(Formerly Palo Duro Energy Inc.) Management s Discussion and Analysis. December 31, 2015

Transcription

1 December 31, 2015

2 This ( MD&A ), prepared as of April 27, 2016, should be read in conjunction with the audited consolidated annual financial statements of CarbonOne Technologies Inc. ( CarbonOne or the Company ) for the year ended December 31, 2015, and related notes thereto, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ). All amounts are stated in Canadian Dollars unless otherwise indicated. Statements in this MD&A that are not historical facts are forward-looking statements that are subject to risk factors set out in a cautionary note contained herein. Readers are cautioned not to put undue reliance on forwardlooking statements. Certain information contained in this MD&A constitutes forward-looking information, which is information relating to future events or the Company s future performance and which is inherently uncertain. All information other than statements of historical fact may be forward-looking information. Forward-looking information is often, but not always, identified by the use of words such as seek, anticipate, budget, plan, continue, estimate, expect, forecast, may, will, project, predict, potential, targeting, intend, could, might, should, believe, objective and similar words or phrases (including negative variations) suggesting future outcomes or statements regarding an outlook. Forward-looking information contained in this MD&A includes, but is not limited to, the Company s expectations regarding the Company s short- and long-term business plan, its future working capital requirements to execute said business plan, its ability to satisfy future working capital requirements, the exposure of its financial instruments to various risks, and its ability to manage those risks. Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information. The Company believes the expectations reflected in the forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct, and readers are cautioned not to place undue reliance on forward-looking information contained in this MD&A. The forward-looking information contained in this document is as of the date of this MD&A and the Company undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law. All of the forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. Additional information relating to CarbonOne is available on the Company s website at and on SEDAR at OVERVIEW CarbonOne Technologies Inc. was incorporated under the Business Corporations Act (Alberta) on April 16, On December 19, 2014, the Company continued from the Province of Alberta to the Province of British Columbia. On July 23, 2015, the Company changed its name from Palo Duro Energy Inc. to CarbonOne Technologies Inc. The Company has two wholly-owned subsidiaries: CarbonOne Holdings Corp., and Palo Duro Operating (US) Inc. The Company is a reporting issuer in British Columbia, Alberta and Ontario and its common shares are traded on the TSX Venture Exchange ( TSX-V ) under the symbol CX. The Company s head office is located at Suite Burrard Street, Vancouver, British Columbia, V7X 1J1. In April 2015, the Company entered into a plan of agreement with Tapango Resources Ltd. ( Tapango ) and CarbonOne Holdings Corp. ( CarbonOne Holdings ) pursuant to which the Company and Tapango would jointly pursue acquisition of all of the issued and outstanding common shares of CarbonOne Holdings (see Transactions below). This transaction closed on July 23, Following the completion of the transaction, the Company changed its name to CarbonOne Technologies Inc. and continued trading on the TSX-V as CarbonOne Technologies Inc. under the new trading symbol CX

3 The Company is engaged in the development, production and commercialization of advanced materials and holds exclusive world-wide licenses for a suite of intellectual property. With its proprietary developments in resin, furnace, and milling technologies, the Company plans to cost-effectively produce low-cost, high-performance composite materials for industrial and structural applications. The Company s products have disruptive implications in a number of industries, competing with traditional materials including wood, metal, concrete, panel insulation and plastic. The Company established a research and development and manufacturing facility near Buffalo, NY, allowing the Company to commercialize existing products and advance new products to launch in the future. To date, the Company has not generated revenues from its products. Recent Developments Financing On March 23, 2016, the Company closed a secured convertible debenture financing for 450,000. The secured convertible debentures have a maturity date of March 23, 2018 and the principal amount of the debentures is convertible into units at 0.15 per unit prior to the maturity date. Each unit comprises of one common share of the Company and one transferrable common share purchase warrant. Each