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FORM 20-F
(Mark One) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR |
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2007 | |
|
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . . |
| For the transition period from |
| to |
| Commission file number: |
| GENOIL INC. |
|
(Exact name of Registrant as specified in its charter)
Canada (Jurisdiction of incorporation or organization) |
|
633 – 6 Avenue S.W., Suite 2020
Calgary, Alberta, Canada T2P 2Y5 (Address of principal executive offices) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, Fully Paid and Non-Assessable Common Shares Without Par Value listed on the TSX Venture Exchange and OTC Bulletin Board
| SEC 1852 (05-06) | Persons who respond to the collection of information contained in | |
| this form are not required to respond unless the form displays a | ||
| currently valid OMB control number. | ||
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Common Shares: 232,912,757 as of December 31, 2007 and 239,935,294 as of April 18, 2008 Preferred shares: 2,785,681 as of December 31, 2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| ¨ Yes |
| x No |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
| ¨ Yes |
| x No |
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| x Yes |
| ¨ No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer ¨ |
| Accelerated filer x |
| Non-accelerated filer ¨ |
Indicate by check mark which financial statement item the registrant has elected to follow
| x Item 17 |
| ¨ Item 18 |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| ¨ Yes |
| x No |
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
| ¨ Yes |
| ¨ No |
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Item 1. Identity of Directors, Senior Management and Advisers
A. Directors and senior management.
Not required as this is an annual report under the Exchange Act .
B. Advisers.
Not required as this is an annual report under the Exchange Act .
C. Auditors.
Not required as this is an annual report under the Exchange Act .
Item 2. Offer Statistics and Expected Timetable
Not required as this is an annual report under the Exchange Act .
|
Item 3.
Key Information
A. Selected financial data. |
Genoil Inc.'s ("Genoil" or the "Corporation") financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP). These principles conform in all material respects with US GAAP except as disclosed in Note 23 to the Consolidated Financial Statements. The following summary financial data should be read together with the Consolidated Financial Statements and the respective notes, the other information contained in this document.
The following selected consolidated financial data as of December 31, 2007, 2006, 2005, 2004 and 2003 and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 have been derived from Genoil's audited Consolidated Financial Statements, which are included elsewhere, and were prepared in accordance with Canadian GAAP. These principles differ in certain respects from those applicable under U.S. GAAP as is discussed in detail in Note 23 to the Consolidated Financial Statements.
Genoil's Consolidated Financial Statements are stated in Canadian Dollars ("CDN$" or "$"). All dollar amounts provided in this annual report are in Canadian Dollars unless otherwise stated.
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To date, the Corporation has not issued any dividends to shareholders.
3
| Currency and Exchange Rates (Cdn$ per 1 US$) | ||||
| Average exchange rate | 2007 | 1.0747 | ||
| 2006 | 1.1304 | |||
| 2005 | 1.2114 | |||
| 2004 | 1.2191 | |||
| 2003 | 1.3916 | |||
| High / Low in last six months (1 US$ = C$) | ||||||
| High | Low | |||||
| March 2008 | 1.0206 | 0.9729 | ||||
| February 2008 | 1.0289 | 0.9814 | ||||
| January 2008 | 1.0329 | 0.9909 | ||||
| December 2007 | 1.0201 | 0.9805 | ||||
| November 2007 | 1.0000 | 0.9215 | ||||
| October 2007 | 0.9984 | 0.9447 | ||||
B. Capitalization and indebtedness.
Not required as this is an annual report under the Exchange Act .
C. Reasons for the offer and use of proceeds.
Not required as this is an annual report under the Exchange Act .
D. Risk factors.
Going Concern
To date Genoil has not attained commercially viable operations from its various patents and technology rights. Genoil's future is dependent upon its ability to obtain adequate additional financing to fund the development of commercial operations from its various patents and technology rights. The consolidated financial statements are prepared on the basis that Genoil will continue to operate throughout the next fiscal period to December 31, 2008 as a going concern. A failure to continue as a going concern would require that stated amounts of assets and liabilities be reflected on a liquidation basis, which would differ from the going concern basis.
General Risk Factors
An investment in the Corporation's common shares ("Common Shares") should be considered highly speculative. In addition to other information in this Form 20-F, you should carefully consider the following factors when evaluating Genoil and its business.
Much of the information included in this annual report includes or is based upon estimates, projections or other "forward-looking statements". Such forward-looking statements include any projections or estimates made by the Corporation and its management in connection with its business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect Genoil's current judgment regarding the direction of its business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this document.
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The section that follows addresses several of the risk factors related to the Corporation's operations in more detail.
Genoil has a history of substantial losses and negative cash flows. It expects these losses and negative cash flows to continue and increase in the future. If it is unable to make a profit, the Corporation may not be able to continue to operate its business.
Genoil has not earned profits to date and it may not earn profits in the future. Profitability, if achieved, may not be sustained. The commercialization of its technologies requires financial resources and capital infusions and future revenues may not be sufficient to generate the funds required to continue its business development and marketing activities. If the Corporation does not obtain sufficient capital to fund its operations, it may be required to forego certain business opportunities or discontinue operations entirely.
Genoil has incurred significant losses and expects to continue to incur significantly greater costs than revenue received. Consequently, the Corporation expects to incur losses in the near term. If Genoil achieves profitability, it may not be able to sustain it. The business of initiating, developing and implementing inventive or innovative processes is inherently risky. Manpower and capital employed may not result in the development of a commercial or economic process. Once successfully developed, there is no certainty that the intended market will be receptive to the Corporation's technology. In all areas of its business, Genoil may compete against entities that may have greater technical and financial resources. The Corporation is completely dependent upon external sources of financing which may not be available on acceptable or economic terms.
The intellectual property and technology developed by Genoil may not work in the manner anticipated or the market may not be receptive to its technology or other new technologies might be more feasible to implement.
Genoil develops technology for use in various industries. Part of the risk in this type of undertaking is that the technology may not perform as expected or its use may not be economical. The development of intellectual property is expensive and time consuming and if the developed product is not marketable, then no revenues will be realized from its development.
The marketability of Genoil's technologies depends on the ability of those technologies to meet and adapt to the needs of industry customers. The markets for Genoil's technologies may not develop further and the current level of market acceptance of its products may decrease or may not be sustainable. In order to continue marketing its technology, the Corporation must adapt to rapid changes in technology and customer requirements. The Corporation's success will depend, in part, on its ability to enhance its existing technology, gain market acceptance, and continue to develop its products to meet increasingly demanding customer requirements.
Genoil's technology is still experimental so the demand for it is unknown. The Corporation's potential market may not develop as it anticipates and, accordingly, it may not be able to expand its business or operate it profitably.
The Corporation's technology has not been proven in any commercial venture and, as such, any market for its technology will depend significantly on its own efforts. As a result, future demand for its technology is unknown. Genoil believes that many of its potential customers are not fully aware of the benefits of its technology. The Corporation must educate potential customers regarding these benefits and convince them of its ability to provide complete and reliable services. The market for its technology may never become viable or grow further. If the market for its technology does not grow or grows more slowly than it currently anticipates, its business, financial condition and operating results would be materially adversely affected.
Key employees may terminate their employment.
Skilled and educated professionals are a fundamental component of the development of intellectual property. If these key employees terminate their employment with Genoil, the development of its intellectual property may be hindered or delayed, increasing the expenses associated with technology development. The Corporation's success is dependent on the services of members of its senior management team. The experience and talents of this team will be a significant factor in its continued success and growth. The loss of any senior management member could have
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a material adverse effect on its operations and business prospects. Given its financial situation, Genoil may not be able to retain or replace its key personnel. The Corporation has no key man insurance.
Genoil has issued common share purchase warrants, options, preferred shares and convertible debt, the conversion and/or exercise of which would have a dilutive effect on its earnings per share.
As of December 31, 2007, the following potentially dilutive instruments were outstanding:
| Options outstanding | 39,091,250 |
| Warrants outstanding | 7,026,528 |
| Notes convertible | 1,988,187 |
| Convertible Preferred Shares | 11,142,724 |
|
|
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| 59,248,689 | |
|
|
|
| Common shares outstanding | 232,912,757 |
| Potential dilution | 25% |
Furthermore, the Corporation may enter into commitments in the future which would require the issuance of additional Common Shares, and it may grant additional stock options. The Corporation is authorized to issue an unlimited number of Common Shares. Issuance of additional shares would be subject to TSX Venture Exchange regulatory approval and compliance with applicable securities legislation. Genoil currently has no plans to issue Common Shares other than upon the exercise of warrants and options, for the purpose of raising funds for general working capital requirements, to acquire additional technology, to accommodate strategic partnerships, or for the satisfaction of debts, in certain, limited circumstances, which issuance would be subject to approval of the TSX Venture Exchange.
Third parties may claim that Genoil infringes their proprietary rights.
Genoil potentially may be subjected to claims that it has infringed the intellectual property rights of others. As the number of products in the oil and gas industry increases, the Corporation may become increasingly subject to infringement claims, including patent and copyright infringement claims. In addition, previous employers of its former, current or future employees may assert claims that such employees have improperly disclosed to Genoil the confidential or proprietary information belonging to those employers. Any such claim, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention from its core business, require it to stop selling or delay shipping, or cause the redesign of its product. In addition, Genoil may be required to pay monetary amounts as damages, for royalty or licensing arrangements, or to satisfy indemnification obligations that it has with some of its customers.
Genoil may not be able to protect its proprietary information.
Genoil relies on a combination of copyright, patents and trade secret laws, confidentiality procedures, contractual provisions and other measures to protect its proprietary information. All of these measures afford only limited protection. These measures may be invalidated, circumvented or challenged, and others may develop technologies or processes that are similar or superior to the Corporation's technology. Despite its efforts to protect its proprietary rights, unauthorized parties may attempt to copy Genoil's products or to obtain or use information that it regards as proprietary. Given its size and financial situation, Genoil may not be ultimately effective in preventing misappropriation of its proprietary rights.
Genoil's intellectual property may become outdated or surpassed by industry improvements.
Genoil is a technology-based company and is involved in developing, improving, and marketing its technology to customers. There is a risk that new developments in Genoil's field of specialty will arise, making its technology products less marketable. To enhance its position in the technology industry, the Corporation must continue to develop and improve its current products and develop product extensions. There may not be a demand for the products or capital available to finance their development in the future.
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Genoil operates in a competitive market.
The business of providing technology-based solutions to industry is highly competitive. Some of Genoil's competitors may have greater financial and marketing resources, greater market share and name recognition than it has, which would allow them to quickly develop market presence in the markets Genoil serves or allow them to expand into new markets that Genoil intends to serve. Given its size and financial position, the Corporation may not be able to effectively compete with these competitors.
Potential expansion and opportunities may arise.
Genoil may continue to expand its operations or product lines through the acquisition of additional businesses, products or technologies. It may not be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses, products or technologies without substantial expenses, delays or other operational or financial challenges. Furthermore, acquisitions may involve a number of additional risks, including the diversion of management's attention, failure to retain key personnel, unanticipated events or circumstances and legal liabilities, some or all of which could have a material adverse effect on Genoil's business, results of operations and financial condition. In addition, acquired businesses, products or technologies, if any, may not achieve anticipated revenues and profitability. Acquisitions could also result in potentially dilutive issuances of equity securities. The Corporation's failure to manage its acquisition strategy could have a material adverse effect on its business, results of operations and financial condition.
U.S. investors may have difficulty enforcing judgments against Genoil or its management.
Genoil is incorporated in Canada. Substantially all of its assets are located outside the United States. As a result, U.S. investors may not be able to:
- effect service of process upon the Corporation or these persons within the United States; or
- enforce against the Corporation or these persons in United States courts, judgments obtained in United States courts, including judgments predicated on the civil liability provisions of the federal securities laws of the United States; or
- initiate a derivative suit on the Corporation's behalf.
Genoil is subject to exchange rate risk.
Genoil is a Canadian company and its operating expenses and capital expenditures are denominated in Canadian dollars. It will be subject to exchange rate risk where it enters into contracts not denominated in Canadian dollars and, accordingly, fluctuations in exchange rates could have a material effect on its results of operations.
Item 4. Genoil's Information
A. Genoil's history and development.
The Company
Genoil was created from an amalgamation on September 5, 1996 under the Canada Business Corporations Act of Genoil Inc. and Continental Fashion Group Inc., a public company whose shares traded on the Alberta Stock Exchange. At the time of the merger, Continental Fashion Group Inc. had no assets, no liabilities and did not carry on any business.
The address of its head office is 2020, 633 – 6 Avenue S.W., Calgary, Alberta, T2P 2Y5 and its phone number is (403) 750-3450.
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| History |
| 1996 | - | Genoil was created from an amalgamation between Genoil Inc. and Continental Fashion Group Inc. | ||
| Continental Fashion Group Inc. shareholders received shares in the amalgamated company on a 10-for-1 | ||||
| basis while Genoil Inc. shareholders received shares in the amalgamated company on a 1-for-1 basis. | ||||
| 1997 | - | Genoil acquired interests in oil and gas properties located in the Province of Quebec; | ||
| - | St. Genevieve Resources Ltd., Genoil's then parent company, re-directed funds from its accounts, leaving | |||
| Genoil insolvent; | ||||
| - | Debt owed by Explogas Ltd. ("Explogas") was converted for farm-in rights in Cuba offshore and onshore | |||
| in a related party transaction by which Genoil acquired shares of Explogas and a general release in | ||||
| respect of their dealings. Subsequent to the conversion of debt, Genoil sold all of its shares in Explogas. | ||||
| 1998 | - | Genoil was re-capitalized by Beau Canada Exploration ("Beau") and it became a subsidiary of Beau; | ||
| - | Genoil's board of directors and management were replaced and it changed its year end to December 31st; | |||
| - | Royalty interests and producing properties in the Western Sedimentary Basin were purchased for | |||
| $2,600,000. As this was a non-arm's length transaction and the purchase price was determined with | ||||
| reference to an independent engineering assessment. | ||||
| - | Genoil listed on the Canadian Venture Exchange (CDNX) predecessor to the TSX Venture Exchange. | |||
| 1999 | - | Genoil acquired all outstanding common shares of CE3 Technologies Inc. This was an arm's length | ||
| transaction; | ||||
| - | Genoil's subsidiaries at the end of 1999 were CE3 Technologies Inc. ("CE3"), Enviremedial Services Inc. | |||
| ("Enviremedial") (CE3 was sole shareholder of Enviremedial), and Genoil Merchant Banking Intragroup | ||||
| Restricted Limited ("GMBI"); | ||||
| - | Genoil sold its Cuban interests. | |||
| 2000 | - | All of Genoil's Canadian royalty interest and producing properties were sold to Beau Canada for | ||
| $1,700,000. As this was a non-arm's length transaction the purchase price was determined with reference | ||||
| to an independent engineering assessment. The disposition was recorded at the exchange value based on | ||||
| a valuation reviewed by independent petroleum engineers; | ||||
| - | Genoil also sold GMBI to Beau for $1,400,000 cash consideration. As Genoil shifted its focus to | |||
| technology development from oil and gas operations, GMBI, which held some residual international oil | ||||
| and gas exploration prospects and some accumulated tax losses, was no longer a core asset. This | ||||
| transaction, which was non-arms length, approximated fair value given a reasonable estimate of the value | ||||
| of the accumulated tax losses and the exploration prospects; | ||||
| - | Beau distributed its holdings in Genoil, a total of 61,600,000 Common Shares, to its shareholders and | |||
| ceased to be Genoil's parent company; | ||||
| - | CE3 was placed into receivership as it had substantial cost overruns on its oil sands cleaning facility. | |||
| CE3's creditors took over the project, and Genoil made a bid to the receiver for CE3's technology. | ||||
| Genoil was successful in its bid and the remaining operations of CE3 were wound up by the receiver; | ||||
| - | Genoil changed its registered office from Toronto, Ontario to Calgary, Alberta. | |||
| 2001 | - | Genoil acquired all of the intellectual property of CE3, as well as certain capital assets, including a pilot | ||
| heavy oil upgrader facility, for $2,000,000 cash consideration and the subordination of CE3's | ||||
| approximate $20,000,000 of secured debt owing to Genoil; | ||||
| - | David Lifschultz acquired 10,121,462 Common Shares of Genoil. Mr. Lifschultz acquired 1,613,450 of | |||
| these shares through a private placement, with the remaining amount acquired through market purchases | ||||
| at prices between $0.09 and $0.11 per share. | ||||
| - | Exclusive rights to the oil-water separation technology which Genoil held were indefinitely extended. | |||
| 2002 | - | Genoil purchased Hydrogen Solutions Inc. and was assigned an existing license for EHG Technology | ||
| LLC ("EHG") technology, which it paid for by issuing 10.5 million Common Shares and agreeing to pay | ||||
| a 32.5% royalty based on net operating income relating to hydrogen production. This was an arm's | ||||
| length purchase. The Corporation acquired the exclusive rights to a process for generating hydrogen | ||||
| from water; | ||||
| - | Genoil acquired patent rights for a three-phase oil water separator as well as an existing commercial oil | |||
| water separation unit in exchange for 700,000 of its Common Shares at a deemed price of $0.22 per | ||||
| share; | ||||
| - | Genoil completed two non-brokered private placements through which it issued 6,566,614 Common | |||
| Shares at a price of $0.18 per Common Share and 20,226,853 Common Shares at a price of $0.10 per | ||||
| share. As part of the latter placement, Mr. Lifschultz purchased an additional 19,770,329 shares, |
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| bringing his shareholdings to 20.5% of Genoil's outstanding Common Shares. Mr. Lifschultz paid cash | ||||
| for these shares; | ||||
| 2003 | - | Genoil continued operations under the agreement with EHG for the purpose of conducting tests of the | ||
| hydrogen generating technology at a site in Romania; | ||||
| - | Outstanding warrants, representing a total of 11,262,500 Common Shares, were extended for one | |||
| additional year to February 12, 2004. These warrants have now expired; | ||||
| - | A number of shares-for-debt agreements were reached with several of Genoil's creditors. As of | |||
| December 31, 2003, Genoil had issued 5,186,060 Common Shares representing $732,325 of creditor | ||||
| liabilities for the year 2003. It received approval from the TSX Venture Exchange to list all of the shares | ||||
| issued pursuant to such arrangements and all such shares were issued subject to a TSX Venture Exchange | ||||
| imposed four-month hold period; | ||||
| - | Genoil completed two non-brokered private placements through which it issued 6,008,499 Common | |||
| Shares at a price of $0.10 per share and 6,917,193 units at a price of $0.15 per unit (each unit being | ||||
| comprised of one Common Share and three-tenths of a share purchase warrant, with each full warrant | ||||
| allowing its holder to purchase one Common Share at a price of $0.20 for a period of two years). | ||||
| 2004 | - | Genoil completed a non-brokered private placement through which it issued 10,642,820 units at a price | ||
| of $0.14 per unit (each unit being comprised of one Common Share and three-tenths of a share purchase | ||||
| warrant with each full warrant allowing its holder to purchase one Common Share at a price of $0.15 for | ||||
| a period of two years). | ||||
| - | The Corporation issued 1,674,999 shares in satisfaction of obligations to four creditors including two | |||
| officers and one related party. | ||||
| - | Genoil entered into a contract with Silver Eagle Refining – Woods Cross Inc. ("Silver Eagle") to install | |||
| the first commercial Genoil Hydroconversion Upgrader ("GHU"). | ||||
| - | Genoil raised $900,000 through two short-term loans from a director. As compensation for the loan, the | |||
| Corporation issued to the lender 300,000 Common Shares at a deemed price of $0.25 per share. | ||||
| - | Genoil signed an agreement with OAO Lukoil (“Lukoil”) for the testing of its heavy oil from the Yarega | |||
| oil field in Russia's Komi Republic. | ||||
| - | Genoil signed a licensing agreement with Velox Corporation regarding the "Maxis" oil and water | |||
| separation system. Genoil has proprietary rights to the "Maxis" hydrocyclone technology that provides | ||||
| upstream, high-speed separation of oil from water in the field. Genoil’s Maxis uses the hydrocyclone | ||||
| system to provide pre-treatment and de-watering of crude emulsions. | ||||
| - | Genoil signed a licensing agreement for its Claris technology with MNGK, a Russian oil services firm. | |||
| - | Genoil acquired a controlling interest in Velox Corporation. | |||
| - | In December, Genoil completed a non-brokered private placement through which it received $5,638,220 | |||
| and issued non-interest bearing convertible debentures with a conversion price of $0.44 per share. The | ||||
