NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(Stated in US Dollars)
(
Unaudited
)
Note 1
Interim Reporting
While the information presented in the accompanying interim three months consolidated financial statements is unaudited, it includes all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. These interim financial statements follow the same accounting policies and methods of their application as the Companys September 30, 2007 annual consolidated financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with the Companys September 30, 2007 annual financial statements.
Operating results for the three months ended December 31, 2007 are not necessarily indicative of the results that can be expected for the year ended September 30, 2008.
Note 2
Nature and Continuance of Operations
The Company was incorporated on August 17, 2000 in the State of Washington, USA and the Companys common shares are publicly traded on the OTC Bulletin Board.
The Company markets and distributes atmospheric water generator machines. It also owns all of the intellectual property relating to a water treatment process and devices for water-from-air machines. Management plans to further evaluate, develop and manage the commercialization, sub-license and/or commercial sale of these products.
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next twelve months. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At December 31, 2007, the Company had not yet achieved profitable operations, has accumulated losses of $9,563,752 since its inception, has a working capital of $633,471 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Companys ability to continue as a going concern. The Companys ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances, however there is no assurance of additional funding being available.
Note 3
Additional Significant Accounting Policies
a)
Stock-based Compensation
In December 2004, the Financial Accounting Standards Board issued FAS 123R Share-Based Payment, a revision to FAS 123. FAS 123R replaces existing requirements under FAS 123 and APB 25, and requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the grant-date fair value of those instruments, with limited exceptions. FAS 123R also affects the pattern in which compensation cost is recognized, the accounting for employee share purchase plans, and the accounting for income tax effects of share-based payment transactions. For small business filers, FAS 123R is effective for interim or annual periods beginning after December 15, 2005. The Company adopted FAS 123R on October 1, 2006.
b)
Foreign Currency Translation
The Company translates foreign currency transactions and balances to its reporting currency, United States dollars, in accordance with SFAS No. 52, Foreign Currency Translation. Monetary assets and liabilities are translated into the functional currency at the exchange rate in effect at the end of the year. Non-monetary assets and liabilities are translated at the exchange rate prevailing when the assets were acquired or the liabilities assumed. Revenues and expenses are translated at the rate approximating the rate of exchange on the transaction date. All exchange gains and losses are included in the determination of net income (loss) for the year.
Note 4
Related Party Transactions
During the three months ended December 31, 2007 and 2006, directors of the company and the spouse of a director of the Company charged the following expenses to the Company:
|
|
|
|
2007
|
2006
|
|
|
|
Cost of sales
|
$
-
|
$
2,925
|
Administrative fees
|
6,693
|
7,343
|
Interest
|
-
|
756
|
Management fees
|
30,000
|
15,000
|
|
|
|
|
$
36,693
|
$
26,024
|
Note 4
Related Party Transactions
(contd)
Included in promissory notes payable at December 31, 2007 is nil due to a director of the Company (September 30, 2007 - $94,593). During the quarter, the promissory note payable and accrued interest was settled by the issuance of common shares at $0.17 per unit whereby each unit consists of 1 common share and 1 share purchase warrant exercisable at $0.17 per warrant on or before September 30, 2010.
Included in accounts payable at December 31, 2007 is $144,342 owing to directors and former directors of the Company and to the spouse of a director of the Company. (September 30, 2007 - $119,343).
Included in inventory at December 31, 2007 are goods valued at $1,170 provided at no cost by a company with directors in common with the Company (September 30, 2007 - $1,170).
Amounts due to related parties are due to a director of the Company. The amounts are unsecured, non-interest bearing and have no specific terms of repayment.
Note 5
Common Stock
Note 11
Commitments
:
Share For Debt Settlements
On October 5, 2007, the Company approved the issuance of 2,058,823 units at $0.17 per unit to settle amounts due to a director of the Company and a shareholder of the Company totaling $350,000. Each unit contained one common share and one share purchase warrant exercisable at $0.17 per share on or before September 30, 2010.
Share Subscriptions
The Company entered into a private placement agreement to issue 588,235 common stock at $0.17 per share for proceeds of $100,000 on December 5, 2007 to an accredited investor.
