PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
We
provide geothermal heat exchange, or geoexchange, solutions for residential,
commercial, and institutional applications as a manufacturer of proprietary geothermal
heat pump technology, design-build geoexchange project provider, and as a geoexchange
energy service company, or ESCO.
Essential Innovations Corp., a wholly owned subsidiary of ours,
manufactures our EI Elemental geoexchange system in Vancouver, B.C., Canada. The EI
Elemental is a high efficiency, eco-friendly comfort system providing heating, cooling,
and dehumidification as well as domestic hot water production for residential,
commercial, and industrial applications. The EI Elemental geoexchange equipment has
significant advantages compared to its industry competitors. First, the product is
designed and engineered specifically and exclusively for R410A refrigerant, the most
advanced and environmentally positive refrigerant now available, whereas our
competitors are just beginning to incorporate R410A in their existing product lines,
while still widely utilizing R22, a non-environmentally friendly refrigerant. Second,
we believe that the integrated controls package within our equipment completely
differentiates us from anyone else in the geoexchange industry and is our most
significant competitive advantage.
The
EI Elemental achieves levels of control and efficiency superior to equipment of our
major competitors, which have not focused efforts on achieving these levels of controls
integration for system optimization.
Our
wholly owned subsidiary, Earth Source Energy, provides the design, engineering,
installation, service, and maintenance to residential, commercial, industrial, and
institutional geoexchange project applications. We have the resources to take
geothermal projects of any scale from concept to completion. With hundreds of complete
geoexchange system installations in buildings of every type, size, and scale, from
high-rise urban towers and hospitals to suburban civic centers and single-family homes,
we have set a high standard for state-of-the-art geoexchange installations. Earth
Source Energy also provides necessary geoexchange design and service assistance to our
dealer network as required.
We
are focusing our overall efforts on:
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developing synergistic industry relationships and
alliances, particularly with large builders and developers that
recognize environmental sensitivity and energy conservation as
important features of land planning and infrastructure
development;
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executing product licensing and distribution agreements
for our EI Elemental geoexchange system;
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establishing a global manufacturing facility for our
product in Asia;
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developing future long-term technology enhancements to
the EI Elemental geoexchange system that we believe may improve
its performance and marketability;
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designing, engineering, and installing geothermal loop
fields, while also providing the equipment supply;
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promoting the complete turnkey ESCO package as a unique
marketing tool for our proprietary geothermal heat pump technology and
in-house geoexchange design, engineering, and installation
expertise;
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expanding operations and increasing manufacturing and
human resources;
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working to secure local area projects to implement our
operating lease model;
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carrying on with our product sales and marketing
campaign; and
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working on existing project opportunities and
installations.
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Operating as an Energy Service Company (ESCO)
We
also operate as a geoexchange ESCO, or contractor, utilizing proprietary turnkey
geoexchange systems and solutions. In that capacity, we examine new or existing
nonresidential or residential project opportunities and subsequently design, finance,
engineer, install, and possibly manage the required geothermal loop-field
infrastructure for particular project sites or applications. We provide a
“one-stop shop” approach to geoexchange technology application for
developers, reducing technological uncertainty and concerns over system design and
performance associated with geoexchange systems by incorporating all of the requisite
areas of technological expertise required for “best practices” design and
implementation in one integrated package. In return, we are paid for our services under
an energy services contract through a lease-to-own arrangement. The lease-to-own
arrangement reduces or eliminates customer responsibility for the initial capital cost
of the geothermal loop field as these costs are repaid by the end-user through
long-term operating lease agreements.
We
believe that operating as an ESCO will help us generate favorable return on investment
scenarios for the following reasons:
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Cost advantages increase as the amortization term
increases – the geothermal loop-field can be amortized over a 15-
to 25-year period.
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Cost savings are relatively constant – once the
cost of the loop is paid for, it represents a relatively constant
source of energy savings and provides a strong and ongoing profit
center. Hence, the amortization payment can be geared to monthly
operating cost savings.
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System design and installation risks are manageable
– this is what ESCOs do successfully.
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Optimira Energy
We
have entered into an agreement to form a joint venture with Optimira Energy Canada,
Ltd., to provide to us certain financing and ESCO management services for the
geoexchange projects we pursue.
Optimira Energy is an integrated energy solutions company and a market
leader in the provision of comprehensive energy and utilities management solutions.
Optimira Energy offers its customers access to an array of multi-technical energy
expertise coupled with project finance resources.
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Optimira Energy develops, installs, finances, owns, and operates
infrastructure improvements designed to optimize the energy efficiency and lifecycle
costs for building facilities. It is focused on delivering energy service solutions
that are designed to address the specific needs and business challenges of each of its
commercial and institutional customers. The joint venture agreement with us represents
Optimira’s first efforts in geoexchange.
Under the joint venture agreement, we and Optimira Energy will form a
new entity to construct, finance and lease geothermal projects. Optimira Energy will:
(a) be the lead manager of each Project; (b) develop, structure, and arrange
third-party financing to fund the construction and operations of each project;
(c) oversee the construction of each project; (d) asset manage each project;
and (e) administer all project financings.
We
will provide a turnkey fixed price and fixed schedule contract for drilling,
high-density polyethylene pipe, materials and labor, ground loop tie-in, flushing and
purging, and contract and project management for the complete geofield portion of each
geothermal loop-field infrastructure that is to be provided to the project site. We
also agree to provide preferential project pricing for the heat pumps that are to be
used in each of the buildings, homes, and/or individual suites within the project
development. When the joint venture entity does not wish to offer a lease program for
the heat pumps, we will sell the heat pumps directly to the developer.
The
purpose of the agreement with Optimira Energy is to provide the financing required and
the administration and management services necessary to allow the joint venture entity
to offer developers a long-term operating lease for the geothermal loop infrastructure
required to be installed on any site in the operation of geothermal heating and cooling
systems. The operating lease programs will be typically structured with either 25-year
or 50-year terms determined on a project-by-project basis. We and Optimira will then
share in the long-term cash flow generated from the projects.
Diamondview
Diamondview Developments, project owner of Diamondview Estates, has
granted us the exclusive right to provide geoexchange heating and cooling systems and
ongoing geothermal services to each of the residential properties on the development.
The first phase of this project consists of 70 single-family homes expected to range
between 3,500 - 6,000 square feet on average, although some homes will also be
significantly larger. A proposed second phase consisting of up to another 225
townhome/condominium units has been submitted for regulatory approval.
The
developer has agreed to promote our Company and its innovative turnkey geothermal
services throughout the span of the project. The developer expects the total build-out
of the first phase of the project will be completed by the end of 2013. Under the terms
of our agreement with Diamondview, Diamondview has included specific language within
its property disclosure statement so as to formally cause both the Strata Corporation,
which will govern the entire property site, and those homeowners on the property
governed by Strata, to be bound to an energy service contract with us. This contract is
structured as a 25-year operating lease directly relating to the use of the geothermal
loop field (“GLF”) we install on each site that is to supply the geothermal
energy to each of the homes to be constructed. We will install individual GLFs on each
of the 70 property sites for use by each of the custom-built residences that are to
follow. We will then collect from the individual homeowners an ongoing monthly lease
payment for a period of 25 years for the use of the GLF by Strata and the homeowners on
each of the individual properties throughout the Diamondview site.
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In
addition to the recurring revenue stream to be received from the loop lease, we are the
exclusive provider of the geothermal heat pump or geoexchange equipment to be used in
each of the homes to be constructed. Furthermore, we are the sole and exclusive
provider of the installation and ongoing maintenance of all of the geoexchange
equipment that services the site.
We
have the absolute right to assign, hypothecate, give, transfer, mortgage, sublet,
license, or otherwise transfer or encumber all or part of our rights, duties, or other
interests in this agreement or the proceeds therefrom.
First Completed ESCO Sale - Wakefield Beach
In
early 2006 we contracted the exclusive right to provide geoexchange heating and cooling
systems and ongoing geothermal services to each of the residential properties at
Wakefield Beach. The total build-out and occupancy for the first phase of the project
was completed in July 2007. Under the terms of our agreement with Wakefield Beach,
Wakefield Beach had included specific language within its property disclosure statement
that formally caused both the Strata Corporation, which governs the entire property
site, and those homeowners on the property governed by Strata to be bound to an energy
service contract with us. This contract was structured as a 25-year operating lease
directly relating to the use of the GLF we installed to supply the geothermal energy to
each of the homes. We also supplied and installed individual GLFs for each of the 31
property sites and will collect from Strata an ongoing monthly lease payment for a
period of 25 years for the use of the GLF by Strata and the homeowners.
In
May 2007, Terasen Energy Services, Inc., a subsidiary of Fortis, Inc., purchased the
GLF that we had sold and installed at the Wakefield site, for a cash payment of
$380,000 CAD. The purchase has been closed and fully financed, and Terasen Energy
Services now owns the rights to the GLF servicing the 31 units.
We
also were the exclusive provider of the geothermal heat pump or geoexchange equipment
and distribution system used in each of the homes. We completed that contract in July
of 2007. The total contract value now paid to us from Wakefield Beach Homebuilders, as
it relates directly to the geothermal heat pump equipment and building distribution,
was $515,000 CAD. We remain the sole and exclusive provider of the installation and
ongoing maintenance of all of the geoexchange equipment that services the entirety of
the site for the term of the operating lease.
We
are currently pursuing a number of further ESCO opportunities in Western Canada, parts
of the United States, China, and Vietnam.
Operating Lease Payments
We
will charge each residential or commercial user of the infrastructure a monthly access
fee for a period of 25 years (or more, in certain situations), towards payment of the
operating lease. This fee allows the end-user to utilize the “loops”
necessary to service heat energy from the earth transferred through fluid (water) into
the geothermal heat pump, which then gives heating, cooling, and/or domestic hot water.
This in turn provides us a 25-year, long-term (the expected life-cycle of the heat
pump), positive net cash flow versus the up-front financing cost of the installation of
the loops and/or equipment when servicing the bank debt taken out on the installation
of the geothermal infrastructure.
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EI Elemental Geoexchange System
Heat
pump technology has been used for decades to provide heat supply to residential,
commercial, and institutional applications. Over the past decade, the industry has
begun to embrace the use of geothermal heat pump technology, extracting heat from the
earth to provide the necessary energy for a number of applications.
The
EI Elemental geoexchange system, our core technology, represents the final product of
our past research and development activities and now ongoing manufacturing activities
and is now being produced in our manufacturing facility as a packaged unit for ongoing
and future sales, installation, and distribution. To date, we have spent approximately
$768,000 on research and development activities in bringing the EI Elemental to
production and manufacture. Although we have a number of planned enhancements to add to
this core technology over time, the EI Elemental geoexchange system is a complete
unit using only the core technology, and it is the core technology that we are now
selling and installing.
General Description
The
EI Elemental geoexchange system can be designed as a geothermal or water source
heat pump.
Heat
pumps use the same thermodynamic cycle used in refrigeration. Heat is transferred, or
“pumped,” from one locale to another using refrigerant fluids; heat is
absorbed into fluid in an evaporator and transferred from the fluid in a condenser. The
pumps can thus be used to transfer heat into or out of the conditioned
space.
Geoexchange System Efficiency
The
efficiency of geothermal heat pump units are described by the coefficient of
performance (“COP”) in the heating mode and the energy efficiency ratio in
the cooling mode, which is the ratio of the output energy divided by the input energy
(electricity for the compressor) and varies from 3.0 to 6.0 with present equipment (the
higher the number the better the efficiency). Thus, a COP of 4.0 would indicate that
the unit produced four units of heating energy for every unit of electrical energy
input. In comparison, an air-source heat pump has a COP of around 2.0 and is dependent
upon backup electrical energy to meet peak heating and cooling requirements. We have
in-house product testing data showing consistent COP ratings in excess of 4.5 –
5.0, placing us at the forefront of the industry.
