(Formerly Palo Duro Energy Inc.) Management s Discussion and Analysis. September 30, 2015

Transcription

1 September 30, 2015

2 The following is management s discussion and analysis ( MD&A ) of ( CarbonOne or the Company ) formerly Palo Duro Energy Inc., prepared as of November 24, This MD&A is intended to assist the reader to assess material changes in the financial condition and results of operations of CarbonOne as of September 30, This MD&A should be read together with the unaudited condensed consolidated interim financial statements for the nine months ended September 30, 2015, and the audited consolidated financial statements for the year ended December 31, 2014 and related notes. Financial amounts are expressed in Canadian dollars unless otherwise indicated. 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 otherwise required by law. All of the forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. The Company s unaudited condensed consolidated interim financial statements for the nine months ended September 30, 2015 have been prepared in accordance with IAS 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and with interpretations of the International Financial Reporting Interpretations Committee. Additional information relating to CarbonOne is available on the Company s website at and on SEDAR at OVERVIEW 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 The Company has two wholly-owned subsidiaries: Palo Duro Operating (US) Inc., and B.C. Ltd., both of which are inactive. The Company is a reporting issuer in British Columbia, Alberta and Ontario and its common shares are traded on the TSX Venture Exchange 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 business combination 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 Acquisition of CarbonOne Holdings below). This transaction closed on July 23, Following the completion of - 2 -

3 the transaction, the Company changed its name to and continued trading on the TSX Venture Exchange ( TSX-V ) as under the new trading symbol CX. The Company is engaged in the development, production, manufacturing 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 can cost-effectively produce low-cost, highperformance 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 has established a research and development and manufacturing facility in 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 operations. Recent Developments XBar TM Rebar CarbonOne has commissioned its XBar TM rebar Production Machine and is ready to fill commercial sale orders of XBar TM rebar. The Production Machine is capable of producing up to one million feet of XBar TM rebar per month, and can produce rebar to different size specifications. CarbonOne has completed a number of tests to date using XBar TM rebar samples from the Company s pilot machine. XBar TM rebar has consistently outperformed other composite rebars in tensile (strength), modulus (stiffness) and strain tests. Testing to date has been conducted by independent labs at Sherbrooke University under the supervision of Dr. Brahim Benmokrane, and at the University of Illinois under the supervision of Dr. Mohsen Issa. With the commencement of commercial production from the Production Machine, the Company has now engaged North Carolina State University, under the supervision of Dr. Sami Rizkalla, and University of Miami, under the supervision of Dr. Antonio Nanni, to perform independent ICC-ES (International Code Council Evaluation Service) testing on XBar TM rebar. ICC-ES tests are based on the standards outlined by ACI 440 (American Concrete Institute) and ASTM (American Society for Testing and Materials). For decades, ICC-ES has been the industry leader in performing technical evaluations for code compliance, providing regulators and construction professionals with clear evidence that products comply with codes and standards. These tests set the industry standard for individuals and organizations involved in concrete design, construction and materials, and will further confirm XBar TM rebar s application as a steel rebar replacement in reinforced concrete structures. North Carolina State University and University of Miami will perform a suite of independent tests on XBar TM rebar produced from the Company s production machine. Both universities are equipped with state-of-the-art ISO-certified laboratories and testing facilities and are considered experts in the field of advanced materials. ICC-ES testing will provide the highest level of industry certification, confirming that the manufacturing process and XBar TM rebar meet the highest quality control standards. The full suite of tests is expected to be completed within Completion of the testing process should give CarbonOne the ICC-ES ESR evaluation report that includes both material certification and also the information that engineers need to design their construction projects using XBar TM rebar. CarbonOne is currently focused on opportunities to use XBar TM rebar in projects that do not require extensive engineering, such as to reinforce roads, parking lots, retaining walls, pre-cast concrete and rail ties, and for mining and marine applications. Confirmation that XBar TM rebar has performed well under ICC-ES testing scenarios is expected to produce opportunities to expand into larger civil applications such as bridges and buildings

