ITEM 1.
DESCRIPTION OF BUSINESS
General
Intelligent Living Corp (“ILC”, the “Company”, “we”, “us”) was incorporated in the State of Nevada in 1998. Through its wholly owned subsidiary MCM Integrated Technologies, Ltd. (“MCM”) the Company operates in the green building sector and has historically offered automation technology for single and multi unit new construction and existing buildings. The Company specialized in designing, supplying, installing, upgrading and servicing control and automation solutions including: energy use monitoring and conservation systems, security and access control systems, lighting control systems, HVAC and environmental controls, and distributed audio/video systems. Incorporated in 1994, MCM has supplied home automation and energy management solutions since 2003. The Company maintains offices in Vancouver, British Columbia and Phoenix, Arizona. Income is derived from both equipment sales and the provision of installation, repair and maintenance services. Customers include residential home owners, developers and builders of single family and multi-unit developments and commercial businesses.
The Company previously engaged in the import and distribution of home décor products for the North American market. This activity was pursued through its wholly owned subsidiary Cardinal Points Trading Corp. In December 2006 the Company discontinued its activity in the home décor sector and began a process to dispose of assets and obligations and evaluate ways and means to recover costs related to the home décor import and distribution business. This process concluded during the current year and future impact on ongoing operations is expected to be de minimis as of May 31, 2012.
In 2008 the Company shifted its focus to the western Canadian housing market. The western Canadian housing market, and in particular the greater Vancouver housing market, has remained strong through the US housing downturn with new construction and renovation projects, and ongoing momentum in home sales and re-sales.
The market opportunities for the Company’s control and automation services and products and associated project margins are enhanced when combined with overall building design and construction. Over several quarters the Company has actively evaluated opportunities to expand its business activities vertically within the Company’s current green building, home automation and energy conservation sectors and horizontally within the construction and renovation sectors. During FY 2012 the Company began planning the expansion of its activities to include: design build services targeting small footprint energy efficient housing, specific to the needs of North American Indian communities and emergency relief housing and multi-strata property renovation and development. These areas of business capitalize on the Company’s in-house engineering, design and project management capabilities and will incorporate automation and control as standard features. Early in the planning process it became clear that restructuring would be required in order for the Company to attract the working capital financing required to support expansion. Restructuring was completed during the year ended May 31, 2012 and the Company expects to begin implementation of its diversification strategy in FY 2013.
On October 31, 2011 the Company’s board of directors approved a Consent Resolution amending the Company’s Articles of Incorporation to affect a one for one hundred and fifty reverse split of the Company’s common stock, and adjustment of the Company’s authorized capital to eight hundred million common shares and five million preferred shares. The proposed amendments were approved by a majority of shareholders on November 1, 2011. The Company filed a preliminary Schedule 14C Information Statement outlining proposed amendments to the Company’s Articles of Incorporation on November 9, 2011 and a definitive Schedule 14C Information Statement on November 25, 2011. The Company set November 25, 2011 as the record date for notification to shareholders. The Company filed the amended Articles of
Incorporation with the Nevada Secretary of State on December 12, 2011, with an effective posting date of December 22, 2012. The reverse split was approved for trading purposes by the Financial Industry Regulatory Authority [FINRA] on January 18, 2012.
Employees
As of May 31, 2012, we had a staff of four consisting of three employees: COO, technical applications specialist, administrative assistant, and one contractor: the Company President.
ITEM 1A
ITEM 1A
RISK FACTORS
Readers should carefully consider the risks and uncertainties described below before deciding whether to invest in shares of our common stock.
Our failure to successfully address the risks and uncertainties described below would have a material adverse effect on our business, financial condition and/or results of operations, and the price of our common stock may decline and investors may lose all or part of their investment. There is no assurance that we will successfully address these risks or other unknown risks that may affect our business.
Risks Relating to our Company
Our independent auditor has issued an audit opinion which includes a statement describing our going concern status. Our financial status creates a doubt whether we will continue as a going concern.
As described in Note 2 of our accompanying financial statements, our limited revenues generated and our lack of any guaranteed sources of future capital create substantial doubt as to our ability to continue as a going concern. The Company had a working capital deficit of ($1,185,764) at May 31, 2012 and a consolidated net loss of $(559,899) for the twelve months then ended. If the Company does not raise a sufficient amount of capital, it may not have the ability to remain in business until such time, if ever, when it becomes profitable.
Although the Company has continued to restructure its operations the Company’s operating income is not yet adequate to offset the Company’s aggregate overhead expenses. To rectify this shortfall, on an operating basis the Company needs to find further ways to reduce overhead expenses and increase its operating revenue sufficient to offset the Company’s overhead expense. There is no assurance that the Company will be able to do so.
Until such time as the Company becomes sustainable profitable it will be necessary to raise additional capital to support operations. There is no assurance that the Company will be able to raise the required capital under terms acceptable to management, or on a schedule and in amounts required to support continued operations if at all. Our failure to achieve or maintain profitability could negatively impact the value of our stock.
We have not operated profitably and have a limited operating history that you can use to evaluate us; therefore, we may not survive if we meet some of the problems, expenses, difficulties, complications and delays frequently encountered by a company in the early stages of shifting its business activities.
We have a limited operating history on which to base an evaluation of our current business and prospects. Potential investors must consider our business and prospects in light of the risks and difficulties frequently encountered by companies in the early stages of shifting activities to include new areas of business. These risks and difficulties include, but are not limited to, lack of sufficient customer base, revenue, cash flow and working capital for marketing, product development, sub-contracting, supplies and inventory. We cannot be certain that our business strategy will be successful or that we will successfully address these and other risks. Our failure to address and mitigate these risks could harm our ability to operate profitably.
We may change our business plan.
Based on the results of our efforts to develop our current operating concept, we are re-evaluating our business plan and our board of directors may determine that it is in the best interests of the shareholders to change our business plan through vertical diversification within the Company’s current business sector and/or horizontal diversification into related sectors. Any such expansion of operations will entail risks, and such actions may involve specific operational activities which may negatively affect the profitability of the Company. Consequently, shareholders must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to the Company at that time, and (ii) management of such expanded operations may divert management’s attention and resources away from its existing operations, all of which factors may have a material adverse effect on the Company’s present and prospective business activities. In addition, we may need to bring in new investors or raise additional capital, all of which could result in dilution of current shareholders. There is no guarantee that our efforts to diversify will be successful.
We require additional funds to achieve our current business strategy and our inability to obtain additional financing would inhibit our ability to expand or even maintain our business operations.
We need to raise additional funds through public or private debt or sale of equity to achieve our current business strategy. This financing may not be available when needed. Even if this financing is available, it may be on terms that we deem unacceptable or are materially adverse to shareholder interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our inability to obtain financing would inhibit our ability to implement our development strategy, and as a result, could require us or diminish or suspend our development strategy and possibly cease our operations. If we are unable to obtain financing on reasonable terms, we could be forced to delay, scale back or eliminate planned expansion and or introduction of new products and services. In addition, such inability to obtain financing on reasonable terms could have a negative effect on our business, operating results, or financial condition to such extent that we are forced to restructure, file for bankruptcy, sell assets or cease operations.
We currently have outstanding debt that is convertible into shares of our common stock at below market pricing resulting in significant dilution to our current stockholders.
At May 31 2012 we had a total of $1,064,676 in debt and accrued interest that is convertible into shares of our common stock at discounts ranging from 0% to 25% of the market price. The conversion of all of this debt could result in significant dilution to our stockholders.
We rely heavily on our management, and the loss of their services could materially and adversely affect our business.
The Company’s business is significantly dependent on the Company’s management team. The Company’s success will be particularly dependent on Michael Holloran, the Company’s Chief Executive Officer, and Murat Erbatur the Company’s Chief Operating Officer and founder of MCM Integrated Technologies. The loss of these individuals would have a material adverse effect on the Company.
The Company may not be able to sustain and develop its customer base and sustain market acceptance of its products and services
Although the Company believes it can continue to develop home automation equipment and technology packages that will maintain and attract a customer base sufficient to support the Company’s activities, the inability of the Company to sustain and develop such a customer base could have a material adverse effect on the Company. There is the possibility that competitors could seize on the Company’s ideas and business model and produce competing product matrices and installations. There is the possibility that the competitors could capture significant market share of the Company’s intended market. No assurance can be given that the Company’s, products and solutions will generate market acceptance and revenues sufficient to achieve and sustain profitable operations.
Recent market events and conditions, including disruptions in the U.S. and international credit markets and other financial systems and the deterioration of the U.S. and global economic conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on our ability to fund our working capital and other capital requirements.