| participants in the private placement also received 3,203,534 warrants entitling them to purchase | ||||
| 3,203,534 Common Shares at a price of $0.85 per share any time prior to December 23, 2009. The | ||||
| debentures mature in December, 2014. | ||||
| 2005 | - | On February 3, 2005, a lender agreed to exercise its right to acquire 10,000,000 Common Shares for | ||
| $2,300,000. As part of the note payable settlement agreement, the Company agreed to arrange for | ||||
| investors to purchase the 10,000,000 Common Shares exercised by the holder for approximately $3.0 | ||||
| million. The total proceeds on the sale of shares were paid to the holder to settle the entire principal and | ||||
| accrued interest outstanding to the lender. | ||||
| - | The Corporation settled payables with insiders equal to $471,414 through the issuance of 1,266,873 | |||
| Common Shares pursuant to certain shares for debt agreements. | ||||
| - | Late in 2005 the Corporation received a letter of termination from Silver Eagle. | |||
| - | Genoil completed a non-brokered private placement, through which it received $750,000 and issued a six | |||
| month convertible debenture, accruing interest at a rate of 12% per annum with a conversion price of | ||||
| $0.44 per share. | ||||
| - | Genoil signed a letter of intent with Surge Global Energy, Inc. to evaluate the construction of a 10,000 | |||
| barrel per day commercial upgrader based on its technology. | ||||
| - | In December 2005, Genoil arranged a non-brokered private placement. Pursuant to this private | |||
| placement, Genoil received $750,000 and issued a six month convertible debenture, accruing interest at a | ||||
| rate of 12% per annum and having a conversion price of $0.44 per share. The private placement also | ||||
| included 426,000 warrants to purchase Common Shares at an exercise price of $0.85 per share and | ||||
| exercisable within 6 months of the date of issuance. |
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| 2006 | - | Genoil entered into a non-binding memorandum of understanding with Hebei Zhongjie PetroChemical | ||
| Group Company Ltd. (“Hebei Zhongjie”) to jointly develop and build the first major commercial heavy | ||||
| oil upgrader in China based on the GHU® technology. | ||||
| - | Genoil's GHU® technology was approved by the United States Patent and Trademark Office. | |||
| - | Lifschultz Terminal and Leasing Co. Inc. and Lifschultz Enterprises Co, LLC converted their outstanding | |||
| $750,000 convertible notes, originally acquired in 2005 and 2006 respectively, into Common Shares thus | ||||
| eliminating a $1,500,000 outstanding debt payable by Genoil. | ||||
| - | SDS Capital Group SPC, Ltd. converted $296,316 of its outstanding $428,995 non-interest bearing | |||
| convertible debenture originally acquired in December 2004. | ||||
| - | In June 2006, Genoil and Steaua Romana Refinery signed a memorandum of understanding for a | |||
| Hydroconversion Upgrader in Romania. | ||||
| - | In August 2006, Genoil entered into a purchase and sale agreement with Murphy Canada Exploration | |||
| Company for the purchase of rights to royalties previously held by Beau Canada Exploration Ltd. Genoil | ||||
| acquired those rights in exchange for 4,500,000 common shares. | ||||
| - | In September 2006, Genoil completed a private placement, receiving US$3,550,150 and issued 4,863,218 | |||
| Common Shares, and 1,215,802 warrants to purchase Common Shares at an exercise price of US$1.10 | ||||
| per share and exercisable within two years from issue date. | ||||
| - | In October 2006, Genoil and Hebei Zhongjie signed a Letter of Intent to proceed with the design and | |||
| installation of a 20,000 bpd GHU at their refinery in Nampaihe Town, Huanghua City, Hebei, China. | ||||
| Hebei Zhongjie shipped oil for testing at the Corporation's pilot facility in Two Hills, Alberta. Genoil | ||||
| will immediately begin work on the first stage of the project's engineering design. | ||||
| - | Genoil completed a non-brokered private placement, through which it received $968,825.19 and issued a | |||
| convertible debenture carrying a 12% annual interest rate and having a conversion price of $0.75 per | ||||
| share. In connection with the issuance of the convertible debentures, Genoil granted 322,941 warrants | ||||
| exercisable for a term of 6 months at $0.98 per share. | ||||
| 2007 | - | In April 2007, Genoil and two holders of convertible notes, originally issued in October 2006, agreed to | ||
| extend the maturity date by six months to October 6, 2007, with such notes to continue on the same term | ||||
| in all other respects. The warrants issued in connection with these notes were likewise extended. | ||||
| - | In April 2007, Genoil entered into a testing agreement with Hebei Zhongjie for testing of their heavy oil | |||
| at the Company’s pilot plant to determine final parameters to move the project into the next phase. | ||||
| - | In May 2007, Genoil entered into shares-for-debt agreements with several of Genoil’s outside directors, | |||
| they agree to forgive a total of $223,000 in unpaid director’s fees in exchange for 660,740 common | ||||
| shares of the Corporation. | ||||
| - | In May 2007, Genoil entered into a funding agreement with the Chairman and CEO of the Corporation, | |||
| who received 600,000 common share purchase warrants in lieu of interest on a line of credit of $ | ||||
| 1,000,000 made available to the Company. Each warrant is exercisable for one common share of the | ||||
| Corporation at a price of $0.58 per share at any time within one year from its date of issue. | ||||
| - In July 2007, the company finalized a private placement receiving $ 2.8 million and issuing 5,130,382 | ||||
| common shares. Additionally, 0.25 common share purchase warrants are being issued for each common | ||||
| share, which are exercisable until three years following their issue date at a price of US$0.78. | ||||
| - Genoil issued 107,825 shares to satisfy amounts outstanding to a consultant of the Corporation. | ||||
| - In August 2007 the Corporation granted 1,000,000 incentive stock options for an officer at a strike price | ||||
| of $0.57, | ||||
| - In September 2007, Genoil announced the completion of the heavy oil testing for Hebei Zhongjie | ||||
| refinery. | ||||
| - The Genoil Crystal Sea bilge cleaner received final US Coast Guard certification for marine oil | ||||
| pollution prevention equipment. | ||||
| - By the end of September, the Canadian patent application for the GHU upgrading technology was | ||||
| approved by the Canadian Intellectual Property Office. | ||||
| - In October 2007, Genoil and the holders of the convertible notes and warrants that had been extended in | ||||
| April, agreed to another extension of six months to April 6, 2008, and on the same terms. | ||||
| - In October 2007, Genoil announced it signed a binding Memorandum of Understanding with Stone & | ||||
| Webster International, subsidiary of The Shaw Group, for marketing and technical assistance for further | ||||
| development of the GHU technology and future projects. | ||||
| - In November 2007, Genoil agreed to convert long term convertible notes held by a major investor into | ||||
| 2,785,681 convertible preference shares. Each preferred share will be convertible into four common | ||||
| shares of Genoil at $1.76. |
10
| - In November 2007, Genoil and Aquamation, Inc. formed an alliance to jointly collaborate in industrial |
| water treatment projects and process plants for the oil and gas, and petrochemical industries. Genoil and |
| Aquamation started work under their joint operating agreement on two gas metering projects in Nigeria. |
B. Business overview.
General Development of the Business
Genoil's principal business is the development of technologies relating to the oil and gas industry. Its present goal is to commercialize its technologies internationally.
The Corporation owns rights to several patented and proprietary technologies. A number of products that have been created from these technologies are under development. None of its technologies have been commercialized. A discussion of these products follows.
No consideration has been given to consumer boycotts as a result of operations in Countries of Particular Concern as defined by the International Religious Freedom Act of 1998 . Genoil is a Canadian company and as such the International Religious Freedom Act of 1998 does not apply to its operations. The Corporation does not produce consumer products.
Pilot Heavy Oil Upgrader
Genoil owns heavy oil upgrader technology. Genoil's pilot heavy oil upgrader (the "Upgrader") uses a hydrogen addition process, as opposed to conventional carbon rejection. The considerable price differential between light and heavy oil creates a potential opportunity for the Upgrader to be developed for both heavy oil and bitumen. The hydrogen addition process is a process whereby hydrogen is mixed with bitumen under specific pressures and temperatures to upgrade the bitumen from a low API to whatever desired value the client requires. Genoil's Upgrader has progressed through the development stage.
During the first quarter of 2006, Genoil entered into a non-binding memorandum of understanding (“MoU”) with Hebei Zhongjie Petrochemical Group Company to jointly develop and build the first major commercial heavy oil upgrader in China based on the Genoil GHU technology. The MoU was followed by a Letter of Intent (“LoI”) after a high level delegation of Hebei Zhongjie visited the Genoil office in Edmonton in September 2006. Hebei Zhongjie shipped a sample of their blend of heavy oil and refinery residues to Canada and in October 2007 Genoil successfully completed the testing at the Two Hills pilot plant. Genoil is currently proceeding with the Front End Engineering & Design ("FEED") study to be integrated into a final contract approval of the project.
This project has a planned start up date of early 2010. The LoI sets out the framework upon which Genoil and Hebei Zhongjie plan to proceed with the design and installation of a 20,000 bpd GHU at Hebei Zhongjie's 150,000 bpd petrochemical facility in Nampaihe Town, Huanghua City, Hebei, China. The LoI also provides that the Corporation will fund 80% of the total capital costs for the implementation of the project and Hebei Zhongjie agrees to fund the remaining 20%. Further, the LoI provides that net profits of the project shall be allocated and paid as to 60% to the account of the Corporation until such time as the Corporation has received net profits in an amount equal to double the Corporation's costs. Following such time, 10% of all net profits realized from the project are to be received by the Corporation for so long as the refinery remains in operation.
A high level Lukoil delegation visited Alberta in mid-June 2006 and held discussions with the Genoil engineering team at its Sherwood Park offices outside Edmonton. During a detailed review of Lukoil’s requirements in the area of heavy oil upgrading, Lukoil requested a further elaboration of a project study submitted with respect to a proposed GHU project in the Komi region of Russia. Genoil presented a commercial proposal for a 60,000 bpd upgrader in October 2006. At this point, Lukoil has not made a decision on the development of the oil field.
In August 2006 Genoil signed a Memorandum of Understanding with Steaua Romana refinery in Romania. It is Genoil's plan to conduct a GHU retrofit of 1,500 bpd on this refinery that processes 11,000 bpd, and to utilize this project as a showcase for European, Eastern European, Russian and CIS oil companies, and despite its relatively small size, to demonstrate the versatility of the GHU technology. The anticipated Steaua Romana refinery retrofit
11
will be conducted for the purpose of upgrading the vacuum distillation towers residues and obtaining hydrocarbons of higher value than might otherwise be achievable and which can be further processed in the refinery. A GHU unit installed in this refinery would help increase their refinery utilization as right now the amount of residue being produced is limiting this refinery to 60% production capacity. The GHU installation is part of a larger refurbishing project of the Steaua Romana refinery and as such is dependent on other decisions the refinery has to make.
In October 2007, Genoil announced the appointment of new experienced staff to manage its global business development and Middle East operations for further global promotion of the GHU® heavy oil upgrading technology.
Following that announcement, Genoil signed a binding Memorandum of Understanding with Stone & Webster International, Inc. (SWI), a wholly owned subsidiary of The Shaw Group Inc. Stone and Webster will provide marketing and technical assistance to Genoil in connection with further development of Genoil’s GHU technology. In the short term SWI is assisting Genoil with our engineering needs as they pertain to the scale up of the GHU, to support the engineering depth it takes to do the detailed engineering and project management of large projects. While Genoil will always maintain control over the process engineering and our GHU technology, SWI’s association with Genoil allows Genoil to field many more engineers required to execute a project in all engineering disciplines required i.e. mechanical, electrical, piping, civil and structural etc.
Oil/Water Separation
Genoil owns certain oil/water separator technology rights through a wholly owned subsidiary. Its Maxis oil/water separator separates oil from water at the wellhead. An oil/water separator test unit is located at the Corporation's Upgrader facility for testing at Two Hills, Alberta, Canada. Other companies also have oil/water separators that operate near the wellhead, but often require additional sources of heat to function efficiently. Oil/water separators generally use gravity, heat or a combination of the two as well as filters. Some separators also use gravity and the movement of the fluid ("cyclonics") to separate oil and water. Genoil's separators are designed to use cyclonic action to separate oil and water more efficiently than strictly gravitational or heat based separators. Other cyclonic separators exist but management believes that, as a result of the design of Genoil's separators, they should perform better than existing separators currently in use.
Genoil’s Crystal Sea water separator is a compact unit that is able to handle smaller volumes using a compartmental process. Genoil built a prototype that has been successfully tested by U. S. Coast Guard and has presented this technology to a major tanker line. The Crystal Sea Separator has the potential of tapping a 50,000 ship market, as all ships over 200 tons which sail internationally must be outfitted with a device of this nature, as per international shipping regulations. This new generation of our existing Crystal technology meets or exceeds the IMO MEPC 107(49) resolution that requires the separators to treat bilge water containing surfactant elements such as oil, emulsionated hydrocarbon water and detergent, and after processing to have an effluent discharge of less than 15 ppm for territorial waters and less than 5 ppm for discharge into inland waterways.
In November 2007, Genoil signed a Joint Operating Agreement with Aquamation Inc., a Houston-based process equipment company, to collaborate in industrial water treatment projects & process plant projects for clients in the oil and gas and petrochemical industries. Under this agreement, both companies will jointly market and further develop and integrate their oil and water separation technologies, supplying process engineering, design, equipment and technology, and executing projects sharing revenues and profits as equal partners. Genoil and Aquamation, have started working on two projects for gas metering plants in Nigeria, for the Nigerian Gas Company and on behalf of Zakhem Construction - Nigeria.
Revenues from Product Sales
The majority of Genoil's products continue to be at the commercialization stage and have not yet produced revenues at this time.
In 2004, Genoil received $139,930 pursuant to an agreement with OAO Lukoil. The upgrading of heavy oil from Lukoil was completed in early 2005. The amounts are included as a recovery in pilot upgrader expenses.
12
During 2007 the Company generated revenues of $83,456 by providing engineering consulting services to Aquamation Ltd pursuant to a Joint Operating Agreement.
Interest was earned on short-term investment of the Company’s cash reserves.
Expenditures Relating to the Sale of Products
Genoil is primarily involved in the development of its technologies for commercial application. The Corporation engaged two full-time employees (one engineer and one administrative) and three consultants (one engineer and two financial professionals) to help in selling and marketing its products, and to seek funding during 2006.
The following table presents expenditures relating to the sale and marketing of Genoil's products for the past five fiscal years, by source:
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|
|
|
|
|
|
|
| Business development | 828,349 | 1,172,098 | 1,739,788 | 3,263,955 | 2,661,106 |
|
|
|
|
|
|
Business development expenses consist largely of traveling expenses as officers traveled, mainly to China, USA and Middle Eastern countries, to negotiate contracts and present at conferences.
Genoil does not intend to commit to any expenditures of any other nature, beyond expenditures necessary for the development and maintenance of its technologies, in the near future.
While Genoil’s primary commercial focus has been on the GHU, it has also recently made advances with respect to potential near term revenue opportunities from its Maxis and Crystal products. Genoil anticipates sales of both Maxis and Crystal units based on increasingly strict environmental regulations. Therefore, the Company is anticipating the generation of income in the short term from sale of oil/water separation equipment. The Corporation continues to believe that the largest potential for medium and long-term revenue is based on sales of the GHU technology.
Geographic Markets
The Company markets its technology mainly to potential customers in the Middle East, Russia and China. The markets for Genoil’s products are global.
Intellectual Property Rights
Genoil has 8 patent applications under review in Canada, the United States, Europe, Venezuela and Brazil and has been granted 6 US patents (Patent nos. 6,074,549; 6,527,960; 6,125,865; 7,001,502; 7,014,756; 5,603,825), 2 Canadian patents (No. 2,243,142 and 2,306,069), and Velox has one patent (5,965,021). Genoil either owns or licenses the rights to all intellectual properties used in its products.
Genoil has copyright, patent rights and trademarks, which are necessary and contribute significantly to the preservation of its competitive position in the markets which it addresses. It is possible that the Corporation's patents and other intellectual property will be challenged, invalidated or circumvented by third parties in the future. In the future, it may not be able to obtain necessary licenses on commercially reasonable terms. Genoil enters into nondisclosure agreements with its suppliers, contractors and employees, as appropriate, so as to limit access to and disclosure of its proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies, which may adversely affect the Corporation.
Sales, Marketing and Distribution
Genoil is presently involved in pursuing sales of its Oil/Water Separator Units. Genoil is pursuing sales of Oil/Water Separators through its international network of agents and various engineering firms that deal with oil and gas companies throughout the world.
13
Genoil intends to market its products and license its GHU technology throughout the world's oil refining and production industry. Genoil is presently engaged in discussions with refining operations in North America, Europe, Latin America, Asia and the Middle East. It has entered into 15 contracts with agents that cover 36 countries to further pursue these sales.
Competition
Genoil is aware that several other companies may be presently pursuing the development of technologies in the oil and gas industry. It acknowledges that it is possible that some of these technologies may be similar in nature to its products and technologies. Such companies, should they be involved in selling or developing the same technology as Genoil, may be potential competitors to the Corporation. The Company believes that its patented fixed bed catalyst hydroprocessing technology in the GHU is competitively advantaged in the market by virtue of the expected comparatively low capital and operating costs and high product yields for operators relative to other coking or hydroprocessing products.
Government Regulations
There are several government regulations with which Genoil must comply. Failure to comply with these regulations could adversely affect its business. Certain government regulations require the imposition of standards that are normally a part of industry knowledge, and as such, would be understood and acted upon by the Corporation in the normal course of doing business.
Genoil, as a producer of technology and intellectual property, is not generally subject to environmental regulations. Genoil specializes in mechanical processes and as such its regular operations do not fall within the scope of environmental protection legislation.
The Corporation is subject to securities regulation in the Canadian jurisdictions in which it is a reporting issuer. As an issuer with securities traded on the TSX Venture Exchange, the Company is subject to its rules. The Corporation's shares are also traded on the OTCBB and as such, the Corporation is subject to the OTCBB listing requirements. Genoil must maintain a legislated level of public disclosure and must maintain minimum listing requirements based on its financial performance, resources and stage of development.
Plan of Operation
Genoil intends to continue to focus on marketing and developing its products in the immediate future. The Company may also consider opportunities in projects that incorporate its GHU Technology.
To fund its near term working capital requirements, the Corporation completed a private placement of shares during 2007, through which it raised about $2.8 million in gross proceeds. During the year, the Company also received about $778,000 on the exercise of options and warrants. These funds have permitted Genoil to fulfill its operating and capital requirements for the last several months; however subsequent financing activities will be required.
At the end of 2007 the Company purchased portions of a refurbished demonstration plant for $600,000. This would form part of a planned 700 bpd demonstration plant planned to be build in the USA. The successful operation of such plant will prove that the GHU technology is scalable and profitable.
C. Organizational structure.
Genoil has a total of 19 full time employees, and also hires outside consultants as required in the cities of Calgary and Edmonton, Alberta, New York, New York, Houston, Texas, and in Europe. The Corporation has also engaged a number of sales agents that cover 36 countries in North and South America, Europe and the Middle East. Some consultants and the agents generally act as representatives on Genoil’s behalf with respect to commercial opportunities in their respective cities and countries. The Corporation intends to rely upon the services of these representatives and to remunerate them by means of sales commissions and incentive stock options.
14
Genoil has five subsidiaries: Genoil (USA) Inc., Velox Corporation, Hydrogen Solutions Inc., Genoil Technology International C.A. and Crystal Clear Solutions Inc. (the "Subsidiaries"). Genoil (USA), Inc., a wholly-owned subsidiary, was incorporated on December 29, 2004, in the State of Delaware, to facilitate payment of charges incurred by David K. Lifschultz, CEO of the Corporation, relating to market development in the U.S.A. Genoil owns 100% of each of Hydrogen Solutions Inc. and Crystal Clear Solutions Inc., both corporations incorporated in Canada pursuant to the Business Corporations Act (Alberta) . It also owns 100% of Genoil Technology International C.A., incorporated in Venezuela. None of these subsidiaries have any material assets or operations. Hydrogen Solution Inc. has had its legal entity status struck due to inactivity.
Genoil holds a 50.1% interest in the voting shares of Velox Corporation, which is a corporation incorporated in Canada pursuant to the Business Corporations Act (Alberta). Velox Corporation's primary asset is a cyclone oil and water separation technology. Velox Corporation currently has no material operations.
D. Property, plant and equipment.
Human Resources and Facilities
Genoil presently operates out of four main locations: an office in Edmonton, Alberta, an office in Calgary, Alberta, an office in New York, New York, and a research and development site located at Two Hills, Alberta.
Genoil currently has eight employees and two consultants based at its office in Edmonton, Alberta. During 2007, the Corporation leased 8,300 square feet and paid $ 9,436.37 per month for rental of this space. Genoil uses its Edmonton office for engineering, research and development.
The Corporation has three employees and one consultant based at its office in Calgary, Alberta. During 2007, Genoil Calgary paid $2,000 per month in rent. Genoil uses its Calgary office for corporate administration and marketing.
Genoil had four employees based at its facilities located in Two Hills, Alberta, at December 31, 2007. It uses its Two Hills facilities for research and development and for client demonstrations.
The Company plans to construct a 700 bpd demonstration plant to help convince potential customers that its GHU technology is scalable. The plant would probably be located in the southern USA and would cost about $10 million to construct.