Detailed Refrigerant Comparison
There are three main types of refrigerant options, and two are still
used frequently:
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Chlorofluorocarbons (“CFCs”) such as R12 and
R13 have been shown to severely damage the ozone layer. Damage occurs
when chlorine is released in the upper atmosphere, which then reacts
with ozone. CFCs are highly stable and so are likely to persist over a
long period of time. Since the Montreal Protocol in 1989, many
countries have implemented anti-CFC legislation and subsequently CFC
use has been reduced significantly. We manufacture no equipment that
utilizes CFCs as refrigerant.
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Hydrochlorofluorocarbons (“HCFCs”) such as
R22 still contain chlorine atoms, but because they are less stable,
they are more likely to break down before reaching the upper
atmosphere. We do not manufacture equipment that uses R22. Increased
legislation is being implemented in many countries and HCFCs are being
actively phased out.
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Hydrofluorocarbons (“HFCs”) such as R410A
contain no chlorine atoms and therefore do not adversely affect the
ozone layer. HFCs are also more efficient than HCFCs and therefore
reduce the energy required to run the heat pump. Consequently, using
HFCs results in fewer greenhouse gas emissions. R410A is the new
geothermal industry standard and all equipment we distribute uses R410A
refrigerant, although in future commercial applications where large
units are required we may also use R407C refrigerant, which is also
deemed environmentally friendly.
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We
have specifically and exclusively engineered and designed our heat pumps around R410A,
affording us greater knowledge of the operating capabilities of the refrigerant as
compared to other manufacturers that are primarily using it as a simple replacement to
their standard R22.
The Artificial Intelligence Controls Diagnostics
(“AICD”)
We
have incorporated a proprietary artificial intelligence controls diagnostics subsystem,
or AICD, designed to regulate and monitor the system for maximum efficiencies. The AICD
supports a personal computer interface with a keypad and a liquid crystal diode, or
LCD, screen to make it user-friendly. We have the ability to incorporate wireless
technology with the option to include individual wireless room sensors upon
installation. Some of the primary benefits of the AICD are:
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multi-zoned comfort (up to 99 zones) through the
building management system;
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an LCD screen and simple keypad are incorporated into
the controller, promoting functionality through ease of use;
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the system can be upgraded and become interoperable with
other building management systems to create an integrated “smart
building”; and
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the AICD, in conjunction with software, creates a
customized “graphical user interface,” affording the
end-user total remote system management.
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The
AICD is used to determine the point at which heat energy stored in the earth or
groundwater should be extracted and used for heating or at which point heat energy
should be transferred to the earth and/or groundwater for cooling. For example, the
AICD stores historical data relating to the length of time it took the system to reach
optimum temperature. That information is used as a basis to start the heating or
cooling at precisely the right time to achieve the best temperature set point. In
calculating for run time optimization, the AICD also adjusts for variables such as
climate and seasonal conditions.
An
essential part of the EI Elemental family of products is the LCD interface. The
LCD screen constantly displays active and stored data, providing the operator with
quality of service and performance. The keypad is outfitted with simple, easy to
understand, colored pads and directional arrows that simplify data collection and
storage.
The
EI Elemental also includes the ability to communicate to a personal computer that
can display graphical information that can be modified. The system is designed to
provide standard notifications, such as the outside temperature, set point and inside
temperature, as well as troubleshooting notifications, such as noting the changeover
from heating to cooling, the existence of a fouled or dirty filter, and other
malfunctions.
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Planned Enhancements
There are several enhancements to the EI Elemental that are in the early
stages of development.
Voice Correspondence Technology
The
voice correspondence system allows users to audibly recognize and adjust what is
occurring within system environmental controls. Speakers can be placed near the set
point controls centers and temperature measuring points so that audible messages can be
relayed through the house when an alarm or notification is present or a set point is
changed. Audible messages can be blocked during times when you do not want to be
disturbed. Messages such as outside temperature, set point, and inside temperature can
be relayed on demand. Notifications such as changeover from heating to cooling, filter
dirty, and other various malfunctions can be relayed as they occur unless audible
messaging is blocked. If messages are missed during the blocking period the user may
toggle through the list to view missed messages.
Phase Change Module Technology
We
are in the beginning stages of developing a proprietary phase change module that can
store substantial amounts of heat energy created by the heat pump at minimal cost. The
ability to use stored heat energy on demand will present attractive cost savings for
heating applications. We intend the phase change module to be used efficiently for
either a heat source or a heat sink. One or more phase change modules could be
incorporated with the EI Elemental. We have completed drawings and a preliminary
design, but have not yet finalized such design, constructed an actual prototype of the
phase change module, or written the software necessary to integrate it into the system.
This enhancement should be ready for integration into the core technology by the end of
2012.
Solar Applications
We
plan to incorporate a proprietary solar director to use solar energy to reduce the
total cost of system operation. The current AICD subsystem will work with the solar
director to continually place it in the position to best collect the sun’s
energy. By collecting and absorbing the sun’s energy, the solar director would
relieve the load on the geothermal ground loop system, in turn reducing the cost of the
heat pump installation by permitting the installation of a smaller ground loop system
in the overall design. In addition to the reduced ground loop size, the heat energy
gathered from the sun could then be used to heat domestic hot water, supply heat on
demand during the day, or store heat during the day in phase change modules for use at
night. Full integration of this enhancement with the core technology will require
significant development and testing, with completion anticipated to be no sooner than
late 2010.
At
the same time, we are in active discussion with several domestic and international
firms whose solar technology could be used in conjunction with our heat pump
technology. We have already successfully incorporated the EI Elemental with solar
technology for a large residential project completed in Ontario with one of our
geoexchange product distributors, Clean Energy Developments. Geothermal and solar are
highly complementary technologies, as the combination of the two can potentially create
a totally sustainable energy supply system given the right climatic situation and
operating parameters.
Pricing
Our
EI Elemental geoexchange system has a retail price ranging between $5,000 and
$20,000, depending upon the system sizing and features, with units available between
one and a half and 30 tons of heating and cooling capacity.
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addition to the cost of the system, there is a significant installation requirement for
drilling and ground coil placement of $10,000 to $25,000 for residential applications,
dependent upon the drilling and trenching requirement, with commercial and
institutional applications being determined on a project-by-project basis, and often
costing hundreds of thousands of dollars or more. We anticipate that a typical total
price for the system and installation will be between $25,000 and $50,000 for a
standard residential installation. Although the cost of geoexchange technology has a
higher initial capital cost than more conventional heating and cooling technologies,
the user will realize substantially reduced operating costs, with payback periods on
that additional upfront cost typically between three to seven years, depending on local
electrical power rates.
Approvals
We
submit our EI Elemental geoexchange systems to the Canadian Standards Association
(“CSA”) and receive individual unit approval and designation by CSA on all
of our equipment that is sold and shipped, with each having a CSA sticker placed on it.
During the second or third quarter of fiscal 2008, we plan to submit each of our models
for complete product line approval, although as stated above, we currently receive
approval under the CSA “Special Blue Designation,” for smaller product
runs. Completion of the full model certification through CSA would qualify our product
line for the energy efficiency verification, or EEV, as well as the “Energy
Star,” a highly valuable branding element for consumer awareness and acceptance
in North America.
Sales and Distribution Cycle
Canada
We
continue to increase the number of dealers in Canada with which we have distribution
agreements. We have successfully sold, manufactured, and distributed hundreds of units
to local dealers and distributors throughout Canada. We conduct training seminars at
our plant for new and existing dealers.
United States
We
intend to enter the United States market next year and we believe an anticipated shift
of our manufacturing to Asia will allow us to become extremely cost competitive with
certain established market leaders in the United States.
We
will initially target dealer development initiatives in the western United
States—Washington, Oregon, California, Montana, Idaho, and Nevada, as well as on
the East Coast—New York and Florida. We have already begun to establish strong
relationships in New York and expect to be able to start shipping units to clients
there during fiscal 2008.
Ongoing Domestic and Overseas Activities
We
currently have operations in the United States, Canada, and Hong Kong; exclusive
distributors in Canada and the Philippines; sales agents in Mexico, China, and Vietnam;
and we are actively seeking additional distributors, dealers, and project opportunities
throughout North America and international markets like Dubai, India, Pakistan, and
parts of Africa for our proprietary geoexchange systems and solutions.
We
are actively investigating the possibility of moving some or all of our manufacturing
activities offshore, primarily to China or Vietnam, in an effort to decrease our
manufacturing costs and help with our transition into Asian markets.
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Competitive Business Conditions
There are a number of companies already active in the areas of heat
exchange technology development and distribution that are substantially larger and
better funded than we are and that have significantly longer histories in the
respective marketplace. Our principal competitors for the commercialization of our
EI Elemental geoexchange system are Florida Heat Pump, Econar Energy Systems,
Water Furnace International, and Climate Master, as well as others, almost all of which
have greater financial, technical, managerial, and marketing resources than
we.
We
believe competition in marketing heat exchange technology is based principally on the
initial price of units as compared with both other heat exchange systems and
traditional systems, the period estimated to be required to recoup any higher
installation costs from energy savings during operation, the reliability of the system,
public familiarity with and acceptance of heat exchange systems, and the reputation of
the manufacturer. To help us compete with other manufacturers with greater resources
and established distribution channels, we have signed a cooperative production
agreement as discussed below.
In
our effort to compete, we have initiated discussions with a number of large developers
for joint venture or partnership possibilities. In seeking relationships with
developers, we emphasize the possible public image benefits from using environmentally
friendly technologies, as well as marketing and revenue benefits.
In
addition, we recruited Peter Bond, a former principal in both Water Furnace
International and Climate Master, Inc., two of our competitors in the industry, to join
our board of directors. In September 2004, Mr. Bond accepted the position of Chief
Operating Officer and is now actively in charge of the manufacturing of our
EI Elemental geoexchange system, heading up our manufacturing facility and
operations. Mr. Bond was instrumental in the development of both Water Furnace
International and Climate Master, Inc.
Direct ESCO Competition
There are several companies throughout North America that adopt a
“turnkey” or “turnkey ESCO” approach to geoexchange technology.
In Canada, a notable organization is Geotility, which implements a simple turnkey
approach and “turnkey ESCO” models. These companies generally possess the
characteristics of geoexchange system installation managers, consultants, or
subcontractors for projects. As competitive companies do not possess manufacturing
capability in-house, they therefore require outsourcing of the geothermal heat pump
equipment to complete the geoexchange “turnkey” system. Our strategy is to
compete by providing all the requisite components of geoexchange system
installation.
In
the United States, the primary proponents of the “turnkey” utility approach
are power cooperatives such as Delta-Montrose Electric Association. All power
cooperatives see geoexchange technology as a demand-side management tool for reducing
power requirements and, in turn, cost for their members. Here, too, our strategy is to
compete by providing a more comprehensive package of products and services than our
competitors.
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Indirect Competition
Indirect competition in the new residential and nonresidential markets
relates to competitive and alternative technologies for space conditioning. Competing
technologies, such as high efficiency gas furnaces, will always be an important factor.
However, compared to geoexchange technology, in terms of energy efficiency and
nonmonetary benefits, this conventional technology is easily outperformed. Therefore,
advanced technologies are the most significant competitor, yet these technologies
remain in their infancy. Solar cells, for instance, are widely used for equipment
operations but not for space conditioning applications. Both technologies indicate
minimal competition.
Acquisition Program
We
are currently looking at the possibility of acquiring other companies directly related
to our current business of geoexchange, whether as manufacturing or contracting
businesses, or companies in other complementary renewable energy fields.
CIPEA Project in China
We
have signed a letter of commitment to be the exclusive provider of geoexchange
technology design, engineering, and equipment supply to the China International
Practice Exhibition of Architecture (“CIPEA”) project, in Nanjing,
China.
Under the signed letter of commitment, we are to work with both the
developer and owner of the CIPEA project in Nanjing and Ekistics Town Planning, a
Canadian-based urban and town planning specialist. Ekistics Town Planning’s
established relationships with both parties has been critical in formulating the basis
for the joint venture relationship.