Beginning in 2007 the U.S. credit markets experienced serious disruption due to a deterioration in residential property values, defaults and delinquencies in the residential mortgage market and a decline in the credit quality of banks and borrowers. These problems led to a substantial and ongoing slow-down in residential housing market construction and sales, declining housing prices, delinquencies in non-mortgage consumer credit and a general decline in consumer confidence. These conditions continued and worsened in 2008 and have persisted through 2012, causing a loss of confidence in the broader U.S. and global credit and financial markets and have resulted in the collapse of, and government intervention in, major banks, financial institutions and insurers, and have created a climate of volatility, reduced liquidity, widening of credit spreads, increased credit losses, tighter credit conditions and most recently the downgrading of US credit rating. Notwithstanding various actions by the U.S. and foreign governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions have caused the broader credit markets to further deteriorate and have introduced volatility and a general decline in world stock markets. In addition, general economic indicators have been slow to recover. These include consumer sentiment, unemployment and economic growth and uncertainty about corporate earnings. These disruptions in the credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.
The Company’s operating results may vary and may not support ongoing development of the business
The Company’s operating results may fluctuate significantly from period to period as a result of a variety of factors including but not limited to: purchasing patterns of customers, competitive pricing and margins, debt service and principal reduction payments, and general economic conditions. There is no assurance that the Company will be successful in marketing its products and services or that the revenues from the sale of such products and services will be sufficient to offset costs and support ongoing development of the business.
Unanticipated Obstacles to Execution of the Business Plan
The Company’s business plans may change significantly. Many of the Company’s potential business endeavors are capital intensive and may be subject to statutory or regulatory requirements. Management believes that the Company’s goals and strategies are achievable in light of current economic conditions and regulatory environments with the skills, background, and knowledge of the Company’s principals and advisors. Management reserves the right to make significant modifications to the Company’s stated strategies depending on future events.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
We may be required to establish strategic relationships with third parties in the home automation and energy efficiency industries and service sectors, including in international markets. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our technology know-how and our products relative to our competitors. We can provide no assurance that we will be able to establish and maintain strategic relationships in the future.
In addition, any strategic relationships that we establish, will subject us to a number of risks, including risks associated with sharing and potentially losing control over technical information and know-how, loss of control of operations that are material to developed business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by our exposure to a number of factors that are outside of our control.
No Assurances of Protection for Non-Proprietary Know-How; Reliance on Trade Secrets
In certain cases, the Company may rely on trade secrets to protect the Company’s technology know-how which the Company has developed or may develop in the future and which do not have intellectual property protection. There can be no assurances that others will not independently develop similar or superior technology know-how. The protection of trade secret status has been the subject of increasing claims and litigation by various companies both in order to protect trade secrets as well as for competitive reasons even where claims are unsubstantiated. The prosecution of claims or the defense of such claims is costly and uncertain given the uncertainty and rapid development of the principles of law pertaining to this area. The Company, in common with other firms, may also be subject to claims by other parties with regard to the use of technology information and data which may be deemed proprietary to others.
Risks Related to Our Common Shares
Dividend Record
We have no dividend record. We have not paid dividends on our common shares since incorporation and do not anticipate doing so in the foreseeable future.
The trading market for our common stock is limited.
We are quoted on the Financial Industry Regulatory Authority’s Over-the-Counter Bulletin Board under the trading symbol “ILVC”. The OTCBB is regarded as a junior trading venue. This may result in limited shareholder interest and hence lower prices for our common stock than might otherwise be obtained.
The market price of our common stock may fluctuate significantly.
The market price of our common shares may fluctuate significantly in response to factors, some of which are beyond our control, such as:
·
the announcement of new products or product enhancements by us or our competitors;
·
developments concerning intellectual property rights and regulatory approvals;
·
quarterly variations in our and our competitors’ results of operations;
·
changes in earnings estimates or recommendations by securities analysts;
·
developments in our industry; and
·
general market conditions and other factors, including factors unrelated to our own operating performance.
Further, the stock market in general has recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common shares, which could cause a decline in the value of our common shares. You should also be aware that price volatility might be worse if the trading volume of our common shares is low.
Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system), in companies continuously in existence for at least three years with net tangible assets of less than $2,000,000. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities.
These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission (see above for discussions of penny stock rules), the FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 1B
ITEM 1B
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES
We maintain our statutory registered agent’s office in Reno, Nevada and our principal executive offices are located at Suite 221, 2323 Quebec Street Vancouver, BC. We occupy approximately 2,000 square feet of office and technology demonstration space. In addition we are renting storage space for surplus equipment and historical records. We do not have leases and are renting all space on a month-to-month basis. The total monthly rent obligation for all space used by the Company is approximately $1,800.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently involved in any litigation, nor do we know of any threatened litigation against us that would have a material effect on our financial condition.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock traded on the OTC Bulletin Board (“OTCBB”) from October 1999 to September 2007, on the Pink Sheets from September 2007 to March 2009, and from March 2009 to present on the OTCBB. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. Prior to August 15, 2007 the name of the Company was Elgrande International Inc. and our trading symbol was “EGDI”. On July 19, 2007 the name of the Company was changed to Intelligent Living Corp and effective August 15, 2007, the trading symbol changed to ILVG. On March 17, 2009, commensurate with re-listing on the OTCBB, the trading symbol changed to ILVC. The following sets forth the range of high and low bid information for the quarterly periods indicated of our last two fiscal years as reported by the National Quotation Bureau:
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information with respect to our common stock issued and available to be issued under outstanding options, warrants and rights.
A
B
C
Number of securities
Weighted-average
Number of securities
to be issued upon
exercise price of
remaining available
exercise of outstanding
outstanding
for future issuance
options, warrants
options, warrants
under equity
and rights
and rights
compensation plans
Plan category
Equity compensation plans
NA
NA
NA
approved by security holders
Equity compensation plans not
NA
NA
approved by security holders
Total
NA
NA
2007 OPTION PLAN
The 2007 Option Plan was adopted by the board with 200,000 shares reserved. The Plan is administered by the Board of Directors of the Company. Subject to the express limitations of the Plan, the Board has authority in its discretion to determine the eligible persons to whom, and the time or times at which,
restricted stock awards may be granted, the number of shares subject to each award, the time or times at which an award will become vested, the performance criteria, business or performance goals or other conditions of an award, and all other terms of the award. The Board also has discretionary authority to interpret the Plan, to make all factual determinations under the Plan, and to make all other determinations necessary or advisable for Plan administration. The Board may prescribe, amend, and rescind rules and regulations relating to the Plan. All interpretations, determinations, and actions by the Board are final, conclusive, and binding upon all parties.
HOLDERS
As of August 29, 2012, the number of holders of record of shares of common stock, excluding the number of beneficial owners, whose securities are held in street name, was approximately 1,600.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common stock in the foreseeable future because we intend to retain any positive earnings to finance the expansion of our business. Thereafter, declaration of dividends will be determined by the Board of Directors in light of conditions then existing, including without limitation our financial condition, capital requirements and business condition.
RECENT SALES OF UNREGISTERED SECURITIES
The following table sets for the information with respect to all securities of the Company sold in its fiscal years ended May 31, 2010, 2011 and 2012, and subscription amounts of outstanding debentures, without registration of the securities under the Securities Act of 1933. The securities so sold are believed by the Company to be exempt from registration under either Regulation S or Rule 506 under the Securities Act of 1933.
If we indicate in the following table that we relied on Section 4(2) of the Securities Act, we relied on the following factors in determining the availability of the exemption: (a) the issuance was an isolated private transaction by us which did not involve a public offering; (b) there were only a very limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the stock; (d) the stock was not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offerees and us.
If we indicate in the following table that we relied on Regulation S, (a) the subscriber was neither a U.S. person nor acquiring the shares for the account or benefit of any U.S. person, (b) the subscriber agreed not to offer or sell the shares (including any pre-arrangement for a purchase by a U.S. person or other person in the U.S.) directly or indirectly, in the United States or to any natural person who is a resident of the United States or to any other U.S. person as defined in Regulation S unless registered under the Securities Act and all applicable state laws or an exemption from the registration requirements of the Securities Act and similar state laws is available, (c) the subscriber made his, her or its subscription from the subscriber's residence or offices at an address outside of the U.S. and (d) the subscriber or the subscriber's advisor has such knowledge and experience in financial and business matters that the subscriber is capable of evaluating the merits and risks of, and protecting his interests in connection with an investment in the Company.
If we indicate in the following table that we relied on Regulation D, we relied upon Rule 506 and (a) the subscriber was an Accredited Investor (as defined in Regulation D), (b) the subscriber invested in the Company for his own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (c) the subscriber agreed not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (d) the subscriber represented that he had knowledge and experience in financial and business matters such that he is capable of evaluating the merits and risks of an investment in the Company, (e) the subscriber had access to all documents, records, and books of the Company pertaining to the investment and was provided the opportunity ask questions and receive answers
regarding the terms and conditions of the offering and to obtain any additional information which the Company possessed or was able to acquire without unreasonable effort and expense, and (f) the subscriber had no need for the liquidity in his investment in the Company and could afford the complete loss of the investment.
