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MANTRA VENTURE GROUP LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plan"", "anticipates", "believes", "estimates", "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 or our industry's 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, performance 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. Our unaudited consolidated financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report. In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "US$" refer to United States dollars and all references to "common stock" refer to the common shares in our capital stock. As used in this quarterly report, the terms "we", "us", "our" and "our company" mean Mantra Venture Group Ltd. and our wholly owned subsidiaries Carbon Commodity Corporation, Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc., as well as our majority owned subsidiary Climate ESCO Ltd. and Mantra Energy Alternatives Ltd., unless otherwise indicated. Business Overview We were incorporated in Nevada on January 22, 2007. On December 8, 2008 we continued our corporate jurisdiction out of the state of Nevada and into the Province of British Columbia, Canada. Our principal offices are located at #562 - 800 15355 24th Avenue, Surrey, British Columbia, Canada, V4A 2H9. Our telephone number is (604) 560-1503. Our fiscal year end is May 31. We are building a portfolio of companies and technologies that mitigate negative environmental and health consequences that arise from the production of energy and the consumption of resources. Our mission is to develop and commercialize alternative energy technologies and services to enable the sustainable consumption, production and management of resources on residential, commercial and industrial scales. We plan to develop or acquire technologies and services which include electrical power system monitoring technology, wind farm electricity generation, online retail of environmental sustainability solutions through a carbon reduction marketplace, and media solutions to promote awareness of corporate actions that support the environment. To carry out our business strategy we intend to acquire or license from third parties technologies that require further development before they can be brought to market. We also intend to develop such technologies ourselves, and we anticipate that to complete commercialization of some technologies we will enter into joint ventures, partnerships, or other strategic relationships with third parties who have expertise that we may require. We also plan to enter into formal relationships with consultants, contractors, retailers and manufacturers who specialize in the areas of environmental sustainability in order to carry out our online retail strategy. 15 -------------------------------------------------------------------------------- We are a development stage company that has only recently begun operations. We have generated only nominal revenues from our intended business activities, and we do not expect to generate significant revenues in the next 12 months. Other than our invention for the electro-reduction of carbon dioxide, we have not yet developed or acquired any commercially exploitable technology. Since our inception, we have incurred operational losses and we have completed several rounds of financing to fund our operations. We carry on our business through our subsidiaries as follows: • Mantra Energy Alternatives Ltd., through which we identify, acquire, develop and market technologies related to alternative energy production, greenhouse gas emissions reduction and resource consumption reduction; • Mantra Media Corp., through which we offer promotional and marketing services to companies in the sustainability sector or those seeking to adopt sustainable practices (currently inactive); and • Climate ESCO Ltd., majority owned, through which we distribute and install LED lighting solutions (currently inactive). We also have a number of inactive subsidiaries which we plan to engage in various business activities in the future. On February 29, 2012, our wholly owned subsidiary, Mantra Energy Alternatives Ltd. ("MEA"), entered into subscription agreements with a number of non-US investors for the sale of up to 3,200,000 shares of MEA at a price of Cdn $1.00 per share, for total proceeds of Cdn$3,200,000. As of the closing of this financing, our company received total proceeds of Cdn$525,000 and holds 6,000,000 shares of MEA out of a total of 6,735,000 issued and outstanding. Effective June 19, 2012, our company's subsidiary, MEA, entered into a service contract with PowerTech Labs Inc., whereby PowerTech assistedMEA in the evaluation and the development of our ERC(electro-reduction of carbon dioxide) system. As compensation, PowerTech was paid $171,000 plus the cost of materials. The carbon enrichment unit proved successful at the proof-of-concept scale, and the bench-scale version was then designed and built. This unit, too, proved successful in its goal of enriching a dilute (roughly 20%) stream of carbon dioxide to over 80%. The program has now been completed. On October 28, 2008, we entered into a convertible debenture with StichtingAdministratiekantoor Carlos Bijl for a principal amount of $150,000 and an annual interest rate of 10%. Bijl started an