Share Purchase Warrants
The following table summarizes the continuity of the Companys warrants:
Note 5
Share Purchase Warrants
- (contd)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Number of
|
Exercise
|
|
Expiry
|
|
|
Warrants
|
Price
|
|
Date
|
|
|
|
|
|
|
|
Outstanding, beginning
|
38,760
|
$2.50
|
|
April 8, 2008
|
|
Issued
|
272,536
|
$0.85
|
|
June 30, 2007
|
|
|
|
or at $1.00
|
|
December 31, 2007
|
|
|
|
or at $1.15
|
|
December 31, 2008
|
|
Issued
|
1,834,045
|
$0.85
|
|
April 30, 2007
|
|
|
|
or at $1.00
|
|
October 31, 2007
|
|
|
|
or at $1.15
|
|
April 30, 2008
|
|
Issued
|
2,058,823
|
$0.17
|
|
September 30, 2010
|
|
Outstanding, ending
|
4,204,164
|
|
|
|
|
Stock Purchase Options
On January 9, 2007, the board of directors amended its 2006 Stock Option Plan and increased the authorized reserved shares for issuance of incentive stock options to 11,000,000 shares of its common stock.
The following table summarizes the continuity of the Companys stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
Average
|
|
|
|
|
of
|
Exercise
|
|
|
|
|
Options
|
Price
|
|
|
|
|
|
|
Outstanding and exercisable, beginning
|
|
|
|
-
|
-
|
Granted
|
|
|
|
12,270,000
|
$0.71
|
Cancelled
|
|
|
|
(3,500,000
)
|
$0.88
|
|
|
|
|
|
|
Outstanding and exercisable, ending
|
|
|
|
8,770,000
|
$0.65
|
The fair value of the stock options granted during the three months ended December 31, 2007 was determined using the Black-Scholes option pricing model with the following assumptions:
Note 5
Stock Options
(Contd)
|
|
|
|
|
|
Expected dividend yield
|
0.0%
|
|
Risk-free interest rate
|
4.58%
|
|
Expected volatility
|
153.04%
|
|
Expected option life
|
5.78 years
|
|
The compensation charge associated with stock options in the amount of $8,010,050 was included in the statement of operations for year ended September 30, 2007.
Additional information regarding stock options outstanding as at December 31, 2007 is as follows:
|
|
|
Number of
|
|
|
Common Shares
|
Exercise Prices
|
Expiry Date
|
|
|
|
1,175,000
|
$0.50
|
September 30, 2013
|
3,725,000
|
$0.62
|
September 30, 2013
|
875,000
|
$1.10
|
September 30, 2013
|
1,700,000
|
$0.57
|
September 30, 2013
|
1,295,000
|
$0.65
|
September 30, 2013
|
|
|
|
8,770,000
|
|
|
Note 6
Non-cash Transactions
Financing and investing activities that do not have a direct impact on current cash flows are excluded from the statements of cash flows. During the year ended September 30, 2006, the Company issued 336,000 common shares at $0.045 per share totalling $15,120 to consultants for consulting services. During the year ended September 30, 2007, the Company issued 272,536 common shares at $0.75 per share totalling $204,402 to directors and formers directors for accounts payable, promissory notes payable and amounts due to related parties. The Company issued 1,000,000 common shares to a marketing agreement at $0.41 per share totalling $410,000. During the three months ended December 31, 2007, the Company approved the issuance of 2,058,823 common shares at $0.17 per share totalling $350,000 to a director and shareholder of the Company for repayment of promissory notes, interest owed and other accounts payable. These transactions were excluded from the statements of cash flows.
Note 7
Contingency
On October 11, 2006, the Company was named as a defendant in a lawsuit whereby the plaintiffs are claiming general damages, with respect to funds totaling approximately $94,000 which were allegedly misappropriated, interest, costs and such further and other relief as the court may deem just. Management of the Company believes the claim is without merit and it is unlikely to succeed. The Company has filed a statement of defense denying the allegations and a counterclaim for defamation. The court has ordered a severance of the action, and has required the plaintiffs to prove their damages, before proceeding to trial on issues of liability.