Number of
Shares
Purchase or
Purchased or
Expiration
Exercise Price
Purchasable
Date (WTS) or
Date of
Type of
(USD
Upon Exercise
Due date
Name
Issue
Security1
Per Share)
or Conversion2
(DEB)
Exemption
Private Investors
7/10-8/10
CS
0.77
110,000
Private Investors
10/10
CS
1.65
106,667
Private Investors
3/11
CS
0.88
79,096
Private Investors
10/11
CS
0.09
100,000
S
Private Investors
1/12
CS
0.03
11,701,000
S, 506
Private Investor
2/02
DEB
$35,000
2/08
S
Private Investors
11/05-2/06
DEB
$555,000
2/14
Private Investors
5/06
DEB
$50,000
6/09
Private Investor
2/08
DEB
$460,000
6/13
S
Private Investor
6/08
DEB
$326,773
6/13
S
(1)
CS - Common Stock, WAR - Warrant, DEB - Debenture; (2) DEB dollar amount convertible
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This annual report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. Some discussions in this report may contain forward-looking statements that involve risk and uncertainty. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this report. Forward-looking statements are often identified by words like: "believe", "expect", "estimate", "anticipate", "intend", "project" and similar expressions or words which, by their nature, refer to future events.
In some cases, you can also identify forward-looking statements by terminology such as "may", "will", "should", "plans", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
RESULTS OF OPERATIONS
Overview
Intelligent Living Corp (“ILC”, the “Company”, “we”, “us”) was incorporated in the State of Nevada in 1998. Through its wholly owned subsidiary MCM Integrated Technologies, Ltd. (“MCM”) the Company operates in the green building sector and has historically offered automation technology for single and multi unit new construction and existing buildings. The Company specialized in designing, supplying, installing, upgrading and servicing control and automation solutions including: energy use monitoring and conservation systems, security and access control systems, lighting control systems, HVAC and environmental controls, and distributed audio/video systems. Incorporated in 1994 MCM has supplied home automation and energy management solutions since 2003. The Company maintains offices in Vancouver British Columbia and Phoenix Arizona. Income is derived from both equipment sales and the provision of installation, repair and maintenance services. Customers include residential home owners, developers and builders of single family and multi-unit developments and commercial businesses.
The Company previously engaged in the import and distribution of home décor products for the North American market. This activity was pursued through its wholly owned subsidiary Cardinal Points Trading Corp. In December 2006 the Company discontinued its activity in the home décor sector and began a process to dispose of assets and obligations and evaluate ways and means to recover costs related to the home décor import and distribution business. This process concluded during the current year and future impact on operations is expected to be de minimis as of May 31, 2012.
In 2008 the Company shifted its focus to the western Canadian housing market. The western Canadian housing market, and in particular the greater Vancouver housing market, has remained strong through the US housing downturn with new construction and renovation projects, and ongoing momentum in home sales and re-sales.
The market opportunities for the Company’s control and automation services and products and associated project margins are enhanced when combined with overall building design and construction. Over several quarters the Company has actively evaluated opportunities to expand its business activities vertically within the Company’s current green building, home automation and energy conservation sectors and horizontally within the construction and renovation sectors. During FY 2012 the Company began planning the expansion of its activities to include: design build services targeting small footprint energy efficient housing, specific to the needs of North American Indian communities and emergency relief housing and multi-strata property renovation and development. These areas of business capitalize on the Company’s in-house engineering, design and project management capabilities and will incorporate automation and control as standard features. Early in the planning process it became clear that restructuring would be required in order for the Company to attract the working capital financing required to support expansion. Restructuring was completed during the year ended May 31, 2012 and the Company expects to begin implementation of its diversification strategy in FY 2013.
On October 31, 2011 the Company’s board of directors approved a Consent Resolution amending the Company’s Articles of Incorporation to affect a one for one hundred and fifty reverse split of the Company’s common stock, and adjustment of the Company’s authorized capital to eight hundred million common shares and five million preferred shares. The proposed amendments were approved by a majority of shareholders on November 1, 2011. The Company filed a preliminary Schedule 14C Information Statement outlining proposed amendments to the Company’s Articles of Incorporation on November 9, 2011 and a definitive Schedule 14C Information Statement on November 25, 2011. The Company set November 25, 2011 as the record date for notification to shareholders. The Company filed the amended Articles of Incorporation with the Nevada Secretary of State on December 12, 2011, with an effective posting date of December 22, 2012. The reverse split was approved for trading purposes by the Financial Industry Regulatory Authority [FINRA] on January 18, 2012.
Results from ongoing operations reported for the year ending May 31, 2012 and 2011 relate to sales of home automation and energy efficiency products and services including system design, equipment supply, installation and support. Results from discontinued operations relate to the Company’s phase out activities in the home décor sector and include costs of third party legal and professional time related to eliminating and reducing liabilities and pursuing legal recourse against the Company’s home décor supplier.
Foreign currency translation
MCM Integrated Technologies, Ltd. and Cardinal Points Trading, Corp. both use the Canadian Dollar as their functional currency. Transactions denominated in currencies other than the entity’s functional currency are translated into the entity’s functional currency at the exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate ruling on the balance sheet date. Currency translation differences are recognized in the statement of income for the period.
On consolidation, the results of operations and cash flows whose functional currency is other than the US dollar are translated into US dollars at the average exchange rate for the period and their assets and liabilities are translated into US dollars at the exchange rate ruling on the balance sheet date. Currency translation differences are recognized within other comprehensive income as a separate component of shareholders’ equity. In the event that such an operation is sold, the cumulative currency translation differences that are attributable to the operation are reclassified to income.
During the 12 month period June 1, 2011 through May 31, 2012, the US dollar to Canadian Dollar exchange rate has varied from a low of 0.9467on October 5, 2011 to a high of 1.0590 on July 27, 2011. The closing exchange rate was 0.9740 and the average exchange rate over the year ended May 31, 2012 was 1.0009 resulting in a comprehensive gain of $21,204 for the year ended May 31, 2012.
Comparison of the Years Ended May 31, 2012 and May 31, 2011.
For the year ended May 31, 2012, revenues from continuing operations were $291,954 compared to $344,538 in the same period ending last year. These revenues are a result of the sale of smart home products and services. The 15% revenue decrease is due to wind down of four longer term projects and reduced business development in the Company’s traditional business sectors.
For the year ended May 31, 2012, gross profit from continuing operations was $130,061 compared to $221,216, a decrease of 41% compared to the same period in the prior year. Gross margin (gross profit as a percent of revenue) was 45% for the year ended May 31, 2012, 30% lower than the prior year. The decrease gross profit and gross margin reflects higher cost of labor and reduced margins on cost of goods and equipment sales.
Operating expenses associated with ongoing operations for the year ended May 31, 2012, were $338,717 versus $369,580 for the same period in the prior year. The decrease in operating expenses reflects the net of increased salaries, decreased consulting fees and depreciation expense and increased office and administration costs.
The Company recorded an operating loss from continuing operations of ($208,656) for the year ended May 31, 2012 compared to an operating loss of ($148,364) for the same period in the prior year. This represents a year-on-year 41% increase in operating loss.
Total other expenses for the year ended May 31, 2012 were $349,305 compared to $252,638 for the comparable period in the prior year. The 38% year-on-year increase reflects a decrease in inventory reserve expense, elimination of amortization expenses associated with beneficial conversion and fee discounts, reduction of a foreign filing tax reserve expense, increased interest expenses and recognition of a one-time goodwill impairment expense associated with the Company's shift in business activities.
The net loss from continuing operations for the year ended May 31, 2012 was ($557,961) compared to a net loss of ($401,002) for the comparable period in the prior year. This is a 39% increase in the year-on-year net loss from continuing operations.
During the year ended May 31, 2012 the Company incurred expenses associated with its discontinued operations. Expenses include third party legal and professional fees related to eliminating and reducing liabilities associated with discontinued operations. The net loss from discontinued operations was ($1,938) compared to a net loss of ($177,177) for the comparable period in the prior year. The decreased expense was due to the substantial elimination of third party legal and professional expenses associated with the Company’s effort to recover costs associated with the closure of the Company’s home décor operations.
