (1,828,138 | ) | $ | (3,408,600 | ) |
Revenue
We generated our initial revenues during the first quarter of fiscal 2007. During the first quarter of fiscal 2007, we delivered our encoding platform to a customer for encoding content from DVD disks onto the
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customer’s video demand platform. The encoding platform is one of the components of the ITonis video solution. Our revenues increased to $171,570 for the first six months of fiscal 2007 from $Nil for the first six months of fiscal 2006.
These initial revenues are not significant in relation to our overall expenses. We anticipate that we will not earn any significant revenues until such time as we have achieved commercial deployment of our ITonis video solution.
Software Development Costs
Software development costs represent amounts attributable to the development of our proprietary software.
Our software development costs increased to $174,046 during the first six months of fiscal 2007 as we continued development of our ITonis video solution. Software development costs during fiscal 2006 included:
amounts paid to Xeris in respect of development work on our ITonis video solution completed by Xeris prior to our taking over software development activities from Xeris in January 2006; and
software development work that we completed in-house.
Consulting
Consulting fees represent amounts that we pay to consultants that are engaged by us.
Consulting expenses increased significantly to $105,958 for the first six months of fiscal 2007 compared to $21,436 for the first six months of fiscal 2006. Consulting expenses have increased in part due to marketing campaigns that were undertaken based on the previous strategy for the firm. Outside consultants were required to facilitate these campaigns because of lack of in-house expertise. We anticipate that management and consulting expenses will increase during fiscal 2007 because of our determination to focus on China.
Salaries And Wages
Salaries and wages are primarily comprised of salaries paid to employees of ITonis CZ who are employed at our research and development facility in Prague.
Salaries and wages were $99,348 during the first six months of fiscal 2007 compared to $107,783 during the first six months of fiscal 2006.
Audit and Accounting
Our accounting and auditing expenses include professional fees for accounting and auditing expenses incurred in connection with the preparation and audit of our financial statements.
Accounting and auditing expenses decreased during the first six months of fiscal 2007 compared to the first six months of fiscal 2006 as a result of the completion of our audited annual and unaudited interim financial statements prepared in connection with our annual report on Form 10-KSB for the year ended November 30, 2006 that we have filed with the SEC.
Depreciation
Depreciation expenses represents depreciation of our computer hardware and equipment.
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Depreciation expenses in the first six months of fiscal 2006 and fiscal 2007 represented depreciation of computer hardware and equipment that we acquired in connection with the development and testing of our ITonis video solution.
Legal
Legal expenses are attributable to legal fees paid to our legal counsel in connection with the completion of our corporate reorganization and our filing a registration statement with the SEC and becoming a reporting company under the Securities Exchange Act of 1934.
Legal expenses during the first six months of fiscal 2007 declined compared to the first six months of fiscal 2006 as a result of our completing our corporate reorganization and preparing and filing of a registration statement with the SEC during fiscal 2006. Legal expenses during the first months of fiscal 2007 have related to our ongoing continuous reporting obligations under the Securities Exchange Act of 1934.
Rent
Our rent expenses include the rent that we pay for our research and development facility in Prague and general office expenses.
Our rent expenses increased significantly in fiscal 2006 as the result of ITonis CZ entering into a lease for our research and development facility in Prague. This lease expense will be ongoing through fiscal 2007.
Intellectual Property
We did not incur any expenses on any intellectual property during the first six months of fiscal 2007. In fiscal 2006, we determined that the cost of the intellectual property purchased during our fiscal 2006 does not meet the criteria for capitalization as set out in SFAS No. 86.
Marketing And Distribution
Our marketing and distribution expenses include amounts that we pay under our reseller and consulting services agreement with Nordic IPTV. We recorded $120,000 in expenses under the Nordic IPTV agreement in fiscal 2006 in respect of four months of service provided by John Marienhof as commercial director of ITonis. In accordance with our agreement with Nordic IPTV, this amount has not been paid but has been accrued. We did not record any marketing and distribution expenses during the first six months of fiscal 2007.
Other Income
We did not generate any other income during the first six months of fiscal 2007. Our other income during fiscal 2006 was comprised of:
Sub-letting part of our ITonis CZ office to iPLATO s.r.o., a company with whom ITonis CZ has one director in common;
Outsourcing the services of our former director and officer, Nicolas Lavaud, to Xeris., a company with whom ITonis CZ has one director in common, as managing director; and
Outsourcing the services of Libor Bucinsky to Devoteam, an arms length party, for the installation of Telefonica Video on Demand platform at Czech Telecom.
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Liquidity And Capital Resources
Cash and Working Capital
As at May 31, 2007, we had cash of $2,880 and a working capital deficit of $758,268, compared to cash reserves of $1,571 and working capital of deficit of $442,867 as at November 30, 2006.