The facilities operated by the Corporation are not subject to environmental protection legislation and to its knowledge no environmental issues exist that would potentially affect its utilization of its assets.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
Forward-Looking Statements
Statements in this report, or any document filed by Genoil with the different governing authorities, by or on behalf of it, to the extent not directly and exclusively based on historical events, constitute "forward-looking statements". These statements represent the Corporation's intentions, plans, expectations, and beliefs, and no assurance can be given that the results described in such statements will be achieved.
Forward-looking statements include, without limitation, statements evaluating market and general economic conditions in the following sections, and statements regarding future-oriented revenues, costs and expenditures. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this document. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties with respect
15
to the Corporation include the effects of general economic conditions, changing foreign exchange rates and actions by government authorities, uncertainties associated with legal proceedings and negotiations, industry supply levels, competitive pricing pressures and misjudgements in the course of preparing forward-looking statements.
Genoil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
A. Operating results
Overview
Genoil's financial statements are prepared in accordance with Canadian GAAP, which conform in all material respects with US generally accepted accounting principles, except as disclosed in Note 23 to the Consolidated Financial Statements, and are presented in Canadian dollars unless otherwise indicated.
The following discussion and analysis provides a review of activities, results of operations, cash flows and the Corporation's financial condition for the fiscal year ended December 31, 2007 in comparison with those for the fiscal year ended December 31, 2006. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company, attached hereto (see Item 19 A).
Genoil is actively involved in the marketing, development and commercial applications of its proprietary technologies. Its pilot plant is located at Two Hills, Alberta.
To December 31, 2007, the Corporation has incurred significant operating losses. The Corporation expects to continue to have operating losses during the next year and expects to fund its operations in the near term from capital stock offerings and project loans.
As Genoil’s business has not yet generated revenue from operations, the Company requires cash infusions on a regular basis as it seeks to grow, develop and market its technologies.
The Corporation will continue to review the prospects of raising additional debt and equity financing to support its operations until such time that its operations become self-sustaining, fund any further research and development activities, and ensure the commercial realization of its assets and discharge of its liabilities. While the Corporation is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for operations.
16
Total administration expenses increased by 6.6% in 2007. The significant subcategories thereof are shown above.
Human resources increased due to the appointment of full time consultants for international business development as well the renewal of the COO’s contract. Also, in 2006 directors were remunerated with stock options, which were classified as stock-based compensation while their fees in 2007 were classified under human resources and settled with shares for debt agreements.
Business development decreased due to a decrease in attendance at conferences and the related printing of marketing material.
The newly appointed full time consultants also received options, resulting in an increase in stock-based compensation.
The increase in rent is mainly due to offices rented in New York for the CEO.
Development expenses increased due to the cost of testing oil for the Hebei Zhongjie Petro-Chemical Group in China.
Please refer to the financial statements for details on other unusual items.
Acquisitions
Genoil did not make any significant acquisitions in 2007.
17
B. Liquidity and Capital Resources
Genoil’s business is capital intensive, requiring cash infusions on a regular basis as it seeks to grow its business. The Corporation expects to be able to fund its capital expenditure program to the end of 2008 using working capital and, to the extent required or desirable, through funds raised in the capital markets and short term loans.
On February 3, 2005, a lender agreed to exercise its right to acquire 10,000,000 Common Shares for $2,300,000. As part of the note payable settlement agreement, the Company agreed to arrange for investors to purchase the 10,000,000 Common Shares exercised by the holder for approximately $3.0 million. The total proceeds on the sale of shares were paid to the holder to settle the entire principal and accrued interest outstanding to the lender.
On October 12, 2005, Genoil completed a non-brokered private placement, through which it received $750,000 and issued a convertible debenture, accruing interest at a rate of 12% per annum and having a conversion price of $0.44 per share.
In December 2005, the Corporation arranged a non-brokered private placement on substantially similar terms to the October 2005 private placement. The Corporation received $750,000 and issued a convertible debenture, accruing interest at a rate of 12% per annum and a conversion price of $0.44 per share. The private placement also included the issuance of 426,000 warrants to purchase Common Shares at an exercise price of $0.85 per share and exercisable within 6 months of the date of issuance.
In September 2006, Genoil raised $3,916,263 in a non-brokered private placement of 4,863,218 units at US$0.73 per unit. Each unit consisted of one Common Share and one-quarter non-transferable share purchase warrant. C$522,497 was allocated to the fair value of warrants. Genoil also received $1,862,483 from the exercise of options and warrants during 2006.
In October 2006, Genoil completed a non-brokered private placement, through which it received $968,825.19, issued a convertible debenture carrying a 12% annual interest rate and a conversion price of $0.75 per share. In connection with the issuance of the convertible debentures, Genoil granted 322,941 warrants exercisable for a term of 6 months at $0.98 per share. The term of the notes and attached warrants were extended by six months in April and October 2007 under the same terms and conditions. In April 2008 it was extended by another six months to October 2008, while the conversion price was changed to $0.49 and the exercise price of the warrants to $0.64. These agreements are with entities affiliated to the Company’s Chairman and CEO.
In May 2007, Genoil entered into shares-for-debt agreements with several of Genoil’s outside directors, who agreed to forgive a total of $223,000 in unpaid director’s fees in exchange for 660,740 common shares of the Corporation. The shares were issued at a 25% discount to market price, the cost of which was also recorded as director’s fees. In June the Company also entered into a shares-for-debt agreement with Emil Pena, issuing 107,825 shares for US$63,617 of consulting fees.
Genoil announced at the end of May it was entering into a $1,000,000 funding agreement with the Chairman and CEO of the Corporation. In lieu of interest on this line of credit, he received 600,000 common shares purchase warrants. Each warrant is exercisable for one common share of the Corporation at a price of $0.61 per share at any time within one year from its date of issue. During the third quarter 2007, a short term advance was repaid in the amount of $388,672. At year end the amount owed under this agreement was $98,527
In July 2007, the company raised funds through a private placement receiving $2,839,731 and issuing 5,130,382 units. Each unit consisted of one share and 0.25 common share purchase warrant attached to each common share. The warrants are exercisable until three years following their issue date at a price of US$0.78
In November 2007, Genoil entered into a cancellation of debt agreement with a major investor whereby the long term convertible notes issued in December 2004 were converted into preferred shares with essentially the same terms and conditions. The convertible notes with a value of $ 4,902,800 were cancelled with the issuance of 2,785,681 Class A preferred shares in the capital of the Corporation. Each preferred share may be convertible into four common shares of Genoil, being redeemable at any time at a price of $1.76 per preferred share.
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The Company also received $778,000 from the exercise of options during 2007. During the year ended December 31, 2007, Genoil's operations used $4.6 million of cash. It is expected that its operations will continue to use cash in the near term. The Corporation proposes to fund its future capital expenditures and future debt repayment through capital stock offerings and by generating revenue through the sale of technologies or royalties. Genoil has not yet been successful in commercializing its products and there are no current definitive agreements in place regarding obtaining financing.
There are no restrictions on the ability of the Subsidiaries to transfer funds to Genoil in the form of cash dividends, loans or advances. However, the Subsidiaries are not yet generating income and the Corporation does not consider them as a source of revenue.
C. Research and development, patents and licenses, etc.
Genoil does not presently plan to conduct any major new research and development, but will continue to refine and fine-tune its present complement of technologies. During 2007 the Company spent $86,000 on the maintenance of its pilot plant.
G. Safe Harbour.
Not applicable.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
At year end, the following were directors and officers of Genoil, their residence, their principal occupations within the past five years, and the periods during which each has served in such capacity.
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| Number of Securities | ||||||||
| Controlled by Director | ||||||||
| Name and Office | Principal Occupation For | Date of | and Percentage of | |||||
| Held | Past Five Years | Birth | Appointment | Total (*) | ||||
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| David K. Lifschultz* | Chief Executive Officer of Genoil | 23-Nov-45 | 25-Feb-02 | 63,927,422 | ||||
| Chairman and CEO | Inc. from 2002 to present. | |||||||
| Larchmont, New York | Chairman of the board of directors | 27% | ||||||
| of Genoil Inc. from 2002 to | ||||||||
| present. | ||||||||
| President and Chief Executive | ||||||||
| Officer of Lifschultz Terminal and | ||||||||
| Leasing, Inc. (Joint Venture | ||||||||
| Investment Company) from 1987 | ||||||||
| to present. | ||||||||
| Chairman and Chief Executive | ||||||||
| Officer of Lifschultz Industries, | ||||||||
| Inc. (Manufacturer of scientific | ||||||||
| and industrial temperature | ||||||||
| measurement systems) from 1991 | ||||||||
| to 2000. | ||||||||
| Henry Bloomfield, | Principal and Managing Partner of | 29-Jul-44 | 14-May-07 | 700,000 | ||||
| Q.C., Director | Bloomfield & Associates | |||||||
| Montreal, Quebec | Member of the Bar of Quebec | <1% | ||||||
| since 1969 and appointed Queens | ||||||||
| Counsel in 1991. | ||||||||
| President of the Eldee Foundation | ||||||||
| and of the Humane Society of | ||||||||
| Canada. | ||||||||
| Joseph Fatony, | Principal, CFO of AFC Realty | 03-Feb-47 | 14-May-07 | 625,000 | ||||
| Director | Capital, Inc, a real estate | |||||||
| New York | investment banking firm in New | |||||||
| York | ||||||||
| He is currently on the Board of | <1% | |||||||
| Directors of Rovion Corp. and is | ||||||||
| also an adjunct professor of | ||||||||
| finance and management at Long | ||||||||
| Island University. | ||||||||
| Brian Korney, | Chief Financial Officer of Genoil | 02-Dec-50 | 03/06/2005 | 241,185 | ||||
| Director | Inc. from Sept 1, 2004 to July 12, | |||||||
| Calgary, Alberta | 2005 | |||||||
| VP - Finance and CFO of Innova | <1% | |||||||
| Exploration Corp. November | ||||||||
| 2000 to August 2004 | ||||||||
| Director of British Controlled | ||||||||
| Oilfields Ltd from July 2006 to | ||||||||
| present. | ||||||||
| Resigned as director on December | ||||||||
| 31, 2007 | ||||||||
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| Number of | ||||||||
| Securities | ||||||||
| Controlled by | ||||||||
| Name and | Principal Occupation For | Date of | Director and | |||||
| Office Held | Past Five Years | Birth | Appointment | Percentage of Total | ||||
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| James Runyan, | Chief Operating Officer and | 17-Jan-58 | 1-Mar-06 | N/A | ||||
| Chief Operating | Executive Vice President of | |||||||
| Officer, | Genoil. He was a consultant to | |||||||
| Edmonton, Alberta Genoil since September 2005, | ||||||||
| and was appointed Chief | ||||||||
| Operations Officer in March | ||||||||
| 2006. | ||||||||
| Sales Manager for Process | ||||||||
| Systems International from | ||||||||
| 1998 to 2003. | ||||||||
| Hendrik Lombard, | Chief Financial Officer of | 02-Nov-63 | 6-Oct-07 | N/A | ||||
| Chief Financial | Genoil Inc. from October 6, | |||||||
| Officer, Calgary, | 2007 to present. Controller to | |||||||
| Alberta | the Corporation since August | |||||||
| 2006. | ||||||||
| Peter Chung, VP | Vice President Engineering | 20-Mar-51 | 1-Sep-06 | N/A | ||||
| Engineering, | since September 2006 | |||||||
| Edmonton, Alberta | ||||||||
(*) The “Numbers of Securities Controlled” are comprised by common shares as of the most recent date, and options, warrants and convertible notes exercisable/convertible within 60 days from December 31, 2007. For Mr. Korney we are only providing number of shares at December 31, 2007 when he ceased to be Director of the Corporation. More information on insider holdings is available on SEDI www.sedi.ca .
| B. Compensation. | ||||||||
| Name and Office | ||||||||
| Held | Compensation paid | Options granted | Exercise price | Expiration date | ||||
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| David Lifschultz, | ||||||||
| Chairman & CEO | - | 3,000,000 | 0.45 | 31/01/2011 | ||||
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| Harry Bloomfield, | ||||||||
| Director | - | 250,000 | 0.61 | 16/05/2012 | ||||
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| Joseph Fatony, | ||||||||
| Director | - | 250,000 | 0.61 | 16/05/2012 | ||||
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| Brian Korney, | 250,000 | 0.61 | 16/05/2012 | |||||
| Director | - | 68,750 | 0.45 | 31/01/2011 | ||||
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| James Runyan, COO | $ 235,500 | 1,250,000 | 0.45 | 31/01/2011 | ||||
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| Hendrik Lombard, | 250,000 | 0.45 | 31/01/2011 | |||||
| CFO | $ 128,663 | 1,000,000 | 0.57 | 24/08/2012 | ||||
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| Peter Chung, VP | ||||||||
| Engineering | $ 159,000 | 1,000,000 | 0.45 | 31/01/2011 | ||||
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21
C. Board practices.
Directors are elected annually to the Board of Directors (the “Board”) at the Corporation's Annual General Meeting. Directors may also, between Annual General Meetings, appoint one or more additional Directors, provided such number of additional directors does not exceed 1/3 of the existing number, to serve until the next Annual General Meeting. No Director has a service contract with Genoil providing for benefits upon termination of employment.
Duties and Obligations of the Board of Directors
The general duty of Genoil's Board of Directors is to oversee the management of Genoil's business and affairs. In particular, the Board of Directors is responsible for the following matters:
(a) adopting a strategic planning process which establishes the Corporation's long-term goals and strategies, and monitoring the success of its management in achieving those goals and implementing the strategy;
(b) identifying the principal risks with respect to all aspects of the Corporation's business, ensuring that there are systems in place to effectively monitor and manage such risks with a view to its long-term viability, and achieving a proper balance between the risks incurred and the potential return to its members;
(c) engaging in succession planning, including appointing, training and monitoring senior management (which includes ensuring that objectives are in place against which management's performance can be measured), establishing and maintaining programs to train and develop management, providing for the orderly succession of management, and assessing the performance and contribution of Genoil's Chief Executive Officer against mutually established objectives;
(d) ensuring that there are effective controls and information systems in place for the Board of Directors to discharge its responsibilities, such as an audit system which can inform the Board of Directors about the integrity of the data and the compliance of the financial information with appropriate accounting principles, and the timely reporting of developments material to the Corporation
Composition of the Board of Directors
As of December 31, 2007, Genoil's Board of Directors consisted of Messrs. David Lifschultz, Brian Korney, Harry Bloomfield and Joseph Fatony. Of the Board, Messrs. Bloomfield and Fatony are "independent". Mr. David Lifschultz is not independent as he is the Chairman and Chief Executive Officer of the Corporation. Brian Korney is not considered to be independent as he has served as Genoil's Chief Financial Officer within the last four years. He has resigned as director, December 31, 2007 being his last day as director. David Johnson was appointed to the board as well as its audit committee on February 26, 2008.
The definition of "independence" that Genoil uses when determining a director's independence is derived from National Instrument 58-101, published by the Canadian Securities Administrators and adopted in all Canadian jurisdictions.
The Board facilitates its exercise of independent supervision over management by attempting to meet independently from management when warranted, determining what additional information it needs from management and seeking outside advice and support as it considers appropriate. Generally the Board attempts to ensure that all board committees are composed in the majority by non-management directors with consideration being had to the Corporation's current size and board composition.
Committees of the Board of Directors
There are currently two committees of the Board of Directors. The Audit Committee is comprised of three directors, one of whom is a related party. The Compensation Committee is comprised of three directors. The mandate and activities of each committee are as follows:
22
Audit Committee . The Audit Committee consisted of, Brian Korney, Joseph Fatony and Henry Bloomfield. The responsibilities of the Audit Committee include:
| (a) | assisting the directors with meeting their responsibilities with respect to financial reporting; |
| (b) | reviewing and reporting to the Board of Directors on all audited financial statements the Corporation |
prepares and enhancing the credibility and objectivity of all financial reports;
(c) reviewing with management and with the external auditor any proposed changes in major accounting policies, in the presentation and impact of significant risks and uncertainties, and in key estimates and judgments of management that may be material to financial reporting;
(d) questioning management and the external auditor regarding significant financial reporting issues discussed during the fiscal period and the method of resolution;
(e) reviewing any problems experienced by the external auditor in performing the audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management; and
(f) reviewing the post-audit or management letters containing the recommendations of the external auditor and management's response, and following up any identified weaknesses.
Compensation Committee . The Compensation Committee consisted of Brian Korney, Joseph Fatony and Harry Bloomfield. The responsibilities of the Compensation Committee are to review the adequacy and form of compensation of directors and senior management, and to supervise the administration of Genoil's stock option plan.
Decisions Requiring the Prior Approval of the Board of Directors
Each committee of the Board of Directors makes recommendations to the Board on an ongoing basis. Generally, recommendations from a committee of the Board of Directors require the approval of the full Board before they are implemented.
D. Employees.
At December 31, 2007, there were a total of 25 employees and consultants working for Genoil. Of these, 3 are senior management, 3 are middle management, 1 is an advisor to the Board, 5 are employed in an administrative capacity, 5 are engineers, 8 are technologists and operators. The Corporation currently has 3 employees and 1 consultant in the Calgary, Alberta, office, 10 employees and consultants in the Edmonton office, 4 operators at its Two Hills, Alberta, facility, 1 employee in Romania and the rest works from the USA. Genoil has no labour unions and no temporary staff.
As at December 31, 2006, there were a total of 21 employees working for Genoil and as at December 31, 2005, Genoil employed a total of 20 employees.
E. Share ownership.
There were 232,912,757 Common Shares issued and outstanding as of December 31, 2007 (2006 -223,054,604). Information as to share and option information for directors, officers and key employees is discussed above in "Item 6.(A) Directors and Senior Management" and in "Item 6.(B) Compensation."
Genoil has established a stock option plan with the objective of advancing its interests by encouraging and enabling the acquisition of a share interests by its directors, officers, employees and consultants, in accordance with the policies and rules of the applicable regulatory authorities. The full text of Genoil's stock option plan is attached as an Exhibit to the Form 20-F for 2006.
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Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders.
The following table sets forth information as of April 18, 2008, with respect to each person known to the Corporation to own more than 5% of its Common Shares. As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from December 31, 2007, through the exercise of any option or warrant. Shares subject to options or warrants that are currently exercisable or exercisable within 60 days are deemed outstanding for computing the ownership percentage of the person holding such options or warrants, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon 239,935,294 Common Shares issued and outstanding.
| Percentage of Share | ||||||
| Number of Shares | Stock Beneficially | |||||
| Class of Share | Identity of Person or Group | Beneficially Owned | Owned | |||
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| Common Shares | David K. Lifschultz | 63,927,422 | 27% | |||
| Tyson Halsey | 14,391,206 | 6.2% | ||||
David Lifschultz has acquired his shareholdings incrementally during the past five years through companies under his control and personally by way of a series of purchases on the open market and private placement subscriptions made for the purpose of providing financial assistance to the Corporation so as to ensure it continues to meet its financial obligations. His beneficial holdings include 8,467,971 Common Shares over which he exercises control as a trustee and through corporations that he controls, 13,500,000 stock options, 1,027,701 warrants and 2,190,850 shares convertible from notes that he currently holds. Mr. Lifschultz is a resident in New York.
In February 2008, Halsey Advisory & Management LLC of New York, filed a Statement of Beneficial Ownership – Schedule 13G with the SEC stating that it held 13,624,206 Common Shares of Genoil, which at that time, constituted 5.85% of the issued and outstanding Common Shares. Mr. Tyson Halsey, a principal of this firm, also owns 767,000 shares of Genoil, which represented another 0.33% of the total Common Shares.
As of the date of this form and to the knowledge of our directors and officers, there is no other person or entity who beneficially owns, directly or indirectly, over more than 5% of the issued and outstanding Common Shares.
Additionally, as at March 31, 2008, CDS & Co. was the registered owner of 127,611,340 Common Shares, which represents approximately 53.19% of the issued and outstanding Common Shares and CEDE & Co. was the registered owner of 68,825,875 Common Shares, representing 28.69% of the Common Shares. The directors and officers of the Corporation understand that CDS & Co. and CEDE & Co. are nominees and not beneficial owners of Common Shares.
To the best of its knowledge, Genoil is not directly owned or controlled by another corporation, by any foreign government or by any natural or legal person.
To the best of its knowledge, Genoil is not aware of any arrangements which may result in a change of control of Genoil at a subsequent date.
B. Related party transactions.
The following is a description of the related party transactions that have occurred during the preceding fiscal year.
In April 2007, Genoil and two holders of convertible debentures issued in October 2006, agreed by way of a Note Extension Agreement to extend the maturity date of the convertible promissory notes to October 6, 2007, with
24
such notes to continue on the same terms in all other respects, and to extend the term of the warrants issued in connection with the issuance of the convertible promissory notes to October 6, 2007. Another extension of the notes and warrants was signed in October 2007, to April 6, 2008. On April 6, 2008 the notes and warrants were again extended for six months while the exercise price of the warrants was lowered to $0.64 and the conversion price was lowered to $0.49.