The
CIPEA project is comprised of a modern art and architecture museum, a reception centre,
a conference centre, and a recreation centre, as well as 20 single-family homes. The
overall architectural design for the site is from the collective minds of a group of 24
of world’s most well-known architects from 16 different countries.
Ekistics Town Planning was integral in helping the Chinese
owner/developer to bring together and amalgamate all of the architectural minds that
are participating in the project. Ekistics was recently commissioned to plan and design
the Athletes Village in Whistler for the 2010 Olympic Winter Games. Ekistics is
currently involved in the design of numerous grand land plans throughout China and will
actively promote the use of geoexchange technology to its client base.
The
opportunity to take advantage of the demand for geoexchange technology in the Chinese
marketplace is enormous, and the joint venture partnerships are positioned to use the
CIPEA project as a technology showpiece and marketing tool.
We
still have no final, formalized contract in place for the CIPEA project; however, we
have continued to refine and re-define our proposal to the CIPEA project and we remain
in ongoing negotiations.
Richmond Thermal Energy Network
In
2006, we were awarded the bid to provide a thermal energy network to the project site
and residential development adjacent to the Richmond speed skating oval for the 2010
Olympic and Paralympic Winter Games being held in Vancouver/Whistler, British Columbia,
Canada. However, the project was officially terminated by the City of Richmond in
October 2007.
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Consultants
We
maintain a consulting agreement with Paul Guterres, a resident of Vancouver, British
Columbia, to develop sales, marketing, and distribution channels in domestic markets,
mainly British Columbia, and in offshore markets, mainly Asia, and in particular Hong
Kong and China, as well as to set-up and liaise with potential financing and funding
sources in Canada, Asia, particularly Hong Kong and China, and elsewhere.
We
have had a consulting agreement with Ecogenics Limited, a Hong Kong company, to develop
sales, marketing, manufacturing, and distribution channels in the Asian marketplace, in
particular, in Hong Kong, China, Taiwan, Japan, Korea, Thailand, the Philippines,
Singapore, and Malaysia. The agreement has expired although the consultant continues to
provide ongoing advisory services in this particular defined region.
We
have had a consulting agreement with Pac Trading, a Costa Rica company, to develop
sales, marketing, and distribution channels in offshore markets, mainly in the
Caribbean and South America, in particular the Caribbean Islands of Barbados, Trinidad,
and Martinique and the countries of Venezuela, Brazil, and Argentina, along with all
other surrounding areas. The agreement has expired although the consultant continues to
provide ongoing advisory services in this particular defined region.
Employees
We
currently have a total staff of 12 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
Our
United States administrative head office is located in Bellingham, Washington. Our
manufacturing and distribution facility and operations headquarters is currently
located in British Columbia, Canada, occupying approximately 18,900 square feet. We
have performed significant leasehold improvements to the site. Our current lease
expires in July 2009 and has one additional two-year renewal option. We believe that
these facilities will be more than adequate for our continued manufacturing needs and
our future research and development initiatives. We have a sales office in Hong Kong,
SAR, China.
We
intend to maintain at least some of our research, development, and manufacturing in the
lower mainland region of British Columbia, Canada because:
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we believe this particular geographic region of North
America is home to other alternative energy companies;
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we know of no other manufacturer of geoexchange
technology in western Canada;
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we believe there are available, educated, human
resources with particular educational and work experience in the
alternative energy field;
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•
|
the Canadian government has programs to grant
initiatives and joint environmental development projects that may
enable us to expedite our research and development efforts as we move
toward commercialization of the EI Elemental geoexchange system
with members of the federal and provincial funding agencies;
|
12
|
|
•
|
this area has strong business and cultural connections
to Asia, particularly the Pacific Rim, which we believe will facilitate
dealing with Asian customers, our Asian subsidiary, and our potential
Asian strategic associates;
|
|
|
•
|
travel from Vancouver to numerous destinations in Asia
is available on a regular, nonstop basis; and
|
|
|
•
|
we believe we can continue research and development
efforts in Canada more economically than in the United States because
of the relative strength of the Canadian dollar.
|
We
are presently looking into the potential to move some or all of our manufacturing
activities offshore, primarily to either China or Vietnam, in an effort to further
decrease our cost of goods.
ITEM 3. LEGAL PROCEEDINGS
We
are not a party to any material legal proceedings and no material legal proceedings
have been threatened by us or, the best of our knowledge, against us, except as
previously disclosed or as provided below.
On
November 14, 2007, the defendants in the lawsuit filed by our subsidiary, Earth Source
Energy Inc. (Supreme Court of British Columbia, No. S 074136, Vancouver Registry), Lynn
Mueller, Mark McCooey, and Free Energy Solutions Inc. filed a counterclaim against us,
our president and chief executive officer, Jason McDiarmid, our former chief financial
officer, Kenneth C.G. Telford, and a Company vice-president, Stevan Perry, alleging
breach of contract, wrongful dismissal, defamation, abuse of process, and other claims.
We believe that the counterclaims are without merit and intend to defend them
vigorously as we continue to press our claims that the individual defendants breached
their noncompetition agreements with Earth Source and their fiduciary obligations to
it, either wrongfully or dishonestly assisted by Free Energy Solutions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matter was submitted to a vote of our security holders during the fourth quarter of the
fiscal year ended October 31, 2007.
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
All
of our directors will serve until the next annual meeting of stockholders or until
their earlier death, retirement, resignation, or removal. Executive officers serve at
the discretion of the board of directors and are appointed to serve until the first
board meeting following the annual meeting of stockholders.
The
following table sets forth the name, age, and position of each of our current directors
and executive officers:
|
Name
|
|
Age
|
|
Title
|
|
|
|
|
|
|
|
Jason McDiarmid
|
|
37
|
|
President, Chief Executive Officer and
Director
|
|
Steve Wuschke
|
|
33
|
|
Chief Technical Officer and Director
|
|
Peter Bond
|
|
69
|
|
Chief Operating Officer and Director
|
|
Salvador Diaz-Verson
|
|
55
|
|
Director
|
The
principal occupation, title, and business experience of our executive officers and
directors during the past five years, including the names and locations of employers,
are indicated below.
Executive Officers
Jason McDiarmid has been our president, chief executive officer, and
a director since 2001.
He has been serving as our chief
financial officer since the resignation of Kenneth C.G. Telford in September 2007.
Mr. McDiarmid is a 1994 graduate of the British Columbia Institute of Technology
in the Department of International Trade and Transportation. From 1997 through 1999,
Mr. McDiarmid served as president and founder of Global Diversification Investment
Corporation, a company with which he created, wrote, published, and distributed
“Diversity; Gearing your Funds Toward a Successful Portfolio,” a stock
market newsletter publication sold throughout North America. That newsletter
publication, which provided publicly traded companies the opportunity to advertise to a
network of new potential investors, ceased publication in 1999. From 1999 through 2001,
Mr. McDiarmid was not actively seeking employment and was investigating
opportunities in the renewable energy field and working with other of our principals on
matters preliminary to our incorporation. Mr. McDiarmid currently resides in
British Columbia, Canada.
22
Steve Wuschke has served as our chief technical officer and a
director since 2001
. Mr. Wuschke is a 1996 honors
graduate of Kwantlen University from the Department of Robotics and Automation.
Following graduation, he completed the Technical Project Management Program at Simon
Fraser University in British Columbia. From 1996 to 2001, Mr. Wuschke was lead
project manager for special interface designs working directly with research and
development for Delta Controls Inc., a globally recognized automation and controls
company. During his time at Delta Controls, Mr. Wuschke was assigned to Chicago
for a year where he worked on contract for Arrowhead Environmental as an applications
engineer designing and implementing building automation systems for high-rise hotels,
commercial and institutional buildings. During his schooling, Mr. Wuschke received
the “Presidents Award of Excellence” for academic achievement and built an
electric vehicle for his final thesis project. Mr. Wuschke is the inventor whose
proprietary designs we have implemented and will proceed to patent in the development
of our EI Elemental geoexchange system. He serves as head of our research and
development program and oversees design and testing of the heat energy system.
Mr. Wuschke currently resides in British Columbia, Canada.
Peter Bond
has been our chief operating
officer since October 2004 and a director since August 2003.
Mr. Bond has over 18 years experience in the energy conservation
industry at various levels, including management, advisory, and consulting. Since 1999,
Mr. Bond has served as the general manager of Koax Corporation, a manufacturer of
heat pump components, responsible for all facets of operating the manufacturing
facility for heat pump components such as engineering, marketing, sales, and day-to-day
plant operations. From 1997-1999, Mr. Bond served as the director of plant
operations for Climate Master, Inc., of Oklahoma City, Oklahoma. He was in charge of
the entire plant, including the reorganizing of the manufacturing facility for Climate
Master, Inc. From 1993 to 1997, Mr. Bond was a principal of, and investor in,
Earth Energy Technologies of Billings, Montana. From 1984 through 1993, he served with
Water Furnace International Industries (WFI Industries) in various capacities, from a
principal and an officer to a role as a consultant, to his final role as the chief
operating officer in his last three years there. Mr. Bond currently resides in
British Columbia, Canada.
Board of Directors
Salvador Diaz-Verson has been a member of our board of directors
since September 1, 2006.
Mr. Diaz-Verson was the
president and chief investment officer of American Family Corporation, now known as
AFLAC, Inc., until he left in 1991. Mr. Diaz-Verson is the founder and principal
of Miramar Securities, a registered broker-dealer; the founder and owner of Diaz-Verson
Capital, LLC, which provides services to public and private pension funds, insurance
companies, and individuals; and the founder and chairman of United Americas Bank, a
national bank headquartered in Atlanta, Georgia. Mr. Diaz-Verson is also the
founder and chairman of Salvaco, a research and development company; a director and
minority owner of Clemente Capital, a money management firm; and a director of SIP
MULTI MEDIA Inc., a communication and network company. Mr. Diaz-Verson is a
graduate of Florida State University and is a resident of Sarasota, Florida.
Code of Ethics
We
have adopted a Code of Ethics that applies to all of our employees, including our
principal executive officer and principal financial officer. Our Code of Ethics was
included as Exhibit 14.01 to our annual report on Form 10-KSB for the year ended
October 31, 2004, filed on January 31, 2005.
23
ITEM 10. EXECUTIVE COMPENSATION
The
following table sets forth, for the last fiscal year, the dollar value of all cash and
noncash compensation earned by the person who was our chief executive officer and each
of our other highest compensated executive officers who earned in excess of $100,000
(the “Named Executive Officers”) as of the end of the last fiscal
year:
|
Name and Principal Position
|
Year Ended Oct. 31
|
Salary
($)
|
Bonus ($)
|
Stock
Award(s)
($)
|
Option Awards ($)
|
Non-Equity Incentive Plan
Compen-sation
|
Change in Pension Value and Non-Qualified Deferred
Compen-sation Earnings ($)
|
All Other Compen-sation ($)
|
Total ($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
Jason McDiarmid
|
2007
|
$174,625
|
--
|
--
|
--
|
--
|
--
|
--
|
$174,625
(1)
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth C.G. Telford
|
2007
|
$112,500
|
--
|
--
|
--
|
--
|
--
|
--
|
$112,500
(2)
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Bond
|
2007
|
$158,750
|
--
|
--
|
--
|
--
|
--
|
--
|
$158,750
(3)
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Wuschke
|
2007
|
$139,700
|
--
|
--
|
--
|
--
|
--
|
--
|
$139,700
(4)
|
|
Chief Technical Officer
|
|
|
|
|
|
|
|
|
|
________________________
|
(1)
|
Of the amount due Mr. McDiarmid for the fiscal year
ended October 31, 2007, $129,250 was converted into our common stock
and $45,375 remained accrued but unpaid at the end of the fiscal
year.
|
|
(2)
|
Of the amount due Mr. Telford for the fiscal year
ended October 31, 2007, $102,500 was converted into our common stock
and $10,000 remained accrued but unpaid at the end of the fiscal
year.
|
|
(3)
|
Of the amount due Mr. Bond for the fiscal year
ended October 31, 2007, $117,500 was converted into our common stock
and $41,250 remained accrued but unpaid at the end of the fiscal
year.
|
|
(4)
|
Of the amount due Mr. Wuschke for the fiscal year
ended October 31, 2007, $103,400 was converted into our common stock
and $36,300 remained accrued but unpaid at the end of the fiscal
year.
|
From
August 1, 2003, through the date of this report, payments due to each of the Named
Executive Officers have been paid in common stock, except for cash payments of
approximately $4,000 to one officer in 2003. See Item 12. Certain Relationships and
Related Transactions: Stock and Option Issuances. We cannot provide any assurance that
our Named Executive Officers will continue to be willing to accept this form of
payment. Mr. Telford assigned the right to receive amounts due to him to Denon
Capital Strategies Ltd., an entity of which he is a director.