warrant entitles the holder to purchase one common share of the Company at a price of 0.20 per share for two years from the closing date of the financing, subject to adjustment in certain circumstances. The 8% interest rate on the debentures is payable semi-annually in arrears. The debentures have a forced conversion feature that is triggered if the Company s share price trades over 0.30 for more than 20 consecutive trading days. The debentures are redeemable with a 60-day notice period. Financial Snapshot The selected financial information set out below is derived from the audited consolidated financial statements of the Company: December 31, 2015 December 31, 2014 Total assets 2,551, ,768 Machinery and equipment 554, ,666 Working capital 294,188 (1,357,523) Comprehensive loss (5,219,492) (3,320,920) Basic and diluted loss per share (0.11) (0.50) Transactions On October 15, 2014, CarbonOne Holdings completed a share exchange with EcoCarbon Technologies Canada Inc. ( EcoCarbon ) and the shareholders of EcoCarbon ( EcoCarbon Shareholders ) where CarbonOne Holdings agreed to purchase all of the issued and outstanding common shares of EcoCarbon from the EcoCarbon Shareholders in exchange for a total of 5,500,000 common shares (1 for 1) of CarbonOne Holdings ( EcoCarbon Transaction ). This is considered a reverse takeover for accounting purposes where EcoCarbon is considered the accounting parent and CarbonOne Holdings is the accounting subsidiary. In October 2014, the Company entered into a definitive agreement with CarbonOne Holdings whereby the Company acquired all of the issued and outstanding common shares of CarbonOne Holdings, and CarbonOne Holdings became a wholly-owned subsidiary of the Company. Upon execution of the definitive agreement, the Company advanced a 500,000 non-interest-bearing secured loan to CarbonOne Holdings, followed by an additional non-interest-bearing secured loan of 250,000. There was a general security agreement in place to secure the loans against all of CarbonOne Holdings rights, title and interest in present and after-acquired property and assets, and all proceeds thereof. On April 17, 2015, the Company entered into an agreement with Tapango Resources Ltd. ( Tapango ) and CarbonOne Holdings, pursuant to which the Company and Tapango jointly pursued the acquisition of all of the - 3 -

4 issued and outstanding common shares of CarbonOne Holdings. Pursuant to IFRS accounting policies, the share exchange and related transactions (collectively the Transaction ) would constitute a reverse takeover of the Company by CarbonOne Holdings. In connection with the Transaction, the Company agreed to consolidate its shares on a 4:1 basis. All comparative references to the number of shares, weighted average number of common shares and loss per share have been restated for the Consolidation. Under the terms of the Transaction, the Company acquired 100% of the issued and outstanding common shares of CarbonOne Holdings (the CarbonOne Holdings Shares ) by issuing to CarbonOne Holdings shareholders one consolidated share of the Company for each issued and outstanding CarbonOne Holdings Share. In addition, the Company acquired 100% of the issued and outstanding common shares of Tapango (the Tapango Acquisition ) by issuing consolidated shares of the Company to shareholders of Tapango for each issued and outstanding Tapango Share (the Tapango Ratio ). All of the outstanding stock options and warrants of Tapango were converted to stock options and warrants of the Company after giving effect to the 4:1 consolidation of the Company s shares and subject to adjustments based on the Tapango Ratio. On July 23, 2015, the Company closed the Transaction with CarbonOne Holdings and Tapango. As part of the Transaction, CarbonOne Holdings and Tapango closed Private Placements at a price of 0.20 per share for gross proceeds of 2,000,014. In connection with the private placements, finders fees of 19,200 in cash and 67,500 common shares of the Company were paid to arm s length finders. Upon completion of the Transaction, an additional finder s fee of 1,565,600 consolidated shares of the Company was paid. Following completion of the Transaction, the Company granted stock options to directors, officers, employees and consultants of the Company to purchase up to an aggregate amount of 6,825,000 shares of the Company. The stock options are exercisable for a five-year period at a price of 0.20, and vest over an 18-month period. Following the grant of options, the Resulting Issuer has 7,783,406 stock options outstanding. The Company s share structure is as follows as at April 27, 2016: Issued and Outstanding 1 80,771,427 Stock Options Exercisable from 0.20 to 0.47, expiring in one to five years 7,783,406 Fully diluted 88,554,833 (1) 42.9 million shares are subject to a pooling agreement which restricts their resale. 5% of the pooled shares were released on July 23, 2015, 5% were released on January 23, 2016, and 5% will be released every six months thereafter to an aggregate of 35% over 3 years. 