In May 2007, Genoil entered into a $1,000,000 funding agreement with the Chairman and CEO of the Corporation. In lieu of interest on this line of credit, he received 600,000 common shares purchase warrants. Each warrant is exercisable for one common share of the Corporation at a price of $0.61 per share at any time within one year from its date of issue.
Transactions with Affiliates, Directors or Officers
Genoil's approach for transactions with affiliates is that they must be on terms no less favourable to the Corporation than could be obtained from unaffiliated third parties.
In the case of transactions involving a director, any of the Corporation's directors who, in any way, whether directly or indirectly, have an interest in a proposed contract or transaction with it, must disclose the nature and extent of his interest to the Corporation's Board and abstain from voting on the approval of the proposed contract or transaction. If he or she fails to do so, he or she must account to the Corporation for any profit made as a consequence of entering into the contract or transaction, unless the contract was fair and reasonable to the Corporation at the time it was entered into, and after full disclosure of the nature and extent of his or her interest, it is approved by the Corporation's shareholders by way of a resolution passed by a majority of not less than two-thirds of the votes cast at a duly convened shareholders' meeting. In addition, any of the Corporation's directors and officers who holds any office or possesses any property whereby, whether directly or indirectly, duties or interests might be created in conflict with his or her duties or interests as a director or officer, must disclose that fact and the nature and extent of the conflict. In the case of a director, the disclosure must be made at a Board meeting.
In the case of transactions involving an officer, the disclosure must be made in writing to the Corporation's Chairman at a Board meeting.
C. Interests of experts and counsel.
Not required as this is an annual report under the Exchange Act .
Item 8. Financial Information
A. Consolidated statements and other financial information.
Please see "Item 17 Financial Statements" and Exhibit 19(a) for a list of the financial statements filed as part of this annual report statement.
Genoil has neither declared nor paid dividends on any of its outstanding Common Shares, and does not intend to do so in the foreseeable future. It intends to retain any future earnings to finance the expansion of its business. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon its earnings, capital requirements and financial position, as well as any other factors deemed relevant by the Board of Directors.
B. Significant changes.
Please see "Item 17 Financial Statements".
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Item 9. The Offer and Listing
A. Offer and listing details.
The following is a summary of the trading history (in Canadian dollars) of the Common Shares on the TSX Venture Exchange and OTC Bulletin Board (in US dollars) for:
• the annual high and low market prices for the five most recent full financial years;
• the quarterly high and low market prices for the two most recent full financial years and any subsequent period; and
• the monthly high and low market prices for the most recent six months.
| Price per share on TSX | Price per share on OTC | |||||||
| Venture Exchange | Bulletin Board | |||||||
| (Cdn $) | (US $) | |||||||
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| Year | High | Low | High | Low | ||||
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| Fiscal year ended December 31, 2003 | $0.25 | $0.09 | $0.14 | $0.14 | ||||
| Fiscal year ended December 31, 2004 | $0.50 | $0.10 | $0.35 | $0.31 | ||||
| Fiscal year ended December 31, 2005 | $0.44 | $0.24 | $0.25 | $0.24 | ||||
| Fiscal year ended December 31, 2006 | $1.87 | $0.24 | $1.62 | $0.20 | ||||
| Fiscal year ended December 31, 2007 | $0.75 | $0.40 | $0.77 | $0.36 | ||||
| Quarter | High | Low | High | Low | ||||
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| Fiscal year ended December 31, 2006 | ||||||||
| First Quarter | $1.39 | $0.24 | $1.20 | $0.20 | ||||
| Second Quarter | $1.87 | $0.93 | $1.66 | $0.81 | ||||
| Third Quarter | $0.96 | $0.69 | $0.87 | $0.59 | ||||
| Fourth Quarter | $1.00 | $0.55 | $0.90 | $0.47 | ||||
| Fiscal year ended December 31, 2007 | ||||||||
| First Quarter | $0.74 | $0.40 | $0.65 | $0.36 | ||||
| Second Quarter | $0.72 | $0.54 | $0.64 | $0.49 | ||||
| Third Quarter | $0.67 | $0.46 | $0.70 | $0.45 | ||||
| Fourth Quarter | $0.75 | $0.48 | $0.77 | $0.48 | ||||
| Most Recent Six Months | High | Low | High | Low | ||||
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| October 2007 | $0.75 | $0.55 | $0.77 | $0.55 | ||||
| November 2007 | $0.68 | $0.55 | $0.73 | $0.55 | ||||
| December 2007 | $0.61 | $0.48 | $0.62 | $0.48 | ||||
| January 2008 | $0.88 | $0.56 | $0.84 | $0.54 | ||||
| February 2008 | $0.81 | $0.64 | $0.81 | $0.64 | ||||
| March 2008 | $0.65 | $0.49 | $0.65 | $0.48 | ||||
B. Plan of distribution.
Not required as this is an annual report under the Exchange Act .
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C. Markets.
The issued and outstanding Common Shares are listed and posted for trading on the TSX Venture Exchange under the trading symbol "GNO" and on the OTC Bulletin Board under the symbol "GNOLF". The Corporation's Common Shares are registered shares.
D. Selling shareholders.
Not required as this is an annual report under the Exchange Act .
E. Dilution.
Not required as this is an annual report under the Exchange Act .
F. Expenses of the issue.
Not required as this is an annual report under the Exchange Act .
Item 10. Additional Information
A. Share capital.
Not required as this is an annual report under the Exchange Act .
B. Memorandum and articles of association.
Genoil was formed by the amalgamation under the Canada Business Corporations Act (the "CBCA") of Genoil Inc. and Continental Fashions Group Inc. ("CFG"), a public company whose shares traded on the Alberta Stock Exchange. At the time of the merger CFG had no assets, no liabilities and did not carry on any business. Genoil was incorporated in April of 1996 under Certificate of Incorporation no. 324649-3. In June of 1996, it amended and altered its Memorandum and Articles of Association. This amendment was made to facilitate a reorganization of its share capital in accordance with the amalgamation referenced above. The Articles of Amalgamation, adopted in September of 1996, replaced the Articles of Incorporation, as amended.
At the Annual and Special Meeting of Shareholders of the Corporation, held on May 31, 2006, shareholders of the Corporation passed a special resolution authorizing the Corporation to amend its Articles to create an additional class of share to be designed as "Class A Preferred Shares" and to allow for the appointment of additional directors of the Corporation between shareholder meetings.
The Articles of Amalgamation are subject to all the provisions of the CBCA. The CBCA provides that a company incorporated under that Act has all the powers and capacities of a natural person. The CBCA further stipulates that a company must not carry on a business that its articles prohibit. The Corporation's articles contain no prohibitions on the nature of businesses that it may carry out. Thus, it has the power and capacity of a natural person.
The following brief description of provisions of the CBCA, the Corporation's amended and restated articles of incorporation and by-laws do not purport to be complete and are subject in all respects to the provisions of the CBCA, the Corporation's restated articles of incorporation and by-laws.
Regulation SK Item 702 requires the Corporation to state the general effect of any statute, charter provisions, by-laws, contract or other arrangements under which any controlling persons, director or officer of the registrant is insured or indemnified in any manner against liability which he may incur in his capacity as such.
In 2005, the Corporation entered into indemnification agreements with David Lifschultz, Brian Korney, Robert Field, Adam Hedayat, and Lawrence Lifschultz, which indemnifies them from losses, costs or damages incurred or sustained by them acting in their capacities of director or officer.
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Furthermore, the by-laws of the Corporation provide that except in respect of an action by or on behalf of the Corporation or other entity to procure a judgment in its favour, the Corporation will indemnify a director or officer of the Corporation against all costs, charges, and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Corporation or other entity.
Directors' Conflicts of Interest
Section 120 of the CBCA requires every director who is, in any way, directly or indirectly, interested in one of Genoil's proposed material contracts or transactions, to disclose the nature and extent of the director's interest in writing or by requesting to have it entered in the minutes of the meeting of directors or of meetings of committees of directors.
The CBCA further provides that a director or officer who is required to disclose an interest may not vote on any resolution to approve the contract or transaction unless the contract or transaction, (i) relates primarily to the director's or officer's remuneration as one of the Corporation's directors, officers, employees or agents or that of an affiliate, (ii) is for indemnity or insurance for the director against liability incurred by the director or officer acting in his or her capacity as a director or officer, or (iii) is with an affiliate.
Borrowing Powers
The Corporation's By-Law No. 3 states that the Board of Directors may exercise borrowing powers provided for in this by-law. These powers include borrowing money on credit, issuing bonds, debentures, notes and other indebtedness, giving guarantees on behalf of the Corporation and granting mortgages by the Corporation, among others.
Directors
The number of directors shall be not less than one and not more than nine. The number of directors may be determined from time to time by an ordinary resolution of the shareholders passed at a duly convened general meeting. A director is not required to own any of the Corporation's shares to be qualified to serve as a director. A director is not required to retire under any age-limit requirement.
Upon the termination of each annual general meeting, all the directors are deemed to cease serving as directors. The number of directors to be elected at any such meeting will be the number of directors then in office unless the directors or shareholders otherwise determine.
If the shareholders remove any director before the expiration of his or her period of office and appoint another person in his or her place, that person so appointed shall hold office only during the remainder of the time that the director in whose place he or she is appointed would have held the office if he or she had not been removed. If the shareholders do not appoint another director to replace the removed director the vacancy may be filled by the directors.
The directors of the Corporation, between annual meetings, may appoint one or more additional directors of the Corporation to serve until the next annual meeting, provided that the number of additional directors of the Corporation shall not at any time exceed one-third of the number of directors who held office at the expiration of the last annual meeting of the Corporation.
The directors, or any committee of directors, may take any action required or permitted to be taken by them and may exercise any of the authorities, powers and discretions for the time being vested in or exercisable by them by way of a resolution either passed at a meeting at which a quorum is present or consented to in writing under the applicable section of the CBCA.
The directors may appoint a president, one or more vice-presidents, a secretary, a treasurer and other officers as determined by the Board, including assistants to the Board. The directors may specify the duties of and delegate powers to manage the business and affairs of the directors to these officers. The Corporation may also appoint a
28
chairman of the Board, who must also be a director, and assign the powers and duties assigned to the managing director or president, under the by-laws, or other powers and duties.
Rights Attached to Shares
The following is a description of the rights, preferences, and restrictions attached to each class of the Corporation's shares:
(a) Unlimited Common Shares – Each Common Share carries the right to one vote at any meeting of the Corporation's shareholders. Dividends are payable on the Common Shares in the discretion of the Board of Directors. After a period of six years, dividends that have been paid but remain unclaimed by shareholders shall be forfeited to the Corporation. In the event of the liquidation, dissolution or winding-up of the Corporation or any distribution of Genoil's assets for the purpose of winding up its affairs, the Common Shares shall be entitled to receive Genoil's remaining property. The Common Shares are not redeemable at the Corporation's option or at the option of the holders. There are no sinking fund provisions respecting the Common Shares. The holders of the Common Shares are not liable for any further capital calls on such shares.
(b) Up to 10,000,000 Class A Preferred Shares – The Class A Preferred Shares may at any time and from time to time be issued in one or more series, each series consisting of such number of shares as may, before their issuance, be determined by resolution of the directors of the Corporation. Subject to the provisions of the CBCA, the directors of the Corporation may by resolution fix before the issue of Class A Preferred Shares the designation, rights, privileges, restrictions and conditions attaching to each series of the Class A Preferred Shares.
Alteration of the Rights of Shareholders
No rights, privileges or restrictions attached to the Common Shares may be altered except with the approval by resolution passed by the vote of the holders of not less than two-thirds of the votes cast in respect of a resolution to alter such rights.
There are no limitations in Genoil's charter on the rights of non-resident or foreign owners to hold Common Shares of Genoil.
Shareholders' Meetings
The CBCA requires the directors to call an annual general meeting of shareholders not later than fifteen months after the last annual general meeting and no later than six months after the end of the Corporation's preceding financial year. The directors may, whenever they think fit, convene a special meeting.
Notice of a meeting must specify the time and place of a meeting, and, in case of special business, the general nature of that business and the text of any resolution. The accidental omission to give notice of any meeting to, or the non-receipt of any notice by any of the shareholders entitled to receive notice does not invalidate any proceedings at that meeting.
All business that is transacted at meetings of shareholders, with the exception of consideration of the financial statements and auditor's report, election of directors, appointment of Genoil's auditor is deemed to be special business.
Genoil's Articles stipulate that business shall be conducted at any general meeting if there is quorum present at the opening of the meeting notwithstanding that there ceases to be a quorum present throughout the meeting. A quorum is shareholders entitled to vote or proxy holders representing more than 10% of Genoil's outstanding shares entitled to vote at the meeting.
Genoil's Articles stipulate that the Chairman of the Board, or in his absence, the Corporation's Managing Director, or in his absence the Corporation's President shall preside as chairman of every general meeting.
29
Unless the directors otherwise determine, the instrument appointing a proxyholder shall be deposited at a place specified for that purpose in the notice convening the meeting, not less than forty-eight hours before the time for holding the meeting at which the proxyholder proposes to vote.
Notice of every general meeting should be sent to:
(a) each director;
(b) the Corporation's auditor;
(c) every shareholder entered in the securities registrar as the holder of a share or shares carrying the right to vote at such meetings on the record date or, if no record date was established by the directors, on the date of mailing such notice; and
(d) every person upon whom the ownership of a share devolves by reason of his being a legal personal representative or a trustee in bankruptcy of a shareholder where the shareholder, but for his death or bankruptcy, would be entitled to vote.
No other person is entitled to receive notice of general meetings.
There are no limitations to the rights of non-resident or foreign shareholders to hold or exercise voting rights associated with Genoil's securities.
These provisions do not deviate significantly from U.S. law, insofar as the following matters are concerned:
According to Rule 405 of the Securities Act , the term "foreign private issuer" means any foreign issuer other than a foreign government except an issuer meeting the following conditions:
(a) More than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and
(b) Any of the following:
(i) The majority of the executive officers or directors are United States citizens or residents;
(ii) More than 50 percent of the assets of the issuer are located in the United States; or
(iii) The business of the issuer is administered principally in the United States.
Further, the predominant rule in most U.S. jurisdictions is that an annual meeting must be held every 13 months.
C. Material contracts.
Genoil has entered into the following material contracts in the ordinary course of business for the two years preceding this registration statement:
1. In February 2006, Genoil entered into a non-binding Memorandum of Understanding with Hebei Zhongjie Petro-Chemical Group to jointly develop and build the first major commercial heavy oil upgrader in China based on the GHU technology should such a project prove feasible and desirable. This memorandum of understanding requires the completion of an engineering and feasibility study to test the GHU technology's ability to process the heavy oil feed which is available at Nanpaihe Town, Huanghua City, Hebei, China, where the proposed upgrader is to be located.
2. In August 2006, Genoil and Steaua Romana Refinery signed a memorandum of understanding for a Hydroconversion Upgrader in Romania.
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3. On August 30, 2006, Genoil entered into a purchase and sale agreement with Murphy Canada Exploration Company for the re-purchase of rights to royalties previously held by Murphy and payable by Genoil. Genoil acquired those rights with the issuance of 4,500,000 Common Shares.
4. On September 29, 2006, Genoil completed a private placement, receiving US$3,550,150 and issued 4,863,218 Common Shares, including also 1,215,802 warrants to purchase Common Shares at an exercise price of US$1.10 per share and exercisable within two years from issue date.
5. In September 2006, Genoil and Hebei Zhongjie Petrochemical Group Company Ltd. signed a Letter of Intent to proceed with the design and installation of a 20,000 barrels per day GHU at their refinery in Nampaihe Town, Huanghua City, Hebei, China. As a next step Genoil is focused on the first stage of the project's engineering design and Hebei Zhongjie is to make arrangements for the shipment of the oil for testing at the Corporation's pilot facility in Two Hills, Alberta.
6. On October 10, 2006, Genoil completed another non-brokered private placement, through which it received $ 968,825.19 and issued convertible debentures carrying a 12% annual interest at a conversion price of $0.75 per share. The term of such debentures has been extended by two of the three holders to October 6, 2007. The term of the third debenture has expired and is repayable 30 days following demand from the holder. No such demand has yet been made.
7. In April 2007, Genoil entered into a definitive testing agreement with Hebei Zhongjie for testing of their heavy crude oil at Genoil's pilot plant and to determine the final catalyst selection, operating conditions and optimization of the GHU process required to move the project into the Front End Engineering and Design phase.
8. In May 2007, Genoil entered into a funding agreement with the Chairman and CEO of the Corporation, who received 600,000 common share purchase warrants in lieu of interest on a line of credit of $ 1,000,000 made available to the Company. Each warrant is exercisable for one common share of the Corporation at a price of $0.58 per share at any time within one year from its date of issue.
9. In July 2007, the company finalized a private placement receiving $ 2.8 million and issuing 5,130,382 common shares. Additionally, 0.25 common share purchase warrants are being issued for each common share, which are exercisable until three years following their issue date at a price of $ 1.06.
10. In October 2007, the maturity date of convertible notes with a face value of $760,785 and the expiry date of 253,595 attached warrants were again extended by six months, without changing any of the other conditions of the agreements. The first such extension happened in April 2007. In April 2008, the notes and warrants were again extended by six months, this time also lowering the conversion price to $0.49 and the exercise price to $0.64.
11. In October 2007, Genoil announced it signed a binding Memorandum of Understanding with Stone & Webster International, subsidiary of The Shaw Group, for marketing and technical assistance for further development of the GHU technology and future projects.
12. In November 2007, Genoil agreed to convert a long term convertible notes and warrants held by a major investor into 2,785,681 convertible preference shares. Each preferred share will be convertible into four common shares of Genoil at $1.76.
13. In November 2007, Genoil and Aquamation, Inc. signed a Joint Operating Agreement to jointly collaborate in industrial water treatment projects and process plants for the oil and gas, and petrochemical industries. Both companies started work on two gas metering projects in Nigeria.
| D. Exchange controls. |
31
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital or affects the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other
than withholding tax requirements. See "Taxation".
E.
Taxation.
Genoil has provided the following summary of the material Canadian federal and U.S. federal income tax considerations generally applicable in respect of the holding or disposing of Common Shares. This summary does not address all possible tax consequences relating to an investment in its Common Shares. There may be provincial, territorial, state and local taxes applicable to a potential shareholder, depending on the shareholder's particular circumstances, which are not addressed in this summary. The tax consequences to any particular holder, including a U.S. Holder of common shares (defined below) will vary according to the status of that holder as an individual, trust, corporation, or member of a partnership, the jurisdiction in which the holder is subject to taxation, the place where the holder is resident and generally, according to the holder's particular circumstances.
U.S. Holder of Common Shares
References to a "U.S. Holder of common shares" in this section include individuals, corporations, trusts or estates who are holders of Common Shares and who:
- for purposes of the Income Tax Act (Canada) (the "ITA") and the Canada-United States Income Tax Convention (1980), as amended by the protocol signed on July 29, 1997, (the "Treaty") are residents of the U.S. and have never been residents of Canada;
- for purposes of the U.S. Internal Revenue Code of 1986 (the "Code") are U.S. persons;
- deal at arm's length with Genoil for purposes of the ITA;
- will hold the Common Shares as capital property for purposes of the ITA;
- will hold the Common Shares as capital assets for purposes of the Code;
- do not and will not hold the Common Shares in carrying on a business in Canada;
- will not perform independent personal services from a fixed base situated in Canada; and
- are not or will not be subject to special provisions of Canadian or U.S. federal income tax law, including, without limiting the generality of the foregoing, financial institutions, real estate investment trusts, shareholders that have a functional currency other than the U.S. dollar, shareholders that own shares through a partnership or other pass-through entity, shareholders that hold shares as part of a straddle, hedge or conversion transaction, tax-exempt organizations, qualified retirement plans, insurance companies, shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation and mutual fund companies.
The following summary of Canadian federal and U.S. federal income tax considerations generally applicable to a U.S. Holder of Genoil's Common Shares is based on the following, as at the time of this statement:
- the ITA and the Income Tax Regulations (Canada) (the "Regulations");
- published proposals to amend the ITA and the Regulations;
- published administrative positions and practices of the Canada Customs and Revenue Agency;
- the Code;
- Treasury Regulations;
32
- published Internal Revenue Service ("IRS") rulings;
- published administrative positions of the IRS;
- published jurisprudence that is considered applicable; and
- the Treaty.
All of the foregoing is subject to material or adverse change, on a prospective or retroactive basis, at any time. The tax laws of the various provinces or territories of Canada and the tax laws of the various state and local jurisdictions of the U.S. are not considered in this summary.
This summary is not exhaustive of all possible income tax consequences. The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of Genoil's Common Shares and no opinion or representation with respect to any such holder or prospective holder with respect to the income tax consequences to any such holder or prospective holder is made. Accordingly, it is recommended that holders and prospective holders of the Corporation's Common Shares consult their own tax advisors about the Canadian federal and provincial and U.S. federal, state, local, and foreign tax consequences of purchasing, owning and disposing of the Corporation's Common Shares.