Note 8
License Rights -
Note 11
|
|
|
|
|
|
June 30,
|
September 30,
|
|
2007
|
2006
|
|
|
Accumulated
|
|
|
|
Cost
|
Amortization
|
Net
|
Net
|
|
|
|
|
|
License rights
|
$
1,180,000
|
$
70,128
|
$
1,109,872
|
$
1,168,873
|
The license rights were amortized straight-line over the initial terms of 15 years until June 2007. The net cost of the license rights has been reclassified with the Intellectual Property acquired in July 2007. (See note 11)
Note 9
Promissory Notes Payable
The promissory notes payable are unsecured and bear interest at 10% per annum. They are due as follows:
|
|
|
|
December 31,
|
September 30,
|
|
2007
|
2007
|
|
|
|
October 9, 2007
|
$
-
|
$ 43,890
|
January 7, 2008
|
-
|
187,706
|
January 9, 2008
|
-
|
94,593
|
|
|
|
|
$
-
|
$ 326,189
|
Note 10
Commitments
On December 11, 2006 and December 12, 2006, the Company entered into two marketing agreements in which the Company would pay $1,000,000 and issue 1,000,000 common shares as follows:
|
|
|
|
|
Common
|
|
Cash
|
Shares
|
|
|
|
Upon filing a registration statement
|
$
-
|
100,000
|
January 15, 2007 (paid)
|
250,000
|
150,000
|
April 15, 2007
|
250,000
|
-
|
May 15, 2007
|
250,000
|
-
|
June 15, 2007
|
250,000
|
250,000
|
July 15, 2007
|
-
|
250,000
|
October 15, 2007
|
-
|
250,000
|
|
|
|
|
$
1,000,000
|
1,000,000
|
During the year ended September 30, 2007, the Company paid $250,000 in respect to the cash portion of the agreements and has issued 1,000,000 common shares of the Company. The 1,000,000 shares issued were not released to the marketing company as it has not commenced its branding and marketing efforts and the contract has expired. The Company is currently re-negotiating the terms of the remaining $750,000. The common shares will be returned to treasury.
Note 11
Intellectual Property
Note 5 and 8
On April 25, 2007, the Company entered into an agreement to acquire all of the intellectual property (IP) relating to a water treatment process and related devices for water-from-air machines from Wataire Industries Inc, Canadian Dew Technologies Inc., Terrence Nylander and Roland Wahlgren. Mr. Nylander was at the time of signing the agreement and currently, the President of the Company.
Consideration for the purchase of the IP was $469,485 (CAD $500,000), which was paid at March 31, 2007, the issuance of 4,800,000 shares of common stock of the Company, the agreement by the Company to pay a royalty equal to 5% of the gross profits from the sales of all apparatus or products relating to the IP for a period of 30 years from April 25, 2007 and a royalty equal to 5% of gross licensing revenues on the IP. This consideration is in addition to the 11,000,000 shares of common stock previously issued for the license rights as disclosed in the Companys annual September 30, 2006 audited consolidated financial statements. The IP acquisition was completed in July 2007.
The IP acquired by the Company includes all copyrights, patent rights, trade secret rights, trade names, trademark rights, process information, technical information, contract rights and obligations, designs, drawings, inventions and all other intellectual and industrial property rights of any sort related to or associated with the invention.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of operations of Wataire International, Inc. (the "Company," "we," "us" or "our" should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this quarterly report for the nine months ended December 31, 2007. This quarterly report contains certain forward-looking statements, and the Company's future operating results could differ materially from those discussed herein. Certain statements contained in this Report, including, without limitation, statements containing the words "believes," "anticipates," "expects" and the like, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments.
CORPORATE HISTORY
Wataire International, Inc. ("Wataire," the "Company," "us," or "we") was incorporated under the laws of the State of Washington on August 17, 2000 and has been a reporting issuer with the United States Securities and Exchange Commission (the "SEC") since November 2000. On October 3, 2006, the Company changed its name to Wataire International, Inc. Previously on August 26, 2003, the Company had changed its name from Corporate Development and Innovation, Inc. to Cimbix Corporation. The Company now trades under the ticker symbol "WTAR" on the Over-the-Counter Bulletin Board.
THE COMPANY
On April 25, 2007, we entered into an agreement with Wataire Industries Inc. (WII), Canadian Dew Technologies Inc. (CanDew), Terrence Nylander and Roland Wahlgren to acquire all of the intellectual property (IP) relating to a water treatment process and devices for water-from-air machines. The agreements previously executed on July 10, 2006, September 12, 2006 and amendments thereto between the Company and WII have been terminated and cancelled and forms part of the current agreement.
Consideration for the purchase of the IP was $469,485 (CAD $500,000), which was paid at March 31, 2007, the issuance of 4,800,000 shares of common stock of the Company, the agreement by the Company to pay a royalty equal to 5% of the gross profits from the sales of all apparatus or products relating to the IP for a period of 30 years from April 25, 2007 and a royalty equal to 5% of gross licensing revenues on the IP. This consideration is in addition to the 11,000,000 shares of common stock previously issued for the license rights as disclosed in the Companys annual September 30, 2006 audited consolidated financial statements. The IP acquisition was completed in July 2007.