action in the Supreme Court of British Columbia for non-payment of the convertible debenture. We entered into a settlement agreement with Bijl dated July 16, 2012, pursuant to which: • the due date of the Convertible Debenture would be extended to April 11, 2013; • within 5 business days we pay $43,890.41 representing net interest to and including September 30, 2012, less $15,000 we forwarded to Bijl on February 16, 2012; • commencing on October 31, 2012 we will pay accrued monthly interest at 10% per annual until April 11, 2013 (Paid); • we will pay a $10,000 premium on the $150,000 principal of the convertible debenture when we satisfy it on April 11, 2013. We entered into an agreement dated April 29, 2013 with Bijl to amend the settlement agreement, pursuant to which: • the due date of the convertible debenture would be extended from April 11, 2013 to September 15, 2013; • upon execution of the amendment to the settlement agreement, we paid $6,836 in full satisfaction of future interest payable on the convertible debenture from April 1, 2013 to September 15, 2015; and • we granted to Bijl options to purchase up to 100,000 common shares of our company, exercisable for a period of 24 months from the time of grant and at the exercise price of $0.12 per common share. 16 -------------------------------------------------------------------------------- On November 15, 2013, we entered into a second settlement agreement amendment with Bijl, pursuant to which we will pay interest of $4,438 and commencing February 1, 2014, we will make monthly payments of $10,000 on the outstanding principal and interest. Our company has made monthly interest payments for a total of $40,000 as at April 1, 2014. On July 31, 2012, our subsidiary, MEA, entered into a master services agreement with Tekion (Canada), Inc. MEA's ERC technology converts carbon dioxide (CO2) in stack gases to a formate salt which can then be further processed into formic acid or used to operate a fuel cell to generate power. MEA engaged PowerTech Labs to do further engineering on the system. In order to get this technology to commercialization, Tekion proposed a program that ran parallel to the PowerTech program to help Mantra with some of the critical issues regarding this process. The program has now been completed. Also on July 31, 2012, MEA entered into a statement of work with Tekion setting out the work summary, deliverables, budgets and timelines in several stages, which have now all been completed. MEA provided an upfront payment to Tekion of $50,000 on the signing of the statement of work. On January 8, 2013, our company entered into an employment agreement with our officer and director, Larry Kristof, whereby Larry Kristof has agreed to provide services as chief executive officer of our company for a period of two years. As compensation, pursuant to the terms of the employment agreement, Larry Kristof will receive an annual salary of $60,000, payable in equal monthly installments. The employment agreement may be terminated by Larry Kristof, for any reason, by providing at least three month's advance written notice to our company. Also on January 8, 2013, our company's subsidiary, MEA, entered into an employment agreement with Larry Kristof, whereby Larry Kristof has agreed to provide services as chief executive officer of MEA for a period of two years. As compensation, pursuant to the terms of the employment agreement, Larry Kristof will receive an annual salary of $60,000, payable in equal monthly installments. The employment agreement may be terminated by Larry Kristof, for any reason, by providing at least three month's advance written notice to our company. On March 13, 2013, we entered into a letter of engagement with BC Research Inc. pursuant to which we engaged BC Research to design and engineer a proposed demonstration unit of our company's ERC technology. The scope of work will include determining power requirements for the planned ERC unit, and producing an equipment list, a functional description of equipment and specification, electrical drawings, a drawing package for potential suppliers, and a simplified 3D model of the system. The objective of the engagement is to determine the fabrication and operating costs of the demonstration unit to within a 25% variance. It is estimated that completion of the planned work will be achieved within 15 weeks from the date of our company's purchase order and payment of a CDN$30,000 retainer. Our company will compensate BC Research based on its customary hourly rates. The total estimated cost of the work plan is CDN$137,000 (approximately USD$134,000). BC Research completed this project and our company retains all intellectual property resulting from the services performed. Concurrently with the engagement of B.C. Research, our company, through our subsidiary,MEA, has entered into a sublease agreement with B.C. Research, dated as at February 25, 2013, for the sublease of a workshop and office space of approximately 600 square feet located in Burnaby, British Columbia. The term of the sublease will continue until March 1, 2014 at a cost of Cdn$18,720 payable in monthly installments of Cdn$1,560. The sublease has not been renewed and we are currently paying the sublease on a month to month basis. On May 7, 2013, we entered into a director agreement with Patrick Dodd. As compensation, under the director agreement, our company granted stock options to Mr. Dodd to purchase up to 200,000 shares of our common stock at a price of $0.10 per share. The stock options shall terminate for exercise the earlier of May 7, 2015 or 180 calendar days after resignation of Mr. Dodd as director, in which case, 100,000 stock options shall remain available to Mr. Dodd at an exercise price of US$0.10 until November 7, 2015. 