Canadian Federal Income Tax Consequences
Disposition of Common Shares
Provided that the Common Shares are listed on a "prescribed stock exchange", which currently includes the TSX Venture Exchange but does not include the OTC Bulletin Board, a U.S. Holder of Common Shares will not be subject to tax in Canada under the ITA on capital gains realized on the disposition of such Common Shares unless the shares are "taxable Canadian property." Such Common Shares will be taxable Canadian property if, in general, at any time during the sixty month period immediately preceding the disposition, 25% or more of Genoil's issued shares of any class (or an option to acquire 25% or more of the issued shares of any class) were owned by such holder, or by such holder and persons with whom such holder did not deal at arm's length. If the Corporation's shares are taxable Canadian property to a U.S. Holder of Common Shares, 50% of any resulting capital gain realized on the disposition of such shares may be subject to tax in Canada. However, the Treaty provides that gains realized by a U.S. Holder of Common Shares on the disposition of shares of a Canadian corporation will be exempt from federal tax in Canada unless the value of the Canadian corporation is derived principally from real property situated in Canada. It is the current position of the Canada Revenue Agency that a U.S. limited liability company is not entitled to the benefits of the Treaty.
Dividend Distributions on Genoil's Shares
Dividends paid on Genoil's Common Shares held by a U.S. Holder of Common Shares will be subject to Canadian non-resident withholding tax. The Corporation is required to withhold taxes at source. Under the Treaty, a withholding rate of 5% is applicable to corporations resident in the United States and who are beneficial owners of at least 10% of the voting shares of the Corporation. Under the Treaty, a withholding rate of 15% is applicable in all other cases.
United States Federal Income Tax Consequences
The U.S. federal income tax consequences related to the disposition and ownership of Common Shares, subject to the Foreign Personal Holding Company Rules, Passive Foreign Investment Company and Controlled Foreign Corporation Rules contained in the Code, are generally as follows:
Disposition of Common Shares
On a disposition of Common Shares, a U.S. Holder of Common Shares generally will recognize a gain or loss. The gain or loss will be equal to the difference between the amount realized on the sale and the U.S. Holder of Common Share's adjusted tax basis in those shares. Any such gain or loss will be a long-term capital gain or loss if
33
the shareholder has held the shares for more than one year. Otherwise the gain or loss will be a short-term capital gain or loss. However, a gain realized on the disposition of Common Shares may be treated as ordinary income if the company was a "collapsible corporation" within the meaning of the Code. The gain or loss will generally be a U.S. source gain or loss.
A collapsible corporation is usually formed to give a short-term venture the appearance of a long-term investment in order to portray income as capital gain rather than profit. Such a corporation is typically formed for the sole purpose of purchasing property and usually dissolved before the property has generated substantial income. The Internal Revenue Service treats the income earned through a collapsible corporation as ordinary income rather than as capital gain.
Dividend Distributions on Shares
Dividend distributions (including constructive dividends) paid by Genoil will be required to be included in the income of a U.S. Holder of Common Shares to the extent of the Corporation's current or accumulated earnings and profits ("E&P") attributable to the distribution without reduction for any Canadian withholding tax withheld from such distributions. Even if such payment is in fact not converted to U.S. dollars, the amount of any cash distribution paid in Canadian dollars will be equal to the U.S. dollar value of the Canadian dollars on the date of distribution based on the exchange rate on such date. To the extent distributions the Corporation pays on the Common Shares exceed the Corporation's current or accumulated E&P, they will be treated first as a return of capital up to a shareholder's adjusted tax basis in the shares and then as capital gain from the sale or exchange of the shares.
Dividends paid on the Common Shares generally will not be eligible for the "dividends received" deduction provided to corporations receiving dividends from certain U.S. corporations. These dividends generally may be subject to backup withholding tax, unless a U.S. Holder of Common Shares furnishes the Corporation with a duly completed and signed Form W-9. The U.S. Holder of Common Shares will be allowed a refund or a credit equal to any amount withheld under the U.S. backup withholding tax rules against the U.S. Holder of Common Share's U.S. federal income tax liability, provided the shareholder furnishes the required information to the IRS.
Foreign Tax Credit
A U.S. Holder of Common Shares will generally be entitled to a foreign tax credit or deduction in an amount equal to the Canadian tax withheld. Dividends paid by Genoil generally will constitute foreign source dividend income and "passive income" for purposes of the foreign tax credit, which could reduce the amount of foreign tax credits available to shareholders. There are significant and complex limitations that apply to the credit.
Foreign Personal Holding Company Rules
Special U.S. tax rules apply to a shareholder of a foreign personal holding company ("FPHC"). Genoil would be classified as a FPHC in any taxable year if both of the following tests are satisfied:
- at least 60% of Genoil's gross income consists of "foreign personal holding company income", which generally includes passive income such as dividends, interest, royalties, gains from shares and commodity transactions and rents; and
- more than 50% of the total voting power of all classes of voting shares or the total value of outstanding shares is owned directly or indirectly by five or fewer individuals who are U.S. citizens or residents.
Passive Foreign Investment Company Rules
Special U.S. tax rules apply to a shareholder of a Passive Foreign Investment Company ("PFIC"). Genoil could be classified as a PFIC if, after the application of certain "look through" rules, for any taxable year, either:
- 75% or more of the Corporation's gross income for the taxable year is "passive income," which includes interest, dividends and certain rents and royalties; or
- the average quarterly percentage, by fair market value of the Corporation's assets that produce or are held
34
for the production of "passive income" is 50% or more of the fair market value of all of its assets.
To the extent Genoil owns at least 25% by value of the shares of another corporation, it is treated for purposes of the PFIC tests as owning its proportionate share of the assets of such corporation, and as receiving directly its proportionate share of the income of such corporation.
Distributions which constitute "excess distributions" from a PFIC and dispositions of Common Shares of a PFIC are subject to the following special rules:
- the excess distributions (generally any distributions received by a U.S. Holder of Common Shares on the shares in any taxable year that are greater than 125% of the average annual distributions received by such U.S. Holder of Common Shares in the three preceding taxable years, or the U.S. Holder of Common Share's holding period for the shares, if shorter) or gain would be allocated on a pro rata basis over a U.S. Holder of Common Share's holding period for the shares;
- the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which the Corporation is a PFIC would be treated as ordinary income in the current taxable year; and
- the amount allocated to each of the other taxable years would be subject to the highest rate of tax on ordinary income in effect for that year and to an interest charge based on the value of the tax deferred during the period during which the shares are owned.
U.S. Holders of Common Shares who actually or constructively own shares in a PFIC may be eligible to make certain elections which require them to include income for the PFIC on an annual basis.
Controlled Foreign Corporation Rules
Generally, if more than 50% of the voting power or total value of all classes of Genoil's shares are owned, directly or indirectly, by U.S. shareholders, who individually own 10% or more of the total combined voting power of all classes of the Corporation's shares, the Corporation could be treated as a controlled foreign corporation ("CFC") under Subpart F of the Code. This classification would require such 10% or greater shareholders to include in income their pro rata shares of its "Subpart F Income," as defined in the Code. In addition, a gain from the sale or exchange of shares by a U.S. Holder of Common Shares who is or was a 10% or greater shareholder at any time during the five year period ending with the sale or exchange will be deemed ordinary dividend income to the extent that the Corporation's E&P is attributable to the shares sold or exchanged.
F. Dividends and paying agents.
Not required as this is an annual report under the Securities Act .
G. Statement by experts.
Not required as this is an annual report under the Securities Act .
H.
Documents on display.
No longer required
I.
Subsidiary information.
Genoil has five subsidiaries; Genoil (USA) Inc., Velox Corporation, Hydrogen Solutions Inc., Crystal Clear Solutions Ltd., and Genoil Technology International C.A. Genoil owns 100% of Genoil (USA) Inc., Hydrogen Solutions Inc, Crystal Clear Solutions Ltd., and Genoil Technology International C.A. None of these aforementioned subsidiaries has any material assets. Genoil owns 52.1% of Velox Corporation. Genoil (USA) Inc., incorporated in the United States, is owned 100% by Genoil.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
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Genoil is not exposed to cash flow and translation risk due to changes in the Canadian/United States dollar exchange rate and interest rate fluctuations at this time due to the fact it does not currently conduct any material business in the United States.
Item 12. Description of Securities Other than Equity Securities
Not required as this is an annual report under the Securities Act .
| PART II |
Item 13. Defaults, Dividends Arrearages and Delinquencies
There have been no material defaults in the payment of interest or principal or any dividend or arrearages or material delinquencies.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
There has been no material modification to the rights of Genoil's security holders.
Item 15. Controls and Procedures
(a) Evaluation of disclosure controls and procedures .
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure.
For the year ended December 31, 2007 the CEO and CFO have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators and as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and have concluded that such controls and procedures were not effective because of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting.
(b) Management's annual report on internal control over financial reporting .
Management is responsible for establishing and maintaining adequate internal controls over financial reporting of the Company. Internal controls over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consol financial statements for external purposes in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), including a reconciliation to US Generally Accepted Accounting Principles (“US GAAP”).
The Company's internal controls over financial reporting includes those policies and procedures that
| I. | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| II. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| III. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. |
A material weakness in internal controls is a significant deficiency, or combination of significant deficiencies, such that there is a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis by the Company.
36
We note, however, that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected and could be material and require a restatement of our financial statements.
Management conducted an evaluation of the effectiveness of internal controls over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, management concluded that the Company's internal controls over financial reporting were not effective as of December 31, 2007 due to the following material weakness:
-
The Company's accounting staff does not have sufficient technical accounting knowledge relating to
accounting for income taxes, complex financial instruments and US GAAP and relied on the assistance of
its auditors in understanding the related accounting and disclosure requirements on these matters.
Management corrected any errors prior to the release of the Company's December 31, 2007 consolidated financial statements.
In future the company will engage an independent accounting firm to provide the required expertise on complex accounting matters.
(c) Attestation Report of registered public accounting firm .
Management’s assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2007 has been audited by BDO Dunwoody LLP, the Company’s independent registered public accounting firm, as stated in their report which appears herein.
(d) Changes in internal controls over financial reporting .
During the previous year the Company implemented a large number of small improvements to its internal control system, mainly implementing a top-down risk-based approach recently mandated by the SEC.
| Item 16. [Reserved ] |
| Not applicable. |
Item A Audit Committee Financial Expert
The board of directors has determined that Brian Korney, who is a chartered accountant, qualifies as a financial expert. He is not an independent director for this purpose, as the New York Stock Exchange Rules state that a director who is an employee of the company is not independent until three years after the end of such employment relationship.
Item B Code of Ethics
Genoil has adopted a Code of Conduct that meets the requirements of the definition of a "Code of Ethics" as that term is defined in Item 16B(b) of Form 20-F. Genoil's Code of Conduct is applicable to all of its employees, including its principal executive officer and principal financial officer. The Corporation does not currently employ a
37
principal accounting officer. Its Code of Conduct has been amended end of December 2008 and copy attached as Exhibit 11.1 to this 20-F Form.
38
| Item C Audit Fees |
Since the third quarter of 2005, Genoil retained BDO Dunwoody LLP as the Corporation's auditors. The following table summarizes the aggregate fees for professional audit services and other services rendered by BDO Dunwoody LLP in the past two years.
In Canadian dollars
| 2007 | 2006 | |||
|
|
|
|||
| Audit Fees | $208,000 | $174,000 | ||
| Audit-Related Fees | - | - | ||
| Tax | - | 12,000 | ||
| All Other Fees | - | - | ||
|
|
|
|||
| Total | $208,000 | $186,000 | ||
Audit Fees
Audit fees include fees for professional services rendered in connection with the audit of Genoil's annual financial statements and audit on the effectiveness of the Company’s internal controls over financial reporting set forth in its Annual Report on Form 20-F and services provided by the independent auditors in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit-related fees are generally fees billed for services that are closely related to the performance of the audit or review of financial statements.
Tax Fees
Tax fees are fees for professional services rendered related to tax compliance, tax advice and tax planning.
All Other Fees
The Company's audit committee is required to pre-approve all audit and non-audit services rendered by and approve the engagement fees and other compensation to be paid to the independent accountant and its affiliates. When deciding whether to approve these items, Genoil's audit committee takes into account whether the provision of any non-audit service is compatible with the independence standards under the guidelines of the SEC and of the Independent Standards Board. To assist in this undertaking, the audit committee requires the independent accountant to submit a report describing all relationships the independent accountant has with the Company and relevant third parties to determine the independent accountant's independence.
Item D Exemptions from the Listing Standards for Audit Committees
Not applicable.
|
Item E
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable. |
39
| PART III |
Item 17. Financial Statements
The Consolidated Financial Statements for years ended December 31, 2007 and 2006 attached as Exhibit 19(a).
Item 18. Financial Statements
The registrant has elected to provide financial statements pursuant to Item 17 that include, as Note 23, the differences between Canadian and US GAAP.
Item 19. Exhibits
| (a) | The Consolidated Financial Statements for the year ended December 31, 2007. |
| (b) | Exhibits |
| Exhibit Number | Description | |
| 1.1* | Articles of Incorporation of Genoil Inc. dated April 1, 1996 | |
| 1.2* | Articles of Amendment of Genoil Inc. dated June 27, 1996 | |
| 1.3*** | Certificate and Articles of Amalgamation of Genoil Inc. dated September 5, 1996 | |
| 1.4*** | Certificate and Articles of Amendment of Genoil Inc. dated May 31, 2006 | |
| 1.5*** | By-laws of Genoil Inc. as adopted on May 2, 2006 | |
| 2.2** | Note and Warrant Purchase Agreement and form of Convertible Note dated December | |
| 23, 2004 | ||
| 2.3*** | $750,000 Convertible Promissory Note Dated October 24, 2005 with Lifschultz | |
| Enterprises Co., LLC. | ||
| 2.4*** | $750,000 Convertible Promissory Note Dated December 23, 2005 with Lifschultz | |
| Terminal and Leasing Ltd. | ||
| 2.5**** | $968,825.19 Convertible Promissory Notes Dated October 6, 2006 with Lifschultz | |
| Enterprises Co., LLC, Lifschultz Family Partnership LP and Sidney B. Lifschultz 1992 | ||
| Family Trust | ||
| 2.6**** | Stock Option Plan of Genoil Inc., as amended October 25, 2001 and January 13, 2003, | |
| March 30, 2004, June 3, 2005, March 1, 2006, May 31, 2006, and May 14, 2007. | ||
| 4.1* | Sample Marketing Agreement | |
| 4.2 | Funding Agreement with David K Lifschultz | |
| 11.1 | Amended Code of Conduct as adopted on December 15, 2007 | |
| 12.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley | |
| Act of 2002 | ||
| 12.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley |
40
| Act of 2002 | ||
| 13.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley | |
| Act of 2002 | ||
| 13.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley | |
| Act of 2002 | ||
| * | These exhibits were filed with Genoil's 2003 Form 20-F. |
| ** | This exhibit was filed with Genoil's 2004 Form 20-F. |
| *** | These exhibits were filed with Genoil's 2005 Form 20-F. |
| **** | These exhibits were filed with Genoil’s 2006 Form 20-F. |
| SIGNATURES |
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Dated: April 18, 2008
|
GENOIL INC
.
By: /s/ David K. Lifschultz David K. Lifschultz Chief Executive Officer |
41
Code of Business Conduct
|
GENOIL INC.
CODE OF BUSINESS CONDUCT |
| 1. | Policies: | ||
| (a) | General: | ||
| (i) | The activities of Genoil Inc. (the " Corporation ") involve and affect a multitude of parties. The Corporation's operations require the cooperation and continued goodwill of business partners, shareholders, governments and other agencies. It is essential that the Corporation's contacts and dealings in carrying out these activities are, and are perceived to be, honest, fair and courteous with due regard to the protection of the other interests involved. These policies outline the Corporation’s expectations as to how employees, consultants, officers and directors are to conduct business; | ||
| (ii) | The Corporation is committed to conducting its affairs in accordance with the applicable laws of all jurisdictions in which it does business. All employees, consultants, officers and directors must comply with the laws, rules and regulations of the jurisdictions in which the Corporation operates and must comply with the requirements of applicable securities regulatory authorities and stock exchanges; | ||
| (iii) | The Corporation expects its employees, consultants, officers and directors to avoid unethical behaviour in its business dealings, whether actual or perceived, even in situations where no law has been violated; | ||
| (iv) | Each employee, consultant, officer and director must undertake to limit, to the extent reasonably practicable, any conflict between his or her personal interest and the interests of the Corporation; | ||
| (v) | Each employee, consultant, officer and director must comply with the Corporation’s accounting regulations, policies, procedures and related controls. All accounts must properly describe and accurately reflect the transactions recorded and all assets, liabilities, revenues and expenses must be properly recorded and fully disclosed in the Corporation’s accounting records; | ||
| (vi) | Employees and officers responsible for financial and other disclosures must ensure that the Corporation makes full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with or submitted to regulatory bodies and in other public communications; | ||
| (vii) | Effectiveness in occupational health, safety and environmental standards is an essential part of achieving efficiency and profitability in the petroleum technology development business. The Corporation strives to achieve continuous improvement in these areas and is guided by the principles of creating a safe working environment, working to minimize the environmental impacts of its activities, and working cooperatively and | ||
| transparently with local communities with respect to the Corporation’s health, safety and environmental activities. As well, the Corporation is committed to regular review and reporting of environmental and safety performance and prompt and effective response to environmental and safety risks concerns; and | ||||
| (viii) | Any communications with securityholders and potential investors are to be made by the Chief Executive Officer or their designate. Any securityholder or potential investor question or concern should be directed to the Chief Executive Officer or their designate. | |||
No employee, full time consultant, officer or director shall engage in any activity which could give rise to, or could be perceived to give rise to, a conflict between the interests of the employee, consultant, officer or director and the interests of the Corporation unless previously approved by the Corporation's board of directors (the " Board of Directors "). All employees, officers, consultants and directors must adhere to any policies adopted in this regard.
If any employee, full time consultant or officer believes that he/she may have a personal interest which could be construed or perceived by others to be in conflict with their position as an employee, consultant or officer, he/she shall disclose such interest to the Chief Executive Officer for direction. If a director believes that he/she may have a personal interest which could be construed or perceived by others to be in conflict with their position as a director, he/she shall disclose such interest to the Board of Directors for direction.
| (c) Corporate Opportunities: |
All employees, officers and directors are prohibited from taking opportunities discovered through the use of the Corporation's property, information or position, using the Corporation's property, information or position for personal gain, and competing with the Corporation.
(d) Use and Disclosure of Confidential Information:
No employee, consultant, officer or director shall disclose Confidential Information obtained in the conduct of the Corporation’s business to anyone other than authorized employees of the Corporation or regulatory authorities entitled to such information. " Confidential Information " includes all non-public information that might be of use to competitors, or harmful to the Corporation or its customers, if disclosed.
Further, no Confidential Information concerning the Corporation’s plans or operations which have not been released to the general public shall be used by an employee, consultant, officer or director for his or her own benefit or disclosed to others.
It is a serious breach of the Corporation's policy, and securities laws generally, for anyone to trade in the common shares or other securities of the Corporation when in possession of information obtained by the employee (" Inside Information "), which has not been publicly disclosed and, if generally known, might reasonably be expected to materially affect the value of such shares or other securities. This prohibition on the trading in the Corporation's securities
when in possession of Inside Information also includes any granting, pricing or exercise of stock options prior to such information being generally disclosed.