4 Financial Snapshot For the period ended September 30, 2015 As at year ended December 31, 2014 Total assets 3,491, ,768 Machinery and equipment 636, ,666 Working capital 1,106,735 (1,357,523) Comprehensive loss (3,986,811) (3,320,920) Basic and diluted loss per share (0.10) (0.05) Business Combination 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 would jointly pursue the acquisition of all of the 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 and is considered an arm s length transaction. In connection with the Transaction, the Company agreed to consolidate its shares on a 4:1 basis. Under the terms of the Transaction, the Company would acquire 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 would offer to acquire 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 would be 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. The Company, the resulting issuer ( Resulting Issuer ), changed its name to and continued trading on the TSX-V under the new trading symbol CX. Following completion of the Transaction, the Company also 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 will vest over an 18-month period. Following the grant of options, the Company has 80,771,427 shares issued and outstanding, 7,783,406 stock options outstanding, and 3,569,998 warrants outstanding, for 92,124,831 shares on a fully diluted basis million common shares of the Company are subject to a pooling agreement which restricts their resale. 5% of the pooled shares were released on July 23, 2015, and 5% will be released every six months thereafter to an aggregate of 35% over 3 years. 65% of the pooled shares are to be released based on cumulative gross revenue earned after the closing date of July 23, 2015, with 20% released when CarbonOne has earned 10 million in cumulative gross revenue, a - 4 -

5 further 20% released at 25 million in cumulative gross revenue and the final 25% released once CarbonOne has earned 35 million in cumulative gross revenue. Development of the Business On September 19 th and 20 th, 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 in 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 TM rebar is CarbonOne s most advanced product. XBar TM rebar is a composite rebar that is lighter than steel yet has stronger tensile strength than steel. XBar TM rebar is also rust proof, providing an important advantage for outdoor applications where rusting rebar is a significant concern, and resulting in a product with a longer expected lifespan than steel rebar. XBar TM rebar will be manufactured and sold through C1 Pultrusions LLC ( C1 Pultrusions ), a majority owned subsidiary of CarbonOne. CarbonOne believes it is entering the rebar market at an optimal time, since rebar durability is becoming a significant concern. Rebar is the skeleton of all concrete construction. Despite virtually all efforts to prevent corrosion, however, steel rebar corrodes and ultimately the structure loses its integrity, requiring replacement. Despite the higher cost, stainless steel (corrosion resistant) rebar is also becoming popular, indicating that the market is willing to pay more for a longer-life product. XBar TM rebar does not rust, it is lighter (cheaper transportation and lighter infrastructure), it has lower install costs because it requires less manpower to carry the product, and it is significantly more durable than existing steel rebar products. C1Board CarbonOne is currently developing a carbon ceramic composite panel ( C1Board ) with potential applications across a wide range of industries. CarbonOne s C1Board prototype is stronger than steel yet lighter than plywood. It is fire proof, insect proof and rot proof, and impervious to water, mold and mildew. C1Board is also insulative. CarbonOne is currently completing a sample production line in its Buffalo, NY facility. The Company expects to have sample products ready for distribution to potential buyers for testing and feedback in Q 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. CarbonOne s proprietary resin technology allows it to produce a very high-quality Activated Carbon pellet at low cost. While the Company s Activated Carbon product is still at the research and development phase, samples tested by potential customers have generated significant interest. The Company sees a number of opportunities to be active in the Activated Carbon supply chain. CarbonOne will continue to review these opportunities and refine its product with the objective of identifying the optimal entry point to exploit early cash flow opportunities in the Activated Carbon market

6 Defense Products CarbonOne is evaluating opportunities to use its expertise, proprietary knowledge and processes to produce armour for both civil and military applications. While the armour product is still at the research and testing phase, CarbonOne Holdings has identified an industry partner that is a leading defense contractor in the U.S. CarbonOne will continue refining its armour product, in consultation with its industry partner. Share Exchange Agreement with Palo Duro Energy Inc. and Tapango Resources Ltd. On May 12, 2015, CarbonOne Holdings entered into a definitive agreement between arms-length parties pursuant to which Palo Duro Energy Inc. ( Palo Duro ) and Tapango Resources Ltd. ( Tapango ) would jointly pursue the acquisition of all of the issued and outstanding common shares of the Company (the CarbonOne Holdings Acquisition ). The CarbonOne Holdings Acquisition and related transactions (the Transactions ) would constitute a reverse takeover of Palo Duro by CarbonOne Holdings. On closing of the Transaction, Palo Duro became the resulting issuer (the Resulting Issuer ) and changed its name to. In connection with the CarbonOne Holdings Acquisition, Palo Duro agreed to consolidate its shares on a 4:1 basis (the Palo Duro Consolidated Shares ). Under the terms of the Transaction, Palo Duro acquired 100% of the issued and outstanding common shares of CarbonOne Holdings ( the CarbonOne Holdings Shares ) by issuing to CarbonOne Holdings shareholders one Palo Duro Consolidated Share for each issued and outstanding CarbonOne Holdings Share. Under the terms of the Transaction, Palo Duro also offered to acquire 100% of the issued and outstanding common shares of Tapango (the Tapango Acquisition ) by issuing of a Palo Duro Consolidated Share 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 Palo Duro after giving effect to the 4:1 consolidation of Palo Duro s shares and subject to adjustments based on the Tapango Ratio. On July 23, 2015, the Company closed the business combination with Palo Duro (now CarbonOne Technologies Inc., the Resulting Issuer) 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, finder s 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, additional finder s fees of 1,565,600 consolidated shares of the Resulting Issuer were paid. Following completion of the Transaction, the Resulting Issuer also 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 Resulting Issuer. The stock options are exercisable for a five-year period at a price of 0.20, and will 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: 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 Warrants Exercisable at 0.19, expiring May 24, ,569,998 Fully diluted 92,124,831 (1) 42.1 million shares are subject to a pooling agreement which restricts their resale. 5% of the pooled shares were released on July 23, 2015, 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