Related Party Loan
During fiscal 2006 Mr. Nicolas Lavaud, our former director and chief executive officer, granted us a loan which was outstanding in the amount of $39,830 as of May 31, 2007. The loan is evidenced by a promissory note, is unsecured and does not bear any interest. The promissory note is payable on demand.
Plan Of Operations
Our planned expenditures over the next twelve months are approximately $1,000,000. As described above under “Our Plan of Operations”, we anticipate that we will require financing in the amount of approximately $1,760,000 in order to carry out our plan of operations for the next twelve months. While this amount may be offset by any gross profits that we earn from sales of our ITonis video solutions, we anticipate that our cash and working capital will not be sufficient to enable us to undertake our plan of operations over the next twelve months without our obtaining additional financing. Accordingly, we anticipate that we will require additional financing in order to enable us to sustain our operations for the next twelve months, as outlined above under “Our Plan of Operations”. We have completed the private placement of units, as outlined above under “Our Plan of Operations”, in furtherance of achieving the required financing, although there is no assurance that the share purchase warrants issued in connection with this financing will be exercised.
Cash Used In Operating Activities
We used cash of $135,039 in operating activities during the first six months of fiscal 2007 compared to cash used of $238,496 in operating activities during the first six months of fiscal 2006.
Cash From Investing Activities
We used cash of $51,789 in investing activities during the first six months of fiscal 2007 which consisted of upgrades and enhancements to technology and purchases of equipment. We used cash in investing activities in the amount of $35,066 during the first six months of fiscal 2006. Cash used in investing activities in fiscal 2006 was attributable primarily to the purchase of computer hardware and equipment that we have acquired in connection with the development and testing of our ITonis video solution.
Cash from Financing Activities
We generated cash of $192,628 from financing activities during the first six months of fiscal 2007 compared to cash of $184,641 generated from activities during the first six months of fiscal 2006.
Cash generated from financing activities during the first six months of fiscal 2007 was attributable to shares issued for cash.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive business activities. For these reasons our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern.
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Future Financings
We anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned activities.
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.
Item 3. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2007, being the date of our most recently completed quarter. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, Mr. Thomas Neal Roberts. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission (the “SEC”).
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is 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 our Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the fiscal quarter ended May 31, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting during the quarter ended May 31, 2007.
The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| (a) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; |
| (b) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and |
| (c) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements. |
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Item 3A(T). Controls and Procedures
Not Applicable.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We currently are not a party to any material legal proceedings and to our knowledge, no such proceedings are threatened or contemplated.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We completed the following sales of securities without registration under the Securities Act of 1933 during the quarter ended May 31, 2007 and subsequent to May 31, 2007.
| 1. | We issued 438,208 shares of our common stock on April 11, 2007 at a price of $0.075 per share to a total of one purchaser for total proceeds of $32,866. We completed this offering pursuant to Rule 903 of Regulation S of the Securities Act. Each sale of shares was completed as an “offshore transaction”, as defined in Rule 902(h) of Regulation S, on the basis that: (i) each investor was outside of the United States at the time the offer to purchase the shares was made; and (ii) at the time the subscription agreement for the shares was executed, the investor was outside of the United States or we had a reasonable belief that the investor was outside of the United States. We did not engage in any directed selling efforts, as defined in Regulation S, in the United States. Each investor represented to us that the investor was not a U.S. person, as defined in Regulation S, and was not acquiring the shares for the account or benefit of a U.S. Person. Each purchaser represented their intention to acquire the securities for investment only and not with a view toward distribution. Appropriate legends have been affixed to the stock certificate issued to each purchaser in accordance with Regulation S confirming that the shares cannot be resold or transferred other than pursuant to Regulation S, registration under the Securities Act or an exemption from the registration requirements of the Securities Act. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved. No registration rights were granted to any of the purchasers. | |