24
The
following table reflects outstanding stock option awards classified as exercisable and
unexercisable as of October 31, 2007, for each of the Named Executive
Officers:
|
|
Option Awards
|
Stock Awards
|
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(1)
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options(#)
|
Option
Exercise
Price($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock
Held That
Have Not
Vested(#)
|
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested($)
(2)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested($)
|
|
|
|
|
|
|
|
|
|
|
|
|
Jason McDiarmid
|
363,000
|
--
|
--
|
0.75
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
1.00
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.30
|
01/31/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.53
|
04/30/2011
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.25
|
10/31/2011
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.50
|
10/31/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
1.00
|
07/31/2012
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.25
|
07/31/2012
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.50
|
07/31/2012
|
--
|
--
|
--
|
--
|
|
Kenneth Telford
|
112,500
|
--
|
--
|
0.50
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
462,500
|
--
|
--
|
1.00
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.30
|
01/31/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.53
|
04/30/2011
|
--
|
--
|
--
|
--
|
|
Peter Bond
|
225,000
|
--
|
--
|
1.00
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
225,000
|
--
|
--
|
1.50
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.30
|
01/31/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.53
|
04/30/2011
|
--
|
--
|
--
|
--
|
|
Steve Wuschke
|
362,000
|
--
|
--
|
0.75
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
1.00
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.25
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
25,000
|
--
|
--
|
0.50
|
04/30/2010
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.30
|
01/31/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
0.53
|
04/30/2011
|
--
|
--
|
--
|
--
|
|
|
250,000
|
--
|
--
|
1.00
|
07/31/2012
|
--
|
--
|
--
|
--
|
Director Compensation
We
did not pay our nonemployee director, Salvador Diaz-Verson, any compensation for his
service as a director during the fiscal year ended October 31, 2007.
25
Equity Compensation Plan Information
We
have authorized securities for issuance under equity compensation plans that have not
been approved by the stockholders, but none under equity compensation plans that were
approved by the stockholders. The following table shows the aggregate amount of
securities authorized for issuance under all equity compensation plans as of February
11, 2008:
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and
rights
(a)
|
|
Weighted-average exercise
price of outstanding
options, warrants
and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by security holders
|
|
--
|
|
--
|
|
--
|
|
Equity compensation
plans not approved by security holders
|
|
11,019,887
|
|
$0.67
|
|
--
|
|
Total
|
|
11,019,887
|
|
$0.67
|
|
--
|
These options are vested and have exercise prices ranging from $0.25 to
$2.00, and expire beginning in 2008 and ending in 2013.
Indemnification of Officers and Directors
Our
articles of incorporation and bylaws provide for the indemnification of our officers,
directors, and others to the maximum extent permitted by Nevada law. Accordingly, our
officers and directors would be entitled to indemnification under a variety of
circumstances, which may include liabilities under the Securities Act of
1933.
Insofar as indemnification under the Securities Act of 1933 may be
permitted to directors, officers, and controlling persons pursuant to the foregoing
provisions, we have been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is contrary to public policy as expressed in the
Securities Act of 1933 and therefore is unenforceable.
Limitation on Liability
Our
articles of incorporation limit the liability of directors to the maximum extent
permitted by Nevada law. In addition, our bylaws require us to indemnify our directors
and officers and allow us to indemnify our other employees and agents to the fullest
extent permitted at law. At present, we are aware of no material pending litigation or
proceeding involving any director, officer, employee, or agent in which indemnification
will be required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification. If we permit
indemnification for liabilities arising under the Securities Act to directors,
officers, or controlling persons under these provisions, we have been informed that, in
the opinion of the Securities and Exchange Commission, this indemnification is against
public policy as expressed in the Securities Act and is unenforceable.
26
A
majority of our directors are residents of Canada. As a result, it may be difficult for
our stockholders residing in the United States to effect service of process within the
United States upon our directors and experts who are not residents of the United
States. It may also be difficult to realize in the United States upon judgments of
courts of the United States predicated upon civil liability of such directors and
experts under the United States federal securities laws. Canadian courts may not
(i) enforce judgments of United States courts of competent jurisdiction obtained
against such directors or experts predicated upon the civil liabilities provisions of
such securities laws, or (ii) impose liabilities in original actions against such
directors and experts predicated solely upon such securities laws. Accordingly, United
States stockholders may be forced to bring actions against our directors and experts
under Canadian law and in Canadian courts in order to enforce any claims that they may
have against such directors and experts. Subject to necessary registration under
applicable provincial corporate statutes in the case of a corporate stockholder,
Canadian courts do not restrict the ability of nonresident persons to sue in their
courts.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information as of February 11, 2008, with respect to
the beneficial ownership of our common stock by each beneficial owner of more than 5%
of the outstanding shares of our common stock, each director and executive officer, and
all executive officers and directors as a group, specifically indicating the number of
shares of common stock owned by each such person and group and the percentage of our
common stock so owned. Each person has sole voting and investment power with respect to
the shares of common stock, except as otherwise indicated:
|
Stockholder
(1)
|
|
Description
|
|
Number
|
|
%
(2)
|
|
|
|
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurus Master Fund
|
|
Common stock
|
|
1,557,822
|
|
3.4%
|
|
c/o MSC Corporate Services Limited
|
|
Warrants
|
|
1,329,882
|
|
2.8
|
|
P.O. Box 309 GT
|
|
|
|
2,887,704
|
|
5.9
|
|
Ugland House, South Church Street
|
|
|
|
|
|
|
|
George Town, Grand Cayman
|
|
|
|
|
|
|
|
Cayman Islands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth G.C. Telford
|
|
Common stock
(3)
|
|
1,367,719
|
|
3.0
|
|
Makati City
|
|
Options
(4)
|
|
1,075,000
|
|
2.3
|
|
Metro Manila
|
|
Warrants
(4)
|
|
1,048,750
|
|
2.2
|
|
Philippines
|
|
|
|
3,840,647
|
|
7.2
|
|
|
|
|
|
|
|
|
|
Officers and Directors:
|
|
|
|
|
|
|
|
Jason McDiarmid
|
|
Common stock
|
|
2,620,060
|
|
5.7
|
|
(Principal stockholder, director, and
officer)
|
|
Options
(4)
|
|
1,463,000
|
|
3.1
|
|
#101-5219 192nd Street
|
|
Warrants
|
|
1,166,283
|
|
2.5
|
|
Cloverdale, BC, Canada V3S 4P6
|
|
|
|
5,199,343
|
|
10.7
|
|
|
|
|
|
|
|
|
|
Steve Wuschke
|
|
Common stock
|
|
2,077,838
|
|
4.5
|
|
(Principal stockholder, director, and
officer)
|
|
Options
(4)
|
|
1,412,000
|
|
3.0
|
|
#101-5219 192nd Street
|
|
Warrants
|
|
603,119
|
|
1.3
|
|
Cloverdale, BC, Canada V3S 4P6
|
|
|
|
4,092,957
|
|
8.5
|
|
|
|
|
|
|
|
|
27
|
Peter Bond
|
|
Common stock
|
|
2,685,371
|
|
5.8
|
|
(Principal stockholder, director, and
officer)
|
|
Options
(4)
|
|
950,000
|
|
2.0
|
|
#101-5219 192nd Street
|
|
Warrants
|
|
806,349
|
|
1.7
|
|
Cloverdale, BC, Canada V3S 4P6
|
|
|
|
4,441,720
|
|
9.2
|
|
|
|
|
|
|
|
|
|
Stevan Perry
|
|
Common stock
|
|
1,530,000
|
|
3.3
|
|
(Principal stockholder and officer)
|
|
Options
(4)
|
|
1,303,000
|
|
2.7
|
|
#101-5219 192nd Street
|
|
Warrants
|
|
517,315
|
|
1.1
|
|
Cloverdale, BC, Canada V3S 4P6
|
|
|
|
3,350,315
|
|
7.0
|
|
|
|
|
|
|
|
|
|
Salvador Diaz-Verson
|
|
Common stock
|
|
175,000
|
|
*
|
|
(Director)
|
|
Options
(4)
|
|
250,000
|
|
*
|
|
#101-5219 192nd Street
|
|
|
|
425,000
|
|
*
|
|
Cloverdale, BC, Canada V3S 4P6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors
as a group (5 persons)
|
|
Common stock
|
|
9,088,269
|
|
19.6
|
|
|
|
Options
(4)
|
|
5,378,000
|
|
10.4
|
|
|
|
Warrants
(4)
|
|
3,093,066
|
|
6.3
|
|
|
|
|
|
17,559,335
|
|
32.1%
|
___________________
|
(1)
|
Except as otherwise noted, shares are owned beneficially
and of record, and such record stockholder has sole voting, investment,
and dispositive power.
|
|
(2)
|
Calculations of total percentages of ownership
outstanding for each individual assume the exercise of currently vested
options held by that individual to which the percentage relates.
Percentages calculated for totals of all executive officers and
directors as a group assume the exercise of all vested options held by
the indicated group.
|
|
(3)
|
1,117,719 of the shares listed in the table that are
beneficially owned by Mr. Telford are registered and held in the
name of Denon Capital Strategies Ltd.
|
|
(4)
|
These vested cashless options and cashless warrants give
the holders the right to acquire shares of common stock at prices
ranging from $0.25 to $2.00 per share with various expiration dates
ranging from 2008 to 2012.
|
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Stock, Option, and Warrant Issuances
In
October 2006, we agreed to issue 110,000 shares of our common stock and warrants to
purchase an additional 110,000 shares of our common stock with an exercise price of
$0.25 per share and an expiration date of October 30, 2011, to Jason McDiarmid, our
chief executive officer and a director, as payment for accrued but unpaid wages in the
amount of $27,500, or $0.25 per share.
In
July 2007, we agreed to issue 924,000 shares of our common stock to Mr. McDiarmid,
as payment for accrued but unpaid wages in the amount of $115,500, or $0.125 per
share.
In
November 2007, we agreed to issue 55,000 shares of our common stock and warrants to
purchase an additional 55,000 shares with an exercise price of $0.25 per share and an
expiration date of October 31, 2011, to Mr. McDiarmid as payment for accrued but
unpaid wages in the amount of $13,750.
28
In
October 2006, we agreed to issue 88,000 shares of our common stock and warrants to
purchase an additional 88,000 shares of our common stock with an exercise price of
$0.25 per share and an expiration date of October 30, 2011, to Steve Wuschke, our chief
technical officer and a director, as payment for accrued but unpaid wages in the amount
of $22,000, or $0.25 per share.
In
July 2007, we agreed to issue 739,200 shares of our common stock to Mr. Wuschke as
payment for accrued but unpaid wages in the amount of $92,400, or $0.125 per
share.
In
November 2007, we agreed to issue 44,000 shares of our common stock and warrants to
purchase an additional 44,000 shares with an exercise price of $0.25 per share and an
expiration date of October 31, 2011, to Mr. Wuschke as payment for accrued but
unpaid wages in the amount of $11,000.