Since Inside Information may also have a material effect on the market price of securities of companies with which the Corporation is dealing, anyone possessing such information must not trade in the securities of those companies until the information has been effectively disclosed to the public, and the public has had sufficient time to evaluate it.
| (e) Political Contributions: |
No funds or assets of the Corporation shall be contributed to any political party or organization or to any individual who holds, or is a candidate for, public office. This policy is not intended to discourage or to prevent any employee from engaging in political activities in an individual capacity on personal time and at personal expense.
| (f) Gifts and Other Payments: |
No person may give to outside companies or individuals, or accept from them, any material gift or extravagant entertainment or any similar benefit. A material gift is one of such value that it would appear to an objective observer to constitute a personal enrichment for the recipient or that it could be a factor in influencing that person’s behaviour.
| (g) Software: |
Purchased software packages usually have copyright or other rights protection. No employee should copy or use copied software which would constitute an infringement of the vendor’s rights. It is also unacceptable to introduce unauthorized software into the Corporation's systems. The Corporation will purchase all software for employees’ usage in performing tasks required by the Corporation. Should there be any doubt as to possible software copyright infringement; the employee shall contact the Chief Executive Officer for direction.
| (h) | Proprietary Data Including Inventions: | |
| (i) | The employment relationship between the Corporation and each employee, and the continuing viability of the Corporation, require a conscientious effort by every employee to improve productivity, modify processes and procedures, and to develop new systems, devices, methods, trademarks, concepts, etc. Having provided the employee with that objective, together with the appropriate financing, staff, consulting advice, material, Confidential Information, etc., the Corporation is the beneficial owner of the results of all such efforts arising from and relating to the Corporation’s business. Accordingly, Proprietary Information which an employee obtains, prepares or develops, either alone or in conjunction with others, while in the employment of the Corporation and relating to the Corporation’s core business or operations, is the exclusive property of the Corporation; | |
| (ii) | " Proprietary Information " includes reports, analyses, intellectual property (including patentable ideas, trademarks, copyright material, and | |
| industrial designs), charts, drawings, computer software (including enhancements of existing software), electronic mail and other documents and Confidential Information prepared by the Corporation's personnel or for the Corporation relating to the Corporation’s business. Proprietary Information does not include any information in the public domain or information in the possession of the employee prior to his/her employment with the Corporation; and | ||
| (iii) | Additionally in the event of termination for any reason, the terminated individual may be required to immediately deliver all of the above information to the Corporation. | |
| (i) | Trading in Securities by Employees, Consultants, Officers and Directors: | |
| (i) | The purpose of this policy is to be compliant with securities laws governing trading in securities of the Corporation, while in possession of material non-public information regarding the Corporation and tipping or disclosing material non-public information to outsiders and avoidance of embarrassment by preventing the appearance of improper trading or tipping; | |
| (ii) | This policy covers all employees, full time consultants, officers and directors of the Corporation. This policy applies not only to the securities of the Corporation which an employee, full time consultant, officer or director owns, but also to those over which control or direction is exercised by such employee, full time consultant, officer or director; | |
| (iii) | This policy applies to any transactions in any securities of the Corporation including pricing and granting of stock options; | |
| (iv) | Insiders are defined as officers and directors of the Corporation for purposes of this policy. Insiders should contact the Chief Executive Officer when considering a transaction in securities of the Corporation to be satisfied that there is no material non-public information which has not been widely disseminated. The responsibility for compliance with insider reporting obligations to the securities administrators rests with the insiders; | |
| (v) | Information will be considered non-public until the close of trading on the first full trading day following public release of such information; | |
| (vi) | No insider, employee or full time consultant may trade in securities of the Corporation while in possession of material non-public information; | |
| (vii) | No insider, employee or consultant may trade in securities of the Corporation outside of trading windows described below or during any designated special trading blackout period; | |
| (viii) | No insider, employee or consultant may disclose material non-public information concerning the Corporation to any outside person (including | |
family members) unless necessary in the course of business. In any instance where such information is disclosed to an outsider, the outsider should be advised that they must not disclose the information to anyone else and they may not trade in securities of the Corporation until the information has generally been disclosed;
(ix) Insiders may trade in securities of the Corporation only during the period beginning after the close of business on the day that is one day following public release of quarterly or year end financial results. No insider may trade in securities of the Corporation during the 10 calendar days prior to a
regularly scheduled Board or Audit Committee meeting to approve financial statements or results;
(x) Employees and consultants should not trade in securities of the Corporation on the day that a press release is issued by the Corporation; and
(xi) The foregoing trading restrictions are in addition to the prohibition against trading while in possession of inside information set forth above in "Use and Disclosure of Confidential Information".
2. Compliance:
The Corporation is responsible for the distribution and proof of distribution of a copy of these policies to every existing and new employee in their respective department and to establish such further procedures as deemed appropriate to monitor compliance.
Each new employee shall be provided a copy, and will be required to acknowledge receiving a copy of the “Code of Business Conduct”.
A violation of these policies could result in disciplinary action and/or could in dismissal for cause.
If questions arise with regard to the interpretation or application of this policy, the employee should consult the employee’s supervisor, department head, or senior management.
The Corporation requires that you promptly report any observed breaches of these policies to any member of the management team or directly to the Chief Executive Officer. In addition, any employee who has a complaint regarding questionable accounting practices may make a submission to the Audit Committee of the Company. Confidentiality and anonymity will be provided for any employees making a complaint in this manner.
The Board of Directors must approve any waiver of any of the provisions of these policies for a director or an officer. Material departures from these policies by a director or an officer will have to be disclosed to shareholders through a material change report filed on SEDAR.
|
Exhibit 12.1
|
| I, David K. Lifschultz, certify that: |
| 1. | I have reviewed this annual report on Form 20-F of Genoil Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our |
| supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known |
| to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
| Date: April 18, 2008 |
|
/s/ David K. Lifschultz
David K. Lifschultz Chief Executive Officer |
42
|
Exhibit 12.2
|
| I, Hendrik Lombard, certify that: |
| 1. | I have reviewed this annual report on Form 20-F of Genoil Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our |
| supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known |
| to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
| Date: April 18, 2008 |
|
/s/ Hendrik Lombard
Hendrik Lombard Chief Financial Officer |
43
| Exhibit 13.1 |
|
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
In connection with the Annual Report on Form 20-F of Genoil Inc. (the “Company”) for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David K. Lifschultz, Chairman and Chief Executive Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1. | The Report fully complies with the requirements of Rule 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
DATED: April 18, 2008
By: /s/ David K. Lifschultz David K. Lifschultz, Chairman and Chief Executive Officer Genoil Inc. |
44
| Exhibit 13.2 |
|
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
In connection with the Annual Report on Form 20-F of Genoil Inc. (the “Company”) for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Hendrik Lombard, Chief Financial Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1. | The Report fully complies with the requirements of Rule 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
DATED: April 18, 2008
By: /s/ Hendrik Lombard Hendrik Lombard, Chief Financial Officer Genoil Inc. |
45
|
GENOIL INC.
Index to Consolidated Financial Statements Year Ended December 31, 2007 |
| Page | ||
| INDEPENDENT AUDITORS' REPORTS | 1 | |
| FINANCIAL STATEMENTS | ||
| Consolidated Balance Sheets | 5 | |
| Consolidated Statements of Loss and Deficit | 6 | |
| Consolidated Statements of Cash Flows | 7 | |
| Notes to Consolidated Financial Statements | 8 - 33 |
| INDEPENDENT AUDITORS' REPORT |
|
BDO Dunwoody LLP Chartered Accountants |
600 Cathedral Place 925 West Georgia Street Vancouver, BC, Canada V6C 3L2 Telephone: (604) 688-5421 |
| Telefax: (604) 688-5132 |
| E-mail: vancouver@bdo.ca |
| www. bdo.ca |
To the Shareholders of Genoil Inc.
We have completed an integrated audit of the consolidated financial statements and internal control over financial reporting of Genoil Inc. as of December 31, 2007 and an audit of its 2006 and 2005 consolidated financial statements. Our opinions, based on our audits, are presented below.
Consolidated financial statements
We have audited the consolidated balance sheets of Genoil Inc. as at December 31, 2007 and 2006 and the consolidated statements of loss and deficit and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.
Internal control over financial reporting
We have also audited Genoil Inc’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Genoil Inc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
1
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and are included in Management’s Report on Internal Control Over Financial Reporting:
| 1. | The Company’s accounting staff do not have sufficient technical accounting knowledge, expertise and training as it relates to accounting for income taxes and complex financial instruments in accordance with Canadian generally accepted accounting principles and the reconciliation between United States and Canadian generally accepted accounting principles with respect to the accounting for complex financial instruments. |
2
We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2007 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
|
Chartered Accountants
Vancouver, Canada April 18, 2008 |
3
|
BDO Dunwoody LLP Chartered Accountants |
600 Cathedral Place 925 West Georgia Street Vancouver, BC, Canada V6C 3L2 Telephone: (604) 688-5421 Telefax: (604) 688-5132 E-mail: vancouver@bdo.ca www. bdo.ca |
COMMENTS BY AUDITORS FOR US READERS ON CANADA – UNITED STATES
| REPORTING DIFFERENCES |
The reporting standards of the Public Company Accounting Oversight Board (United States) for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the financial statements. Public Company Accounting Oversight Board (United States) reporting standards also require the addition of an explanatory paragraph when changes in an accounting policy, such as those described in notes 3 and 24, have a material effect on the consolidated financial statements. Although we conducted our audit in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report to the shareholders on the Consolidated Financial Statements dated April 18, 2008 is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors’ report when these are adequately disclosed in the financial statements.
|
Chartered Accountants
Vancouver, Canada April 18, 2008 |
4
| COMMITMENTS (Note 16) |
| CONTINGENCIES (Note 17) |
| SUBSEQUENT EVENTS (Note 20) |
| GOING CONCERN (Note 1) |
| APPROVED BY THE BOARD |
| /signed/ D.K. Lifschultz__D.K. Lifschultz Director |
|
/signed/ J. Fatony
_____ J Fatony Director |
| See notes to consolidated financial statements |
5
| GENOIL INC. | ||||||
| Consolidated Statements of Loss and Deficit | ||||||
| Years Ended December 31, 2007, 2006 and 2005 | ||||||
| (Expressed in Canadian Dollars) | ||||||
|
|
|
|
||||
| 2007 | 2006 | 2005 | ||||
|
|
|
|
|
|||
| REVENUES | $ 83,456 | $ - | $ - | |||
|
|
|
|
||||
| EXPENSES | ||||||
| Administrative expenses | 4,794,687 | 4,493,679 | 4,231,735 | |||
| Stock-based compensation (Note 14) | 4,669,555 | 3,554,776 | 1,960,141 | |||
| Amortization | 574,812 | 580,899 | 629,506 | |||
| Accretion of convertible notes (Note 7) | 327,475 | 487,398 | 463,558 | |||
| Development expenses | 468,366 | 335,322 | 1,408,054 | |||
| Interest | 273,113 | 125,613 | 58,383 | |||
|
|
|
|
||||
| LOSS FROM OPERATIONS | (11,108,008) | (9,577,687) | (8,751,377) | |||
|
|
|
|
||||
| INTEREST INCOME | 24,877 | 23,393 | 19,484 | |||
|
|
|
|
||||
| LOSS BEFORE OTHER EXPENSES | (10,999,675) | (9,554,294) | (8,731,893) | |||
| OTHER EXPENSES (Note 15) | (342,885) | (4,351,753) | (2,191,428) | |||
|
|
|
|
||||
| NET LOSS | (11,342,560) | (13,906,047) | (10,923,321) | |||
| DEFICIT - BEGINNING OF YEAR | (43,779,493) | (29,873,446) | (18,950,125) | |||
|
|
|
|
||||
| DEFICIT - END OF YEAR | $ (55,122,053) | $ (43,779,493) | $ (29,873,446) | |||
|
|
|
|||||
| Loss per share - Basic and Diluted | $ (0.05) | $ (0.07) | $ (0.06) | |||
| Weighted avg. number common shares | 228,067,695 | 211,830,875 | 191,558,255 | |||
| See notes to consolidated financial statements |
6
| GENOIL INC. | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| Years Ended December 31, 2007, 2006 and 2005 | ||||||||
| (Expressed in Canadian Dollars) | ||||||||
|
|
|
|
|
|||||
| 2007 | 2006 | 2005 | ||||||
|
|
|
|
|
|
||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ (11,342,560) | $ (13,906,047) | $ (10,923,321) | |||||
| Items not affecting cash: | ||||||||
| Amortization | 574,812 | 580,899 | 629,506 | |||||
| Accrued interest | 252,819 | 96,024 | 8,952 | |||||
| Accretion of convertible notes | 327,475 | 487,398 | 463,558 | |||||
| Stock-based compensation | 4,669,555 | 3,554,776 | 1,960,141 | |||||
| Other expenses | 342,885 | 4,351,753 | 2,191,428 | |||||
|
|
|
|
|
|||||
| (5,175,014) | (4,835,197) | (5,669,736) | ||||||
|
|
|
|
|
|||||
| Changes in non-cash working capital: | ||||||||
| Receivables | (51,501) | 91,049 | (41,731) | |||||
| Accounts payable and accrued liabilities | 691,730 | (765,668) | 495,457 | |||||
| Prepaid expenses and deposits | (105,322) | (89,279) | - | |||||
|
|
|
|
|
|||||
| 534,907 | (763,898) | 453,726 | ||||||
|
|
|
|
|
|||||
| Cash flow used by operating activities | (4,640,107) | (5,599,095) | (5,216,010) | |||||
|
|
|
|
|
|||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of office equipment | (39,107) | (51,054) | (58,161) | |||||
| Purchase of pilot plant equipment | (168,296) | - | (1,356,539) | |||||
|
|
|
|
|
|||||
| Cash flow used by investing activities | (207,403) | (51,054) | (1,414,700) | |||||
|
|
|
|
|
|||||
| FINANCING ACTIVITIES | ||||||||
| Advances from (to) related parties | 98,527 | (118,383) | (1,065,548) | |||||
| Proceeds from debt financing | - | 968,825 | 1,500,000 | |||||
| Repayment of debt | - | - | (3,033,943) | |||||
| Issuance of common shares | 3,465,998 | 5,778,746 | 4,047,613 | |||||
|
|
|
|
|
|||||
| Cash flow from financing activities | 3,564,525 | 6,629,188 | 1,448,122 | |||||
|
|
|
|
|
|||||
| INCREASE (DECREASE) IN CASH FLOW | (1,282,985) | 979,039 | (5,182,588) | |||||
| Cash and equivalents - beginning of year | 1,434,671 | 455,632 | 5,638,220 | |||||
|
|
|
|
|
|||||
| CASH AND EQUIVALENTS - END OF YEAR | $ 151,686 | $ 1,434,671 | $ 455,632 | |||||
|
|
|
|
||||||
| CASH FLOWS SUPPLEMENTARY INFORMATION | ||||||||
| Interest paid | $ 20,294 | $ 7,168 | $ - | |||||
|
|
|
|
||||||
| Income taxes paid | $ - | $ - | $ - | |||||
|
|
|
|
||||||
Non-cash items not included in the statements of cash flows are detailed in note 18
| See notes to consolidated financial statements |
7
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
1. NATURE OF BUSINESS AND ABILITY TO CONTINUE AS A GOING CONCERN
Genoil Inc. (the “Company”) was incorporated under the Canada Business Corporations Act. The Company is a technology development company focused on providing innovative solutions to the oil and gas industry through the use of proprietary technologies. The Company’s business activities are primarily directed to the development and commercialisation of its upgrader technology, which is designed to economically convert heavy crude oil into light synthetic crude. The Company is listed on the TSX Venture Exchange under the symbol GNO as well as the Nasdaq OTC Bulletin Board using the symbol GNOLF.OB. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis, which presumes the Company will be able to realize its assets and discharge its liabilities in the normal course of operations for the foreseeable future. As at December 31, 2007, the Company has incurred a loss of $11,342,560 (2006 - $13,906,047; 2005 - $10,923,321) for the year and has accumulated losses of $55,122,053 (2006 - $43,779,493) since inception. The ability of the Company to continue as a going concern is in substantial doubt and is dependent on achieving profitable operations, commercialising its upgrader technology, and obtaining the necessary financing in order to develop this technology further. The outcome of these matters cannot be predicted at this time. The Company will continue to review the prospects of raising additional debt and equity financing to support its operations until such time that its operations become self-sustaining, to fund its research and development activities and to ensure the realization of its assets and discharge of its liabilities. The Company is implementing a plan to address these uncertainties to enable it to continue as a going concern through 2009 and beyond. This plan includes new debt and equity financings sufficient to sustain operations. In this regard the Company has secured a $1 million line of credit (note 6). While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for future operations. The Company is not expected to be profitable during the ensuing twelve months and therefore must rely on securing additional funds from either issuance of debt or equity financing for cash consideration. During the year the Company received net debt and equity financing of $3,564,525. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These financial statements are prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which differ in certain respects from those in the United States. These differences are described in note 23. These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, together with a 50.1% interest in Velox Corporation (an inactive company with no significant assets or liabilities). All intercompany transactions and balances have been eliminated. |
| (continues) |
8
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
| (Expressed in Canadian Dollars) |
|
2. SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use of estimates The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Significant estimates and assumptions include the ability to continue as a going concern, stock-based compensation, amortization and valuation of property, plant and equipment, patents and technology rights and assumptions and estimates used in the fair values of multiple element arrangements. Actual results could differ from these estimates. Cash and cash equivalents Cash includes cash on hand and cash at banks. Cash equivalents include short term deposits held in money market funds with maturities, at inception, of less than three months and that are not subject to any risk of change in value. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated amortization. Renewals and betterments are capitalized. Repairs and maintenance costs are charged to operations as incurred. Property, plant and equipment are amortized over their estimated useful lives at the following rates and methods and annual rates: |
| Office equipment | 20% | straight-line method | ||
| Upgrader | 10% | declining-balance method |
|
Patents and technology rights
Patents are recorded at cost and are amortized over ten years on a declining-balance basis. Pending patent costs are not amortized until patents are registered. Technology rights are recorded at cost. Amortization is provided over ten years on a declining- balance basis. Impairment of long-term assets The Company assesses the impairment of long-lived assets, which consist of upgraders, patents and technology rights and office equipment, whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying value of the assets to future undiscounted net cash flows expected to be generated by the assets. An impairment loss is measured as the amount by which the carrying amount exceeds its fair value. Revenue recognition The Company’s revenue is derived from provision of engineering and consulting services. Revenue is recognized as these services are rendered, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is considered probable, and the fees are not subject to forfeiture or other concessions. |
| (continues) |
9
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
2. SIGNIFICANT ACCOUNTING POLICIES
(continued)
Foreign currency translation Accounts of foreign operations, which are considered financially and operationally integrated, have been translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities have been translated at the year end exchange rate. Non-monetary assets have been translated at the rate of exchange prevailing at the date of transaction. Revenues and expenses have been translated at the average rates of exchange during the year, except for amortization, which has been translated at the historical rate. Foreign exchange gains and losses are recognized in earnings. Research and development costs Research costs are expensed in the period incurred. Development costs are expensed in the period unless the Company believes the development project meets Canadian generally accepted accounting criteria for deferral and amortization. In evaluating these criteria, the Company considers technological feasibility to be established only when a product demonstrates it operates under conditions which are acceptable to target customers. If management determines that the development of products to which such costs have been capitalized is not reasonably certain, or that costs exceed recoverable value, such costs are charged to operations. Stock-based compensation The Company has a stock option plan as described in note 10. The fair value method is used to determine the expense for options granted. Under this method, compensation cost is measured at the date of grant using the Black-Scholes model with assumptions described in note 14. The cost is expensed over the vesting period with a corresponding credit to Contributed Surplus. Consideration received on exercise of options plus the amount previously recognized as expense is credited to share capital. Future income taxes The asset and liability method of tax allocation is used in accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the carrying value and tax basis of assets and liabilities, and measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future tax assets are recorded if realization is considered more likely than not. A valuation allowance is recorded for the amount not expected to be realized. Loss per share Basic loss per share amounts are calculated using the weighted average number of shares outstanding during the year. The Company uses the treasury stock method for calculating diluted earnings per share. For the year ended December 31, 2007, potentially dilutive common shares (relating to convertible notes, options and warrants outstanding) totaling 59,248,690 (2006 - 45,661,580; 2005 - 49,337,242) were not included in the computation of loss per share because the effect was anti-dilutive. |
| (continues) |
10
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
2. SIGNIFICANT ACCOUNTING POLICIES
(continued)
Convertible instruments The equity and liability components of convertible instruments are presented separately in accordance with their substance. The liability component is accreted to the amount payable at maturity by way of a charge to earnings using the effective interest method. Warrants are recorded at fair value using the Black-Scholes model and classified as a component of shareholder's equity. 3. ADOPTION OF NEW ACCOUNTING STANDARDS Effective January 1, 2007, the Company adopted five new Canadian Institute of Chartered Accountants (“CICA”) accounting standards: (a) Handbook Section 1530, Comprehensive Income; (b) Handbook Section 3855, Financial Instruments – Recognition and Measurement; (c) Handbook Section 3861, Financial Instruments – Disclosure and Presentation; (d) Handbook Section 3865, Hedges; and (e) Handbook Section 1506, Accounting Changes. The main requirements of these new standards and the resulting financial statement impact are described below. Consistent with the requirements of the new accounting standards, the Company has not restated any prior period amounts as a result of adopting the accounting changes. The effect of the adoption of these standards is summarized below. (a) Comprehensive Income, Section 1530: This standard requires the presentation of a statement of comprehensive income and its components. Comprehensive income includes both net earnings and other comprehensive income. Other comprehensive income includes holding gains and losses on available for sale investments, gains and losses on certain derivative financial instruments and foreign currency gains and losses relating to self-sustaining foreign operations, all of which are not included in the calculation of net earnings until realized. The adoption of this new standard had no effect on the consolidated financial statements of the Company. A statement of comprehensive income has not been included as the Company does not have items to recognize as other comprehensive income. |
| (continues) |
11
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
3. ADOPTION OF NEW ACCOUNTING STANDARDS
(continued)
(b) Financial Instruments – Recognition and Measurement, Section 3855: This standard sets out criteria for the recognition and measurement of financial instruments for fiscal years beginning on or after October 1, 2006. This standard requires all financial instruments within its scope, including derivatives, to be included on the balance sheet and measured either at fair value or, in certain circumstances when fair value may not be considered most relevant, at cost or amortized cost. Changes in fair value are to be recognized in either the statements of operations or the statement of comprehensive income. All financial assets and liabilities are recognized when the Company becomes a party to the contract creating the item. As such, any of the Company’s outstanding financial assets and liabilities at the effective date of adoption are recognized and measured in accordance with the new requirements as if these requirements had always been in effect. Any changes to the fair values of assets and liabilities prior to January 1, 2007 were recognized by adjusting opening accumulated other comprehensive income. All financial instruments are classified into one of the following five categories: held-for-trading, held to maturity, loans and receivables, available for sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their initial classification: • Held to maturity investments, loans and receivables, and other financial liabilities are initially measured at fair value and subsequently measured at amortized cost. Amortization of premiums or discounts and transaction costs are amortized into net earnings, using the effective interest method. • Available for sale financial assets are measured at fair value, with unrealized gains and losses recorded in other comprehensive income until the asset is realized, at which time they will be recorded in net earnings. • Held for trading financial instruments are measured at fair value. All gains and losses resulting from changes in their fair value are included in net earnings in the period in which they arise. • All derivative financial instruments are classified as held for trading financial instruments and are measured at fair value, even when they are part of a hedging relationship. All gains and losses resulting from changes in their fair value are included in net earnings in the period in which they arise. As a result of adopting this standard the Company has the following classifications, all of which have been recorded on the balance sheet at fair value: Held for trading - Cash and Cash equivalents Loans and Receivables - Receivables Other Liabilities - Accounts payable & Accrued Liabilties, Due to Related Parties, Convertible notes Subsequent to initial adoption, the last two categories will be measured at amortized cost using the effective interest rate method. |
| (continues) |
12
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
3. ADOPTION OF NEW ACCOUNTING STANDARDS
(continued)
(c) Financial Instruments – Disclosure and Presentation, Section 3861: This standard sets out standards which address the presentation of financial instruments and non- financial derivates, and identifies the related information that should be disclosed. These standards also revise the requirements for entities to provide accounting policy disclosures, including disclosure of the criteria for designating as held-for-trading those financial assets or liabilities that are not required to be classified as held-for-trading; whether categories of normal purchases and sales of financial assets are accounted for at trade date or settlement date; the accounting policy for transaction costs on financial assets and financial liabilities classified as other than held-for-trading; and provides several new requirements for disclosure about fair value. (d) Accounting policy choice for transaction costs: On June 1, 2007, the Emerging Issues Committee of the CICA issued Abstract No. 166, Accounting Policy Choice for Transaction Costs (EIC-166). This EIC addresses the accounting policy choice of expensing or adding transaction costs related to the acquisition of financial assets and financial liabilities that are classified as other than held-for-trading. Specifically, it requires that the same accounting policy choice be applied to all similar financial instruments classified as other than held- for-trading, but permits a different policy choice for financial instruments that are not similar. The Company has adopted EIC-166 effective January 1, 2007 and requires retroactive application to all transaction costs accounted for in accordance with CICA Handbook Section 3855, Financial Instruments – Recognition and Measurement. The Company has evaluated the impact of EIC-166 and determined that this has had no impact on the consolidated financial statements of the Company. (e) Hedging, Section 3865: This standard specifies the circumstances under which hedge accounting is permissible and how hedge accounting may be performed. The Company currently does not hold any financial instruments designated for hedge accounting. (f) Accounting Changes, Section 1506: Section 1506 revised the standards on changes in accounting policy, estimates or errors to require a change in accounting policy to be applied retrospectively (unless doing so is impracticable or is specified otherwise by an new accounting standard), changes in estimates to be recorded prospectively, and prior period errors to be corrected retrospectively. Voluntary changes in accounting policy are allowed only when they result in financial statements that provide reliable and more relevant information. In addition, these revised standards call for enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements. The impact of this new standard cannot be determined until such time as the Company makes a change in accounting policy, other than the changes resulting from the implementation of the new CICA Handbook standards discussed in this note. (g) International Financial Reporting Standards: The CICA plans to converge Canadian GAAP with International Financial Reporting Standards ("IFRS") over a transition period expected to end in 2011. The impact of the transition to IFRS on the Company’s consolidated financial statements has yet to be determined. |
| (continues) |
13
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
3. ADOPTION OF NEW ACCOUNTING STANDARDS
(continued)
(h) Future accounting changes: Capital Disclosures and Financial Instruments – Disclosures and Presentation On December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535, Capital Disclosures, Handbook Section 3862, Financial Instruments – Disclosures, and Handbook Section 3863, Financial Instruments – Presentation. These standards are effective for interim and annual consolidated financial statements for the Company's reporting period beginning on October 1, 2007. Section 1535 specifies the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. The new Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments — Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The Company is currently assessing the impact of these new accounting standards on its consolidated financial statements. |
|
During the year management determined that the carrying value of certain assets were less
than their future undiscounted net cash flows expected to be generated from these assets. As a result the Company recorded $81,557 (2006 - $nil, 2005 - $2,198,248) in impairment provisions against these assets. |
14
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
| 5. | INTANGIBLE ASSETS | |||||||||||
| 2007 | 2006 | |||||||||||
|
|
|
|
||||||||||
| Accumulated | Accumulated | |||||||||||
| Cost | amortization | Cost | amortization | |||||||||
|
|
|
|
|
|||||||||
| Technology rights | $ 3,833,437 | $ (1,938,051) | $ 4,075,137 | $ (1,797,359) | ||||||||
| Patents | 856,649 | (426,652) | 856,649 | (378,874) | ||||||||
|
|
|
|
|
|
||||||||
| $ 4,690,086 | $ (2,364,703) | $ 4,931,786 | $ (2,176,233) | |||||||||
|
|
|
|
|
|||||||||
| Net book value | $ 2,325,383 | $ 2,755,553 | ||||||||||
|
|
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|
|
|||||||||
|
The patents relate to fluid gas integration, crude oil and bitumen treatment and oil-water separation.