The IP acquired by the Company includes all copyrights, patent rights, trade secret rights, trade names, trademark rights, process information, technical information, contract rights and obligations, designs, drawings, inventions and all other intellectual and industrial property rights of any sort related to or associated with the invention.
Our business is to fully exploit our products and technology by marketing and distributing the commercial and home/office water generation machines as well as the under-the-counter/over-the-counter units, and the water-producing greenhouse.
The atmospheric water generator produces purified water from the atmosphere by using a condensing surface and a special filtration system that removes dust, airborne particles and bacteria to generate clean drinking water and simultaneously cleaning the air. This method of extracting water vapor has been in use for many years. Some similar applications include air conditioners and dehumidifiers. The actual water production and cost per gallon varies with the humidity and temperature of the atmosphere at the specific site in which the unit is employed.
The Wataire water generation equipment is a water-from-air technology system developed by a team of specialized technicians incorporating patent pending technologies that control bacterial contamination. The Company currently sells two types of atmospheric units: (i) small-scale home/office units, which include a full-sized upright model and a countertop model and which can produce between four to seven gallons of water per day depending on humidity and temperature levels of the location of the unit, and (ii) commercial/industrial units capable of producing more than 5,000 liters (1320 gallons) of safe drinking water each day depending upon ambient conditions.
The home/office units are designed to replace bottled water and purified water dispensers, eliminating the need for replenishment and storage of plastic bottles. These units are intended for usage in residences, schools, offices, hospitals and restaurants. They can also serve as a personal disaster relief unit for consumers in circumstances such as hurricane Katrina where residents in the affected area had no drinking water.
The industrial units are intended for use in military camps, industrial applications such as factories, commercial applications such as hotels, humanitarian and disaster relief applications where fresh drinking water is scarce.
The water generation equipment is a water-from-air technology system developed by a team of specialized technicians incorporating patent pending technologies that control bacterial contamination. The water generating units are equipped with an electronic control system that turns the machine on and off when full and can circulate the water to maintain clean drinking water 24 hours a day, 365 days a year. It has a dynamic display to allow for monitoring the machine's operation, showing when a new filter is required. Water generated from the Wataire machines meets World Health Organization drinking water standards.
The system provides an independent, sustainable, safe water source for a wide variety of possible circumstances such as mining and petroleum exploration camps, bottled water and beverage manufacturers, food manufacturers, military camps, non-government organizations, humanitarian assistance organizations, emergency and disaster relief situations. According to field trials recently held in Belize and Thailand, the system performed well in a tropical environment producing the design projected volume of water and achieving the desired water
quality standards. While we believe the unit is also economically viable in temperate climates, the Wataire units work best in the tropics due to the high humidity levels, which will produce the highest rate of water production at the lowest cost per gallon.
The patent pending water treatment system is comprised of a three-stage water treatment design that cleans water to meet World Health Organization guidelines. The unit consists of a filtration system, a food-grade dehumidifier water producing module, and a water treatment module. The water treatment process is proprietary and may be subject of various patent applications already filed.
The process basically involves taking filtered moist air from the atmosphere and dehumidifying it for treatment by the water treatment module. This produced water is then processed through sediment filters, ultra-fine filters, activated charcoal filters and ultraviolet light treatment that eliminate virtually all biological contaminants including bacteria, viruses, and pollutants that are in the air. Atmospheric water vapor is an abundant resource that can be used with virtually no negative environmental impacts. The machine should be situated in a space that can provide fresh flowing air to the machine intake as it dehumidifies the space. The water-from-air technology has received broad acceptance around the world as a new and sustainable source of potable water.
Our target markets for the water-from-air systems are businesses, governments, and people who are situated in the humid tropics. To date, WII has sold various units of the atmospheric water generator in over 30 different countries and has received positive response from system users. The Company has just begun its marketing launch. As of this date, the Company sold many home/office units and a commercial/industrial unit. We are receiving orders from all parts of the world.
Recently, an independent evaluation initiated by Kansas State University Food Safety System Research department confirms the production of safe drinking water from our home/office atmospheric water generator unit. Water collected from the water generator was evaluated to determine the natural bacterial populations in the product. No microbial populations were detected in water collected. The study confirms the ability of our water generator to produce safe drinking water from natural humidity in the atmosphere. Further studies will be conducted to evaluate trace chemical impurities.