17 -------------------------------------------------------------------------------- Collaboration with Alstom (Switzerland) Ltd. On June 24, 2013, through our majority owned subsidiary,MEA our company entered into an agreement with Alstom (Switzerland) Ltd. concerning the joint research and development projects relating to (1) a pilot plant for the conversion of carbon dioxide to formate at a Lafarge cement plant (the "Lafarge pilot project"); and (2) the development of processes for the conversion of carbon dioxide to other valuable chemicals. Pursuant to the agreement with Alstom, MEA and Alstom will co-operate in one or more research and development projects related to MEA's ERC technology. Prospective projects will be associated with the development of technologies and processes for the conversion of CO2 to chemical products and the investigation of the feasibility of scale-up and commercialization of these processes. Prior to undertaking any research and development project under the agreement, MEA and Alstom will mutually agree to special terms and conditions governing the purpose, aims and objectives of any such project, including technical descriptions, the designation of work phases and project managers, and the allocation of responsibilities and costs between the parties. The commencement of any work phase for any project will be at the sole discretion of Alstom. Intellectual Property Management MEA and Alstom also will establish an intellectual property committee to oversee and manage all intellectual property issues and activities resulting from the agreement, including the protection of any new intellectual property. Each party will have exclusive right and discretion to prosecute all patents and patent applications resulting from its work on any project. The parties will jointly prosecute any intellectual property in jointly-owned results. Alstom will have the additional option under the agreement to acquire an exclusive license to intellectual property created by MEA under the agreement, and to a license to MEA's ERC technology as may be reasonably required to exploit intellectual property assumed by Alstom. The agreement does not affect ownership of any underlying intellectual property of either party. Lafarge Pilot Project and Carbon Dioxide to Alternative Products The agreement with Alstom will remain valid for 5 years or the completion of the last active project, whichever last occurs, and may be extended at any time by the written agreement of both parties. The first joint research and development project under the agreement is the Lafarge pilot project, which plans for the design, construction, and installation of a pilot plant for the conversion of 100 kg/day carbon dioxide to formate, followed by a commercialization scale-up study. Alstom's contribution to the Lafarge pilot plant project will be approximately Cdn$250,000 for in-kind services. A second integrated research and development project will study carbon dioxide conversion to alternative chemical products by electrochemical reduction, with a focus on catalyst materials and lifetime. Alstom's contribution to the alternative products project will be approximately Cdn$190,375 for Phase 1. For Phases 2 through 4 Alstom's planed, but not committed, contribution is estimated at Cdn$456.125 and the final amount of Phase 5 will be determined. Mantra and Alstom are actively seeking external funding to support the execution of the projects. On July 1, 2013, we entered into a consulting agreement with BC0798465 Ltd., whereby BC0798465 Ltd. agreed to provide Mr. Colin Oloman for consulting services to our scientific advisory board for an indefinite term. In consideration for such consulting services, we have agreed to compensate BC0798465 Ltd. for Mr. Oloman's services at Cdn$150 per hour and 300,000 options to acquire 300,000 common shares of our capital stock, previously registered on a Form S-8 registration statement, filed with the United States Securities and Exchange Commission on November 24, 2009, at a purchase price of $0.20 per share for a period of two years. On October 10 and October 17, 2013, our company's subsidiary, MEA, entered into employment agreements with Amin Aziznia and Sona Kazemi, whereby Mr. Aziznia and Mrs. Kazemi have each agreed to perform services as senior process engineers of MEA for a term of one year. As compensation for services rendered, Mr. Aziznia and Mrs. Kazemi shall each receive base gross remuneration of $65,000 per annum with an increase to $70,000 per annum subject to receipt by MEA of an Industrial Research and Development Fellowship from the Natural Sciences and Engineering Research Council of Canada (the "NSERC IRDF Grant"). The compensation is payable in twelve 18 -------------------------------------------------------------------------------- equal monthly installments. In addition, we