65% of the pooled shares are released based on cumulative gross revenue earned after the closing date of July 23, 2015, with 20% released when the Company has earned 10 million in cumulative gross revenue, a further 20% released at 25 million in cumulative gross revenue and the final 25% released once the Company has earned 35 million in cumulative gross revenue. Development of the Business On September 19 and 20, 2014, and as amended on June 10, 2015, the Company signed two exclusive technology license agreements that grant the Company exclusive world-wide rights to use certain technologies and licensed patents for the purpose of developing, producing, marketing and selling products that make use of these technologies and/or patents. The Company has established a research, development and manufacturing facility near Buffalo, NY, allowing the Company to commercialize existing products and advance new products to launch in the future. CarbonOne believes its intellectual property and technologies will allow it to create higher-quality products at a lower cost than its competitors. CarbonOne is currently producing samples of several products for testing and distribution to potential customers. To date CarbonOne has not generated any revenue from its products. XBar TM Rebar XBar rebar is CarbonOne s most advanced product. XBar rebar is a rust proof composite rebar that is lighter and has higher tensile strength than steel rebar. XBar rebar provides a number of safety and engineering advantages over - 4 -

5 steel rebar and is designed to bring significant improvements across a wide range of applications. XBar rebar will be produced by C1 Pultrusions LLC, an 80% owned subsidiary of CarbonOne. At the end of November 2015, C1 Pultrusions commissioned its XBar rebar production machine, which has the ability to produce up to one million feet of XBar rebar per month. C1 Pultrusions approach to manufacturing composite rebar allows the Company to manufacture a high-quality product that, based on preliminary testing, is expected to outperform its competitors on both a performance and cost perspective. CarbonOne is meeting with and providing samples of XBar rebar to rebar distributors, pre-cast concrete manufacturers and engineering firms with the objective of introducing XBar rebar to the market and bidding on upcoming projects. To confirm XBar rebar s performance across a range of strength and durability metrics, C1 Pultrusions has engaged North Carolina State University and the University of Miami to perform independent ICC-ES (International Code Council Evaluation Service) testing on XBar rebar and plans to also undertake testing according to the CSA (Canadian Standards Association) standards. C1 Pultrusions will receive preliminary test results throughout 2016 as each test is completed, allowing the Company to further expand the technical information that it can provide to engineering firms and potential buyers. The biggest market opportunities for XBar rebar will come following completion of the testing process. Activated Carbon Activated Carbon is used as a filtration medium for various domestic and industrial applications such as water filtration, wastewater treatment and air treatment. Using its proprietary resin, CarbonOne has developed a pelletizing process that produces very high-quality activated carbon pellets. Samples tested by potential customers have met target specifications and generated significant interest. Discussions are underway to commercialize this opportunity in the near term. C1Core TM / C1Board TM CarbonOne has revised its C1Board strategy, based on customer feedback, and has designed a composite panel that will be used by manufacturers to provide an integrated product for the recreational vehicle, commercial trailer and parcel delivery vehicle industry. CarbonOne s C1Core panel will be produced as a multi-layer composite material to which customers can laminate reinforcement fiber on the outside to make a composite board. C1Core panel with these laminated reinforcement fibers is similar to the composite sandwich panels currently used in the industry, with the added benefits of higher compression strength, higher insulative value and fire resistance properties. CarbonOne expects to deliver samples of C1Core panel to potential customers in Q Defense Products CarbonOne is evaluating opportunities to use its proprietary knowledge and processes to produce armour for both civil and military applications. CarbonOne continues to review opportunities and refine its armour products with the objective of identifying the optimal entry point to the defense products market. Trends There are no current trends in the Company s business that are likely to impact the Company s performance