7 Trends There are no current trends in the Company s business that are likely to impact on the Company s performance. 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: Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Total assets 3,491,904 1,525,988 1,108, , , , , ,157 Working capital 1,106,735 (1,011,500) (1,747,690) (1,357,523) (1,074,624) (487,130) (298,902) (675,974) Net income (loss) (3,640,854) 324,144 (450,619) (2,199,479) (196,903) (508,247) (379,554) (346,356) Comprehensive income (loss) (3,715,210) 147,000 (426,491) (2,266,528) (146,747) (558,327) (349,318) (464,602) Loss per common share basic and diluted (0.05) (0.01) (0.10) (0.30) (0.00) (0.10) (0.10) (0.20) 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 the 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 1,172,467 in acquisition loss from the acquisition of Tapango and 750,134 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 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

8 Results of Operations for the Three Months Ended September 30, 2015 The Company incurred 750,134 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 CarbonOne assets acquired resulted in the 750,134 reverse acquisition cost. The Company incurred 1,172,467 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 Tapango assets acquired. Management fees increased by 133,570 during this quarter compared to the previous year due to an increase in operational and financing activities in the Company s operations 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 quarter. Consulting fees increased to 145,754 in 2015 compared to Nil in This increase relates to 44,988 paid to U.S. consultants during the quarter in connection with the Company s U.S. operations. An additional 100,766 was paid to consultants related to the work performed in connection with the CarbonOne Holdings and Tapango Transaction. Legal fees increased by 116,751, from 425 in 2014 to 117,176 in This increase was directly related to increased activities relating to the Share Exchange Transaction as well as work related to the Private Placement financing. Audit fees decreased from 17,695 in the previous comparative quarter to Nil in 2015 as there was no audit work done in Q During the three months ended September 30, 2015, the Company issued 380,814 in share-based compensation related to closing of the Transaction. Research expenses increased by 528,313, from 197,018 in 2014 to 725,331 in This increase is related to increased activities relating to advancement of the Company s products. Furthermore, the Company reclassified 442,996 into research expense that had been previously capitalized in equipment cost, as it related directly to research-related activities. Rent and utilities expense of 47,932 was higher during the three months ended September 30, 2015 (September 30, 2014: 26,665). 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. Office and administrative expenses increased from 3,053 in the comparable quarter in 2014 to 142,212 in This is mainly due to increased activities such as an increase of 47,680 in filing fees from the Transaction, 25,514 in finders fees relating to the Private Placements, and 40,336 in office-related costs from the addition of new U.S. subsidiaries. Results of Operations for the Nine Months Ended September 30, 2015 The Company incurred 750,134 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 CarbonOne acquired resulted in the 750,134 reverse acquisition cost. The Company incurred 1,172,467 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 nine months ended September 30, 2015, the Company wrote off 850,000 in management fees previously accrued in accounts payable (Nil for September 30, 2014). Management fees increased by 120,570 during this period compared to the previous year due to an increase in operational and financing activities in the Company s operations 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

