Summary of Significant Accounting Policies

12 Months Ended

Oct. 31, 2012

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

3. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, Micro Imaging Technology (“MIT”). As of October 31, 2005, the operations of the Company’s subsidiaries, Electropure EDI, Inc. and Electropure Holdings, LLC, were discontinued and the Company became a development stage company. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Effective October 31, 2012, the Company reclassified and capitalized as machinery and equipment eight of its MIT 1000 Systems that it had carried as finished goods valued at $75,788. A redesigned model of the systems is currently underway and the Company will utilize these eight first generation models as laboratory testing equipment. These systems are being depreciated, commencing November 1, 2011, over an expected useful life of 3 years. This change in classification does not materially affect previously reported cash flows in the Consolidated Statement of Cash Flows, and had no effect on the previously reported Consolidated Statement of Operations for any period.

Cash and Cash Equivalents

For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.

Impairment of Long-Lived Assets

The Company annually evaluates its long-lived assets, including identifiable intangible assets for potential impairment. When circumstances indicate that the carrying amount of an asset is not recoverable, as demonstrated by the projected undiscounted cash flows, an impairment loss is recognized. The Company’s management has determined that there was no such impairment present at October 31, 2012 and 2011.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis. The Company’s management monitors inventory for excess and obsolete items and makes necessary valuation corrections when such adjustments are required.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over an expected useful life of 3 or 5 years. The leasehold improvements made to the Company’s leased facility are being depreciated over an expected useful life of 5 years. Expenditures for normal maintenance and repairs are charged to operations. The cost and related accumulated depreciation of assets are removed from the accounts upon retirement or other disposition, and the resulting profit or loss is reflected in the Statement of Operations. Renewals and betterments that materially extend the life of the assets are capitalized.

The production tooling for the Company’s revised MIT 1000 has been capitalized and the $14,000 cost is being amortized over an estimated useful life of 3 years.

Advertising Costs

The Company charges advertising costs to expense as incurred. The Company incurred $25,357 in advertising expense during the fiscal year ended October 31, 2012.

Accrued Payroll, Payroll Taxes and Benefits

From April 2010 through March 2012, payments made to two employees were recorded as reductions in accrued and unpaid payroll. In April 2012, the Company reclassified such payments as net payroll payments; calculated and recorded the employer and employee taxes that should have been withheld on such payment. Federal and state payroll tax returns have been filed for the last three quarters of 2010, all of 2011 and the first quarter of 2012. Estimated penalties and interest on the late filings and payments, in the sum of $27,029, have been accrued as of October 31, 2012. On September 20, 2012, the Internal Revenue Service filed a Notice of Federal Tax Lien against the Company assessing $58,857.60 for unpaid taxes, penalties and interest. A Notice of Tax Lien was also filed by the State of California on November 9, 2012 in the amount of $8,206,75, including penalty and interest, The Company has been in contact with the respective tax authorities in an effort to negotiate a payment arrangement for the taxes due.

Accrued Payroll and Benefits consist of the above payroll taxes and salaries, wages, and vacation benefits earned by employees, but not disbursed as of October 31, 2012. Accrued Payroll also includes the above estimated penalties and interest due on such unpaid payroll taxes. Liability for vacation benefits is accrued when earned monthly and reduced when taken. At the end of each fiscal period, the balance in the accrued vacation benefits liability account is adjusted to reflect current pay rates. Annual leave earned but not taken is considered an unfunded liability since this leave will be funded from future appropriations when it is actually taken by employees.

Concentration of Credit Risk and Other Risks and Uncertainties

Accounts Payable – Trade

As of October 31, 2012, the amount due to a former consultant to the Company, $112,000, represented 61% of the total amount due for accounts payable to non-affiliates. On May 17, 2012, the Company entered into settlement agreements with two consultants to the Company to satisfy a total of $62,855 and $298,748 in accrued fees for services in exchange for payments of $30,000 and $75,000, respectively. The Company made full payment of the settlement amounts on May 30, 2012 and recognized a gain on extinguishment of debt on these settlements in the sum of $34,068 and $223,748, respectively.