6 Summary of Selected Quarterly Results The selected financial information set out below is based on and derived from the unaudited consolidated financial statements of the Company for the quarters listed: Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total assets 2,551,764 3,491,904 1,525,988 1,108, , , , ,874 Working capital 294,188 1,106,735 (1,011,500) (1,747,690) (1,357,523) (1,074,624) (487,130) (298,902) Net income (loss) (1,564,197) (3,632,964) 324,144 (450,619) (2,199,479) (196,903) (508,247) (379,554) Comprehensive income (1,232,681) (3,707,320) 147,000 (426,491) (2,266,528) (146,747) (558,327) (349,318) (loss) Loss per common share basic and diluted (0.02) (0.05) 0.01 (0.10) (0.30) (0.00) (0.10) (0.10) The Company had no revenue and paid no dividends during the above periods. Net and comprehensive loss highlights from the past eight quarters are as follows: The increase in total assets from Q to Q was from the Transaction that combined the assets of both Tapango and CarbonOne Holdings. Furthermore, the Company completed a private placement of 2,000,014 concurrent with closing of the Transaction. The increase in net loss from Q to Q was mainly from the acquisition and reverse takeover ( RTO ) costs associated with closing of the Transaction. The Company incurred 918,115 in acquisition loss from the acquisition of Tapango and 925,821 in RTO cost in CarbonOne Holdings. The Company also combined expenses from the two additional companies upon consolidation in Q3-2015, compared to Q The decrease in net loss from Q to Q was the result of lower research expenditures incurred during the quarter. The increase in net income and comprehensive income in Q compared to Q was due to the 850,000 management fee write-off that was forgiven during the three months ended June 30, The total assets increase in Q compared to Q was mainly due to costs incurred on machinery and equipment. The increase in net and comprehensive loss in Q compared to Q was due to the 1,389,459 reverse acquisition costs incurred from the RTO by EcoCarbon. Total assets increased in Q compared to Q due to the addition of assets from the EcoCarbon Transaction offset by a US200,000 payment made as part of an agreement to obtain an exclusive technology license. Results of Operations for the Three Months Ended December 31, 2015 Consulting fees decreased to 13,624 in 2015 compared to 101,950 in This was due to a decrease in consultants being used by the Company. During the three months ended December 31, 2015, the Company incurred 78,318 in legal fees (2014: 66,447). Also during this period, the Company reclassified 149,865 of expenses previously recorded as legal fees as transaction costs. During the three months ended December 31, 2015, the Company incurred 258,094 in share-based compensation related to the stock options granted upon closing of the Transaction. (2014: Nil). During the three month period ended December 31, 2015, the Company incurred 427,183 in research expenses which was higher than the research costs incurred in the same period in 2014 by 218,310. This increase is due to increased activities relating to advancement of the Company s products. Furthermore, the Company reclassified 480,703 into write down of equipment that had been previously classified as research costs

7 Investor relations and insurance expenses were 29,687 (December 31, 2014: 611) and 18,221 (December 31, 2014: 2,257), respectively, during the three months ended December 31, These amounts are higher compared to the previous period because the Company undertook increased investor relations activities following the Transaction. Also, there was a higher requirement for insurance coverage due to the Company s increased activities in the U.S. Results of Operations for the Twelve Months Ended December 31, 2015 The Company incurred 925,821 in a transaction loss from the legal acquisition of CarbonOne Holdings by CarbonOne, where CarbonOne Holdings is considered the accounting parent and the Company is the accounting subsidiary. As a result, the difference between the estimated fair value of CarbonOne Holdings shares issued to the Company s shareholders less the net fair value of the assets of the Company resulted in the 925,821 reverse acquisition cost. The Company incurred 918,115 in a transaction loss from the acquisition of Tapango as part of the Transaction. This loss reflects the difference between the estimated fair value of the consideration of CarbonOne shares paid to Tapango shareholders less the net fair value of the assets of Tapango acquired. During the year ended December 31, 2015, the Company wrote off 850,000 in management fees previously accrued in accounts payable (December 31, 2014: Nil). Management fees increased by 122,045 during this period compared to the previous year due to an increase in operational and financing activities in 2015 compared to These costs are related to fees charged to a management company for administrative, finance, accounting, and investor relations, as well as certain office expenses that were not incurred in the previous period. Consulting fees increased to 