(Formerly Palo Duro Energy Inc.) Condensed Consolidated Interim Financial Statements

Transcription

1 Condensed Consolidated Interim Financial Statements For the nine months ended (Unaudited - Expressed in Canadian Dollars) - 1 -

2 Notice of No Auditor Review of Interim Financial Statements In accordance with National Instrument Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of these condensed consolidated interim financial statements they must be accompanied by a notice indicating that these condensed consolidated interim financial statements have not been reviewed by an auditor. The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company's management. The Company s independent auditor has not performed a review of these condensed consolidated interim financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor

3 Condensed Consolidated Interim Statement of Financial Position As at September 30, 2015 December 31, 2014 Assets Current Cash $ 1,302,310 $ 143,282 Deposit 14,256 - Receivables 52,600 3,900 Prepaid 137,701 10,000 1,506, ,182 Deferred cost (Note 8) 1,082,000 - Licensing fee (Note 10a) 266, ,920 Machinery and equipment (Note 4) 636, ,666 Liabilities Current $ 3,491,904 $ 868,768 Accounts payable and accrued liabilities (Note 5) $ 400,132 $ 1,514, ,132 1,514,705 Loans (Note 6) - 500,000 Total liabilities 400,132 2,014,705 Shareholders' equity Share capital (Note 8) 10,920,033 3,629,142 Share premium (Note 7) 353, ,229 Share-based payment reserve 931,912 - Non-controlling interest (Note 9) (20,613) (628) Accumulated other comprehensive loss (334,946) (107,574) Deficit (8,757,843) (5,020,106) Total shareholders' equity 3,091,772 (1,145,937) Nature of operations and going concern (Note 1) Commitments (Note 10) On behalf of the Board of Directors: $ 3,491,904 $ 868,768 "Murray Flanigan" Director "Robert Cross" Director The accompanying notes are an integral part of these condensed consolidated interim financial statements

4 Condensed Consolidated Interim Statement of Loss and Comprehensive Loss Three months ended September Nine months ended September 30, 30, Expenses Accounting $ 51,855 $ 20,000 $ 57,231 $ 70,000 Audit - 17,695 46,951 27,085 Bank charges 2, ,221 1,102 Consulting 145, ,726 - Legal 117, ,779 11,009 M anagement 193,570 60, , ,000 Office and administrative 142,212 3, ,839 7,806 Research 725, ,018 1,175, ,118 Rent and utilities 47,932 26, ,876 93,744 Salaries 91,190 23, ,007 79,218 Share-based compensation 380, ,814 - Transfer agent 67,311-67,311 - Travel 41,159 7, ,128 91,045 Loss before other income and expenses (2,006,783) (355,603) (3,155,944) (1,226,127) Other income (expenses) M anagement fee write-off ,000 - Accretion (Note 7) (10,307) Foreign exchange 285,911 (31,328) 466,487 (5,190) Interest expense - (329) - (329) Interest income 2,619-2,619 - Loss on acquisition (Note 2) (1,172,467) - (1,172,467) - Reverse acquisition cost (Note 2) (750,134) - (750,134) - (1,634,071) (31,657) (603,495) (15,826) Net loss for the period $ (3,640,854) $ (387,260) $ (3,759,439) $ (1,241,953) Attributable to: Non-controlling interest (21,702) - (21,702) - Equity shareholders of the Company (3,619,152) (387,260) (3,737,737) (1,241,953) $ (3,640,854) $ (387,260) $ (3,759,439) $ (1,241,953) Other comprehensive loss Foreign currency translation attributed to non-controlling interest $ (10,715) $ - $ (10,715) $ - Foreign currency translation attributed to equity shareholders of the Company (63,641) (32,574) (216,657) 33,167 Comprehensive loss for the period $ (3,715,210) $ (419,834) $ (3,986,811) $ (1,208,786) Loss per share Basic and diluted loss per share $ (0.05) $ (0.08) $ (0.10) $ (0.27) Weighted average number of shares outstanding 72,546,071 4,655,556 36,430,361 4,655,556 The accompanying notes are an integral part of these condensed consolidated interim financial statements

5 Condensed Consolidated Interim Statement of Cash Flows For the nine-month period ended September 30, Cash flows from operating activities Loss for the period before tax $ (3,759,439) $ (1,241,953) Adjustments for: Accrued interest expense - 10,307 Interest income (2,619) - Loss on acquisition (Note 2) 1,172,467 - Management fee write-off (850,000) - Reverse acquisition cost (Note 2) 750,134 - Share-based compensation 380,814 - Unrealized foreign exchange gain (466,487) 5,190 Changes in non-cash working capital items: Receivables (48,700) 155,408 Prepaid and deposits (141,957) (12,458) Accounts payables and accrued liabilities 133, ,268 Interest income received 2,619 - Net cash used in operating activities (2,829,744) (669,238) Cash flows from financing activities Proceeds from loans 312,500 - Proceeds from private placement 2,000,014 Advance from convertible note (Note 7) - 717,180 Cash received from Tapango Acquisition 1,117,434 - Cash received from RTO 1,018,160 - Net cash received in financing activities 4,448, ,180 Cash flows from investing activities Purchase of equipment (483,074) (97,989) Net cash received in investing activities (483,074) (97,989) Foreign exchange effect on cash 23,738 (485) Change in cash during the period $ 1,159,028 $ (50,532) Cash, beginning of the period $ 143,282 $ 85,147 Cash, end of the period $ 1,302,310 $ 34,615 The accompanying notes are an integral part of these condensed consolidated interim financial statements