granted to each of Mr. Aziznia and Ms. Kazemi, 100,000 stock options to acquire up to 100,000 common shares of our company at a purchase price of $0.10 per share. The options are non-transferrable, vest immediately and expire upon the earlier of 24 months, or upon termination of the employment agreements. The agreements will be immediately terminated if MEA does not receive the NSERC IRDF Grant. On March 1, 2014, we entered into an agreement with Small Cap Invest Ltd., a Frankfurt-based financial service company. Serving as a contractor, Small Cap Invest will develop investor and public relations across Europe, and use an impressive breadth of experience to ultimately facilitate the penetration and development of Mantra's technologies in European markets. On March 13, 2014, we entered into a consulting agreement with DC Consulting LLC ("DCC"), dated effective March 13, 2014, whereby DCC has agreed to provide our company with various services including management consulting, business advisory, shareholder information and public relations which commenced March 17, 2014 and terminates on March 16, 2015. The agreement provides for a monthly cash payment in the amount of $7,250 per month and the issuance of 25,000 shares of our company's common stock upon execution of the agreement and 20,000 shares of our company's common stock per month for months 2 to 12. Effective March 25, 2014, our company, through our subsidiary MEA, entered into letter of engagement with BC Research Inc. pursuant to which BC Research has undertaken to design, engineer and build our company's ERC demonstration unit. Based in Vancouver, British Columbia, BC Research is the technology commercialization and innovation center of NORAM Engineering and Constructors Ltd., a globally active firm which provides innovative solutions and engineering and equipment packages to the chemical, pulp and paper, minerals processing and electrochemical industries. The BC Research facility houses a wet chemical laboratory and over 10,000 square feet of pilot plant space, and is where our company is performing its ongoing research and development work on ERC. Pursuant to the letter of engagement BC Research (in collaboration with NORAM) has been engaged to engineer, design and build our company's ERC demonstration unit for the estimated cost of Cdn$360,000 (approximately $326,000). Engineering and design services for the project will be provided primarily by NORAM engineers and scientists. Our company has delivered the first payment installment of Cdn$190,000 to BC Research and project work has commenced and is estimated to take approximately 24 weeks. We may terminate the agreement at any time and will retain all prior-owned and new intellectual property related to the project. Electro Reduction of Carbon Dioxide ("ERC") On November 2, 2007, through our subsidiary, MEA, we entered into a technology assignment agreement with 0798465 BC Ltd. whereby we acquired 100% ownership in and to a certain chemical process for the electro-reduction of carbon dioxide as embodied by and described in the following patent cooperation treaty application: Country Application File Date Status Number Patent Cooperation Treaty (PCT) W02207 10/13/2006 PCT As of the date of this quarterly report, we have been awarded the following patents: Country Patent Number Patent Date Name of Patent India 251493 March 20, 2012 "An Electrochemical Process for Reducing of Carbon Dioxide" China ZL 2006 8 May 8, 2013 "Continuous Co- 0037810.8 Current Electrochemical Reduction of Carbon Dioxide" 19 -------------------------------------------------------------------------------- The reactor at the core of the chemical process, referred to as the electrochemical reduction of carbon dioxide (CO2), or ERC, has been proven functional through small scale prototype trials. ERC offers a possible solution to reduce the impact of CO2 on Earth's environment by converting CO2 into chemicals with a broad range of commercial applications, including a fuel for a next generation of fuel cells. Powered by electricity, the ERC process combines captured carbon dioxide with water to produce materials, such as formic acid, formate salts, oxalic acid and methanol, that are conventionally obtained from the thermo-chemical processing of fossil fuels. However, while thermo-chemical reactions must be driven at relatively high temperatures that are normally obtained by burning fossil fuels, ERC operates at near ambient conditions and is driven by electric energy that can be taken from an electric power grid supplied by hydro, wind, solar or nuclear energy. In fuel cells liquid fuels are indirectly burned with air to form carbon dioxide and water, while generating electricity. This process is known as electrochemical combustion or electro-oxidation. The complementary nature of ERC and electro-oxidation makes it possible to use ERC in a regenerative fuel cell cycle, where carbon dioxide is converted to a fuel that is consumed in a fuel cell to regenerate carbon dioxide. As shown in the figure, the net energy input required in this cycle could be supplied from a renewable or non-fossil fuel source. [[Image Removed]] ERC has been shown to produce a range of compounds, including formic acid, formate salts, oxalic acid, and methanol. The efficiency for generation of each compound depends on the experimental conditions, most importantly the material of the cathode, which catalyzes the electrochemical reactions. Until appropriate cathodes are found some products of CO2 reduction (methanol, for instance) are obtained at efficiencies too low for practical use. Other products can be generated on known cathodes with high current yields that could support valuable practical processes. For example, formic acid has been obtained on tin cathodes with current yields above 80%. Formate salts and sodium bicarbonate are obtained at similarly high yields. 