In
October 2006, we agreed to issue 100,000 shares of our common stock and warrants to
purchase an additional 100,000 shares of our common stock with an exercise price of
$0.25 per share and an expiration date of October 30, 2011, to Kenneth Telford, then
our chief financial officer and a director, as payment for accrued but unpaid wages in
the amount of $25,000, or $0.25 per share.
In
July 2007, we agreed to issue 720,000 shares of our common stock to Mr. Telford as
payment for accrued but unpaid wages in the amount of $90,000, or $0.125 per
share.
In
November 2007, we agreed to issue 50,000 shares of our common stock and warrants to
purchase an additional 50,000 shares with an exercise price of $0.25 per share and an
expiration date of October 31, 2011, to Mr. Telford as payment for accrued but
unpaid wages in the amount of $12,500.
In
October 2006, we agreed to issue 100,000 shares of our common stock and warrants to
purchase an additional 100,000 shares of our common stock with an exercise price of
$0.25 per share and an expiration date of October 30, 2011, to Peter Bond, our chief
operating officer and a director, as payment for accrued but unpaid wages in the amount
of $25,000, or $0.25 per share.
In
July 2007, we agreed to issue 840,000 shares of our common stock to Mr. Bond as
payment for accrued but unpaid wages in the amount of $105,000, or $0.125 per
share.
In
November 2007, we agreed to issue 50,000 shares of our common stock and warrants to
purchase an additional 50,000 shares with an exercise price of $0.25 per share and an
expiration date of October 31, 2011, to Mr. Bond as payment for accrued but unpaid
wages in the amount of $12,500.
In
October 2006, we agreed to issue 114,000 shares of our common stock and warrants to
purchase an additional 114,000 shares of our common stock with an exercise price of
$0.25 per share and an expiration date of October 30, 2011, to Stevan Perry, an
employee and principal stockholder, as payment for accrued but unpaid wages in the
amount of $28,500, or $0.25 per share.
In
July 2007, we agreed to issue 723,200 shares of our common stock to Mr. Perry as
payment for accrued but unpaid wages in the amount of $90,400, or $0.125 per
share.
In
November 2007, we agreed to issue 42,000 shares of our common stock and warrants to
purchase an additional 42,000 shares with an exercise price of $0.25 per share and an
expiration date of October 31, 2011, to Mr. Perry as payment for accrued but
unpaid wages in the amount of $10,500.
In
August 2007, Laurus Master Fund, a principal stockholder, exercised a warrant that
resulted in our issuance of 1,557,822 shares of common stock to Laurus.
29
Loans
Officers and Directors
From
time to time, our officers and directors advance expenses or make other payments on our
behalf. We treat these advances and payments as loans that are unsecured, without
specific terms of repayment, and do not bear interest.
We
owed Jason McDiarmid, our chief executive officer and director, $32,571 in such
advances at October 31, 2006. During the fiscal year ended October 31, 2007, we
borrowed an additional $77,592 from Mr. McDiarmid, repaid him an aggregate of
$64,233 in cash, and had a balance of $46,939 owing to him at October 31,
2007.
We
owed Kenneth Telford, who resigned as our chief financial officer and director in
September 2007, $14,011 in such advances at October 31, 2006. During the fiscal year
ended October 31, 2007, we borrowed an additional $30,270 from Mr. Telford, repaid
him an aggregate of $6,204 in cash, and had a balance of $38,029 at October 31,
2007.
We
owed Steve Wuschke, an executive officer and director, $8,236 in such advances at
October 31, 2006. During the fiscal year ended October 31, 2007, we borrowed an
additional $63,416 from Mr. Wuschke, repaid him an aggregate of $34,800 in cash,
and had a balance of $50,183 at October 31, 2007.
We
owed Peter Bond, an executive officer and director, $23,778 in such advances at October
31, 2006. During the fiscal year ended October 31, 2007, we borrowed an additional
$58,688 from Mr. Bond, repaid him an aggregate of $20,326, and had a balance of
$66,302 owing to him at October 31, 2007.
Morpheus Financial Corporation
In
September 2006, Morpheus loaned us $50,000 CAD, due September 30, 2006, with interest
at 15%. We also granted options to purchase 150,000 shares of our common stock at $0.30
per share until 2011.
Director Independence
During the fiscal year ended October 31, 2007, our board of directors
consisted of Jason McDiarmid, Ken Telford (through September 20, 2007), Steve Wuschke,
Peter Bond, and Salvador Diaz-Verson. Only Mr. Diaz-Verson is independent as that
term is defined in NASDAQ Rule 4200(a)(15). Each of the other directors was also our
executive officer.
We
are not subject to any requirement that we have an independent audit committee, and our
board of directors as a whole serves as our audit committee. Mr. Diaz-Verson is
independent as that term is defined under NASDAQ Rule 4350(d)(2)(A).
There were no transactions between us and Mr. Diaz-Verson to be
considered in determining whether he was independent under the standards identified
above.
30
ITEM 13. EXHIBITS
|
Exhibit
Number*
|
|
Title of Document
|
|
Location
|
|
|
|
|
|
|
|
Item 3.
|
|
Articles of Incorporation and Bylaws
|
|
|
|
3.01
|
|
Articles of Incorporation
|
|
Incorporated by reference from the registration
statement on Form SB-2, SEC File No. 333-106839, filed July 7,
2003.
|
|
|
|
|
|
|
|
3.02
|
|
Articles of Amendment to the Articles of
Incorporation
|
|
Incorporated by reference from the registration
statement on Form SB-2, SEC File No. 333-106839, filed July 7,
2003.
|
|
|
|
|
|
|
|
3.03
|
|
Bylaws
|
|
Incorporated by reference from amendment no. 1 to the
registration statement on Form SB-2, SEC File No. 333-106839, filed
September 12, 2003.
|
|
|
|
|
|
|
|
Item 4.
|
|
Instruments Defining the Rights of Holders, Including
Indentures
|
|
|
|
4.01
|
|
Specimen stock certificate
|
|
Incorporated by reference from the registration
statement on Form SB-2, SEC File No. 333-106839, filed July 7,
2003.
|
|
|
|
|
|
|
|
Item 10.
|
|
Material Contracts
|
|
|
|
10.12
|
|
Form of Subscription Agreement
|
|
Incorporated by reference from amendment no. 1 to the
registration statement on Form SB-2, SEC File No. 333-106839, filed
September 12, 2003.
|
|
|
|
|
|
|
|
10.22
|
|
Agreement to Provide Exclusive Geoexchange Project
Services between Diamondview Developments Ltd., Essential Innovations
Technology Corp., and Essential Innovations Corporation dated April 7,
2005
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB/A for the quarter ended April 30, 2005, SEC File No. 333
106839, filed June 23, 2005.
|
|
|
|
|
|
|
|
10.27
|
|
Share Purchase Agreement among Earth Source Energy Inc.,
Pacific Geo Exchange Inc., Mueller Family Trust, Jade Eagle Trust,
Aries Developments Ltd., Lynn Mueller, Mark McCooey, Paul Callon, and
Essential Innovations Technology Corp. dated February 3,
2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
31
|
Exhibit
Number*
|
|
Title of Document
|
|
Location
|
|
|
|
|
|
|
|
10.28
|
|
Addendum to the Share Purchase Agreement among Earth
Source Energy Inc., Pacific Geo Exchange Inc., Mueller Family Trust,
Jade Eagle Trust, Aries Developments Ltd., Lynn Mueller, Mark McCooey,
Paul Callon, and Essential Innovations Technology Corp. dated February
8, 2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.29
|
|
Addendum #2 to the Share Purchase Agreement among Earth
Source Energy Inc., Pacific Geo Exchange Inc., Mueller Family Trust,
Jade Eagle Trust, Aries Developments Ltd., Lynn Mueller, Mark McCooey,
Paul Callon, and Essential Innovations Technology Corp. dated March 6,
2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.30
|
|
Security and Purchase Agreement by and among Laurus
Master Fund, Ltd. and Essential Innovations Technology Corp., with
Essential Innovations Corp., as guarantor, made as of March 2,
2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.31
|
|
Registration Rights Agreement between Essential
Innovations Technology Corp. and Laurus Master Fund, Ltd. dated
March 2, 2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.32
|
|
Secured Term Note for $2,000,000 payable to Laurus
Master Fund, Ltd. dated March 2, 2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.34
|
|
Master Security Agreement between Laurus Master Fund,
Ltd. and Essential Innovations Technology Corp. and Essential
Innovations Corporation dated March 2, 2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
32
|
Exhibit
Number*
|
|
Title of Document
|
|
Location
|
|
10.35
|
|
Common Stock Purchase Warrant
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.36
|
|
Share Pledge Agreement among Laurus Master Fund, Ltd.,
Essential Innovations Technology Corp., and Essential Innovations
Corp., dated March 2, 2006
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.37
|
|
Term Sheet between Essential Innovations Technology
Corp. and Salvador Diaz-Verson dated September 1, 2006**
|
|
Incorporated by reference from the current report on
Form 8-K filed September 11, 2006.
|
|
|
|
|
|
|
|
10.39
|
|
Agreement between Wakefield Beach Developments Ltd. and
Essential Innovations Corporation dated January 17, 2006
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
|
10.40
|
|
Employment Agreement between Essential Innovations
Technology Corp. and Jason McDiarmid dated April 1, 2006**
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
|
10.41
|
|
Employment Agreement between Essential Innovations
Technology Corp. and Ken Telford dated April 1, 2006**
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
10.42
|
|
Employment Agreement between Essential Innovations
Technology Corp. and Steve Wuschke dated April 1, 2006**
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
33
|
Exhibit
Number*
|
|
Title of Document
|
|
Location
|
|
10.43
|
|
Employment Agreement between Essential Innovations
Technology Corp. and Peter Bond dated April 1, 2006**
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
|
10.44
|
|
Employment Agreement between Essential Innovations
Technology Corp. and Stevan Perry dated April 1, 2006**
|
|
Incorporated by reference from the quarterly report on
Form 10-QSB for the quarter ended January 31, 2006, filed March 17,
2006.
|
|
|
|
|
|
|
|
10.45
|
|
Severance Agreement with related employee schedule dated
April 1, 2006**
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
|
10.47
|
|
Loan Agreement between Morpheus Financial Corporation
and Essential Innovations Technology Corp. dated August 15,
2006
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
|
|
|
|
|
|
|
10.49
|
|
Joint Development Agreement by and between Essential
Innovations Technology Corp, Dragonfly Capital, and Optimira Energy
Canada, Ltd., dated September 6, 2007
|
|
This filing.
|
|
|
|
|
|
|
|
Item 14.
|
|
Code of Ethics
|
|
|
|
14.01
|
|
Code of Ethics
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2004, SEC File No. 333 106839,
filed January 31, 2005.
|
|
|
|
|
|
|
|
Item 21.
|
|
Subsidiaries of the Registrant
|
|
|
|
21.01
|
|
Schedule of Subsidiaries
|
|
Incorporated by reference from the annual report on Form
10-KSB for the year ended October 31, 2006, filed February 13,
2007.
|
34
|
Exhibit
Number*
|
|
Title of Document
|
|
Location
|
|
|
|
|
|
|
|
Item 31.
|
|
Rule 13a-14(a)/15d-14(a)
Certifications
|
|
|
|
31.01
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14
|
|
This filing.
|
|
|
|
|
|
|
|
31.02
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14
|
|
This filing.
|
|
|
|
|
|
|
|
Item 32.
|
|
Section 1350 Certifications
|
|
|
|
32.01
|
|
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
This filing.
|
|
|
|
|
|
|
|
32.02
|
|
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
This filing.
|
_______________
|
*
|
The number preceding the decimal indicates the
applicable SEC reference number in Item 601, and the number following
the decimal indicating the sequence of the particular document. Omitted
numbers in the sequence refer to documents previously filed with the
SEC as exhibits to previous filings, but no longer required.
|
|
**
|
Identifies each management contract or compensatory plan
or arrangement required to be filed as an exhibit as required by Item
13 of Form 10-KSB.
|
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The
aggregate fees billed by Peterson Sullivan PLLC for professional services rendered for
the audit of our annual consolidated financial statements during the fiscal year ended
October 31, 2007, and for the reviews of the consolidated financial statements included
in our quarterly reports on Form 10-QSB for that fiscal year were $79,200. The
aggregate fees billed by Peterson Sullivan PLLC for professional services rendered for
the audit of our annual consolidated financial statements and for the reviews of the
consolidated financial statements included in our quarterly reports on Form 10-QSB
during the fiscal year ended October 31, 2006, were $47,719.