9 Consulting fees increased to 152,726 in 2015 compared to Nil in This increase relates to 51,960 paid to U.S. consultants in connection with the Company s U.S. operations during the period. An additional 100,766 was paid to consultants related to the work performed in connection with the CarbonOne Holdings and Tapango Transaction. Legal fees increased by 306,770, from 11,009 in 2014 to 317,779 in This increase was directly related to increased activities relating to the Share Exchange Transaction as well as work related to the Private Placement financing. Audit fees increased from 27,085 in the previous comparative period to 46,951 in This increase is mainly due to work performed in connection with the Share Exchange Transaction with Palo Duro and Tapango compared to the previous period. During the nine months ended September 30, 2015, the Company issued 380,814 in share-based compensation related to closing of the Transaction. Research expenses increased by 600,373, from 575,118 in 2014 to 1,175,491 in This increase is related to increased activities relating to advancement of the Company s products. Furthermore, the Company reclassified 442,996 into research expense that had been previously capitalized in equipment cost, as it related directly to research-related activities. Rent and utilities expense of 100,876 was higher during the nine months ended September 30, 2015 (September 30, 2014: 93,744). 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. Office and administrative expenses increased from 7,806 in the comparable period in 2014 to 190,839. This is mainly due to increased activities such as an increase of 47,680 in filing fees in connection with the Transaction, 25,514 in finder fees relating to the Private Placements, and 80,122 in office-related costs from the addition of new U.S. subsidiaries. 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 on September 30, 2015 was 1,302,310 (December 31, 2014: 143,282). The Company had working capital of 1,106,735 at September 30, 2015 (December 31, 2014: (1,357,523)). On May 13, 2015, the Company issued 10,500,000 common shares to shareholders for 105 in connection with seed stage financing. 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. 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. Also, as part of the closing of the Transaction, the Company received 1,018,160 and 1,117,434 via cash and loans from Palo Duro and Tapango, respectively. Management of the Company believes that its current working capital will not be sufficient to cover its costs for the next 12 months. The Company will require additional funds to support its working capital requirements or for other purposes and may seek to raise additional funds through public or private equity funding, bank debt financing or from other sources. The Company may receive cashflow from the production and sale of its products including XBar TM rebar and activated carbon. 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

10 Operating Activities Cash used by operating activities during the nine-month period ended September 30, 2015 was 2,829,744 (September 30, 2014: 669,238). The Company has six full-time employees. Investing Activities Cash used in investing activities during the nine-month period ended September 30, 2015 was 483,074 (September 30, 2014: 97,989) relating to the purchase of equipment. Financing Activities During the nine-month period ended September 30, 2015, the Company received cash from financing activities of 4,448,108 (September 30, 2014: 717,180). Related Party Transactions Key management personnel compensation was: Nine-month period ended September Management fees 354, ,000 During the nine-month period ended September 30, 2015, the Company accrued 264,000 in management fees owed to J. Proust & Associates, a private company controlled by John Proust, the Chief Executive Officer and director of the Company (September 30, 2014: Nil). During the nine-months ended September 30, 2015, the Company also accrued 60,000 in management fees owed to Fiore Management and Advisory Corp., a private company which Gordon Keep, a director of the Company, is an officer. These fees include administrative, finance, accounting, investor relations and management consulting services. An additional 30,000 was accrued for management fees payable to Jack Khorchidian, a current officer and director of the Company (September 30, 2014: 210,000 for one current and one former officer). As at September 30, 2015, a total of 75,000 and Nil (September 30, 2014: 455,662 and 383,287, respectively) were owed to Jack Khorchidian and Peter Hogendoorn (a former officer), which is included in accounts payable and accrued liabilities. As at September 30, 2015, 72,490 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 quarter ended June 30, 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 For the license agreement with Ceramic Matrix Composites, LLC ( CMC ) entered into in September 2014 and subsequently amended on June 10, 2015, the Company was required to pay US200,000 to maintain exclusivity. This was fully paid as at June 30, In addition, the Company must pay a royalty of 5% of net sales of licensed products that are sold commercially. There are annual minimum royalties to retain exclusivity once a licensed product, made using the licensed technology, reaches profitability, which has yet to be achieved. The annual minimum royalties are as follows:

11 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. By agreement dated September 17, 2014 and subsequently amended on June 10, 2015 for the license agreement with United Materials Inc. ( UMI ), which is a related party, 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 licensed products reach profitability, which 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. 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 Expenditur e (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 Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Current Share Data As at September 30, 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 and 3,569,998 warrants outstanding exercisable at 0.19, for a total of 92,124,831 shares outstanding on a fully diluted basis

12 Basis of Preparation The condensed consolidated interim 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, actual experience 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

13 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 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

14 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 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