These patents expire between 2019 to 2021. The Company has the worldwide rights, except for Europe, for certain separation technologies. The term of these rights ranges from 5 to 10 years, depending on country. Recovery of the patents and technology rights costs remain uncertain. It depends on the commercial application thereof and ultimately attaining profitable operations During 2007 and 2006, management determined that the carrying value of certain technology rights were less than their future undiscounted net cash flows expected to be generated. As a result the Company recorded $171,794 (2006 - $121,753, 2005 - $nil) in impairment provisions against these rights. |
| 6. | RELATED PARTY TRANSACTIONS | |||||
| 2007 | 2006 | |||||
|
|
|
|||||
| Due to related parties | $ 98,527 | $ - | ||||
|
|
|
|||||
|
This amount is due to a director and is non-interest bearing, unsecured and repayable on demand.
The above transaction is in the normal course of operations and was measured at the exchange amount, being the amount of consideration established and agreed to by the related parties. The fair value of the loan, being the present value of the future principal repayment using a discount factor of 16%, was found to approximate the exchange amount. This loan has been repaid subsequent to year end. During the year, the Company granted 600,000 warrants at an exercise price of $0.61 per share and an expiry date of 12 months from the date of grant, to a director in order to secure a $1,000,000 personal line of credit by him. This transaction was not in the normal course of operations and was measured at the exchange amount being the fair value of the warrants at the date of grant. The warrants were measured at their fair value using the Black Scholes option pricing model using the following assumptions: volatility of 76%; risk free rate of 4.6%; expected life 1 year; and a zero dividend yield. The fair value of the warrants, in the amount of $103,110, has been recognised in the consolidated statement of loss as interest expense with a corresponding entry to contributed surplus. The line of credit is unsecured, has a term of one year and bears no interest. As at December 31, 2007 no amount has been drawn on the line of credit. |
15
| GENOIL INC. | ||||||||||||
| Notes to Consolidated Financial Statements | ||||||||||||
| Years Ended December 31, 2007, 2006 and 2005 | ||||||||||||
| (Expressed in Canadian Dollars) | ||||||||||||
|
|
|
|
|
|
||||||||
| 7. | CONVERTIBLE NOTES | |||||||||||
| Series A | Series B | Series C | Series D | Total | ||||||||
|
|
|
|
|
|
|
|||||||
| Gros s amount received | $ 5,638,220 | $ 750,000 | $ 750,000 | $ 968,825 | $ 8,107,045 | |||||||
| Value of warrants and c onvers ion option | (3,822,864) | (25,819) | (26,738) | (51,036) | (3,926,457) | |||||||
|
|
|
|
|
|
||||||||
| Fair value of repayment obligation | $ 1,815,356 | $ 724,181 | $ 723,262 | $ 917,789 | $ 4,180,588 | |||||||
|
|
|
|
|
|
||||||||
| 2006 | ||||||||||||
| Beginning balance | $ 2,033,199 | $ 735,135 | $ 723,262 | $ - | $ 3,491,596 | |||||||
| New issuances | - | - | - | 917,789 | 917,789 | |||||||
| Accretion | 420,622 | 14,865 | 26,738 | 25,173 | 487,398 | |||||||
| Interest accrued | - | - | - | 27,773 | 27,773 | |||||||
| Conversions | (296,316) | (750,000) | (750,000) | - | (1,796,316) | |||||||
|
|
|
|
|
|
||||||||
| $ 2,157,505 | $ - | $ - | $ 970,735 | $ 3,128,240 | ||||||||
|
|
|
|
|
|
||||||||
| 2007 | ||||||||||||
| Accretion | 301,611 | 25,862 | 327,473 | |||||||||
| Interest accrued | - | - | - | 124,226 | 124,226 | |||||||
| Conversion to common shares | (132,679) | (132,679) | ||||||||||
| Conversion to preferred shares | (2,187,826) | - | (2,187,826) | |||||||||
|
|
|
|
|
|
||||||||
| $ 138,611 | $ - | $ - | $ 1,120,823 | $ 1,259,434 | ||||||||
|
|
|
|
|
|
||||||||
| (continues) | ||||||||||||
|
|
|
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|
|||||||
16
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
7. CONVERTIBLE NOTES
(continued)
Series A On December 23, 2004, the Company issued a $5,638,220 non-interest bearing convertible note. This convertible note is due on December 23, 2014. The note holders also received 3,203,534 warrants entitling them to purchase the same number of shares at a price of $0.85 per share at any time prior to December 23, 2009. At the holder’s option, the note may be converted to common shares of the Company at a rate of $0.44 per share at any time prior to maturity. The convertible note may also be converted at the Company’s option if the Company’s common share trading price exceeds $1.55 per share for 30 consecutive trading days during the term of the note. The fair value of the repayment obligation, being the present value of the future principal and interest payments using a discount factor of 12%, was estimated to be $1,815,356 on the date the agreement was signed. To estimate the fair value of the warrants, the Company used the Black-Scholes option- pricing model with the following assumptions: zero dividend yield; expected volatility of 100%; risk- free rate of 3%; and expected life of 5 years, resulting in a fair value of $834,153. The residual portion of the proceeds of $2,988,711 was allocated to the conversion option. Both the warrants and conversion option were recorded as debt discounts and are being accreted over the term of the debt. During the year ended December 31, 2007, the Company recorded accretion expense of $301,611 (2006 - $420,622, 2005 - $217,843). During 2006, notes with a face value of $296,316 were converted into common shares of the company at a price of $0.44 per share and 673,445 shares were issued. A director and officer of the Company and an entity associated with the officer and director subscribed for $306,425 of the convertible notes issued effective December 23, 2004 and was assigned 174,106 share purchase warrants. During 2007, notes with a face value of $132,679 were converted into common shares of the company at a price of $0.44 per share and 301,543 shares were issued. On November 15, 2007, at the request of a large note holder, notes with a face value of $4,902,800 (and related discounts of $2,714,970) were converted into 2,785,681 Class "A" preferred shares of the Company. The preferred shares are convertible into 11,142,724 common shares - being the same number of common shares the convertible notes would have been convertible into. Per EIC - 96, "Acccounting for the early extinguishment of convertible securities through (1) early redemtion or repurchase and (2) induced early conversion", the preferred shares were valued using the market price ($0.61) of the common shares on date of conversion. This consideration transferred (i.e. the value of the preferrred shares) to settle the Series A convertible notes was allocated to the carrying value of the debt and conversion option element on the same basis as was used to allocate the original debt proceeds. The fair value of the debt portion was calculated by discounting it face value at 16%, the estimated market rate for the Company. This resulted in a loss of $176,450 on the debt element being recorded (note 15), while contributed surplus was reduced by $4,432,786, being the consideration allocated to the conversion option. Had we used a market rate of 18%, a gain of $94,312 would have been recorded. |
| (continues) |
17
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
7. CONVERTIBLE NOTES
(continued)
Series B On October 24, 2005, the Company issued a $750,000 convertible note to a company controlled by a director and officer of the Company. This convertible note was due on April 6, 2006 and had an interest rate of 12% per annum. At the holder’s option, the note was convertible to common shares of the Company at a rate of $0.44 per share at any time prior to maturity. The fair value of the repayment obligation, being the present value of the future principal and interest payments using a discount factor of 19.5%, was estimated to be $724,181 on the date the agreement was signed. The residual portion of the proceeds of $25,819 was allocated to the conversion option and was recorded as debt discount with the corresponding charge to contributed surplus. During the year ended December 31, 2006, the Company recorded accretion expense of $14,865 (2005 - $10,954). During 2006, the holder converted the entire principal of $750,000 and interest of $26,250 on the note into common shares of the company at a price of $0.44 per share and received 1,764,204 shares. Series C On December 23, 2005, the Company issued a $750,000 convertible note to a company controlled by a director and officer of the Company. This convertible note was due on June 24, 2006 and had an interest rate of 12% per annum. The note holder also received 426,000 warrants entitling him to purchase the same number of shares at a price of $0.85 per share at any time prior to July 24, 2006. At the holder’s option, the note was convertible to common shares of the Company at a rate of $0.44 per share at any time prior to maturity. The fair value of the repayment obligation, being the present value of the future principal and interest payments using a discount factor of 19.5%, was estimated to be $723,262 on the date the agreement was signed. To estimate the fair value of the warrants, the Company used the Black-Scholes option- pricing model with the following assumptions: zero dividend yield; expected volatility of 77%; risk-free rate of 3.8%; and expected life of 0.5 years, resulting in a fair value of $1,150. The residual portion of the proceeds of $25,588 was allocated to the conversion option. Both the warrants and conversion option were recorded as debt discounts and were accreted over the term of the debt. During the year ended December 31, 2006, the Company recorded accretion expense of $26,738 (2005 - $NIL) to its fair value. During 2006, the holder converted the entire principal of $750,000 and interest of $42,000 on the note into common shares of the Company at a price of $0.44 per share and received 1,800,000 shares. |
| (continues) |
18
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
7. CONVERTIBLE NOTES
(continued)
Series D On October 6, 2006, the Company issued a $968,825 convertible note to entities controlled by a director and officer of the Company in settlement of debt owed them. This convertible note is due on April 6, 2007 and has an interest rate of 12% per annum. The note holder also received 322,941 warrants entitling the holder to purchase the same number of shares at a price of $0.98 per share at any time prior to April 6, 2007. At the holder’s option, the note may be converted to common shares of the Company at a rate of $0.75 per share at any time prior to maturity. The convertible note may also be converted at the Company’s option if the Company’s common share trading price exceeds $1.55 per share for 30 consecutive trading days during the term of the note. The fair value of the repayment obligation, being the present value of the future principal and interest payments using a discount factor of 24%, was estimated to be $917,789 on the date the agreement was signed. The residual amount, being $51,036, was allocated to the fair value of the warrants and no value was allocated to the conversion option. The debt discount will be accreted over the term of the debt. To estimate the fair value of the warrants, the Company used the Black-Scholes option- pricing model with the following assumptions: zero dividend yield; expected volatility of 86%; risk-free rate of 4.37%; and expected life of 0.5 years. During the year ended December 31, 2007, the Company recorded accretion expense of $25,862 (2006 - $25,173). On April 6, 2007, the maturity date of convertible notes with a face value of $760,785 and the expiry date of 253,595 attached warrants were extended by six months to October 6, 2007. On that date, the notes and attached warrants were again extended by six months. All other terms and conditions attached to the notes remained unchanged. The convertible notes are now due on April 6, 2008. Per EIC-88, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” the extension of the notes at April 6 and October 6 was considered a modification of the debt. The fair value of the repayment obligation, being the present value of the future principal and interest payments at each modification date using a discount factor of 16% was estimated to approximate the face value of the notes at each date. No amount was allocated to the conversion option. The extension of the attached warrants at April 6 and October 6 was considered pursuant to the requirements of S3870.55 of handbook. The aggregate incremental value of the warrants at both extension dates, in the amount of $25,484, was expensed as additional interest expense. The fair value of the warrants at each modification date was estimated using the Black-Sholes option pricing model with the following assumptions: zero dividend yield; expected life of 0.5 years; expected volatility of 76% and 76% respectively; and risk free rate of 4.19% and 4.35% respectively. The balance of the notes, with a face value of $208,040 and accrued interest of $32,640, is now callable. The attached 69,346 warrants have expired. The Company has entered into a one year line of credit that would provide the required capital, should this portion of the debt be called. (note 6) |
19
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
| 8. | SHARE CAPITAL | |
| Authorized: | ||
|
|
An unlimited number of common shares without par value. | |
|
|
10,000,000 Class A Preferred shares, issuable in series. | |
| Issued and outstanding common shares: | ||
| Number | Amount | |||
| 2005 | ||||
| Balance, beginning of year | 178,880,056 | 15,576,995 | ||
| Shares for debt | 1,266,873 | 471,414 | ||
| Stock options exercised | 3,816,731 | 491,725 | ||
| Warrants exercised | 12,087,567 | 5,125,272 | ||
|
|
|
|||
| Balance, end of year | 196,051,227 | $ 21,665,406 | ||
|
|
|
|||
| 2006 | ||||
| Private placement (1) | 4,863,218 | 3,425,270 | ||
| Shares for debt | 456,807 | 269,858 | ||
| Stock options exercised | 10,314,101 | 2,899,991 | ||
| Warrants exercised | 2,631,602 | 598,904 | ||
| Conversion of notes (Note 7) | 4,237,649 | 1,864,566 | ||
| Repurchase of royalty agreement (Note 15) | 4,500,000 | 4,230,000 | ||
| Share issue expenses | (144,766) | |||
|
|
|
|||
| Balance, end of year | 223,054,604 | $ 34,809,229 | ||
|
|
|
|||
| 2007 | ||||
| Private placement (2) | 5,130,382 | 2,399,621 | ||
| Shares for debt | 768,565 | 364,939 | ||
| Stock options exercised (note 10) | 3,657,663 | 1,400,699 | ||
| Conversion of notes (Note 7) | 301,543 | 132,679 | ||
| Share issue expenses | (227,990) | |||
|
|
|
|||
| Balance, end of year | 232,912,757 | $ 38,879,177 | ||
|
|
|
|||
| Issued and outstanding Class "A' Preferred shares: | ||||
| Number | Amount | |||
| 2007 | ||||
| Balance, beginning of year | - | $ - | ||
| Issued on conversion of convertible notes (3) | 2,785,681 | 6,797,062 | ||
|
|
|
|||
| Balance, end of year | 2,785,681 | $ 6,797,062 | ||
|
|
|
|||
| TOTAL SHARE CAPITAL | $ 45,676,239 | |||
|
|
||||
| (continues) |
20
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
8. SHARE CAPITAL
(continued)
1. In September 2006, the Company issued 4,863,218 units at US$0.73 per unit. Each unit consisted of one common share and one-quarter non-transferable share purchase warrant. Each full warrant entitles the holder to purchase one common share at US$1.10 for a period of two years. C$3,425,270 of the proceeds was allocated to share capital and C$522,497 to warrants. The value attributed to the warrants were calculated using the Black-Scholes model with volatility; 106%, risk free rate 3.95% and dividend yield nil over their expected life of 2 years. The Company issued 236,311 warrants with an exercise price of $0.82 as a finders fee in connection with this private placement. The $113,085 value attributed to the warrants was calculated using the Black-Scholes model with volatility; 106%, risk free rate 3.95% and dividend yield nil over an expected life of 2 years. 2. In June 2007, the Company issued 5,130,382 units at US$0.52 per unit. Each unit consisted of one common share and one-quarter non-transferable share purchase warrant. Each full warrant entitles the holder to purchase one common share at US$0.78 for a period of three years. C$2,399,621 of the proceeds was allocated to share capital and C$440,110 to warrants. The value attributed to the warrants were calculated using the Black-Scholes model with volatility; 93%, risk free rate 3.93% and dividend yield nil over their expected life of 3 years. The Company issued 234,692 warrants with an exercise price of $0.52 as a finders fee in connection with this private placement. The $76,157 value attributed to the warrants was calculated using the Black-Scholes model with volatility; 95%, risk free rate 4.71% and dividend yield nil over an expected life of 2 years. 3. During the year the Company issued Class "A" Preferred shares in connection with the conversion of long term notes (note 7). The preferred shares can be converted into common shares at a ratio of four common shares for each preferred share. This can be done at the option of the holder of the preferred shares or, after five years, at the option of the Company. The preferred shares carry no voting power and can be redeemed by the Company at $1.76 per share at any time. In the event of liquidation, dissolution or winding up of the Company, the preferred shares shall have preference to receive up to $1.76 per share, before any distribution to any other share holders of the Company. 4. During the year stock options were exercised raising gross proceeds of $778,099. As a result $622,600, representing the fair value of these options, was reclassified from contributed surplus to share capital. |
| 9. | CONTRIBUTED SURPLUS | |||||
| 2007 | 2006 | |||||
|
|
|
|||||
| Balance, beginning of year | $ 11,669,412 | $ 9,075,415 | ||||
| Options granted | 4,669,556 | 3,554,776 | ||||
| Options exercised (note 8) | (622,600) | (1,437,820) | ||||
| Warrants granted | 644,861 | 686,795 | ||||
| Warrants exercised | - | (209,754) | ||||
| Notes converted to preferred shares (note 7) | (4,432,786) | - | ||||
|
|
|
|||||
| Balance, end of year | $ 11,928,443 | $ 11,669,412 | ||||
|
|
|
|||||
21
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
10. STOCK OPTIONS
The Company has a stock option plan for directors, officers, employees and consultants. The term and vesting conditions of each option may be fixed by the Board of Directors when the option is granted, but the term cannot exceed 10 years. The maximum number of shares that may be reserved for issuance under the plan is fixed at 44,961,229. The maximum number of shares that may be optioned to any one person is 5% of the shares outstanding at the date of the grant. Details of the stock options are as follows: |
| Weighted | Weighted | Weighted | ||||||||||
| Average | Average | Average | ||||||||||
| Exercise | Exercise | Exerc ise | ||||||||||
| Price | Price | Price | ||||||||||
| Number | 2007 | Number | 2006 | Number | 2005 | |||||||
|
|
|
|
|
|
|
|||||||
| Balance, beginning of year | 27,213,502 | $ 0.45 | 27,180,103 | $ 0.19 | 24,312,738 | $ 0.15 | ||||||
| Granted | 16,478,750 | 0.51 | 11,564,166 | 0.78 | 8,250,000 | 0.30 | ||||||
| Cancelled | (943,339) | 0.35 | (1,216,666) | 0.33 | (1,565,904) | 0.20 | ||||||
| Exerc ised | (3,657,663) | 0.21 | (10,314,101) | 0.14 | (3,816,731) | 0.13 | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, end of year | 39,091,250 | $ 0.49 | 27,213,502 | $ 0.45 | 27,180,103 | $ 0.19 | ||||||
|
|
|
|
|
|
|
|||||||
| Exerc isable, end of year | 27,553,749 | $ 0.46 | 21,342,250 | $ 0.35 | 23,680,103 | $ 0.18 | ||||||
|
The following is a summary of options outstanding and exercisable (vested) as at December 31,
2007: |
| Outstanding | Vested | |||||||||||
|
|
|
|
|
|
|
|
||||||
| WA | Remaining | WA | ||||||||||
| Remaining Outstanding | Vested | Vested | ||||||||||
| Outstanding Contractual | Exercise | Vested | Contractual Exercise | |||||||||
| Range | Options | Life | Price | Options | Life | Price | ||||||
|
|
|
|
|
|
|
|
||||||
| $0.00 to $0.39 | 13,050,000 | 1.42 | $0.23 | 12,516,666 | 1.37 | $0.22 | ||||||
| $0.40 to $0.79 | 21,773,750 | 3.35 | $0.51 | 11,721,250 | 3.06 | $0.49 | ||||||