Audit Related Fees
Peterson Sullivan PLLC did not bill us for any professional services
that were reasonably related to the performance of the audit or review of financial
statements for either the fiscal year ended October 31, 2007, or the fiscal year
ended October 31, 2006, that are not included under Audit Fees above.
Tax Fees
Peterson Sullivan PLLC billed $11,600 and $2,964 for the fiscal years
ended October 31, 2007 and 2006, respectively, for professional services rendered for
tax compliance, tax advice, and tax planning.
All Other Fees
Peterson Sullivan PLLC did not perform any services for us or charge any
fees other than the services described above for either the fiscal year ended
October 31, 2007, or the fiscal year ended October 31, 2006.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting
Policies
Organization
Essential Innovations Technology Corp. (the “Company”) was
incorporated under the laws of the state of Nevada on April 4, 2001. The
Company’s subsidiary, Essential Innovations Corporation (“EIC”) is
engaged in the manufacturing, installation, and distribution of the “EI Elemental
Heat Energy System” family of geo exchange heat products and technology in North
America, though its sales to date are primarily in western Canada. On March 6,
2006, the Company acquired all of the issued and outstanding shares of Pacific Geo
Exchange Inc. (“PGE”) and its wholly-owned subsidiary, Earth Source Energy
Inc. (“ESE”), which is engaged in the design and installation of geo
exchange systems in western Canada. Until January 31, 2005, the Company was in the
development stage and substantially all of the Company’s efforts had been
directed towards product and distribution chain development primarily in western
Canada. Effective as of February 1, 2005, the Company had sales of these products
and management determined that the Company had emerged from the development
stage.
Future Operations
The
Company’s consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States applicable to a going
concern which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. As discussed above, the Company recently emerged from
the development stage and it has not yet generated positive cash flows from operations.
It is the Company’s intention to raise additional equity to finance the further
development of a market for its products until positive cash flows can be generated
from its operations. However, there can be no assurance that such additional funds will
be available to the Company when required or on terms acceptable to the Company. Such
limitations could have a material adverse effect on the Company’s business,
financial condition or operations, and these consolidated financial statements do not
include any adjustment that could result. Failure to obtain sufficient additional
funding would necessitate the Company to reduce or limit its operating activities or
even discontinue operations.
Basis of Consolidation
These consolidated financial statements include the accounts of
Essential Innovations Technology Corp. and its wholly-owned subsidiaries, Essential
Innovations Asia Limited (“EIA”), EIC, PGE and ESE. All significant
inter-company balances and transactions have been eliminated.
Cash
Cash
consists of checking accounts held at financial institutions in Canada and Hong Kong.
At times cash balances may exceed insured limits.
Accounts Receivable
Accounts receivable result primarily from installation contracts and the
sale of geothermal products and are recorded at their principal amounts. Receivables
are considered past due after 30 days. When necessary, the Company provides an
allowance for doubtful accounts that is based on a review of outstanding receivables,
historical collection information, and current economic conditions. There is an
allowance for doubtful accounts of $84,526 at October 31, 2007. Receivables are
generally unsecured. At October 31, 2007, two customers accounted for 30% of the
net accounts receivable balance.
F-8
As
of October 31, 2007, accounts receivable totaling $136,886 were in dispute by the
Company's customers and the Company has filed certain legal claims in an attempt to
recover those amounts. These factors have been considered in the Company's estimate of
allowance for doubtful accounts.
Inventory
Inventory consists primarily of raw materials used in the manufacture of
geo exchange products which are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation,
unless the estimated future undiscounted cash flows expected to result from either the
use of an asset or its eventual disposition is less than its carrying amount in which
case an impairment loss is recognized based on the fair value of the asset.
Depreciation of property and equipment is based on the estimated useful
lives of the assets and is computed using straight-line and accelerated methods over
lives ranging between three and five years. Leasehold improvements are amortized over
the shorter of the term of the associated lease or estimated useful life. Repairs and
maintenance are charged to expense as incurred. Expenditures that substantially
increase the useful lives of existing assets are capitalized.
Goodwill
Goodwill arose upon the acquisition of PGE in March 2006 and represents
the excess of cost of acquisition over the fair value of the identifiable assets
acquired less liabilities assumed. The Company’s policy is to review the carrying
value of goodwill on at least an annual basis and between annual tests if indicators of
potential impairment exist and record any impairment at that time.
During the year ended October 31, 2007, the Company reorganized the
operations of its PGE subsidiary. In the opinion of the Company’s management, the
value of the goodwill recorded upon the acquisition of the subsidiary was eroded and
the Company recorded a non-cash impairment charge of $2,033,948 against operations
representing a write-off of all goodwill.
Intangible Assets
Intangible assets consist of geo-site rights and 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.
Revenue Recognition
Revenues from the sales of geo exchange products are recognized as the
sales are made, the price is fixed and determinable, collectibility is probable, and no
significant Company obligations with regard to the products remain.
Revenue from construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to date
to estimated total costs for each contract. Because of the inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates used may change
in the near term. If estimated costs to complete long-term contracts indicate a loss,
provision is made in the current period for the total anticipated loss. The lives of
contracts entered into are typically twelve months or less, but performance may require
two construction seasons.
F-9
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents revenues recognized in advance of amounts billed.
Conversely, the liability, “Billings in excess of costs and estimated earnings on
uncompleted contracts,” represents amounts billed in advance of revenues
recognized.
Shipping and Handling Expenses
Shipping and handling costs are expensed as incurred. Shipping and
handling costs of $19,986 in 2007 and $14,998 in 2006 are included with costs of sales
on the accompanying consolidated statements of operations.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising costs of $2,371
in 2007 and $11,678 in 2006 are included in general and administrative expenses on the
accompanying consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. To the extent that it is not considered to be
more likely than not that a deferred tax asset will be realized, a valuation allowance
is provided.
Investment Tax Credits
The
Company follows the cost reduction method of accounting for investment tax credits
(“ITC”) whereby the benefit of assistance is recognized as a reduction in
the cost of the related capital asset or expenditure when receipt of the ITC is
considered to be reasonably assured. Any adjustments necessary to ITC are recorded in
the period the adjustments are known.
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 years ended October 31, 2007 and 2006, 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)
Statement of Financial Accounting Standards (“SFAS”) No. 130
establishes standards for reporting comprehensive income (loss) and its components in
financial statements. Other comprehensive income (loss), as defined, includes all
changes in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any significant transactions that are required to be reported in
other comprehensive income (loss), except for foreign currency translation
adjustments.
F-10
Foreign Operations and Currency Translation
The
Company translates foreign assets and liabilities of its subsidiaries, other than those
denominated in U.S. dollars, at the rate of exchange at the balance sheet date.
Revenues and expenses are translated at the average rate of exchange throughout the
year. Gains or losses from these translations are reported as a separate component of
other comprehensive income (loss), until all or a part of the investment in the
subsidiaries is sold or liquidated. The translation adjustments do not recognize the
effect of income tax because the Company expects to reinvest the amounts indefinitely
in operations.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the local functional currency are
included in general and administrative expenses.
Use of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the
fiscal year. The Company makes estimates for, among other items, percentage of
completion method of accounting for revenue from construction contracts, determination
of inventory at the lower of cost or market, useful lives for depreciation and
amortization, determination of future cash flows associated with impairment testing for
goodwill and long-lived assets, determination of the fair value of stock options and
warrants, determination of warranty accruals and allowances for doubtful accounts. 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: cash, accounts receivable, accounts
payable, accrued expenses and wages, loans payable, 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 its share-based compensation under the provisions of FASB
Statement No. 123(R),
Share-Based
Payment
, (“FAS 123R”). The Company adopted FAS
123R as of November 1, 2005, using the modified prospective application method.
The adoption of FAS 123R resulted in additional compensation of $1,975,783 being
recorded in the year ended October 31, 2006, which resulted in a net effect on basic
and diluted loss per share of $(0.08). There was no impact on cash flows.
Note
2. Recent Accounting Pronouncements
The
Emerging Issues Task Force, or EITF, reached consensus on Issue No. 03-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,” which provides guidance on determining when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. The Financial Accounting Standards Board, or FASB,
issued FASB Staff Position, or FSP, EITF 03-1-1, “Effective Date of Paragraphs
10-20 of EITF Issue No. 03-1,” “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” which delays the
effective date for the measurement and recognition criteria contained in EITF 03-1
until final application guidance is issued. The adoption of this consensus or FSP is
expected to have no impact on the Company’s consolidated financial
statements.
F-11
SFAS
No. 157, “Fair Value Measurements” is effective for fiscal years beginning
after November 15, 2007. This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 changes the definition of fair
value, the methods used to measure fair value, and expands disclosures about fair value
measurements and emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset or
liability. The adoption of SFAS No. 157 is not expected to impact the Company’s
consolidated financial statements.
In
July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.” This
interpretation provides guidance for recognizing and measuring uncertain tax positions,
as defined in SFAS No. 109, “Accounting for Income Taxes.”FIN No. 48
prescribes a threshold condition that a tax position must meet for any of the benefit
of an uncertain tax position to be recognized in the financial statements. Guidance is
also provided regarding derecognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company does not expect that this interpretation will have a material impact
on its financial position, results of operations, or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for fiscal
years beginning after December 15, 2008. The adoption of SFAS 141(R) will have an
impact on accounting for business combinations once adopted, but the effect is
dependent upon acquisitions at that time.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the interests of
the parent and the interests of the non-controlling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The adoption of SFAS No. 160 is not
expected to impact the Company’s consolidated financial statements.
Note
3. Uncompleted Contracts
Costs, estimated earnings, and billings on uncompleted contracts are
summarized as follows:
|
Costs incurred on uncompleted contracts
|
$ 59,558
|
|
Estimated earnings
|
293,811
|
|
|
353,369
|
|
Billings to date
|
(395,596)
|
|
|
$ (42,227)
|
F-12
Included in the accompanying balance sheet under the following
captions:
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
$ 9,929
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
(52,156)
|
|
|
$ (42,227)
|
Note
4. Property and Equipment, net
Property and equipment consist of the following as of October 31,
2007:
|
Office furniture and equipment
|
|
$ 80,074
|
|
Leasehold improvements
|
|
55,197
|
|
Computer equipment
|
|
68,263
|
|
Computer software
|
|
38,982
|
|
|
|
242,516
|
|
Less accumulated depreciation
|
|
(157,012)
|
|
|
|
$ 85,504
|
Note
5. Intangible Assets
Intangible assets consist of the following as of October 31,
2007:
|
Geo-site rights
|
|
$ 477,028
|
|
Intellectual property
|
|
41,379
|
|
|
|
518,407
|
|
Less accumulated amortization
|
|
(42,041)
|
|
|
|
$ 476,366
|
Geo-Site Rights
During 2005, the Company acquired the exclusive rights to provide a
geo-field operating lease and to supply its heating and cooling units to a new
residential subdivision in Westbank, British Columbia, for 225,000 shares of the
Company’s common stock with a fair value of $225,000 and 150,000 options, with a
fair value of $47,468, exercisable until 2010, redeemable for 150,000 shares of the
Company’s common stock, 75,000 at $0.75 per share and 75,000 at $1.00 per share.
The Company guaranteed that the 225,000 shares of the Company’s common stock
would have an aggregate fair market value of at least $225,000 one year after issuance,
and if the aggregate fair market value is less than $225,000, the Company would issue
additional shares of common stock to make the aggregate value $225,000.