The consolidated net loss for the year ended May 31, 2012 was ($559,899) compared to ($578,179) for the comparable period in the prior year. A gain of $21,204 was realized due as a result of foreign currency translation compared to a loss of ($45,680) in the comparable period of the prior year. The resulting comprehensive loss for the period ending May 31, 2012 was ($538,695) compared to ($623,859) for the corresponding period in the prior year, a reduction of 14%.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
As of May 31, 2012, our principal sources of liquidity included cash and cash equivalents, cash flow from our operating subsidiaries, and loans from related parties. At May 31, 2012, cash and cash equivalents totaled $2,685 compared to $3,475 at May 31, 2011.
Our business continues in transition and our liquidity must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of re-development. The ongoing impairment in the U.S. and Canadian economies and financial markets has and will continue to impact the Company’s sales and liquidity for the foreseeable future. Risk factors relevant to these events and management decisions include, but are not limited to: the Company’s ability to secure ongoing product supply, foreign exchange fluctuations, continued acceptance of the Company’s traditional products and services, success of the Company’s efforts to diversify its products and services changes in technology and consumer adoption of technology, the strength of the North American housing market and consumer economy in general, and cannot be credibly quantified by the Company at this time.
Internal and External Sources of Capital
For the year ending May 31, 2012 the Company realized a loss on operations of ($557,961) and a net loss of ($559,899). As of May 31, 2012 the Company had a working capital deficit of $1,185,764 and limited assets to sell in order to create short or long term liquidity. Therefore, we are dependent on external sources for funding until such time as the Company develops positive net cash flow to maintain liquidity. Until such time as we have positive cash flow on a sustained basis, the dependence on external capital will remain. There are no guarantees that we will be able to raise external capital in sufficient amounts or on terms acceptable to us.
Investing Activities
There were no investing activities during the fiscal year ended May 31, 2012.
Financing Activities
Since inception, we financed operations through proceeds from the issuance of equity and debt securities and loans from shareholders and others. To date, we raised approximately $13.50 million from the sale of common stock and as at May 31, 2012 we have borrowings of approximately $1.17 million from investors and shareholders. Funds from these sources were used as working capital to fund the development of the Company.
The Company executed a securities purchase agreement dated as of December 7, 2005 (the "Purchase Agreement") with certain accredited investors under which we agreed to sell to these investors our convertible Debentures due three years from the final Closing Date under the Purchase Agreement in the aggregate principal amount of up to $600,000 bearing interest at the rate of 6% per annum and convertible into restricted shares of our Common Stock at a conversion price for each share of Common Stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of our Common Stock for the fifteen trading days immediately preceding the date of conversion. At any time, the total number of shares held by each debenture holder is not to exceed 4.99% of the issued and outstanding shares. At the close of the offering the company the company completed the sale of an aggregate of $555,000 in Debentures under the Purchase Agreement which resulted in net proceeds of $424,850. In February 2011 the debenture holders extended the maturity date of the debentures to February 28, 2014. In 2006 the Company secured additional debenture financing from an accredited investor in the amount of $50,000 under terms similar to the December 7, 2005 purchase agreement.
For the fiscal year ended May 31, 2012 net proceeds from financing activities totaled $49,570 from related party loans.
FUTURE PLAN OF OPERATIONS
Beginning in 2008 the Company shifted its focus to the western Canadian housing market. The western Canadian housing market, and in particular the greater Vancouver housing market, has remained strong through the US housing downturn with new construction and renovation projects, and ongoing momentum in home sales and re-sales. Through 2012 the U.S. housing market continued to remain depressed with some signs of a market bottom having been reached. The Company will remain focused on the Canadian market until such time as the US market gains upward momentum and or until a significant market opportunity becomes available.
The Company is actively pursuing expansion both vertically within the Company’s current green building, home automation and energy conservation sectors and horizontally within related sectors including home construction and development. The Company is pursuing expansion opportunities in parallel with a shift in the Company's focus from supplier/sub-contractor to prime contractor/developer. This shift in focus will allow the Company to gain greater financial and market leverage from its knowhow and engineering and project management capabilities. This shift will also increase the Company's flexibility to pursue project and development opportunities. This shift of focus is expected to result in a short term impact on revenue.
Beginning in the second quarter of FY 2011 the Company began discussions with a local specialty builder and entered into a non-binding letter of intent to explore joint opportunities for property development within the greater Vancouver area, design build housing specific to the needs of First Nations communities and small economical fast erecting relief housing. The Company initially favored a joint venture approach to these markets; however, after detailed analysis of structural and financial cost benefits, the Company is pursuing these opportunities as the prime contractor/developer.
This effort has led to eco and energy friendly designs for single family housing, multi-suite elder’s residence and small footprint relief housing. The designs capitalize on modular construction techniques and utilize advanced building systems. The Company is in negotiation with a coastal First Nations band for turnkey design build housing and with a major First Nations owned timber supplier to jointly pursue domestic markets for Native American Indian housing in both Canada and US and offshore markets for small footprint relief housing. The opportunity to supply housing to Native American Indian communities is extensive and the Company plans to focus effort on developing this market over the coming year.
The Company has also undertaken extensive pro-forma analysis of multi-strata development opportunities within greater Vancouver communities that have zoning approval for building multi-units on single family residential lots. The Company recently completed a major renovation of a penthouse condominium in Vancouver. This project is a blueprint and showcase for the Company’s green building, home automation and energy conservation capabilities. The Company is moving forward with this area of business in the Greater Vancouver housing market and is actively looking at ways and means of securing development funding.
Cash flow from ongoing business activities combined with the availability of loans from related parties are estimated to be sufficient to sustain the current level of operations and planned activities through to the end of the 2013 fiscal year.
OFF BALANCE-SHEET ARRANGEMENTS
During the year ended May 31, 2012 the Company did not engage in any off-balance sheet arrangements as defined in Item 303(a) of the SEC's Regulation S-K.
ITEM 7A
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our bank credit facility because borrowings under the facility are variable rate borrowings. At the current time all of the borrowings under our credit agreements accrue interest at bank prime rate plus applicable margins. Assuming that the balance on our line of credit as of May 31, 2012, was the same throughout the entire year, each 1.0% increase in the prime interest rate on our variable rate borrowings would result in an increase in annual interest expense and a decrease in our cash flows and income before taxes of approximately $3,351 per year.
Foreign Currency Exchange Risks
Our home automation subsidiary (MCM) and discontinued home décor subsidiary (Cardinal Points) both have assets and liabilities in Canadian dollars and both use the Canadian Dollar as their functional currency. Each financial period, all assets (including goodwill) and liabilities of MCM and Cardinal Points are translated into U.S. Dollars, our reporting currency, using the closing rate method. In addition, we occasionally purchase goods in Canadian dollars for resale in US dollars and routinely purchase goods in US dollars for resale in Canadian dollars.
There are principally two types of foreign exchange risk: transaction risks and translation risks. Transaction risks may impact the results of operations and translation risks may impact comprehensive income. These are discussed more fully below.
Transaction risks
Transactions in currencies other than the functional currency are translated at either an average exchange rate used for the reporting period in which the transaction took place (to approximate to the exchange rate at the date of transactions for that period) or in some cases the rate in effect at the date of the transaction. Differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is settled or translated, are recognized in the consolidated statements of operations as foreign exchange transaction gains and losses.
MCM’s and Cardinal Points’ cash balances consist of Canadian Dollars and U.S. Dollars. This exposes us to foreign currency exchange rate risk in the Statement of Operations. The change in exposure from period to period is related to the change in the balance of the bank accounts based on timing of event receipts and payments. For the period ended May 31, 2012, the Company purchased goods and services of approximately $54,000 for sale in Canadian dollars. During the 12 month period June 1, 2011 through May 31, 2012, the US dollar to Canadian dollar exchange rate has varied from a low of 0.9467 on October 5, 2011 to a high of 1.0590 on July 27, 2011. Assuming that the majority of the goods and services were priced in U.S. dollars at their point of origin and that the goods and services were purchased at the extremes of the observed swing in the U.S. Dollar exchange rate against the Canadian Dollar, with all other variables held constant a shift of approximately CAD 6,064 in the cost of goods and services would be realized.
Translation risks
The financial statements of MCM and Cardinal Points, with a functional currency of Canadian dollars, are translated into U.S. dollars using the current rate method. Accordingly, assets and liabilities are translated at period-end exchange rates while revenue, expenses and cash flows are translated at reporting period weighted average exchange rates. Adjustments resulting from these translations are accumulated and reported as the principal component of other comprehensive loss in stockholders’ equity. The magnitude of the adjustment resulting from application of the current rate method is directly related to the difference between the average exchange rate and closing exchange rate for the period.