In May 2007, the Company initiated its Advisory Board consisting of Professor James Marsden, PhD and Mr. Brian Baker, BA. Dr. James Marsden, a distinguished scientist and food safety and security expert, is the Companys Chairman of the Scientific Advisory Board. Dr. Marsden currently serves as Regents Distinguished Professor and Associate Director of the Biosecurity Institute at Kansas State University (KSU). KSU has placed a major emphasis on food safety and security. The research and educational activities at KSU address issues that directly impact human health, agricultural security and the economy. The university is the site of the Biosecurity Research Institute and the National Agricultural Biosecurity Center. Dr. Marsden will advise us on issues relating to the production of water for consumer products; products sized for large commercial applications; government and military systems; remote systems designed to produce drinking water and sanitation in developing countries.
Mr. Brian Baker is a co-founder and President of International Mascot Corporation (IMC), one of the largest producers of character costumes in the world, and as such has been involved in the operation design, marketing, finance and manufacture of products for over 25 years. Mr. Baker has made solid business decisions to attain positive growth for his global company. His solid understanding of the importance of maintaining control over certain niches in the marketplace provided a successful expansion of the companys operations in the mascot industry. IMCs operations include a manufacturing and sales facility in Atlanta and Georgia. IMC is developing two other companies, specifically producing multiple products of the same design using state-of-the-art production technology. Mr. Baker has been awarded the Canadian Export Award of Distinction and the Premiers Award of Distinction.
In August 2007, the Company was pleased to receive an initial report from the Mars Societys Flashline Mars Arctic Research Station (FMARS) that our atmospheric water generators provided safe drinking water for the 7 person crew on the 4 month simulated Mars mission in Canadas high arctic. The purpose of the mission was to provide information and insight on what humans will be facing when they eventually land on the planet Mars. The successful utilization of the Companys atmospheric water generators indicates plausible opportunities for future space exploration breakthroughs.
As part of our humanitarian efforts, our CI 2500 commercial water generator machine was on tour in the Southeastern United States to provide aide in the State of Louisiana and Georgia. The tour was successful and the Company was greeted by many State officials and members of Atlanta City Council, as well as Non-Government Officials interested in utilizing the Companys technology to provide drinking water on a large scale, and demonstrated the Mobile Emergency Response Unit (CI 2500 mobile unit) and 4010 home/office unit. While there, the Company was featured on local television broadcasts.
In November 2007, we were invited to London, England to accept the National Green Apple Award on behalf of the Company and our Australian distributor, Envirosource International Pty Ltd. The award for Environmental Best Practices recognizes, rewards and promotes environmental endeavors and initiatives at all levels. The award promotes environmental work of local authorities, commerce and industries around the world and acknowledges the efforts for a greener earth. The award was presented in the House of Commons, London, UK and was hosted by the Rt. Hon. Patricia Hewitt, MP.
PLAN OF OPERATION
Our objective is to exploit our IP through product development for sales and sub-licensing of our products to earn royalty revenue streams. We anticipate that total expenditures over the next 12 months will be approximately $8,000,000. These funds may be raised through equity or debt financings, sales of product, royalty streams from sub-licensing. Raising additional capital will result in further dilution in the equity ownership of the Companys shares by its current shareholders. There is no assurance that the Company will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in the Companys common stock.
We have no cash to fund our operations at this time, so we plan to seek debt financing as well as offer common stock in private placements during the next 12 months to raise minimum proceeds of $8,000,000. We believe the proceeds from such debt financing and private placements will
enable us to expand our operations, buy inventory and start our marketing campaign. If we are able to raise the additional funding of $8,000,000 by selling licenses and products, or in private placement transactions and/or debt financing over the next 12 months to cover our minimum cash requirements to persons who are "accredited investors", it would be allocated as follows:
$1,500,000 for marketing, public relations and advertising;
$3,200,000 to purchase inventory;
$1,000,000 for research and development;
$900,000 for management salaries and wages;
$300,000 for professional services and filing requirements;
$500,000 for transaction costs;
$600,000 for working capital;
Due to the "start up" nature of the Company's business, the Company expects to incur losses as the Company conducts its ongoing sales and product development programs as well as its organization of the Company. We will require additional funding to continue our sales and product development programs, for operating expenses, for marketing expenses, to pursue regulatory approvals for our products, for any possible acquisitions or new technologies, and we may require additional funding to establish manufacturing capabilities in the future. We may seek to access the public or private equity markets whenever conditions are favorable. We may also seek additional funding through strategic alliances or collaborate with others. We cannot be certain that adequate funding will be available on terms acceptable to us, if at all. Because we are presently in the early stages of development and promotional stages of our business, we can provide no assurance that we will be successful with our efforts to establish revenue sufficient to operate at a break-even or profitable level. In order to pursue our existing operational plan, we are dependent upon the continuing financial support of creditors and stockholders until such time when we are successful in raising equity capital to finance the operations and capital requirements of the Company or until such time that we can generate sufficient revenue to maintain our operations.