20 -------------------------------------------------------------------------------- ERC Development to Date We have retained one of the creators of the technology, Professor Colin Oloman, as a member of our scientific advisory board, to further develop the carbon dioxide reduction process to achieve optimal results on a consistent basis. On June 1, 2008, we entered into a technology development and support agreement with Kemetco Research Inc., an integrated science, technology and innovation company. Pursuant to that agreement, we have established a research and development facility for the ERC in Vancouver, British Columbia, staffed by a dedicated research team provided by Kemetco. In October of 2008, we completed our first ERC prototype reactor capable of processing 1 kilogram of CO2 per day.In order to facilitate the testing and development of this reactor, we entered into an agreement with Kemetco on January 29, 2010. The agreement was intended to govern the development and testing of our prototype reactor for a period of 10 months and contemplated costs of approximately $250,000 including labor and materials purchases. On March 18, 2010 we entered into another agreement with Kemetco which amended and replaced the January 29, 2010 agreement. Under the terms of the latest agreement, we have agreed to proceed with the testing and development of our ERC prototype reactor for a period of 5 months at an estimated cost of approximately $125,000. [[Image Removed]] Pictured Above, Design for Bench Scale ERC Reactor We anticipate that commercialization of ERC will require us to develop reactors capable of processing not less than 100 tons of CO2 per day; however, there is no guarantee that we will successfully produce reactors of that size.Production of commercially viable ERC reactors will depend on continued research and development, successful testing of small scale ERC reactors, and securing of additional financing. At the conclusion of our current agreement and development program with Kemetco, an assessment will be made of the project's progress and the next phase to be conducted. 21 -------------------------------------------------------------------------------- Established and Emerging Market for ERC and By-Products: The technology behind ERC can be applied to any scale commercial venture which outputs CO2 into the atmosphere. We anticipate that, once fully commercialized, we will be able to offer ERC as a CO2 management system to various industry including steel, power generation and lumber. The existing applications of ERC by-products include use as feedstock preservatives, de-icing solutions, and baking soda, among others. Sodium formate and formic acid, two of the main by-products of ERC, currently have an average market value of $1,200/ton, with more than 600,000 tons of formic acid produced annually (Li, 2006). Their applications are diverse, including feedstock preservatives, de-icing solutions, cleaning solutions and baking soda to name a few. The market for formic acid has experienced continual growth and demand over the past several years, mainly attributed to the following: European and developing country demand for formic acid in silage, rising raw materials, energy and logistics costs; and animal feed preservative and Asian demand for formic acid in leather, rubber, food and pharmaceutical industries. The average market price of formic acid is expected to increase by as much as 20% in 2012 (Dunia Frontier Consultants, 2008). However, if the ERC process reaches market acceptance as a way to deal with CO2 emissions from industryfacilities, it will likely lead to supply of formic acid in excess of current market demand. We have identified several potential future applications for formic acid, which may lead to an expansion in current market demand. The application we have identified and are currently focusing on is steel pickling. Steel Pickling Steel pickling is part of the finishing process in the production of certain steel products in which oxide and scale are removed from the surface of strip steel, steel wire, and other forms of steel, by dissolution in acid. A solution of either hydrochloric acid (HCl) or sulfuric acid is generally used to treat carbon steel products, while a combination of hydrofluoric and nitric acids is often used for stainless steel. Approximately one quarter of the HCl produced in the U.S. is used for pickling steel (American Chemistry, 2003), consuming an estimated 5Mt/year. As an organic acid, formic acid would be a very attractive replacement for HCl in the steel pickling process. Formic acid has manypotential advantages over HClin this application, including: less iron lost from the steel surface, improvement in final surface quality, and the elimination of corrosion inhibiting and neutralizing rinse processes to prevent rust development. In addition, formic acid is both bio-degradable and reusable which would allow water used in the picking process to be recycled more easily. 