The fluctuation in the exchange rates resulted in foreign currency translation gains reflected in comprehensive gain in stockholders’ equity of $,21,204 for the year ended May 31, 2012. Future changes in the value of the U.S. dollar to Canadian dollar could have a material impact on our financial position.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF INTELLIGENT LIVING CORP. AND SUBSIDIARIES
VANCOUVER, BRITISH COLUMBIA
We have audited the accompanying consolidated balance sheet of Intelligent Living Corp. and Subsidiaries as of May 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit), and cash flows for the years then ended. 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 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 the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Living Corp. and Subsidiaries as of May 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
September 4, 2012
Houston, TX
www.mkacpas.com
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Intelligent Living Corp (“ILC”, the “Company”, “we”, “us”) was incorporated in the State of Nevada in 1998. Through its wholly owned subsidiary MCM Integrated Technologies, Ltd. (“MCM”) the Company operates in the green building sector and has historically offered automation technology for single and multi unit new construction and existing buildings. The Company specialized in designing, supplying, installing, upgrading and servicing control and automation solutions including: energy use monitoring and conservation systems, security and access control systems, lighting control systems, HVAC and environmental controls, and distributed audio/video systems. Incorporated in 1994 MCM has supplied home automation and energy management solutions since 2003. The Company maintains offices in Vancouver British Columbia and Phoenix Arizona. Income is derived from both equipment sales and the provision of installation, repair and maintenance services. Customers include residential home owners, developers and builders of single family and multi-unit developments and commercial businesses.
The Company previously engaged in the import and distribution of home décor products for the North American market. This activity was pursued through its wholly owned subsidiary Cardinal Points Trading Corp. In December 2006 the Company discontinued its activity in the home décor sector and began a process to dispose of assets and obligations and evaluate ways and means to recover costs related to the home décor import and distribution business. This process concluded during the current year and future impact on operations is expected to be de minimis as of May 31, 2012.
Results from ongoing operations reported for the year ending May 31, 2012 and 2011 relate to sales of home automation and energy efficiency products and services including system design, equipment supply, installation and support. Results from discontinued operations relate to the Company’s phase out activities in the home décor sector and include the cost of third party legal and professional time related to eliminating and reducing liabilities, and pursuing legal recourse against the Company’s home décor supplier.
The Company’s year-end is May 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Intelligent Living Corp. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Accounting Method
The Company’s financial statements are prepared using the accrual method of accounting.
Accounts Receivable
The Company carries its accounts receivable at net realizable value. Because of the small customer base, direct contact with customers and relatively small number of transactions, the Company uses the direct write off method to account for doubtful accounts. The Company estimates bad debt based on management’s ongoing review and assessment of accounts and creation of reserves for the full amount of doubtful accounts. At May 31, 2012 and 2011, there were accounts receivable allowances of NIL.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
Advertising and Marketing Expenses
Advertising expenses consist primarily of costs incurred in the design, development, and printing of Company literature and marketing materials. The Company expenses all advertising expenditures as incurred. The Company incurred advertising and marketing expenses of $3,853 and $121 for the years ending May 31, 2012 and 2011 respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. At May 31, 2012 and 2011, the Company did not have cash equivalents.
Commitments and Contingencies
We record estimated commitments for future obligations and estimate contingencies when information is available that indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. When no accrual is made for a loss contingency because one or both of these conditions are not met, or if an exposure to loss exists in excess of the amount accrued, we disclose such contingencies when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. Determining the likelihood of incurring a liability and estimating the amount of the liability involves significant judgment. If the outcome of the liability is more adverse to us than management currently expects, then we may have to record additional charges in the future. See Note 6 for details on commitments and contingencies.
Comprehensive Income
The Company accounts for Comprehensive Income in accordance with ASC Topic 220. ASC Topic 220 establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. For the year ending May 31, 2012 the Company reported a comprehensive gain of $20,609 resulting from the conversion of Canadian dollar subsidiaries into US dollars. For the year ending May 31, 2012 the accumulated comprehensive loss due to the conversion of Canadian dollar subsidiaries into US dollars was $88,170.
Costs Associated with Exit or Disposal Activities
The Company accounts for exit or disposal activities in accordance with ASC Topic 220, “Accounting for Costs Associated with Exit or Disposal Activities” ASC 220 establishes standards for the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. There has been no impact on the Company’s financial position or results of operations from adopting ASC 220.
Earnings per Share
The Company has adopted ASC 260 “Earnings Per Share”. Basic loss per share is computed using the weighted average number of common shares outstanding. Diluted net loss per share is the same as basic net loss per share, as the inclusion of common stock equivalents would be antidilutive.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
The following potential common shares have been excluded from the computation of diluted net income per share for the years ended May 31, 2012 and 2011 because their inclusion would have been antidilutive:
For the Year Ended
May 31, 2012
For the Year Ended
May 31, 2011
Outstanding common stock options and warrants
Nil
Nil
Convertible loans
21,840,862
1,412,355
Fair Value of Financial Instruments
On July 1, 2008, the Company adopted Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“Topic 820”). Topic 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
·
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The following table represents our assets and liabilities by level measured at fair value on a recurring basis at May 31, 2012
Description
Level 1
Level 2
Level 3
None
None
none
The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.
Software Development Costs
Software development costs include direct costs incurred for internally developed products classified under Other Assets. We account for software development costs in accordance with ASC 350-40. All capitalized software costs are amortized on a straight line basis over an estimated useful life and are reviewed for impairment annually. As of May 31, 2012, all software costs were fully amortized.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
Foreign Currency Translation
MCM Integrated Technologies, Ltd. and Cardinal Points Trading, Corp. both use the Canadian Dollar as their functional currency. Transactions denominated in currencies other than the entity’s functional currency are translated into the entity’s functional currency at the exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate ruling on the balance sheet date. Currency translation differences are recognized in the statement of income for the period.
On consolidation, the results of operations and cash flows whose functional currency is other than the US dollar are translated into US dollars at the average exchange rate for the period and their assets and liabilities are translated into US dollars at the exchange rate ruling on the balance sheet date. Currency translation differences are recognized within other comprehensive income as a separate component of shareholders’ equity. In the event that such an operation is sold, the cumulative currency translation differences that are attributable to the operation are reclassified to income.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
As shown in the accompanying financial statements, at May 31, 2012 the Company has an accumulated deficit of $14,988,201, and current liabilities in excess of current assets by $1,165,764. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Commencing in July 2006 and continuing through the year ended May 31, 2012 management has systematically continued to phase out of the home décor sector. Commencing in Q3 2007 the Company began reporting all home décor activity under the category of discontinued operations. This transition was completed as of May 31, 2012. In December 2006 the Company moved into the home automation sector with the acquisition of MCM Integrated Technologies. The transition has substantially reduced the Company’s financial obligations with respect to overheads, cost of inventory, cost of sales and need for support services. The Company recorded positive operating income for the year ended May 31, 2007 and loss on operations for the years ended May 31, 2008 through 2012.
Goodwill
Goodwill is calculated as the excess of the fair value of consideration paid over the fair value of tangible and intangible assets acquired and liabilities assumed. Goodwill is tested for impairment annually according to ASC 350-20. An impairment test would also be performed in any period in which events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment would be recognized at that time, to the extent that the carrying amount exceeds the undiscounted future net cash flows expected from its use. The Company recorded goodwill in the amount of $242,604 related to the acquisition of MCM Integrated Technologies, Ltd. Management reviewed Goodwill and found that there was impairment for the year ended May 31, 2012 and an expense for the full value of goodwill has been recognized.
Impairment of long-lived assets
We have adopted ASC 350 for the assessment of impairment of goodwill and indefinite life intangibles on an annual basis. The potential impairment of finite life intangibles is assessed whenever events or a change in circumstances indicate the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
·
significant underperformance relative to historical or expected projected future operating results;
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
·
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
·
significant negative industry or economic trends;
·
significant decline in our stock price for a sustained period of time; and
·
our market capitalization relative to net book value.
When we determine that the carrying value of goodwill and indefinite life intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any potential impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
Inventory
The Company has adopted ASC 330: Inventory at May 31, 2012 and 2011 consisted of a variety of home automation equipment. Inventories are recorded using the specific identification method and valued at the lower of recorded cost or market value. The recorded cost of inventory was $53,701 at May 31, 2012, and $60,463 at May 31, 2011. Reserves of $51,749 at May 31, 2012 and $50,881 at May 31, 2011 were recorded for home automation inventory.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. References herein to the Company include the Company and its subsidiaries, unless the context otherwise requires.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years (see note 3). Property and Equipment held by MCM are pledged as security for the Company’s line of credit.
Provision for Taxes
We account for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that we recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes - Intra-period Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. We would recognize interest and penalties related to unrecognized tax benefits in income tax expense.