In the process of carrying out its business plan, the Company may determine that it cannot raise sufficient capital to support any of its business divisions on acceptable terms, or at all. The Company's board of directors has a fiduciary duty to act in the best interests of the corporation and its shareholders. The board of directors may decide that it is in the best interests of the corporation and its shareholders to liquidate the business, enter into a new line of business or engage in a business combination with another business.
The Company is not currently a party to any contracts, letters of intent, commitments or agreements and is not currently engaged in active negotiations with respect to any acquisitions other than disclosed elsewhere in this report. The Company continues to seek business opportunities to either complement or accentuate its current business initiatives.
COMPETITION
Water purification and bottled water industries are highly competitive. According to past internal research, there were possibly nine entities experimenting with the technology of water generation, of which two or three were direct active competitors. Some of those companies have limited or no business activities while others have entered into strategic alliances with one
another. The relatively high energy cost associated with changing water from its vapor phase in the air to the liquid phase appears to be an obstacle to making sales for a number of these competitors. Control of bacteria and viruses in the field of atmospheric water generation creates a technological challenge that our patent pending water treatment module has resolved. The atmospheric water generator and filtration system industry is new, rapidly evolving and can compete with more traditional water treatment systems that rely on surface and ground water supplies. In the future, our competitors can and may duplicate many of the products or services offered by us.
We believe a robust market opportunity exists for our atmospheric water generators and filtration systems. Our technology provides an alternative solution to the worlds shortage of fresh water and can provide clean, safe drinking water in various geographical settings. Today, governments and health professionals are increasingly conscious of the negative health effects of pollution, chemicals used to disinfect water supplies, and residual salt in desalinated water, and how they affect human health.
We want to be identified as an environmentally sustainable business. Clean drinking water is becoming a scarce commodity as our population increases. Pollution from sewage, industry, agriculture and acid rain has destroyed many surface water reservoirs and aquifers. We believe water generation treatment and filtration is poised to be an important humanitarian industry as we learn more about global warming.
MARKET ANALYSIS AND STRATEGY
Our development is still in its early stages, however we anticipate having an outline of our marketing strategy in the spring of 2008. In December 2006, the Company retained Cucoloris Films, Inc. (Cucoloris), a Los Angeles-based multimedia and marketing company to help us with our marketing needs. Cucoloris is specialized in launching and handling large corporate brands for global marketing campaigns. They have a long history of work with many non-profit organizations, government agencies and foundations including work for the Natural Resources Defense Council and produced many Public Service campaigns. They have produced commercials all over the world and known for producing product launch and corporate image campaigns. Some of their campaigns include Coca Cola, Kodak, American Airlines, Visa, Sprint, AT & T, Boeing as well as banks, insurance companies, automobiles and global Fortune 500 companies. They have received over hundred awards and nominated as production company of the year by the California Film Commission. Their Farm Aid commercial has been selected for the permanent collection at the Museum of Modern Art in New York.
We believe that with their specialized consultancy division in branding content, social messaging and viral marketing their services will enhance the awareness of global warming and how our business can be identified as a proactive, environmentally friendly company.
LIQUIDITY AND CAPITAL RESOURCES
The Company remains in the development stage. Historically, operations have been financed through proceeds from the issuance of equity and loans from directors. The advances have no stated repayment terms. These funds were used to pay legal and accounting expenses along with several other miscellaneous operational infrastructure costs. Recently, the board approved to issue Robert Rosner, our Chief Executive Officer, up to 696,494 units, each unit consisting of a
share of common stock and a warrant to purchase a share of common stock, in consideration for the forgiveness of up to $118,404 of indebtedness of the Company to Mr. Rosner ($.17 per unit). The warrant stocks expire on September 30, 2010 and are exercisable at $.17 per share. As of the date of this Interim Report, the units have not been issued.