166,350 in 2015 compared to 101,950 in 2014 due to increased activities relating to the Company s U.S. operations during the period. Legal fees increased by 168,776, from 77,456 in 2014 to 246,232 in This increase was directly related to increased corporate activities within the US operations such as patent searches and exclusive license agreements. During the year ended December 31, 2015, the Company recorded 901,303 in share-based compensation where 638,908 of it related to the stock options granted upon closing of the Transaction. Research expenses increased by 337,980, from 783,991 in 2014 to 1,121,971 in This increase is related to increased activities relating to advancement of the Company s products. Rent and utilities expense of 163,059 was higher during the year ended December 31, 2015 (2014: 114,926). The increase can be attributed to additional utilities paid for Tapango and CarbonOne Holdings as well as increased activities in the Company s U.S. subsidiaries. Investor relations and insurance expenses were 33,887 (December 31, 2014: 611) and 34,746 (December 31, 2014: 2,257), respectively, during the year ended December 31, These amounts are higher compared to the previous year because the Company undertook additional investor relations activities following the Transaction. Also, a higher requirement of insurance coverage was incurred due to the Company s increased activities in the U.S. Liquidity and Capital Resources The Company does not earn any revenue and relies on its working capital to fund activities and its administrative costs. The Company s cash position at December 31, 2015 was 430,906 (December 31, 2014: 143,282). The Company had working capital of 294,188 at December 31, 2015 (December 31, 2014: (1,357,523)). As at the date of this MD&A, the Company has a negative working capital of approximately (277,030). On July 23, 2015, the Company closed the Transaction with Palo Duro and, as part of the Transaction, the Company and Tapango closed Private Placements at a price of 0.20 per share for gross proceeds of 2,000,014. Concurrent with the closing of the Transaction, the Company also issued 5,410,000 common shares at a price of 0.20 for a total of 1,082,000 to United Materials Inc. ( UMI ) as a reduction of future royalties costs (from 5% to 3%). UMI is a related party to which the Company must pay future royalties for net sales of licensed products that are sold commercially

8 The Company s continuing existence and its ability to discharge its liabilities and fulfill its commitments as they come due is dependent upon the ability of the Company to obtain equity and/or debt financing, the start of manufacturing operations and generating sales of the Company s products, and ultimately, reaching and maintaining profitable operations at its production facility. Management plans to continue to develop and commercialize its products to ensure the Company can generate sustainable, long-term profitability, and obtain additional financing, if needed. While the Company has been successful at securing financing in the past, there can be no assurance that it will be able to do so in the future. These material uncertainties cast significant doubt upon the Company s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue business. These adjustments could be material. The Company s financial statements are prepared in accordance with IFRS on a going concern basis, which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. If the Company is unable to obtain adequate additional financing, the Company will be required to curtail its operations. The financial statements do not include adjustments to amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations. Although the Company has no set policy, management of the Company may use financial instruments to reduce corporate risk in certain situations. The Company presently has no hedges or other financial instruments in place. Operating Activities Cash used by operating activities during the year ended December 31, 2015 was 3,078,308 (December 31, 2014: 1,566,143). The Company has four full-time employees. Investing Activities Cash used in investing activities during the year ended December 31, 2015 was 431,133 (December 31, 2014: 151,272) relating to the purchase of equipment. Financing Activities During the year ended December 31, 2015, the Company received cash from financing activities of 3,777,873 (December 31, 2014: 1,768,663). Related Party Transactions Key management personnel compensation was: December 31, 2015 December 31, 2014 Management fees 486, ,000 Consulting fees - 98,424 Share-based compensation 471, , ,424 During the year ended December 31, 2015, the Company accrued 381,000 (December 31, 2014: 30,000) in management fees owed to J. Proust & Associates, a private company controlled by John Proust, the Company s Chief Executive Officer and director. The Company also accrued and paid 105,000 in management fees owed to Fiore Management and Advisory Corp., a private company in which Gordon Keep, a director of the Company, is also an officer (December 31, 2014: Nil). These fees include administrative, finance, accounting, investor relations and management consulting services. An additional 81,867 (December 31, 2014: Nil) was accrued for salaries payable to Jack Khorchidian, a current officer and director of the Company