At May 31, 2012, the Company had net deferred tax asset calculated at an expected rate of 34% of approximately $4,257,000 principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at May 31, 2012. The significant components of the deferred tax asset at May 31, 2012 and May 31, 2011 were as follows:
May 31,
May 31,
Net operating loss carryforward
$
12,522,234
$
12,233,858
Deferred tax asset - NOL
$
4,257,600
$
4,159,552
Deferred tax asset valuation allowance
$
(4,257,600)
$
(4,159,552)
Net deferred tax asset
$
-
$
-
At May 31, 2012, the Company had net operating loss carryforwards of approximately $12,234,000 which expire in the years 2020 through 2030. The change in the allowance account from May 31, 2011 to May 31, 2012 was $98,048.
The components of current income tax expense as of May 31, 2012 and 2011 respectively are as follows:
For the period ended May 31, 2012, other than a reserve of $130,000 for potential federal tax penalties associated with late filing of foreign subsidiary disclosures, the Company did not record any liabilities for uncertain tax positions.
Revenue Recognition
The Company generates revenues designing and installing, integrating and servicing automation solutions and energy use monitoring and conservation systems for commercial and residential new construction and renovation projects. The Company generates revenues in three primary ways: first, the Company offers a complete turnkey solution with products and services to contractors and end users; second, the Company sells only products to its contractors and end users; and third, the Company sells only services to its contractors and end users. Revenue on product sales, service agreements and turnkey contracts is recognized using the completed contract method in accordance with ASC Topic 605 “Revenue Recognition in Financial Statements.”.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
Reclassifications
The Company has reclassified certain prior period amounts to conform to the current year presentation. These reclassifications had no material impact on the financial position, results of operations, or cash flows in the periods presented.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. The useful lives of property and equipment for purposes of computing depreciation are three to seven years. The following is a summary of property, equipment, and accumulated depreciation:
Property and Equipment
May 31,
May 31,
Computer hardware and software
$
815,287
$
825,159
Furniture, fixtures, vehicles, leaseholds
345,199
362,777
Book value of property and equipment
1,160,486
1,187,936
Less accumulated depreciation
(1,150,223)
(1,168,636)
Property and equipment - net
$
10,263
$
19,300
Other assets [Proprietary automation software]
$
14,854
$
15,610
Less accumulated depreciation
14,854
15,610
Other assets - net
$
-
$
-
For the years ended May 31, 2012 and 2011 depreciation expenses on continuing operations were $8,324 and $39,284 respectively and on discontinued operations were $nil and $10,092 respectively. The total depreciation expenses for the years ended May 31, 2012 and 2011 were $8,324 and $49,376 respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
NOTE 4 - COMMON STOCK
During the year ended May 31, 2011, the Company issued 295,763 shares of common stock for conversion of debentures, accrued interest and loans payable valued at $330,998.
During the year ended May 31, 2012 the Company issued 11,801,000 shares of common stock for conversion of debt valued at $360,030.
All stock issued was within terms of the underlying agreements.
NOTE 5 - RELATED PARTIES (NOTES PAYABLE RELATED PARTY)
During the year ended May 31, 2011 loans and accounts payable due to the Company’s officers increased $48,533. The Company had short-term loans and accounts payable outstanding to corporate officers at May 31, 2011 in the amount of $424,302. They are unsecured, due on demand and bear interest at an average rate of 7.4%. Accrued interest to May 31, 2011 was $8,651. The total outstanding related party debt [principal plus accrued interest] for the period ended May 31, 2011 was $432,953.
During the year ended May 31, 2012 $180,000 of accrued liabilities, $115,388 of short term note payable and $2,612 of accrued interest due the Company’s CEO was consolidated into a debenture bearing interest at a rate of 6% convertible into shares of the Company’s common stock at a conversion price not less than the greater of $0.0005 per share or the lowest closing price of the Company’s Common Stock for any trading day on which a Notice of Conversion is received, or for any of the 20 consecutive days on which shares of the Company traded immediately preceding the date of receipt of each Notice of Conversion. The Company determined that there was no derivative liability or beneficial conversion associated with the note. The debenture and $5,780 of accrued interest were converted into 9,926,000 shares of common stock of the Company at an average price of $0.03 per share. The conversion was made in accordance with the underlying debt agreement.
During the year ended May 31, 2012 new loans and accounts payable due to the Company’s officers totaled $52,175. The Company had short-term loans and accounts payable outstanding to corporate officers at May 31, 2012 in the amount of $350,232. They are unsecured, due on demand and bear interest at an average rate of 9.7%. Accrued interest on May 31, 2012 was $785. The total outstanding related party debt [principal plus accrued interest] for the period ended May 31, 2012 was $351,017.
The following table summarizes the position of notes, and amounts due to related parties at May 31, 2012 and May 31, 2011:
Related Parties
Principal
Outstanding
on May 31,
Interest
Accrued to
May 31,
Principal
Outstanding
on May 31,
Interest
Accrued to
May 31,
Short term notes
$
350,232
424,302
8,651
Total
$
350,232
424,302
8,651
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
For the year ending May 31, 2012 the Company did not have any lease or other long term commitments and management was not aware of any contingencies not already provided for. The Company rents office, warehouse, and storage space on a month-to-month basis. This arrangement is expected to continue for the foreseeable future.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
NOTE 7 - CONCENTRATION OF CREDIT RISK
Cash
The Company maintains cash balances at two banks. Accounts at each institution are insured by the Canadian Depository Insurance up to $60,000 in Canadian funds. At May 31, 2012 and 2011, no account exceeded this limit.
Revenue and Accounts Receivable
The Company had one significant customer during the year ended May 31, 2012. For the year ended May 31, 2012 revenue was $267,971 (92% of total revenue) and on May 31, 2012 the account receivable was $2,367 (34% of net receivables).
NOTE 8 - THIRD PARTY NOTES AND DEBENTURES PAYABLE
During the 12 months ended May 31, 2011 the Company converted a $35,000 non-interest bearing short term loan into 6,500,000 shares of the Company’s common stock. The number of shares issued on conversion was determined using the fair market value of the Company’s shares at the time of conversion. The total short term third party non-interest bearing notes outstanding on May 31, 2011 were $28,533.
During the 12 months ended May 31, 2012 the Company reclassified $80,000 of accrued liability into a non interest bearing convertible note maturing on June 1, 2012. The accrued liability resulted from professional fees payable under a consulting contract dated July 2010. Pursuant to terms of the consulting contract, the note formalizes the Company’s option to settle the outstanding liability through issuance of common stock and the effective date of the note tacks back to December 2010 reflecting the period in which the Company realized the benefit of the services. The note is convertible into shares of the Company’s common stock at a conversion price not less than the greater of $0.0005 per share or the lowest closing price of the Company’s Common Stock for any trading day on which a Notice of Conversion is received, or for any of the 20 consecutive days on which shares of the Company traded immediately preceding the date of receipt of each Notice of Conversion. The Company determined that there was no derivative liability or beneficial conversion associated with the note.
During the period ended May 31, 2012 the Company converted $18,750 of third party short term note principal into 625,000 shares of common stock at a share price of $0.03 per share. The conversion was made in accordance with the underlying debt agreement. The total short term third party non-interest bearing note principal outstanding on May 31, 2012 was $88,739.
In the 12 months ended May 31, 2011 the Company converted $70,000 of third party professional fees payable, $179,000 of debenture principal and $82,000 of debenture accrued interest into 44,364,407 shares of the Company’s common stock. All conversions were within terms of the underlying agreements. $693,253 of debenture principal due in FY 2011 was extended as follows: $232,480 due February 28, 2011 was extended to February 28, 2014 and $460,773 due June 1, 2010 was extended to June 1, 2014. The total $768,253 debenture principal outstanding on May 31, 2011 consists of: $75,000 in short term debentures and $693,253 in long term debentures.
In the 12 months ended May 31, 2012 the Company converted $37,500 of debenture principal and into 1,250,000 shares of the Company’s common stock. All conversions were within terms of the underlying agreements. The total $730,753 debenture principal outstanding on May 31, 2012 consists of: $75,000 in short term debentures and $655,753 in long term debentures.
All outstanding notes and debentures were evaluated for embedded derivatives in accordance with ASC 815 and were found to not include any embedded derivatives.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
The following tables summarize the outstanding principal and discounts associated with debentures and notes outstanding at May 31, 2011 and May 31, 2012.