The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2007, we have been unsuccessful in our efforts to raise additional capital to meet our plan of operations. Our cash position as of September 30, 2007 was $NIL. Since inception, we have recognized no significant revenue. We have accumulated operating losses of $9,563,752 and as of September 30, 2007 we had a working a capital of $633,471. At the present time, and over the next 12 months, our primary focus will be to (i) raise capital, (ii) develop our marketing plan, new initiatives and operational plan, and (iii) establish sales.
Results of operations for the three-month period ended December 31, 2007, as compared to the nine-month period ended December 31, 2006.
Operating Expenses
. For the three-month period ended December 31, 2007, we had total operating expenses of $163,787
as compared to total operating expenses of $3,770,820 for the three month period ended December 31, 2006, a decrease of $3,607,033
.
The decrease in operating expenses was generally due to the stock-based compensation of $3,604,000.
Management Fees.
For the three-month period ended December 31, 2007, we had management fees of $30,000 as compared to $15,000 for the three month period ended December 31, 2006, an increase of $15,000 in management fees.
Professional Expenses
. For the three-month period ended December 31, 2007 we had professional expenses of $24,992 as compared to $30,845 for the three month period ended December 31, 2006, a decrease of $5,853, due to the decrease accounting and legal counsel fees.
Net Loss
. For the three-month period ended December 31, 2007, we had a net loss of $163,787 as compared to a net loss of $3,770,620 for the three month period ended December 31, 2006, a decrease of $3,606,833 due basically from the stock-based compensation of $3,604,000.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. They also issued Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets, and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in August and October 2001, respectively.
SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. SFAS 141 supersedes APB Opinion No. 16, Business Combinations, and Statement of Financial Accounting Standards No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises, and is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new rules, the Company is no longer required to amortize goodwill and other intangible assets with indefinite lives, but will be subject to periodic testing for impairment. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets. The Company's operational policy for the assessment and measurement of any impairment in the value of goodwill and intangible assets, which primarily relates to contract-based intangibles such as license agreements and extensions, is to evaluate annually, the recoverability and remaining life of its intangible assets to determine the fair value of these assets. The methodologies to be used to estimate fair value include the use of estimates and assumptions, including projected revenues, earnings and cash flows. If the fair value of any of these assets is determined to be less than its carrying value, the Company will reflect the impairment of any such asset over its appraised value.
SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements.
SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company records impairment losses on long lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. In such cases, the amount of the impairment is determined on the relative values of the impaired assets.
Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Financial Statements, addresses consolidation by business enterprises of variable interest entities. It is effective immediately for variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities acquired before February 1, 2003. The implementation of Interpretation No. 46 did not have a material effect on the Company's financial statements.
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, amends and clarifies accounting for derivative instruments under SFAS No. 133. It is effective for contracts entered into after June 30, 2003. The impact of adoption of this statement is not expected to be significant.
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The impact of adoption of this statement is not expected to be significant.
In December 2004, the FASB issued SFAS 153, Exchanges of Non-monetary Assets, an amendment of APB No. 29, Accounting for Non-monetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement 123 (revised 2004) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains services in share-based payment transactions. This Statement requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in a case filed in October 2006 in the Supreme Court of British Columbia, Canada entitled
Atkinson et al. v. Cimbix Corporation et al
. The action relates to allegations by plaintiffs that $94,000 in subscriptions was deposited into a law firms trust account for investment in On4 Communications Inc., formerly PetsMobility Network (Canada) Inc. (On4). The plaintiffs allege that the law firm deducted legal fees from the amount held in trust and transferred the balance of the funds to On4. Both the law firm and On4 are also defendants in the case. The Company believes the claims against it are without merit and unlikely to succeed. The action is currently in the pleading stage. The Company has filed a statement of defense denying the allegations against it and has filed a counter claim for defamation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In October 2007, the Company agreed to issue to Robert Rosner, our Chief Executive Officer, 696,494 units, each unit consisting of a share of common stock and a warrant to purchase a share of common stock, in consideration for the forgiveness of up to $118,404 of indebtedness of the Company to Mr. Rosner ($.17 per unit). The warrants stock will expire on September 30, 2010 and are exercisable at $0.17 per share. As of the date of this annual report, the units have not been issued. The Company claims an exemption from registration of these securities pursuant to Section 4(2) of the Act.