9 As at December 31, 2015, a total of 55,000 and Nil (December 31, 2014: 635,649 and 466,015, respectively) were owed to Jack Khorchidian and Peter Hogendoorn (a former officer) respectively, which is included in accounts payable and accrued liabilities. As at December 31, 2015, 116,030 was owed to J. Proust & Associates and is included in accounts payable and accrued liabilities. There are no terms or conditions related to these amounts owed to related parties, and the amounts owed are unsecured. During the year ended December 31, 2015, a total of 850,000 in management fees, previously accrued and payable as at December 31, 2014, was forgiven by current and former officers of the Company. On May 21, 2015, the Company issued 28,420,000 common shares in exchange for loans and payables outstanding totaling 710,500 owed by the Company to officers and directors of the Company, as well as one arm s length individual. Commitments In September 2014, the Company entered into two exclusive technology license agreements that allow the Company to commercialize and exploit technologies pertaining to ceramic composites. These license agreements were amended on June 10, a) For the license agreement with Ceramic Matrix Composites, LLC ( CMC ), the Company paid US200,000 (276,800) to maintain exclusivity. In addition, the Company must pay a royalty of 5% of net sales of licensed products that are sold commercially., the Company recorded depreciation of 32,856 in research activities resulting in a balance of 241,233 (December 31, 2014: 225,920). There are annual minimum royalties to retain exclusivity once a licensed product reaches profitability. This has not yet been achieved. The annual minimum royalties are as follows: Period after reaching profitability Annual minimum royalty payable (US) 1 st year 50,000 2 nd year 250,000 3 rd year 500,000 4 th year 1,000,000 5 th year and each subsequent year 1,750,000 The Company, at its sole option, may purchase all the rights in the licensed technologies from CMC for US2,000,000 payable in cash or common shares of the Company. b) By agreement dated June 10, 2015 for the license agreement with UMI, to maintain exclusivity the Company must make minimum expenditures including annual minimum royalties in respect of each licensed technology. The Company must pay a royalty of 3% of net sales of licensed products that are sold commercially except for licensed products using the software technology, in which case the royalty paid is 1% of net sales sold commercially. There are annual minimum royalties to retain exclusivity once a licensed product reaches profitability. This has not yet been achieved. The Company, at its sole option, may purchase all the rights to each licensed technology from UMI payable in cash or common shares of the Company. For the year ended December 31, 2015, the Company recorded depreciation of 47,726 in research activities resulting in a balance of 1,034,273 (December 31, 2014: Nil)

10 The following is a summary of the minimum expenditure amounts, minimum royalties payable and buyout amounts: Licensed Technology Minimum Expenditure must be Completed by Minimum Expenditure (US) Minimum Royalty Payable (US) Year 1 Year 2 Year 3 Year 4 Year 5+ Buyout Price (US) Resin N/A Nil 24, , , , ,000 3,000,000 Panel Machine (used) January 23, ,000 Nil Nil Nil Nil Nil Nil Panel Machine (new) July 23, , , ,000 1,200,000 2,400,000 4,200,000 25,000,000 Microwave N/A Nil 48, , , ,000 1,680,000 5,000,000 Pump N/A Nil Nil Nil Nil Nil Nil 1,500,000 Spray Dryer July 23, ,000 18,000 90, , , ,000 1,000,000 Milling Reactor July 23, ,000 42, , , ,000 1,470,000 10,000,000 Thermal Conversion January 23, ,000 48, , , ,000 1,680,000 10,000,000 Reactor Fiber Spinner January 23, ,000 18,000 90, , , ,000 3,000,000 Software January 23, ,000 18,000 90, , , ,000 3,000,000 Armor April 23, ,000 30, , , ,000 1,200,000 7,500,000, the minimum expenditures relating to the Panel Machine (used) and Armor licensed technologies have been met (US127,988 and US70,915 respectively). Annual minimum royalties will be payable commencing on the first day of the first calendar quarter after a licensed product made using the applicable technology reaches commercially profitable production levels. Subsequent Events On March 23, 2016, the Company closed a secured convertible debenture financing for 450,000. The secured convertible debentures have a maturity date of March 23, 2018 and the principal amount of the debentures is convertible into units at 0.15 per unit prior to the maturity date. Each unit comprises of one common share of the Company and one transferrable common share purchase warrant. Each warrant entitles the holder to purchase one common share of the Company at a price of 0.20 per share for two years from the closing date of the financing, subject to adjustment in certain circumstances. The 8% intrest rate on the debentures is payable semi-annually in arrears. The debentures will have a forced conversion feature that is triggered if the Company s share price trades over 0.30 for more than 20 consecutive trading days. The debentures are redeemable with a 60-day notice period. On March 24, 2016, a total of 3,569,998 share purchase warrants with a strike price of 0.19 expired without exercise. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Current Share Data As at December 31, 2015, the Company had 80,771,427 common shares issued and outstanding. As at the date of this MD&A, there were 80,771,427 common shares outstanding, along with 7,783,406 stock options outstanding exercisable from 0.20 to 0.47 for a total of 88,554,833 shares outstanding on a fully diluted basis

11 Risks and Uncertainties The Company may be exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives. The Company manages risks to minimize potential losses. The main objective of the Company s risk management process is to ensure that the risks are properly identified and that the capital base is adequate in relation to those risks. The Company s operations and results are subject to a number of different risks at any given time. These factors, include but are not limited to manufacturing and production delays, price fluctuations for the Company s products, price fluctuations for the Company s source materials, competition from manufacturing peers, competition to hire and retain quality staff, operating hazards, insurable risks and limitations of insurance, regulatory requirements, share price volatility and currency fluctuations. The key determinants as to the Company s operational outcomes are as follows: a) the state of capital markets, which will affect the ability of the Company to finance further acquisitions and expand its production programs; b) the ability of the Company to successfully advance and commercialize its products; c) the ability of the Company to identify and successfully acquire additional patents for additional resources, whether by option, joint venture or otherwise. Financial Markets: The Company is dependent on the equity markets as its sole source of operating working capital and the Company s capital resources are largely determined by the strength of the markets and by the status of the Company s products in relation to these markets, and its ability to compete for the investor support of its products. Capital Needs: The research and development costs associated with the Company will require additional financing. The current source of future funds available to the Company is the sale of additional equity capital or debt financing. There is no assurance that such funding will be available to the Company or that it will be obtained on terms favourable to the Company or will provide the Company with sufficient funds to meet its objectives, which may adversely affect the Company s business and financial position. Failure to obtain sufficient financing may result in delaying or indefinite postponement of research and development activities or even the loss of licenses to use certain technology. Basis of Preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). Significant Accounting Judgments and Estimates The preparation of these financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical Accounting Estimates The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future,

12 actual results may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in net loss in the period of the change, if the change affects that period only, or in the period of the change and future periods, if the change affects both. Information about critical judgments in applying accounting policies that have the most significant risk of causing material adjustment to the carrying amounts of assets and liabilities recognized in the financial statements within the next financial year are discussed below: Functional currency - Under IFRS, each entity within the Company has its results measured using the currency of the primary economic environment in which the entity operates (the functional currency). Judgment is necessary in assessing each entity s functional currency. The Company considers the currency of expenses and outflows, as well as financing activities, as part of its decision-making process. Research and development costs - Considerable judgment is required to identify the point in the progress of a research and development project at which a new or improved product or process is determined to be technologically feasible, marketable, or useful and therefore determining when research and development costs should be capitalized. Fair value of the Reverse