The principal and accrued interest on notes and debentures as at May 31, 2011 and May 31, 2012 are summarized in the following tables:
Notes and Debentures
Principal
Amount at
May 31, 2011
Weighted
Average
Interest Rate
Accrued Interest
May 31, 2011
Third Party Notes
$
28,533
NIL
$
NIL
Third Party Debentures
768,253
6.4%
223,628
Total
$
796,786
6.0%
$
223,628
Notes and Debentures
Principal
Amount at
May 31, 2012
Weighted
Average
Interest Rate
Accrued Interest
to
May 31, 2012
Third Party Notes
$
88,739
NIL
$
NIL
Third Party Debentures
730,753
6.5%
272,672
Total
$
819,492
5.8%
$
272,672
Principal payments on loans and debentures payable in the years ending May 31, 2013 through 2017 are as follows:
Fiscal
Year
Principal
$163,739
$232,480
$423,273
-
-
Total
$819,492
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
NOTE 9 - DISCONTINUED OPERATIONS
At May 31, 2012, the Company had disposed of all discontinued inventory and fully depreciated all plant and equipment assets. At May 31, 2012, assets from discontinued operations were de minimis.
Liabilities from discontinued operations consisted of:
The loss from discontinued operations ($1,938), recorded for the 12 months ended May 31, 2012, was a result of miscellaneous charges related pursuing legal recourse against the Company’s home décor supplier.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2011, FASB issued Accounting Standard Update (ASU) 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The update provides additional guidance to creditors on evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (TDR) and clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. This guidance is effective for interim or annual periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this guidance has not had a material impact on the Company's financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The update removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective prospectively for transactions, or modifications of existing transactions, that occur on or after the first interim or annual period beginning on or after December 15, 2011. Management is currently assessing the impact of this guidance on the Company’s financial position and results of operations.
In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”).” The guidance under ASU 2011-04 amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.
INTELLIGENT LIVING CORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The guidance improves the comparability of financial reporting and facilitates the convergence of U.S. GAAP and IFRS be amending the guidance in ASC 220, Comprehensive Income. Under the amended guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This guidance is effective retrospectively for annual and interim periods beginning after December 15, 2011. The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.
In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment (the revised standard)”. Under ASU No. 2011-08 companies have the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. The guidance is effective for fiscal years beginning after December 15, 2011 and earlier adoption is permitted.
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. Under ASU 2011-11 disclosures are required to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the ASU requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations, or cash flows.
NOTE 11 - CHANGES IN PRESENTATION OF COMPARATIVE STATEMENTS
The presentation of certain amounts for previous periods has been reclassified to conform to the presentation adopted for the current period.
NOTE 12 - SUBSEQUENT EVENTS
There were no subsequent events from the end of the period to the date of issuance of this filing.
ITEM 9
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A(T).
ITEM 9A(T).
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this annual report on Form 10-K, an evaluation was carried out by our management, with the participation of the Chief Executive and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")) as of May 31, 2012. The evaluation concluded that there was a material weakness in our internal control over financial reporting as of May 31, 2012. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the issuer’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness related to the lack of monitoring or review of work performed by our management and lack of segregation of duties. As of May 31, 2012, in the preparation of audited financial statements, footnotes and financial data, all of our financial reporting was carried out solely by our chief financial and accounting officer and we did not have an audit committee to monitor and review the work performed. The lack of segregation of duties resulted from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control. Based on this evaluation the Chief Executive and Principal Financial Officer has concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective for the reasons stated below.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. 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. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control 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 our assets; (ii) 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 are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the interim or annual consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness in 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.
Management conducted an evaluation of the design and operation of the Company’s internal control over financial reporting as of May 31, 2012 based on the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework.
Based upon its evaluation, our management concluded that there was a material weakness in our internal control over financial reporting as of May 31, 2012. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the issuer’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness related to the lack of monitoring or review of work performed by our management and lack of segregation of duties. As of May 31, 2012, in the preparation of audited financial statements, footnotes and financial data, all of our financial reporting was carried out solely by our chief financial and accounting officer and we did not have an audit committee to monitor and review the work performed. The lack of segregation of duties resulted from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) or 15(d)-15(f)) that occurred during fourth quarter of the period covered by this yearly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
Not applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers and directors and their ages as of August 29, 2012 are as follows:
NAME
AGE
POSITION
Michael F. Holloran
President, CEO and Director
Murat Erbatur
COO, Director
MICHAEL F. HOLLORAN, PRESIDENT AND CEO
Michael Holloran was elected a director and accepted the position of President & CEO of ILC in 2000. He brings to ILC a wealth of senior management experience spanning 38 years, including 22 years with the Beak International Group and long-term involvement spearheading strategic corporate expansion into international markets, primarily within Southeast Asia. He has been senior consultant to several international engineering companies including: Simons International Inc., AMEC Inc., and Klohn Crippen Berger. He has served as advisor to several multi-national companies and held advisory board and committee memberships including the University of Guelph School of Engineering and the Canadian Pulp and Paper Association. He holds a Masters Degree in Chemical and Environmental Engineering from McMaster University, a Bachelor of Science (Honors) degree in Applied Mathematics and Physical Chemistry from the University of Waterloo and a Management Studies diploma from Sheridan College.
MURAT F. ERBATUR, COO AND DIRECTOR
Murat F. Erbatur was elected a director in February 2004 and accepted the position of COO in December 2006. Mr. Erbatur founded and is currently President and CEO of MCM Integrated Technologies Ltd and ScanTech Imaging Corp. MCM is one of the leading providers of information technology products and services. ScanTech Imaging Corp. is the market leader in fillable and linkable forms for the mutual fund industry. Mr. Erbatur has held the positions in MCM Integrated Technologies and Scantech Imaging Corp. for the past 15 years and 13 years respectively. Mr. Erbatur has spent most of his 37-year professional career in computers and their applications in technical and business environments. His career includes 11 years with Swan Wooster Engineering, three years as Vice President of Engineering Software Development Corp, two years as Director of Marketing with REBIS Industrial Work Group Software and six years with Simons International as Manager, Computer Applications. Mr. Erbatur received a B.Sc. degree in Civil Engineering from Robert College (Istanbul, Turkey) in 1972 and a Masters degree in Engineering from University of British Columbia in 1973.
Directors are elected by the stockholders at annual meetings. Between annual meetings vacancies in our board of directors may be filled by the board itself. There are currently two vacancies on our board of directors. Directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers are appointed by our board of directors and hold office until their successors are appointed and qualified. Neither of our current directors would qualify as “independent” under NASDAQ rules.
Except as disclosed under Item 12, the Registrant knows of no transactions involving the Registrant during the last two years in which our directors had a direct or indirect interest.
None of our executive officers or key employees is related by blood, marriage or adoption to any other director or executive officer.
To our knowledge, there is no arrangement or understanding between any of our officers and any other person pursuant to which the officer was selected to serve as an officer.
Nominating Committee
We do not have a separate Nominating Committee. Our full Board of Directors performs the functions usually designated to a Nominating Committee.
There have been no changes to the procedures by which security holders may recommend nominees to the board of directors.
Audit Committee
We do not have a separate Audit Committee. Our full Board of Directors performs the functions usually designated to an Audit Committee. We do not have an Audit Committee financial expert.
Corporate Code of Conduct
In June 2007 we adopted a Code of Ethics for senior financial management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our President, Chief Executive Officer and Principal Financial Officer, COO, Directors, and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.
Under the Code of Ethics, all members of the senior financial management shall:
·
Act honestly and ethically in the performance of their duties at our company,
·
Avoid actual or apparent conflicts of interest between personal and professional relationships,
·
Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company,
·
Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that affect the conduct of our business and our financial reporting,
·
Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member’s independent judgment to be subordinated,
·
Respect the confidentiality of information acquired in the course of work, except when authorized or legally obtained to disclosure such information,
·
Share knowledge and maintain skills relevant to carrying out the member’s duties within our company,
·
Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community,
·
Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and Promptly bring to the attention of the Chief Executive Officer any information concerning:
I.
significant deficiencies in the design or operating of internal controls which could adversely to record, process, summarize and report financial date or
II.
any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls.
We will provide a copy of the Code of to any person without charge, upon request. Requests can be sent to Intelligent Living Corp. Suite 221, 2323 Quebec Street, Vancouver BC V5T4S7.
There are no family relationships between any of our executive officers and/or directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
We believe that during the fiscal year ended May 31, 2012, Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were satisfied.
Number
Transactions
Known Failures
Of late
Not Timely
To File a
Name and principal position
Reports
Reported
Required Form
Michael F. Holloran, President & CEO and Principal Accounting & Financial Officer
Thomas A. Simons
Murat Erbatur, COO
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual compensation for services in all capacities to us for the years ended May 31, 2012 and 2011:
SUMMARY COMPENSATION TABLE
Name and
Principal
Position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Stock
Awards
[issued and
pending]
($)
(e)
Option
Awards
($)
(f)
Non-Equity
Incentive
Plan Compensation
($)
(g)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)
(h)
All Other
Compen-
sation
(s)
(i)
Total
($)
(j)
M Holloran
CEO
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
M Erbatur
COO
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options/SARs were granted in the fiscal year ended May 31, 2012.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
No officer or Director hold or exercised any options in the fiscal year ended May 31, 2012.
LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
We have not awarded any stock options, stock appreciation rights or other form of derivative security or common stock or cash bonuses to our executive officers and directors.
COMPENSATION OF DIRECTORS
The members of our Board of Directors are reimbursed for actual expenses incurred in attending Board meetings.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of August 29, 2012, information concerning the beneficial ownership of the our Common Stock by (i) each person who is known by us to own beneficially more than 5% of our Common Stock, (ii) each of our directors and officers, and (iii) all of our directors and executive officers as a group.
Title of
Name and Address
Amount and Nature
% of
Class
of Beneficial Owner
of Beneficial Ownership
Class(1)
Common
Michael F. Holloran
5,085,830
Direct
41%
Stock
c/o Suite 221, 2323 Quebec St.
Vancouver, B.C. V5T 4S7
Thomas A. Simons
5,057,513
Direct
40%
c/o Suite 221, 2323 Quebec St.
Vancouver, B.C. V5T 4S7
Murat Erbatur
Direct
<1%
c/o Suite 221, 2323 Quebec St.
Vancouver, B.C. V5T 4S7
All officers and directors
as a Group (2 persons)
5,086,230 shares
41%
(1)
Percentage ownership based on 12,507,975 shares issued and outstanding.
Changes in Control
There are no arrangements that may result in a change in control of the Registrant.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Our By-Laws include a provision regarding related party transactions which requires that each participant to such transaction identify all direct and indirect interests to be derived as a result of the Company's entering into the related transaction. A majority of the disinterested members of the board of directors must approve any related party transaction.
Except for the transactions described below, none of our directors, senior officers or principal shareholders, nor any associate or affiliate of the foregoing have any interest, direct or indirect, in any transaction, since the beginning of the fiscal year ended May 31, 2012, or in any proposed transactions, in which such person had or is to have a direct or indirect material interest.
During the year ended May 31, 2011, loans from the Company’s CEO increased by $41,581 and loans from the Company’s COO increased by $6,952. The loans are unsecured and due on demand. Total outstanding related party debt (principal plus accrued interest) for the year ended May 31, 2011 was $432,953.
During the year ended May 31, 2012, the Company’s CEO loaned the Company $42,645 and the Company’s COO loaned the Company $9,530. These amounts are uncollateralized and due on demand. The Company paid $25,828 in interest to its COO in cash and accrued $7,868 in interest due the Company’s CEO.
During the year ended May 31, 2012 $180,000 of accrued liabilities, $115,388 of short term note payable and $2,612 of accrued interest due the Company’s CEO was consolidated into a debenture bearing interest at a rate of 6%. The debenture and $5,780 of accrued interest were converted into 9,926,000 shares of common stock of the Company at an average price of $0.03 per share. The conversion was made in accordance with the underlying debt agreement.
The Company shares office space and administrative costs in Vancouver with ScanTech Imaging Corp. (ScanTech”), a company controlled by the Company’s COO Murat Erbatur. The Company provides technical consulting services to ScanTech on an as required basis. For the year ended May 31, 2012 the total value of services provided was $Nil.
Director Independence
The Company’s Board of Directors has determined that none of its directors are independent based on the standards for director independence for the NYSE Amex Equities.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1)
Audit related fees for audit Year ended May 31, 2012: $25,000
(2)
Audit related fees for audit Year ended May 31, 2011: $28,000
(3)
All other fees: N/A
(4)
Audit committee pre-approval processes, percentages of services approved by audit committee, percentage of hours spent on audit engagement by persons other than principal accountant’s full time employees: N/A.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following financial statements have been filed with this Annual Report on Form 10-K and are presented in Item 8, herein.
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Balance Sheets
3. Consolidated Statements of Operations and Other Comprehensive Loss
4. Consolidated Statements of Cash Flows
5. Condensed Notes to the Consolidated Financial Statements
(b) The following Exhibits are filed by attachment to this Annual Report on Form 10-K:
EXHIBIT NUMBER
DESCRIPTION
31(2)
Certification of Michael F. Holloran Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32(2)
Certification of Michael F. Holloran Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101.INS(1)(2)
XBRL Instance Document
101.SCH(1)(2)
XBRL Taxonomy Extension Schema Document
101.CAL(1)(2)
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(1)(2)
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(1)(2)
XBRL Taxonomy Extension Label Linkbase Document
101.PRE(1)(2)
XBRL Taxonomy Extension Presentation Linkbase Document
(1)
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
(2)
Filed herewith.
In addition to those Exhibits shown above, the Company incorporates the following Exhibits by reference to the filings set forth below:
EXHIBIT
NUMBER
DESCRIPTION
3.1
Articles of Incorporation
3.1 in Form 10-SB dated Feb 2, 1999
3.11
By-Laws
3.11 in Form 10-SB dated Feb 2, 1999
3.2
Certificate of Amendment
3.2 in Form 10K/A dated August 18, 2010
4.2
Form of 12% Convertible debenture
4.2 in Form 10-KSB dated Aug 21, 2001
4.3
Form of Stock Purchase Warrant
4.3 in Form 10-KSB dated Aug 21, 2001
4.4
Stock Purchase Agreement, between
4.4 in Form SB-2 dated May 17, 2002
Company and IFG Private Equity LLC
4.5
Commitment Warrant to IFG
4.5 in Form SB-2 dated May 17, 2002
Private Equity LLC
4.6
Registration Rights Agreement, between
4.6 in Form SB-2 dated May 17, 2002
Company and IFG Private Equity LLC
4.7
1998 Directors' & Officers' Stock Option Plan
99.1 in Form S-8 dated Feb 29, 1999
4.8
1999 Stock Option Plan
99.2 in Form S-8 dated Feb 29, 1999
4.9
2001 Stock Option Plan
4.7 in Form S-8 filed November 27, 2001
4.10
2003 Stock Option Plan
4.8 in Form S-8 filed October 25, 2002
4.11
2005 Stock Option Plan
4.8 in Form S-8 filed July 28, 2005
4.12
2006 Stock Option Plan
4.8 in Form S-8 filed April 28, 2006
4.13
2007 Stock Option Plan
4.8 in Form S-8 filed April 13, 2007
10.3
M. Page-Consulting Agreement
10.3 in Form 10-SB dated Feb 2, 1999
10.4
C. Parfitt-Consulting Agreement
10.4 in Form 10-SB dated Feb 2, 1999
10.6
Office lease dated Aug 27, 1998
10.6 in Form 10-SB dated Apr 21, 1999
10.7
Office lease dated Dec 22, 1998
10.7 in Form 10-SB dated Apr 21, 1999
10.8
Wolnosc International-Consulting Agreement
10.8 in Form 10-SB dated Aug 29, 2000
10.9
Office lease dated Jan 1, 2000
10.9 in Form 10-SB dated Aug 29, 2000
10.10
Capital Lease Agreement
10.10 in Form 10-SB dated Aug 29, 2000
10.11
Michael F. Holloran - Consulting Agreement
10.11 in Form 10-KSB dated Aug 21, 2001
10.12
Sublease Agreement of Company's offices dated August 7, 2001
10.12 in Form 10-QSB dated Oct 15, 2001
10.13
Addendum to the Sublease dated August 22, 2001
10.13 in Form 10-QSB dated Oct 15, 2001
10.14
Paul Morford Consulting Agreement
10.14 in Form 10-QSB dated Oct 15,
10.15
8% Secured Convertible Promissory
4.7 in Form 8-K dated January 4,
Note due December 31, 2006
10.16
Securities Purchase Agreement, dated
10.15 in Form 8-K dated January 13,
December 7, 2005, by and among the
Company and the holders of the Company’s
6% Convertible Debentures, with the form
of Debenture attached
10.17
Registration Rights Agreement, dated
10.16 in Form 8-K dated January 13, 2006
December 7, 2005, by and among the
Company and the Holders of the 6%
Convertible Debentures
10.18
Walther-Glas Investment Agreement
10.16 Form 10-KSB/A2 dated July 18, 2008
10.19
Agreement and Plan of Reorganization
10.18 in Form 8-K dated Dec 15, 2006
List of Subsidiaries
21 in Form 10-SB dated Aug 29, 2000
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf the undersigned, thereto duly authorized.
Dated: September 4, 2012
Intelligent Living Corp
By: /s/ Michael F. Holloran
________________________
Michael F. Holloran,
President, Chief Executive Officer, Principal Financial and Accounting Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 4, 2012.
SIGNATURE CAPACITY
________________________________________________________________________
/s/ Michael F. Holloran
President, Chief Executive Officer, Principal Financial and Accounting Officer and Director
_____________________
Michael F. Holloran
/s/ Murat Erbatur
_____________________
Chief Operating Officer and Director
Murat Erbatur