22 -------------------------------------------------------------------------------- Results of Operations for the Three Month Periods Ended November 30, 2013 and November 30, 2012. The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the quarter ended November 30, 2013 which are included herein. Revenues Our operating results for three month periods ended February 28, 2014 and February 28, 2013 are summarized as follows: Difference Between Three Month Period Ended Three Months Three Months February 28, 2014 Ended Ended and February 28, 2014 February 28, 2013 February 28, 2013 ($) ($) ($) Revenue $ 16,858 $ Nil $ 16,858 Operating expenses $ 218,553 $ 177,762 $ 40,791 Otherexpenses $ 13,596 $ 7,761 $ 5,835 Net loss $ (215,291 ) $ (185,523 ) $ (29,768 ) From our inception on January 22, 2007 to February 28, 2014 we have generated $204,074 in revenues. For the three months ended February 28, 2014 we generated $16,858 in revenues compared to revenues of $Nil generated during the same period in 2013. Expenses Our operating expenses for the three month periods ended February 28, 2014 and February 28, 2013 are summarized as follows: Three Months Ended February 28, February 28, 2014 2013 ($) ($) Business development $ 81 $ 10,797 Consulting and advisory $ 24,893 $ 27,416 Depreciation and amortization $ 5,048 $ 8,623 Foreign exchange loss (gain) $ (19,588 ) $ (13,723 ) General and administrative $ 11,150 $ 11,472 Management fees $ 45,564 $ 75,776 Professional fees $ 33,231 $ 28,847 Public listing costs $ 5,706 $ 3,325 Rent $ 15,821 $ 4,500 Research and development $ 91,918 $ (661 ) Travel and promotion $ 1,178 $ 21,390 Wages and benefits $ 3,551 $ Nil For the three months ended February 28, 2014, we incurred total operating expenses of $218,553 compared to total operating expenses for the three months ended February 28, 2013 of $177,762. The $40,791increasein operating expense during 2014 is primarily due to increased research and development activities. 23 -------------------------------------------------------------------------------- Net Loss Since our inception on January 22, 2007 to February 28, 2014, we have incurred a net loss of $8,934,442. For the three months ended February 28, 2014 we have incurred a net loss of $215,291 compared to a net loss of $185,523for the same period in 2013. Results of Operations for the Nine Month Periods Ended February 28, 2014 and February 28, 2013. Revenues Our operating results for nine month periods ended February 28, 2014 and February 28, 2013 are summarized as follows: Difference Between Nine Month Period Ended Nine Months Nine Months February 28, 2014 Ended Ended and February 28, 2014 February 28, 2013 February 28, 2013 ($) ($) ($) Revenue $ 165,262 $ 3,027 $ 162,235 Cost of goods sold $ Nil $ 2,500 $ (2,500 ) Operating expenses $ 823,917 $ 1,100,552 $ (276,635 ) Other expenses $ 52,941 $ 28,658 $ 24,283 Net loss $ (711,146 ) $ (1,128,683 ) $ 417,537 For the nine months ended February 28, 2014 we generated $165,262 in revenues compared to revenues of $3,027generated during the same period in 2013. From January 22, 2007 (inception) to February 28, 2014, we have an accumulated deficit of $8,693,199. We anticipate that we will incur substantial losses over the next year and our ability to generate additional revenues in the next 12 months remains uncertain. 24 -------------------------------------------------------------------------------- Expenses Our operating expenses for the nine month periods ended February 28, 2014 and February 28, 2013 are summarized as follows: Nine Months Ended February 28, February 28, 2014 2013 ($) ($) Business development $ 8,743 $ 21,012 Consulting and advisory $ 121,837 $ 78,951 Depreciation and amortization $ 17,706 $ 21,950 Foreign exchange loss (gain) $ (37,407 ) $ 5,044 General and administrative $ 56,172 $ 32,453 License fees $ 40,000 $ 39,442 Management fees $ 138,512 $ 258,087 Professional fees $ 114,017 $ 122,748 Public listing costs $ 12,821 $ 15,947 Rent $ 39,740 $ 13,500 Research and development $ 234,521 $ 368,157Shareholder communications and awareness $ 7,382 $ 34,719 Travel and promotion $ 52,086 $ 98,542 Wages and benefits $ 17,787 $ Nil For the nine months ended February 28, 2014, we incurred total operating expenses of $823,917 compared to total operating expenses for the nine months ended February 28, 2013 of $1,100,552. The $276,635 decreasein operating expense during 2014 is primarily due to higher research and development activities and management compensation in the comparable period. Net Loss For the nine months ended February 28, 2014 we have incurred a net loss of $711,146 compared to a net loss of $1,128,683for the same period in 2013. Liquidity and Capital Resources Working Capital At At February 28, May 31, 2014 2013 Current Assets $ 33,959 $ 79,823 Current Liabilities $ 1,391,991 $ 1,206,379 Working Capital Deficit $ (1,358,032 ) $ (1,126,556 ) 25 -------------------------------------------------------------------------------- Cash Flows January 22, Nine Months Nine Months 2007 Ended Ended (Inception) to February 28, February 28, February 