The
225,000 shares issued in 2005 had an aggregate value of $112,500 and during 2006, the
Company issued an additional 225,000 shares of the Company’s common stock to make
up the deficit. The total cost of $434,987 will be amortized on a pro rata per-unit
basis as residential lots are sold. During the year ended October 31, 2007, $42,041 of
amortization was recognized.
F-13
Intellectual Property
The
Company acquired certain proprietary information that provides the basis for the
effective implementation and operation of the geo-utility business concept in return
for 75,000 fully paid and non-assessable shares of common stock with a fair value of
$30,000 and options to purchase 150,000 shares of common stock, 37,500 at $0.75 per
share and 37,500 at $1.00 per share exercisable until July 31, 2009 and 37,500 at
$1.25 per share and 37,500 at $1.50 per share exercisable until July 31, 2010.
These have been recorded at the fair value of $57,496. In addition, the vendor is
entitled to a royalty of 2.5% from gross revenue of geo-utility projects in which the
Company is directly involved and 0.5% of gross fees from geo-utility projects when the
Company provides project management. This intangible asset has an indefinite life. The
Company has not earned any gross revenue from geo-utility projects and, accordingly, no
royalty expense is included in the accompanying consolidated statements of operations.
Management evaluates the asset for impairment on at least an annual basis and recorded
an impairment loss of $41,378 during 2006. Management determined that no further
impairment occurred in 2007.
Option Rights Agreement
During 2005, the Company obtained the exclusive rights to acquire a new
technology within the geothermal heating and cooling and any other heating,
ventilating, and air conditioning related application from a director of the Company
and his partner, who is the father of the Company’s Chief Executive Officer. This
agreement was modified in April 2006 to reduce the cost to exercise the option. The
Company paid for this option by issuing 50,000 fully paid and non-assessable shares of
its common stock, with a fair value of $25,000 and options to acquire 50,000 shares of
the Company’s common stock at a price of $0.75 per share exercisable for five
years. These shares and share options were recorded at a fair value of $55,156. During
2007, the Company determined not to exercise this option, and it expired in September
2007. The cost was fully amortized in 2006.
Note 6. Related-Party Transactions and Balances
Loans Payable, Related Parties
During 2003, a director and officer of the Company made an unsecured
loan to the Company in the amount of $30,600, due on demand, payable monthly as to
interest only at 8%, with the principal to be repaid in full on or before April 1,
2004. In connection with this loan, options were granted which entitle the holder to
purchase 50,000 shares of common stock of the Company until 2012: 25,000 at $0.25 per
share and 25,000 at $0.50 per share. The fair value of the options of $37,978 was
recorded as interest expense during 2003. During 2004, the loan was extended and the
Company agreed to pay an additional $6,511 in refinancing costs. The balance remaining
at October 31, 2007 is $11,195.
During 2006, two related parties made unsecured loans to the Company
totaling $61,191, due September 30, 2006, with interest at 15%. The Company also
granted options to purchase 195,000 shares of common stock of the Company until 2011 at
$0.30 per share. The fair value of the warrants of $69,787 was recorded as interest
expense during 2006. The full amount of $61,191 remains due to these related parties at
October 31, 2007.
During 2007, a related party who was an officer of the acquired ESE
subsidiary paid off the balance of a finance loan on behalf of the Company. A balance
of $15,717 remains outstanding to this related party as of October 31, 2007.
F-14
Due to Shareholders
Amounts due to shareholders at October 31, 2007 are unsecured,
without specific terms of repayment and non-interest-bearing. During 2006, $161,094 of
amounts due to shareholders were settled by issuing 536,979 shares of common stock and
warrants to purchase 536,979 shares of common stock at $0.30 per share until 2011,
based on the fair value of the shares of common stock at the transaction date. The
balance remaining due at October 31, 2007 is $213,442.
Other Related Party Transactions:
|
|
•
|
During 2007 and 2006, the Company incurred consulting
fees and related expenses to a company controlled by an officer and
director of the Company in the amount of $112,500 and $150,000,
respectively. During 2007, $102,500 was converted into 770,000 shares
of common stock. In addition, warrants to purchase 50,000 shares of
common stock of the Company at $0.25 per share until 2011 were also
issued as part of one of the conversions. During 2006, $150,000 of the
amount owing plus $37,500 of amounts owing at October 31, 2005,
were converted into 575,000 shares of common stock based on the fair
value of the shares of common stock at the transaction dates. In
addition, warrants to purchase 375,000 shares of common stock of the
Company at $0.30 per share until 2011 and 100,000 shares of common
stock of the Company at $0.25 per share until 2011 were also issued as
part of the conversions. During 2006, the Company granted 250,000
shares of common stock of the Company, with a fair value of $132,500
and options to purchase 250,000 shares of common stock of the Company
at $0.53 per share until 2011 and 250,000 shares of common stock of the
Company at $0.30 per share until 2011. The balance owing as at
October 31, 2007 was $38,029 and is included in shareholder loans
on the accompanying consolidated balance sheet.
|
|
|
•
|
During 2006, the Company issued 118,750 shares of common
stock and warrants to purchase 118,750 shares of common stock of the
Company at $0.40 per share until 2011 for fair value of $47,500 and
335,000 shares of common stock and warrants to purchase 335,000 shares
of common stock of the Company at $0.30 per share until 2011 for fair
value of $100,500 to a company controlled by an officer and director of
the Company.
|
|
|
•
|
During 2007, certain management and directors of the
Company converted $452,650 of accrued wages into 3,422,200 shares of
common stock of the Company. In addition, warrants to purchase 191,000
shares of common stock of the Company at $0.25 per share until 2011,
valued at $32,007, were also issued as part of the conversion. No gain
or loss was recorded on these conversions. During 2006 certain
management and directors of the Company converted $696,664 of accrued
wages into 2,144,212 shares of common stock of the Company and warrants
to purchase 1,362,212 shares of common stock of the Company at $0.30
per share until 2011 and 412,000 shares of common stock of the Company
at $0.25 per share until 2011.
|
|
|
•
|
During 2006, the Company issued 61,356 shares of common
stock of the Company, with a fair value of $15,339 to a shareholder for
the purchase of an automobile.
|
F-15
Note
7. Term Loan
During 2006, the Company arranged term financing of $2 million to
complete the acquisition of PGE and ESE. This loan is secured against all assets of the
Company and bears interest, payable monthly, at the rate of prime plus 3%, with a
minimum interest rate of 8%. During the first half of 2007, the principal repayments
were renegotiated and the new principal payments are $30,000 per month from May 2007 to
November 2007; $37,500 per month from December 2007 to May 2008; and $62,500 per month
from June 2008 until the loan is paid in full. In addition to the monthly payments, the
Company is required to pay 30% of annual positive cash flow as additional principal
payments. At October 31, 2007, the Company was delinquent in interest payments and
other fees of $38,193 and principal payments of $180,000. As a result of such default,
all amounts due under the term loan have been reclassified to current on the
accompanying consolidated balance sheet.
The
Company has recorded a discount against the loan based on the relative fair value of
related warrants to purchase 2,919,496 shares of common stock related to the $2 million
term loan in the amount of $960,000. As the lender has agreed not to hold more than
4.99% of the Company’s stock at any one time, only that portion of the debt
discount equivalent to the exercising of warrants that would equate to 4.99% of the
Company’s outstanding stock as of the date of funding was expensed as interest in
the amount of $391,000 in the accompanying statements of operations during 2006. The
balance of the debt discount is being amortized over 36 months, and related discount
amortization of $189,660 and $517,440 for the periods ended October 31, 2007 and 2006,
respectively, is included in the accompanying statements of operations.
The
following represents payments due under the term loan as renegotiated:
|
|
Principal due
|
|
Less discount
|
|
Net
|
|
Delinquent amounts due
|
$
|
180,000
|
|
$
|
--
|
|
$
|
180,000
|
|
2008
|
|
567,500
|
|
|
189,660
|
|
|
377,840
|
|
2009
|
|
750,000
|
|
|
63,240
|
|
|
686,760
|
|
2010
|
|
244,610
|
|
|
--
|
|
|
244,610
|
|
Total, term loan
|
$
|
1,742,110
|
|
$
|
252,900
|
|
|
1,489,210
|
|
Plus amounts due under finance loans
|
|
|
|
|
|
|
|
5,179
|
|
Total, current portion of long-term debt,
|
|
|
|
|
|
|
$
|
1,494,389
|
Note 8. Share Capital
Preferred Stock
The
Company’s authorized capital includes 10,000,000 shares of preferred stock of
$0.001 par value. The designation of rights including voting powers, preferences, and
restrictions shall be determined by the Board of Directors before the issuance of any
shares.
No
shares of preferred stock are issued and outstanding as of October 31,
2007.
Common Stock
During 2007, the Company:
|
|
•
|
Issued 7,560,000 shares of common stock of the Company
and warrants to purchase 7,560,000 shares of common stock of the
Company at $0.10 per share for total proceeds of $378,000. The proceeds
allocated to warrants were $157,500.
|
F-16
|
|
•
|
Issued 244,520 shares of common stock of the Company and
warrants to purchase 241,000 shares of common stock of the Company at
$0.25 per share to related parties for services with a fair value of
$61,130.
|
|
|
•
|
Issued 3,946,400 shares of common stock of the Company
at $0.125 per share to related parties for services with a fair value
of $493,300.
|
|
|
•
|
Issued 60,000 shares of common stock of the Company in
settlement of $15,000 of amounts owing to a consultant.
|
|
|
•
|
Issued 20,270 shares of common stock of the Company for
payment of services received with a fair value of $6,081.
|
|
|
•
|
Issued 75,000 shares of common stock of the Company to
employees for services with a fair value of $18,750.
|
|
|
•
|
Issued 25,000 shares of common stock to a consultant for
services received with a fair value of $7,500.
|
|
|
•
|
Issued 390,344 shares of common stock to consultants for
services received with a fair value of $48,793.
|
|
|
•
|
Issued 50,000 shares of common stock of the Company as
part consideration for a third party to provide the Company with an
agreement for exclusive rights to its technology.
|
|
|
•
|
Issued 133,770 shares of common stock of the Company in
settlement of $26,754 of amounts owing to a supplier.
|
|
|
•
|
Issued 50,000 warrants with a fair value of $3,911 to
cover financing costs.
|
|
|
•
|
Issued 1,557,822 shares of common stock of the Company
in a cashless warrant exercise by the lender of the term
loan.
|
During 2006, the Company:
|
|
•
|
Issued 44,000 shares of common stock and warrants to
purchase 44,000 shares of common stock of the Company at $0.50 per
share until 2010 for $22,000.
|
|
|
•
|
Issued 666,250 shares of common stock and warrants to
purchase 666,250 shares of common stock of the Company at $0.40 per
share until 2010 for $266,500.
|
|
|
•
|
Issued 15,000 shares of common stock and warrants to
purchase 15,000 shares of common stock of the Company at $0.35 per
share until 2011 for $5,250.
|
|
|
•
|
Issued 2,162,541 shares of common stock and warrants to
purchase 2,162,541 shares of common stock of the Company at $0.30 per
share until 2011 for $648,763.
|
|
|
•
|
Issued 214,400 shares of common stock and warrants to
purchase 214,400 shares of common stock of the Company at $0.25 per
share until 2011 for $53,600.
|
|
|
•
|
Issued 1,284,352 shares of common stock for payment of
services with a fair value of $543,616.
|
|
|
•
|
Issued 371,370 shares of common stock to certain
employees for payment of accrued wages and consulting fees in the
amount of $185,685.
|
|
|
•
|
Issued 224,020 shares of common stock to related parties
for payments of services with a fair value of $112,010.
|
|
|
•
|
Issued 1,171,230 shares of common stock with a fair
value of $504,133 in connection with acquisition of
subsidiaries.
|
|
|
•
|
Issued 225,000 shares of common stock with a fair value
of $112,500 to settle the shortfall in value of shares issued in 2005
with regards to acquisition of geo-site rights.