| 2. | We issued 936,300 shares of our common stock on May 18, 2007 at a price of $0.050 per share to one purchaser for total proceeds of $46,815. We completed this offering pursuant to Rule 903 of Regulation S of the Securities Act. Each sale of shares was completed as an “offshore transaction”, as defined in Rule 902(h) of Regulation S, on the basis that: (i) each investor was outside of the United States at the time the offer to purchase the shares was made; and (ii) at the time the subscription agreement for the shares was executed, the investor was outside of the United States or we had a reasonable belief that the investor was outside of the United States. We did not engage in any directed selling efforts, as defined in Regulation S, in the United States. Each investor represented to us that the investor was not a U.S. person, as defined in Regulation S, and was not acquiring the shares for the account or benefit of a U.S. Person. Each purchaser represented their intention to acquire the securities for investment only and not with a view toward distribution. Appropriate legends have been affixed to the stock certificate issued to each purchaser in accordance with Regulation S confirming that the shares cannot be resold or transferred other than pursuant to Regulation S, registration under the Securities Act or an exemption from the registration requirements of the Securities Act. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved. No registration rights were granted to any of the purchasers. | |
| 3. | We issued 1,000,000 units of our common stock (each a “Unit”) on June 11, 2007 at a price of $0.25 per Unit to a total of one purchaser for total proceeds of $250,000. Each Unit consists of one share and one share purchase warrant (each a “Warrant”), each Warrant entitles the purchaser |
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to purchase one additional share of common stock of the Company (each a “Warrant Share”) at a price of $0.25 per Warrant Share within a two year period from the date of grant. We completed this offering pursuant to Rule 903 of Regulation S of the Securities Act. Each sale of the Units was completed as an “offshore transaction”, as defined in Rule 902(h) of Regulation S, on the basis that: (i) each investor was outside of the United States at the time the offer to purchase the Units was made; and (ii) at the time the subscription agreement for the Units was executed, the investor was outside of the United States or we had a reasonable belief that the investor was outside of the United States. We did not engage in any directed selling efforts, as defined in Regulation S, in the United States. Each investor represented to us that the investor was not a U.S. person, as defined in Regulation S, and was not acquiring the Units for the account or benefit of a U.S. Person. Each purchaser represented their intention to acquire the securities for investment only and not with a view toward distribution. Appropriate legends have been affixed to the stock certificate issued to each purchaser in accordance with Regulation S confirming that the securities cannot be resold or transferred other than pursuant to Regulation S, registration under the Securities Act or an exemption from the registration requirements of the Securities Act. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved. No registration rights were granted to any of the purchasers.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to our security holders for a vote during the six months ended May 31, 2007.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are included with this Quarterly Report on Form 10-QSB:
| Exhibit | |
| Number | Description of Exhibit |
| 3.1 | Articles of Incorporation (1) |
| 3.2 | Certificate of Amendment to Articles of Incorporation (1) |
| 3.3 | By-Laws (1) |
| 3.4 | Certificate of Change pursuant to NRS 78.209 effective March 19, 2007 (6) |
| 10.1 | Asset Purchase Agreement dated October 1, 2005 between ITonis Inc. and Onyx Trading Inc. (1) |
| 10.2 | Employment Agreement between ITonis Inc. and Antonin Kral dated January 1, 2006. (1) |
| 10.3 | Employment Agreement between ITonis Inc. and Nicolas Lavaud dated February 1, 2006. (1) |
| 10.4 | Asset Purchase Agreement between ITonis Inc. and Nordic IPTV Company ApS (formerly “Makeitwork ApS”) dated January 31, 2006 (1) |
| 10.5 | Reseller Agreement dated February 7, 2006 between ITonis Inc. and Makeitwork ApS (1) |
| 10.6 | Lease Agreement dated December 23, 2005 between Achat Real a.s. and ITonis CZ s.r.o. (1) |
| 10.7 | 2006 Stock Option Plan (2) |
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| Exhibit | |
| Number | Description of Exhibit |
| 10.8 | Amendment dated February 15, 2006 to Employment Agreement between ITonis Inc. and Nicolas Lavaud dated February 1, 2006 (3) |
| 10.9 | Amendment dated August 9, 2006 to Reseller Agreement dated February 7, 2006 between ITonis Inc. and Nordic IPTV Company ApS (formerly, Makeitwork ApS") (3) |
| 10.10 | Promissory Note issued by ITonis Inc. to Nicolas Lavaud in the amount of CZ 400,000Kc dated July 3, 2006 (3) |
| 10.11 | Subscription Agreement between ITonis Inc. and Spectrum Managers Ltd. dated December 12, 2006 (4) |
| 10.12 | Memorandum of Understanding between the Company and iOcean Media Limited dated April 16, 2007 (7) |
| 14.1 | Code of Ethics (8) |
| 16.1 | Letter of Moores Rowland dated February 15, 2007 (5) |
| 31.1 | |
| 32.1 |
| (1) | Filed as an exhibit to the registration statement on Form SB-2 filed with the SEC on May 12, 2006. |
| (2) | Filed as an exhibit to Amendment No. 1 to the registration statement on Form SB-2 filed with the SEC on June 27, 2006. |
| (3) | Filed as an exhibit to Amendment No. 2 to the registration statement on Form SB-2 filed with the SEC on August 11, 2006. |
| (4) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 15, 2006. |
| (5) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 23, 2007. |
| (6) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 20, 2007. |
| (7) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on April 24, 2007. |
| (8) | Filed as an exhibit to our Annual Report on Form 10-KSB filed with the SEC on April 27, 2007. |
| (9) | Filed as an exhibit to this Quarterly Report on Form 10-QSB. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ITONIS INC. | |||
| By: | /s/ Thomas Roberts | ||
| Thomas Roberts | |||
| Chief Executive Officer and Chief Financial Officer | |||
| Date: July 16, 2007 | |||
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