28, 2014 2013 2014 Net Cash Used In Operating Activities $ (444,170 ) $ (1,219,402 ) $ 775,232 Net Cash Used In Investing Activities $ (1,481 ) $ (6,628 ) $ 5,147 Net Cash Provided by Financing Activities $ 420,264 $ 1,137,030 $ (716,766 ) Change In Cash $ (25,387 ) $ (89,000 ) $ 63,613 As of February 28, 2014, we had $Nil cash in our bank accounts and a working capital deficit of $1,358,032. As of February 28, 2014 we had total assets of $115,581 and total liabilities of $1,621,402. From January 22, 2007 (date of inception) to February 28, 2014, we raised net proceeds of $5,298,086 in cash from the issuance of common stock and share subscriptions received, $201,571 from loans payable, bank indebtedness of $2,776, and $442,000 from proceeds from the issuance of convertible debentures, offset by repayment of loans payable of $69,009, repayment of convertible debentures of $10,000, and repayment of capital lease obligations of $13,227 for a total of $5,852,197 of cash provided by financing activities for the period. We received net cash of $420,264 from financing activities for the nine months ended February 28, 2014 compared to $1,137,030for the same period in 2013. During this period we raised $254,683 in cash from the issuance of our common stock and share subscriptions received, and $192,000 from proceeds from the issuance of convertible debentures, and had bank indebtedness of $2,776, offset by repayment of capital lease obligations of $5,306, repayment of loans payable of $13,889, and repayment of convertible debentures of $10,000. In the comparable period during 2013, we raised cash of $1,191,186 from the issuance of our common stock and share subscriptions received offset by repayment of capital lease obligations of $4,056and repayment of loans payable of $50,100. We used net cash of $444,170in operating activities for the nine months ended February 28, 2014 compared to $1,219,402for the same period in 2013. We used net cash of $5,609,233 in operating activities for the period from January 22, 2007 (date of inception) to February 28, 2014. We used cash of $1,481 in investing activities for the nine months ended February 28, 2014 compared to $6,628cash used by investing activities for the same period in 2013. During the nine months ended February 28, 2014 we had a net decrease of $25,387 in our cash position compared to a net decrease of $89,000for the same period in 2013. Our monthly cash requirements for the nine month period ended February 28, 2014 was $49,352 compared to $135,489for the same period in 2013. At our current cash position and if this cash requirement continues, we do not have sufficient cash to cover our expenses for one month. 26 -------------------------------------------------------------------------------- We expect that our total expenses will increase over the next year as we increase our business operations. We have not been able to reach the break-even point since our inception and have had to rely on outside capital resources. We do not anticipate making significant revenues for the next year. Over the next 12 months, we plan to primarily concentrate on commercializing our ERC technology and associated projects. Description Estimated expenses ($) Research and Development 2,200,000 Consulting Fees 250,000 Commercialization of ERC 1,300,000 Shareholder communication and awareness 200,000 Professional Fees 300,000 Wages and Benefits 200,000 Management Fees 150,000 Total 4,600,000 In order to fully carry out our business plan, we need additional financing of approximately $4,600,000 for the next 12 months. In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders' loans. We do not presently have sufficient financing to undertake our planned business activities. Issuances of additional shares will result in dilution to our existing shareholders. We currently do not have any arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to be within the amount of capital resources that are available to us. Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. Inflation The effect of inflation on our revenue and operating results has not been significant. Critical Accounting Policies Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management. 27 -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with U.S. 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 period. Our company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. Our company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Stock-based Compensation Our company records stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation", using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Our company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by our company's stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to our company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period. Technology Development Revenue Our company performs research and development services. Our company recognizes revenue under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability of the contract price is considered reasonably assured and can be reasonably estimated. Revenue is based on direct labor hours expended at contract billing rates plus other billable direct costs. Recent Accounting Pronouncements Our 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. |