Litigation and Claims

On May 16, 2012, Alpine MIT Partners, LLC (Plaintiffs) filed a civil action against the Company and its Chairman and Chief Executive Officer, Jeffrey G. Nunez, (collectively, the Company), in the Texas District Court, Travis County. Plaintiffs alleged breach of contract and civil conspiracy, as well as tortious interference with contractual relations and prospective business relations. The lawsuit alleges that the Company breached certain provisions of a March 7, 2012 Securities Purchase Agreement the Company executed with the Plaintiff to sell up to $2.0 million of 7% Senior Secured five-year Convertible Debentures convertible into shares of common stock at a conversion rate of $.003 per share. The purchase and sale of the first $1.0 million Debenture was scheduled to close on or before April 6, 2012 and was subject to, among other things, Alpine closing the necessary equity funding to consummate the transactions. No money was ever received by the Company from Alpine.

The lawsuit also suggests that the Company’s Chairman and Chief Executive Officer, Jeffrey G. Nunez, has a history of regulatory and securities law violations. The Company’s Board of Directors has researched the matter and understands that in January 2004, Mr. Nunez was requested by the NASD to appear and provide testimony pursuant to NASD Rule 8210. Mr. Nunez did not appear, but agreed not to associate in any capacity, in the future, with NASD member firms. The Company’s Board of Directors believes this to be of no consequence with respect to Mr. Nunez’ qualifications to serve as a board member and chief executive officer of the Company.

On January 10, 2013, the Company learned that Plaintiffs had filed a lien against the Company’s patents on May 8, 2012 with the California Secretary of State under the Uniform Commercial Code. The Company is considering taking action to vacate the lien as well as other legal remedies against the Plaintiffs that may be available to the Company in California.

A hearing on the Company’s motion to change the venue of this matter from Texas to California is scheduled for February 2013.

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on its financial statements in any given reporting period. However, in the opinion of Management, after consulting with legal counsel, the ultimate liability related to the current outstanding lawsuit is not expected to have a material adverse effect on its financial statements.

Management is of the opinion that the ultimate resolution of such matter now pending will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. However, the outcome of legal proceedings cannot be predicted with any degree of certainty.

Antidilution Liability

The Company has recorded a $65,401 liability to allow for the possible dilutive impact of equity issuances that alter or effect conversion or exchange rates existing on the various dates of conversion or exercise of securities having adjustable conversion rates.

Research and Development

Research and development expenditures are charged to expense as they are incurred. The Company’s research and development activities include ongoing work on various uses of the micro imaging multi-angle laser light scattering technology. Contract research and development expenditures are expensed as incurred.

Stock Based Compensation

The Company measures share based compensation at the grant date, based on the fair value of the award using the Black-Scholes Option Pricing Model, and recognizes such compensation as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

The Company recognized no share-based compensation expense during the fiscal year ended October 31, 2012. Share-based compensation of $29 was recognized on options and warrants that vested during the fiscal year ended October 31, 2011.

Activity under the Company’s stock option plans is included in Note 9.

Income Taxes

The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities. They are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws change. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

Loss Per Share

Basic earnings (loss) per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings (loss) of the entity. Common stock equivalents of 76,133,333 and 8,000,000 as of October 31, 2012 and 2011, respectively, have been omitted from the earnings (loss) per share calculation, as their effect would be antidilutive.

New Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosure about Offsetting Assets and Liabilities, which requires an entity to include additional disclosures about financial instruments and transactions eligible for offset in the statement of financial position, as well as financial instruments subject to a master netting agreement or similar arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on our financial statements.

June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity 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. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers specific requirements to present reclassification adjustments for each component of accumulated other comprehensive income. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 has not had a material effect on the Company’s operating results or financial position.

In July 2012, the FASB issued ASU No. 2012-02 (“ASU 2012-02”), “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Corporation does not expect that the adoption of this standard will have a material effect on its financial statements.

There were various other updates recently issued, many of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on our consolidated financial position, results of operations or cash flows.