|
|
|
•
|
Issued 25,000 shares of common stock upon options being
exercised to purchase shares of common stock at $0.25 per
share.
|
|
|
•
|
Issued 1,250,000 shares of common stock to certain
management of the Company for contract renewals with a fair value of
$662,500.
|
|
|
•
|
Issued 979,166 shares of common stock to certain
employees for payment of accrued wages in the amount of
$293,750.
|
F-17
|
|
•
|
Issued 162,612 shares of common stock to certain
employees for payments of services with a fair value of
$52,984.
|
|
|
•
|
Issued 444,409 shares of common stock and warrants to
purchase 444,409 shares of common stock at $0.30 per share until 2011
to related parties to settle repayment of loans and advances of
$133,323.
|
|
|
•
|
Issued 220,000 shares of common stock and warrants to
purchase 116,667 shares of common stock at $0.30 per share until 2011
to settle repayment of loans and consulting fees.
|
|
|
•
|
Issued 61,356 shares of common stock for the purchase of
automotive equipment with a fair value of $15,339.
|
|
|
•
|
Issued 758,046 shares of common stock and warrants to
purchase 758,046 shares of common stock at $0.30 per share until 2011
to related parties for payments of services with a fair value of
$227,414.
|
|
|
•
|
Issued 512,000 shares of common stock and warrants to
purchase 512,000 shares of common stock at $0.25 per share until 2011
to related parties for payments of services with a fair value of
$128,000.
|
|
|
•
|
Issue 628,310 shares of common stock to related parties
for payments of services with a fair value of $187,741.
|
|
|
•
|
Issued 629,333 shares of common stock for payments of
services with a fair value of $161,500.
|
|
|
•
|
Issued 92,570 shares of common stock and warrants to
purchase 92,570 shares of common stock at $0.30 per share until 2011 to
a related party to settle repayment of loans and advances of
$27,771.
|
Stock Purchase Warrants
At
October 31, 2007, the Company had reserved shares of common stock for the
following outstanding warrants to purchase 16,682,724 shares of the
Company’s common stock:
|
Number of warrants
|
Exercise Price
|
Expiry
|
|
1,329,882
|
$ 0.001
|
2050
|
|
300,000
|
0.01
|
2011
|
|
7,610,000
|
0.10
|
2012
|
|
967,400
|
0.25
|
2011
|
|
4,831,732
|
0.30
|
2011
|
|
115,000
|
0.35
|
2010/2011
|
|
791,250
|
0.40
|
2010/2011
|
|
270,000
|
0.50
|
2010/2011
|
|
317,460
|
0.63
|
2011
|
|
75,000
|
0.75
|
2010
|
|
75,000
|
1.00
|
2010
|
|
16,682,724
|
|
|
During the year ended October 31, 2006, the Company both issued and
cancelled options to purchase 5,667,258 shares of the Company’s common stock at
$0.001.
During the year ended October 31, 2007, the Company extended the
exercise period on certain warrants that were due to expire during the year. Additional
stock compensation expense of $1,519 was recorded for this modification to these
warrants, as per the requirements of FAS 123R.
F-18
Note 9. Stock-Based Compensation
Although the Company does not have a formal stock option plan, it issues
stock options to directors, employees, advisors and consultants. Stock options
generally have a four- to five-year contractual term, vest immediately and have no
forfeiture provisions.
A
summary of the Company’s stock options as of October 31, 2007 is as
follows:
|
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at October 31, 2005
|
|
6,515,000
|
|
$ 0.78
|
|
|
|
Options exercised
|
|
(25,000)
|
|
(0.25)
|
|
|
|
Options issued:
|
|
|
|
|
|
|
|
to employees
|
|
10,000
|
|
0.25
|
|
|
|
to consultants
|
|
125,000
|
|
0.40
|
|
|
|
to employees and directors
|
|
1,975,000
|
|
0.30
|
|
|
|
to employees
|
|
90,000
|
|
0.37
|
|
|
|
to employees
|
|
250,000
|
|
0.63
|
|
|
|
to consultant
|
|
250,000
|
|
0.50
|
|
|
|
to employees and directors
|
|
1,250,000
|
|
0.53
|
|
|
|
to consultants
|
|
304,887
|
|
0.30
|
|
|
|
Outstanding at October 31, 2006
|
|
10,744,887
|
|
0.63
|
|
|
|
Options issued:
|
|
|
|
|
|
|
|
to employees
|
|
75,000
|
|
0.26
|
|
$ 0.22
|
|
to consultants
|
|
150,000
|
|
0.67
|
|
0.19
|
|
for exclusive rights
|
|
50,000
|
|
0.50
|
|
0.20
|
|
Outstanding at October 31, 2007
|
|
11,019,887
|
|
0.67
|
|
|
The
following table summarizes stock options outstanding at October 31,
2007:
|
Exercise Price
|
|
Number Outstanding at October 31, 2007
|
|
Average Remaining Contractual Life (Years)
|
|
Number
Exercisable at
October 31, 2007
|
|
$ 0.25
|
|
389,750
|
|
2.7
|
|
389,750
|
|
0.26
|
|
75,000
|
|
4.1
|
|
75,000
|
|
0.30
|
|
2,279,887
|
|
3.5
|
|
2,279,887
|
|
0.37
|
|
90,000
|
|
3.6
|
|
90,000
|
|
0.40
|
|
125,000
|
|
3.4
|
|
125,000
|
|
0.50
|
|
1,237,250
|
|
3.1
|
|
1,237,250
|
|
0.53
|
|
1,250,000
|
|
3.6
|
|
1,250,000
|
|
0.63
|
|
250,000
|
|
3.5
|
|
250,000
|
|
0.75
|
|
1,835,500
|
|
4.1
|
|
1,835,500
|
|
1.00
|
|
3,101,250
|
|
2.8
|
|
3,101,250
|
|
1.25
|
|
87,500
|
|
2.8
|
|
87,500
|
|
1.50
|
|
282,500
|
|
2.2
|
|
282,500
|
|
2.00
|
|
16,250
|
|
3.0
|
|
16,250
|
|
|
|
11,019,887
|
|
|
|
11,019,887
|
|
Aggregate Intrinsic Value
|
|
$ --
|
|
|
|
$ --
|
The
aggregate intrinsic value in the table above represents the total pretax intrinsic
value for all “in-the-money” options. At October 31, 2007, all outstanding
options had exercise prices greater than the Company’s closing stock price on
that day, so the aggregate intrinsic value of all outstanding and exercisable options
was $0 as of that day. The aggregate intrinsic value changes, based on the fair market
value of the Company’s stock.
F-19
The
fair value of each option granted is estimated at the date of grant using the
Black-Scholes option-pricing model. The assumptions used in calculating the fair value
of the options granted in 2007 and 2006 were risk-free interest rate of 5.0%, a 4 to
5-year expected life, a dividend yield of 0.0%, and a stock price volatility factor of
97% to 163%. For the year ended October 31, 2007, the Company recorded $45,471 of stock
compensation expense for new stock options granted during the period.
During the year ended October 31, 2007, the Company extended the
exercise period on certain options that were due to expire during the year. Additional
stock compensation expense of $9,575 was recorded for this modification to these
options, as per the requirements of FAS 123R.
Note 10. Income Taxes
No
provision for income taxes has been made for the period since the Company incurred net
losses.
Deferred Tax Assets
As
of October 31, 2007, the Company has net operating losses of approximately
$9,670,000 available for future deduction from taxable income derived in the United
States which begin to expire in the year 2022. In addition, the Company’s
Canadian subsidiary has non-capital losses of approximately US $5,236,000 available for
future deductions from taxable income derived in Canada, which begin to expire in 2008.
The Company’s Hong Kong subsidiary has non-capital operating losses of
approximately US $130,000, which do not expire. The potential benefit of net operating
loss carryforwards has not been recognized in the consolidated financial statements
since the Company cannot determine that it is more likely than not that such benefit
will be utilized in future years. The components of the net deferred tax asset and the
amount of the valuation allowance are as follows:
|
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforwards (expiring through
2025)
|
|
$ 5,293,000
|
|
$ 3,993,600
|
|
Research and development credits
|
|
42,000
|
|
42,000
|
|
Stock compensation expense
|
|
467,800
|
|
448,500
|
|
Capital loss carry forward
|
|
37,400
|
|
37,400
|
|
Valuation allowance
|
|
(5,840,200)
|
|
(4,521,500)
|
|
Net deferred tax assets
|
|
$ --
|
|
$ --
|
The
difference between the U.S. Statutory Federal tax rate of 34% and the provision for
income tax of zero recorded by the Company is primarily attributable to the change in
the Company’s valuation allowance against its deferred tax assets and to a lesser
extent to the tax rate differential on losses in foreign countries. The change in the
valuation allowance was an increase of $1,318,700 for 2007 and an increase of
$2,055,500 for 2006. Certain 2006 reconciliation factors have been revised based on
changes in current estimates. There is no effect on the 2006 financial
statements.
Investment Tax Credits
As
of October 31, 2007, the Company’s Canadian subsidiary has investment tax
credits of U.S. $42,000 which may be carried forward and used to offset the
subsidiary’s future Canadian income tax liabilities. The benefit of these tax
credits has not been recognized in the consolidated financial statements and they will
begin to expire in 2012.
F-20
Note 11. Commitments and Contingencies
Lease Commitments
The
Company has an operating lease for office and warehouse space in Surrey, British
Columbia, Canada. The Company exercised an option to renew the lease for a two year
term in July 2007. The lease expires June 30, 2009, and there is a remaining
option to renew the lease for an additional two year term. The Company also has a
month-to-month lease for office space in Bellingham, Washington. In addition, the
Company leases automobiles and certain equipment. For 2007 and 2006, the Company
incurred total rent expense of $128,378 and $123,629, respectively.
The
Company has lease commitments for the next several years as follows:
|
2008
|
|
$
|
208,547
|
|
2009
|
|
|
148,810
|
|
2010
|
|
|
16,750
|
|
2011
|
|
|
2,031
|
|
Total Commitments
|
|
$
|
376,138
|
Litigation
On
November 14, 2007, the defendants in a lawsuit filed by the Company’s ESE
subsidiary filed a counterclaim against the Company and several of its officers,
alleging breach of contract, wrongful dismissal, defamation, abuse of process, and
other claims. The Company believes that the counterclaims are without merit and intends
to defend them vigorously as it continues to press its claims that the individual
defendants breached their noncompetition agreements with ESE and their fiduciary
obligations to it. The Company’s management has determined that no provision for
loss is necessary as of October 31, 2007.
Note
12. Segment Information
The
Company views its operations in two lines of business – (1) manufacturing and (2)
geo exchange design and installation. Summarized financial information by segment for
the years ended October 31, 2007 and 2006, as taken from the internal management
reports, is as follows:
|
|
Year Ended
October 31, 2007
|
|
Year Ended
October 31, 2006
|
|
|
|
|
Revenue
|
|
|
|
|
|
Manufacturing
|
$ 846,016
|
|
$ 414,709
|
|
Geo exchange design and installation
|
1,908,356
|
|
1,920,593
|
|
|
$ 2,754,372
|
|
$ 2,335,302
|
|
Loss
|
|
|
|
|
|
Manufacturing
|
$ (821,780)
|
|
$ (762,572)
|
|
Geo exchange design and installation
|
(2,313,152)
|
|
(164,469)
|
|
Corporate
|
(971,839)
|
|
(6,762,283)
|
|
|
$(4,106,771)
|
|
$(7,689,324)
|
|
Assets
|
|
|
|
|
|
Manufacturing
|
$ 823,455
|
|
$ 780,590
|
|
Geo exchange design and installation
|
351,459
|
|
3,032,654
|
|
Corporate
|
75,346
|
|
143,883
|
|
|
$ 1,250,260
|
|
$ 3,957,127
|
F-21
Note 13. Subsequent Events
In
December 2007, the Company entered into a subscription agreement and issued 1,000,000
shares of its common stock to an unrelated party for cash of $50,000, or $0.05 per
share.
F-22