| $0.80 to $1.19 | 337,500 | 2.42 | $1.12 | 337,500 | 2.42 | $1.12 | ||||||
| $1.20 to $1.59 | 3,550,000 | 2.30 | $1.21 | 2,883,333 | 2.28 | $1.21 | ||||||
| $1.60 to $2.00 | 380,000 | 3.34 | $1.65 | 95,000 | 3.34 | $1.65 | ||||||
|
|
|
|
|
|
|
|
||||||
| 39,091,250 | 2.60 | $0.49 | 27,553,749 | 2.20 | $0.46 | |||||||
|
|
|
|
|
|
|
|
||||||
22
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
11. WARRANTS
A summary of the changes in share purchase warrants outstanding and exercisable at the end of the year is as follows: |
| Weighted | Weighted | Weighted | ||||||||||||||
| Average | Average | Average | ||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||
| Price | Price | Pric e | ||||||||||||||
| Number | 2007 | Number | 2006 | Number | 2005 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Balance, beginning of year | 4,978,588 | $ 0. 95 | 6,359,912 | $ 0.55 | 18,134,716 | $ 0.32 | ||||||||||
| Granted | 2,117,286 | 0. 70 | 1,775,054 | 1.14 | 426,000 | 0.85 | ||||||||||
| Exerc ised | - | (2,631,602) | 0.15 | (12,087,567) | 0.29 | |||||||||||
| Expired | (69,346) | 0. 98 | (524,776) | 0.72 | (113,237) | 0.20 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of year | 7,026,528 | $ 0. 85 | 4,978,588 | $ 0.95 | 6,359,912 | $ 0.55 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
The following is a summary of warrants as at December 31, 2007:
| Outstanding | ||||||
|
|
|
|||||
| Remaining | ||||||
| Outstanding | Contractual | WA Outstanding | ||||
| Range | Warrants | Life | Exercise Price | |||
|
|
|
|
|
|||
| $0.40 to $0.79 | 2,353,597 | 1.70 | $0.71 | |||
| $0.80 to $1.19 | 4,672,931 | 1.56 | $0.92 | |||
|
|
|
|
|
|||
| 7,026,528 | 1.61 | $0.85 | ||||
|
|
|
|
|
|||
23
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
12. INCOME TAXES
The tax effects of the temporary differences that give rise to the Company's future tax assets and liabilities are as follows: |
| 2007 | 2006 | |||
|
|
|
|||
| Net operating and capital losses | $ 7,958,800 | $ 10,446,400 | ||
| Long term assets | 441,000 | 320,300 | ||
| Deferred exploration costs | 318,200 | 434,300 | ||
| Undeducted financing costs | 48,600 | 51,600 | ||
| Valuation allowance | (8,766,600) | (11,252,600) | ||
|
|
|
|||
| Future tax assets | $ - | $ - | ||
|
|
|
|
The tax benefit of net operating losses carried forward and the associated valuation allowance
were reduced by $1,308,300 (2006 - $140,000), representing the tax effect of losses which expired during the year. The income tax provision recorded differs from the income tax obtained by applying the statutory income tax rate of 32.12% (2006 - 34.12%; 2005 - 34.12%) to the income for the year and is reconciled as follows: |
| 2007 | 2006 | 2005 | ||||
|
|
|
|
||||
| Benefit at Canadian statutory rate | $ (3,643,200) | $ (4,744,700) | $ (3,727,000) | |||
| Permanent differences | 1,703,000 | 1,379,200 | 824,100 | |||
| Effect of a reduction in Statutory rate | 3,156,300 | - | - | |||
| Increase/(decrease) in valuation allowance | (1,216,100) | 3,365,500 | 2,902,900 | |||
|
|
|
|
||||
| Future tax recovery | $ - | $ - | $ - | |||
|
|
|
|
|
The Company's future tax assets include approximately $194,400 (2006 - $151,300) related to
deductions for share issue costs in excess of amounts deducted for financial reporting purposes. If and when the valuation allowance related to these amounts is reversed, the Company will recognize this benefit as an adjustment to share capital as opposed to income tax expense in the Statement of Operations. The valuation allowance as at December 31, 2007 was increased by $48,800 (2006 - $10,200, 2005 - $nil), representing the effect of the unamortized share issuance costs incurred in the period. The Company has approximately $1,272,900 (2006 and 2005 - $1,272,900) of undeducted exploration and development costs which are available for deduction against future income for Canadian tax purposes. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and this causes a change in management's judgement about the recoverability of future tax assets, the impact of the change on valuation allowance is reflected in current income. |
24
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
13. NON-CAPITAL TAX LOSSES CARRIED FORWARD
The Company has incurred estimated losses of $31,835,000 for tax purposes which are available reduce future taxable income and which expire in various amounts from 2008 to 2026. Such benefits will be recorded as an adjustment to the tax provision in the year realized. |
|
14. STOCK-BASED COMPENSATION
The fair value of each stock option granted (note 10) was estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions: |
| 2007 | 2006 | 2005 | ||||
|
|
|
|
||||
| Volatility | 89% - 99% | 94% - 110% | 155% | |||
| Expected life (years) | 3 - 3.75 | 2 - 5 | 5 | |||
| Risk-free rate | 3.9% - 4.7% | 3.8% - 4.2% | 3.5% | |||
| Dividend yield | 0% | 0% | 0% | |||
| The weighted average fair value of options granted in 2007 was $0.32 (2006 - $0.47; 2005 - $0.27). | ||||||
| 15. | OTHER EXPENSES | |||||||
| 2007 | 2006 | 2005 | ||||||
|
|
|
|
||||||
| Settlement of claim | $ - | $ 4,230,000 | $ - | |||||
| Impairment of assets (notes 4 & 5) | 253,351 | 121,753 | 2,191,428 | |||||
| Loss on conversion of debt (note 7) | 176,450 | - | - | |||||
| Accounts payable written off | (86,916) | - | - | |||||
|
|
|
|
||||||
| $ 342,885 | $ 4,351,753 | $ 2,191,428 | ||||||
|
|
|
|
||||||
|
Settlement of claim
On February 9, 2006, a statement of claim was filed in the Court of Queen’s Bench of Alberta, Canada, with the Company as the defendant, alleging a liability of $51,120 owing to the plaintiff on account of unpaid royalties and non-performance in respect of the execution of a further formal document evidencing the propriety of the royalty. In the alternative to settling this claim, the statement of claim alleges that the plaintiff be entitled to $13 million, being the amount of the original debt extinguished in the agreement. During the year ended December 31, 2006, the Company settled the claim by repurchasing the royalty rights by the issuance of 4,500,000 common shares. The shares had a fair value of $4,230,000 as determined by the market price on the date of the transaction and were recorded as an expense in the previous year. Accounts payable written off This amount relates to a 2004 balance on a vendor account. It originated from lease payments for an asset that did not perform as expected and the Company refused to make payments. We believe the statue of limitations will prevent the vendor from claiming this amount in future. |
25
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
16. COMMITMENTS
The Company has entered into lease agreements which require minimum lease payments summarized as follows: |
| Contractual obligation repayment schedule: | ||
| 2008 | $ 72,116 | |
| 2009 | 1,454 | |
|
|
||
| $ 73,570 | ||
|
|
|
| 2007 | 2006 | 2005 | ||||
|
|
|
|
||||
| Shares issued to settle debts | $ 364,939 | $ 269,858 | $ 471,414 | |||
| Shares issued to settle convertible debts (note 7) | 132,679 | 1,864,566 | - | |||
| Notes converted into preferrence shares (note 7) | 2,187,826 | - | - | |||
|
|
|
|
||||
| $ 2,685,444 | $ 2,134,424 | $ 471,414 | ||||
|
|
|
|
||||
|
19. SEGMENTED INFORMATION
The Company operates in one industry segment that being the development of the upgrader technology for use in the oil industry. Substantially all of the Company's operations and assets are in Canada and are solely focused on the development and commercialisation of this technology. 20. SUBSEQUENT EVENTS Subsequent to December 31, 2007 the Company issued 6,643,750 common shares at a weighted average price of $0.2413, in connection with the exercise of various stock options for total gross proceeds of $1,603,188. The Company also raised US$250,000 in a private placement of 378,787 shares with 94,696 attached warrants. The warrants has a strike price of US$0.99 with a term of five years. In April 2008 the term of the Series D convertible notes mentioned in note 7, were extended by another six months at a conversion price of $0.49 and an exercise price of $0.64 for the attached warrants. |
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
21. FINANCIAL INSTRUMENTS
Credit Risk The Company is exposed to credit risk with respect to its cash and receivables. Receivables are comprised mainly of goods and services tax credits receivable from a Canadian tax agency and cash is placed with major financial isntitutios. Management believs this mitigates the risk associated with these instruments. Currency Risk The Company translates the results of its foreign operations into Canadian dollars using rates approximationg the average exchange rate for the year. The exchange rate may vary and create foreign currency risk. At year-end the Company had certain obligations and assets denominated in US dollars and there are no contracts in place to manage the exposure. As at December 31, 2007 the Company had cash of US$9,753 (2006 - US$1,067,102) and accounts payable of US$2,209 (2006 - US$41,099). Interest rate risk The Company is not exposed to significant interest rate risk due to the short-term nature of its financial instruments and due to the long-term convertible notes not bearing interest. 22. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the current year's presentation. 23. DIFFERENCES BETWEEN US AND CANADIAN GAAP The Company prepares the consolidated financial statements in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which conform in all material respects to those in the United States ("US GAAP"), except as follows: a) Under Canadian GAAP, effective January 1, 2004, Genoil retroactively adopted new Canadian accounting standards for stock based compensation and measured all equity instruments awarded at fair value and recognized the compensation expense over the period of services. For US GAAP purposes, effective January 1, 2004, the Company retroactively adopted, with restatement of prior years' financial statements, the fair value method of accounting for all stock-based payments made after January 1, 1995 in accordance with SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). Effective January 1, 2006, The Company adopted the requirements of the Statement of Financial Accounting Standard 123R ("SFAS 123R") "Share Based Payment" which replaces SFAS 123. There was no significant impact on the Company as a result of the adoption of the new requirements under SFAS 123R. |
| (continues) |
27
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
23. DIFFERENCES BETWEEN US AND CANADIAN GAAP
(continued)
b) Under US GAAP, the conversion feature of the convertible debenture - series A and the detachable warrants described in note 7, issued by the Company meet the criteria to be exempt from SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" and were not required to be bifurcated. As a result, the Company followed Emerging Issue Task Force (“EITF”) No. 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments" and recorded the proceeds of the convertible debenture based on the relative fair value of the convertible debenture and the detachable warrants. For US GAAP purposes, the relative value of the detachable warrants and the intrinsic value of the conversion option were determined to be $1,775,098 and $1,006,250, respectively. Also, the conversion of Series A convertible debentures with a face value of $4,902,800 into 2,785,681 Class A preferred notes as described in Note 7 resulted in a loss on extinguishment that was different under Canadian GAAP and U.S. GAAP. For Canadian GAAP purposes, the company followed EIC-96, "Accounting for the early extinguishment of convertible securities through (1) early redemption or repurchase and (2) induced early conversion”. Therefore, the consideration transferred (i.e. the value of the preferred shares) to settle the Series A convertible debt was allocated to the carrying value of the debt and the conversion option element on the same basis as was used to allocate the original debt proceeds. The resulting loss relating to the debt element ($176,450) was charged to the consolidated statement of loss and the portion of the consideration allocated to the conversion option ($4,432,785) was charged to contributed surplus. For US GAAP purposes, the company followed EITF 96-19, “Debtors accounting for modification and convertible debt instruments” and EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”. Therefore, the consideration transferred (i.e. the value of the preferred shares) was allocated to the conversion element of the convertible security based on the intrinsic value of the debt’s conversion feature at the date of extinguishment, and the residual consideration was allocated to the debt. As a result of this difference in the allocation of the consideration, the loss on conversion relating to the debt element would increase by $1,706,845 and the charge to contributed surplus would be reduced by $2,538,521. As a result of the difference in discount amounts, the value of the convertible debentures and the debt extinguishment described above, the carrying value of the convertible debentures under US GAAP should be increased by $51,781 (2006 - $943,446; 2005 - $1,024,649) (net of related accretion expense) and the accretion expense would have decreased by $59,990 (2005 - $82,203; 2005 - $11,027). The $59,990 includes a difference related to the conversion of $132,639 of notes to common shares, which resulted in a $23,433 difference in accretion expense. |
| (continues) |
28
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
23. DIFFERENCES BETWEEN US AND CANADIAN GAAP
(continued)
c) Under US GAAP, the conversion feature of the convertible notes - series B and C and the detachable warrants described in Note 7, issued by the Company meet the criteria to be exempt from SFAS 133 and were not required to be bifurcated. As a result, the Company followed EITF No. 00-27 and recorded the proceeds of the convertible notes based on the relative fair value of the convertible notes and the detachable warrants. Accordingly, management has determined that the embedded conversion option within the debt instrument did not result in any beneficial conversion option value. In addition, the Company determined that the portion of the proceeds allocated to the detachable warrants was $1,189. During the year ended December 31, 2006 the notes were converted to common shares. The accretion expense under US GAAP for these convertible notes was $1,137 (2005 - $52) and as such, accretion expense would have decreased $40,466 for 2006 (2005 - $10,902) under US GAAP. |
| (continues) |
29
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
23. DIFFERENCES BETWEEN US AND CANADIAN GAAP
(continued)
d) Under US GAAP, the conversion of the convertible notes – series D and the detachable warrants described in note 7 met the criteria to be exempt from SFAS 133 and are not required to be bifurcated. As a result, the Company followed EITF 00-27 and recorded the proceeds on the convertible notes based on the relative fair value of the convertible notes and detached warrants. For US GAAP purposes the relative fair value of the detachable warrants and the intrinsic value of the conversion option were determined to be $78,087 and $388,111 respectively at the time of issuance. On April 6, 2007, the maturity date of the convertible notes with a face value of $760,785 and the expiry date of the 253,595 attached warrants were extended by six months to October 6, 2007. On that date, the notes and warrants were again extended by six months. For Canadian GAAP purposes, the Company followed EIC-88, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and considered both extensions to be modifications of the debt with the incremental fair value of the warrants, in the amount of $25,484 expensed as additional interest expense. For US GAAP purposes, the Company followed EITF No. 96-19, “Debtors accounting for modification and convertible debt instruments”. Applying the guidance in this EITF the Company determined that the extension on both dates were modifications because each extension did not result in a substantial change (defined as greater than 10%) in the cash flows between the original and modified notes. The extensions also did not cause the fair value of the embedded conversion option to change by more than 10% of the carrying amount of the original notes immediately before and after the extensions. The Company determined the change in the fair value of the embedded conversion option immediately before and after the April and October extensions to be $55,892 and $54,574, respectively, using the Black-Scholes option pricing model using the following assumptions: |
| April 6, 2007 | October 6, 2007 | |||||||
| Before | After | Before | After | |||||
| Expected life | 1 day | 183 days | 1 day | 183 days | ||||
| Volatility | 0.00% | 63.90% | 0.00% | 64.99% | ||||
| Dividend yield | 0.00% | 0.00% | 0.00% | 0.00% | ||||
| Risk free rate | 0.00% | 4.14% | 0.00% | 4.43% | ||||
|
The increase in the fair value of the embedded conversion option immediately after the
extensions was then adjusted to the carrying value of the debt and amortized over the remaining term of the debt using a new effective interest rate. As a result of the differences described above, under US GAAP, the carrying value of the convertible notes liability as at December 31, 2007 would decrease by $28,927 (2006 - $277,094) (net of related accretion expense) with a corresponding increase in shareholders’ equity. The accretion expense for US GAAP for these convertible notes was $384,496 (2006 - $163,242) and the accretion expense would have increased by $358,633 (2006 - $138,069) under US GAAP. |
30
|
GENOIL INC.
Notes to Consolidated Financial Statements Years Ended December 31, 2007, 2006 and 2005 |
(Expressed in Canadian Dollars)
|
The consolidated assets and cashflows are the same under Canadian and US GAAP.
24. NEW US ACCOUNTING PRONOUNCEMENTS SFAS No. 155 In February 2006, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140”. Among other things, SFAS No. 155 permits the election of fair value re-measurement for certain hybrid financial instruments that would otherwise require bifurcation under Statement 133, Accounting for Derivative Instruments and Hedging Activities. These hybrid financial instruments would include both assets and liabilities. SFAS No. 155 is effective for fiscal years beginning after September 15, 2006. The adoption of this statement did not have an impact on the compny's consolidated financial statements. (continues) |
31
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
24. NEW US ACCOUNTING PRONOUNCEMENTS
(continued)
SFAS No. 157 In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of the statement are effective fiscal years beginning after November 15, 2007. The Company is currently evaluating its impact. SFAS No. 159 In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Fincial Liabilities - including and amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value, effective for years beginning after November 15, 2007. The Company is currently evaluating the impact of this statement. FSP EITF 00-19.2 In December 2006, the FASB issued Staff Position "FSP" No. EITF 00-19-2. This FSP addresses an issuer's accounting for registration payment arrangements and specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FASB No. 5. The guidance in this FSP amends FASB Statements 133 and 150 and FASB Interpretation No. 45 to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. |
| (continues) |
32
GENOIL INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars)
|
24. NEW US ACCOUNTING PRONOUNCEMENTS
(continued)
FIN 48 In June 2006, FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FAS No. 109)” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely- than-not criteria. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, b) a reduction in a deferred tax asset or an increase in a deferred tax liability or c) both a and b. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in FAS No. 109 is not an appropriate substitute for the de- recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged by this interpretation. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. |
33