Takeover - As a private company, there is estimation in determining fair value of the consideration in the Transaction. This was determined by reference to the completed private placement of 0.20 per share (see Note 2 in the accompanying financial statements). Financial Instruments On initial recognition, all financial assets and financial liabilities are recorded at fair value plus directly attributable transaction costs, other than financial assets and liabilities classified as at fair value through profit or loss. All transactions related to financial instruments are recorded on a trade date basis. The directly attributable transaction costs of financial assets and liabilities classified as at fair value through profit or loss are expensed in the period they are incurred. Subsequent Measurement Financial Assets The Company classifies its financial assets into one of the following categories, depending on the purpose for which the asset was acquired. The Company s accounting policy for each category is as follows: Fair value through profit or loss - This category comprises derivatives, or assets acquired or incurred principally for the purpose of selling or repurchasing it in the near term. They are carried in the statement of financial position at fair value with changes in fair value recognized in profit or loss. Cash is classified as fair value through profit or loss. Loans and receivables - These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortized cost using the effective interest method less any provision for impairment. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Cash receivables and loans receivable are classified as loans and receivables. Held-to-maturity investments - These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company s management has the positive intention and ability to hold to maturity. These assets are measured at amortized cost using the effective interest method. If there is objective evidence that the investment is impaired, determined by reference to external credit ratings and other relevant

13 indicators, the financial asset is measured at the present value of estimated future cash flows. Any changes to the carrying amount of the investment, including impairment losses, are recognized in profit or loss. The Company has not classified any financial assets as held-to-maturity. Available-for-sale - Non-derivative financial assets not included in the above categories are classified as available-for-sale. They are carried at fair value with changes in fair value recognized directly in other comprehensive income (loss). Where a decline in the fair value of an available-for-sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from equity and recognized in profit or loss. The Company has not classified any financial assets as available-for-sale. All financial assets except for those recognized at fair value through profit or loss are subject to review for impairment at each reporting date. Financial assets are impaired when there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described above. Financial Liabilities The Company classifies its financial liabilities into one of two categories. The Company s accounting policy for each category is as follows: Fair value through profit or loss - This category comprises derivatives, or liabilities acquired or incurred principally for the purpose of selling or repurchasing it in the near term. They are carried in the statement of financial position at fair value with changes in fair value recognized in profit or loss. The Company has not classified any financial liabilities as fair value through profit or loss. Other financial liabilities - This category includes accounts payable and accrued liabilities, which are recognized at amortized cost at the settlement date using the effective interest method of amortization. Accounts payable and loans are classified as other financial liabilities. New Standards, Amendments and Interpretations Issued IFRS 9 - Financial Instruments. This IFRS introduces new requirements for classifying and measuring financial assets and liabilities and carries over from the requirements of IAS 39 - Financial Instruments: Recognition and Measurement, Derecognition of Financial Assets and Financial Liabilities. The required adoption date for IFRS 9 is January 1, The Company is currently assessing the effect of this standard. IFRS 15 - Revenue from Contracts with Customers. This IFRS establishes principles to address the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. IFRS 15 will be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. The Company is currently assessing the effect of this standard. IFRS 16 - Leases. This IFRS, which supersedes IAS 17 - Leases, specifies how to recognize, present and disclose leases. The standard provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. IFRS 16 is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted if IFRS 15 has also been applied