In October 2007, the Company agreed to issue to Darfield Financial Corp approved the issuance of 1,362,329 units, each unit each unit consisting of a share of common stock and a warrant to purchase a share of common stock, in consideration for the forgiveness of up to $231,596 of indebtedness of the Company to Darfield Financial Corp ($.17 per unit). The warrants stock will expire on September 30, 2010 and are exercisable at $0.17 per share. As of the date of this annual report, the units have not been issued. The Company claims an exemption from registration of these securities pursuant to Section 4(2) of the Act.
In December 2007 the Company entered into a private placement agreement to issue 588,235 common shares at a price of $0.17 per share for a total price of $100,000 to an individual who is an accredited investor.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
None
ITEM 5. OTHER MATTERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index of Exhibits
Exhibit
Number
Description of Exhibit
--------- -------------------------------------------------
3.3 Amendment of Articles of Incorporation (1)
10.1
License Agreement between the Company and Wataire Industries Inc. dated July 10, 2006 (2)
10.2
License Agreement between the Company and Wataire industries Inc. dated September 12, 2006 (5)
10.3
Amended License Agreement between the Company and Wataire Industries Inc. dated October 19, 2006 (6)
10.4
Amended License Agreement between the Company and Wataire Industries Inc. dated October 19, 2006 (6)
10.5
2006 Stock Option Plan (9)
10.6
Form of Stock Option Agreement at $0.50 (9)
10.7 Form of Stock Option Agreement at $0.62 (10)
10.8
Amended 2006 Stock Option Plan (8)
10.9
Consulting Agreement between Cucoloris Films Inc. and the Company dated December 11, 2006 (7)
10.10
Consulting Agreement between Cucoloris Films Inc. and the Company dated December 11, 2006 (7)
10.12
Warrant issued to P204 Enterprises Ltd. on October 17, 2006 (11)
10.13 License Agreement between Airborn Water Company and the Company dated January 25, 2007 (12)
10.14 IP Transfer Agreement between the Company, Wataire Industries Inc., Canadian Dew
Technologies Inc., Terrence Nylander and Roland Wahlgren (13)
10.15
Form of Stock Option Agreement at $0.57 (14)
10.16
Form of Stock Option Agreement at $0.65 (15)
10.17 Compensation Agreement between Cucoloris Films Inc. and the Company dated May 23, 2007
10.18
Amendment to Agreement between Airborn Water Company and the Company dated June 20, 2007 (17)
10.19 Agreement between Access Energy Technologies and the Company dated June 14, 2007
10.20
Amendment to Agreement between Access Technologies and the Company dated June 20, 2007 (16)
10.21
Amendment to Agreement between Aquaduct and the Company dated June 20, 2007 (17)
31.1 Certification 302, CEO (8)
31.2 Certification 302, CFO (8)
32.1 Certification 906, CEO (8)
32.1 Certification 906, CFO (8)
99.1 License Agreement between the Company and On4 Communications Inc., formerly Petsmobility Network (Canada) Inc. (4)
99.2
Asset Purchase Agreement between the Company, Petsmobility Inc. and On4 Communications, Inc. (3)
99.3 Rescission Agreement between the Company and On4 Communications, Inc. (3)
99.4 Articles of Correction (3)
Notes:
(1)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated June 14, 2004 and October 17, 2006.
(2)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated July 14, 2006.
(3)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated February 6, 2006.
(4)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated June 17, 2005.
(5)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated September 15, 2006
(6)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated October 23, 2006.
(7)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated December 15, 2006.
(8)
Filed with this report.
(9)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated October 10, 2006.
(10)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated November 13, 2006.
(11)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated October 20, 2006.
(12)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated January 31, 2007
(13) Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated April 30, 2007.
(14)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated April 10, 2007.
(15)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated May 9, 2007.
(16)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated June 18, 2007.
(17)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 8-K dated June 20, 2007.
(b)
Reports on Form 8-K
On October 10, 2007, we reported to the Securities and Exchange Commission that the Company agreed to issue a total of 2,058,823 units at $0.17 per unit for cancellation of indebtedness of the Company.
On December 11, 2007, we reported to the Securities and Exchange Commission that the Company approved the issuance of 588,235 common shares of the Company pursuant to a private placement at $0.17 per share for a total of $100,000 to an accredited investor.
On January 23, 2008, we reported to the Securities and Exchange Commission that Terrence Nylander resigned as officer and director of the Company.