6 Condensed Consolidated Interim Statement of Changes in Equity Number of shares Share capital Shares subscribed Share premium Contributed surplus Accumulated other comprehensive loss Noncontrolling interest Deficit Total equity Balance, December 31, ,500,000 $ 15,020 $ - $ - $ 179,166 $ (70,837) $ - $ (1,736,632) $ (1,613,283) Shares issued for debt conversion (Note 8) 1,000,000 1,889, , ,063,185 Equity component - convertible note ,166 (179,166) Loss for the period (1,241,953) (1,241,953) Foreign currency translation (86,260) - - (86,260) Balance, September 30, ,500,000 $ 1,904,142 $ - $ 353,229 $ - $ (157,097) $ - $ (2,978,585) $ (878,311) Balance, December 31, ,950,001 $ 3,629,142 $ - $ 353,229 $ - $ (107,574) $ (628) $ (5,020,106) $ (1,145,937) Shares issued for debt conversion 28,420, , ,500 Shares issued to UMI 15,910,000 1,082, ,082,105 Shares issued for RTO 8,054,606 1,610, ,610,922 Shares issued for Tapango Acquisition 7,803,652 1,560, ,560,730 Shares issued for finders' fees 1,633, , ,620 Shares issued for private placement 10,000,068 2,000, ,000,014 Share-based compensation , ,912 Loss for the period (21,702) (3,737,737) (3,759,439) Foreign currency translation (227,372) 1,717 - (225,655) Balance, September 30, ,771,427 $ 10,920,033 $ - $ 353,229 $ 931,912 $ (334,946) $ (20,613) $ (8,757,843) $ 3,091,772 The accompanying notes are an integral part of these condensed consolidated interim financial statements

7 1. NATURE OF OPERATIONS AND GOING CONCERN CarbonOne Technologies Inc. ( CarbonOne or the Company ) (previously Palo Duro Energy Inc.) was incorporated on April 16, 2002 under the Business Corporations Act (Alberta, Canada). On July 23, 2015, the Company changed its name to CarbonOne Technologies Inc. from Palo Duro Energy Inc. upon completing a business combination (the Transaction ) in which the Company issued shares to shareholders of CarbonOne Holdings Corp ( CarbonOne Holdings ) to acquire all of CarbonOne Holdings issued and outstanding shares. This resulted in CarbonOne Holdings becoming a wholly-owned subsidiary of CarbonOne. Following completion of the Transaction, the Company became the Resulting Issuer and continued trading on the TSX Venture Exchange ( TSX-V ) under the symbol CX. See Note 2. 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 from United Materials International, LLC ( UMI ). With its proprietary developments in resin, furnace, and milling technologies, the Company can 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. Additionally, CarbonOne sees opportunities for near-term cash flow in the activated carbon industry. To date, the Company has not generated revenues from its operations. The Company s head office is located at Suite Burrard Street, Vancouver, British Columbia, Canada, V7X 1J1. These financial statements have been prepared 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. As at September 30, 2015, the Company had not yet achieved profitable operations and had incurred a net loss of $3,759,439 during the nine-month period ended September 30, 2015, a cash outflow from operating activities of $2,829,744 and, as at that date, the Company had working capital of $1,106,735. This includes $850,000 in management fees forgiven by current and former officers of the Company (Note 5) and settlement of payables by the issuance of shares (Note 8). The Company has various license commitments (Note 10) that are associated with the Company s operations. 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 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

8 2. REVERSE TAKEOVERS ( RTO ) a) EcoCarbon RTO On October 15, 2014, the Company s wholly owned subsidiary, CarbonOne Holdings, completed a share exchange between CarbonOne Holdings, EcoCarbon Technologies Canada Inc. ( EcoCarbon ) and the shareholders of EcoCarbon ( EcoCarbon Shareholders ) whereby CarbonOne Holdings agreed to acquire all of the issued and outstanding common shares of EcoCarbon from the EcoCarbon Shareholders in exchange for 55,000,000 common shares of the Company (the Eco Transaction ). This is considered an RTO for accounting purposes where EcoCarbon is considered the accounting parent and CarbonOne Holdings is the accounting subsidiary. As EcoCarbon was deemed to be the acquirer for accounting purposes, its assets, liabilities and operations since incorporation are included in these consolidated financial statements at their historical carrying values. The Company s results of operations have been included from October 15, 2014, the date of the completion of the RTO. Concurrent with the Eco Transaction, the CarbonOne Holdings completed a non-brokered private placement of 10,000,000 shares at $0.05 for gross proceeds of $500,000. In accordance with IFRS 3, Business Combinations, the substance of the Eco Transaction was a reverse acquisition of a non-operating company. The transaction does not constitute a business combination since CarbonOne Holdings does not meet the definition of a business under the standard. As a result, under IFRS the Eco Transaction is accounted for as a capital transaction with EcoCarbon being identified as the acquirer and the transaction being measured at the fair value of the equity consideration issued to CarbonOne Holdings. IFRS 2, Share-based Payments, applies to transactions where an entity grants equity instruments and cannot identify specifically some or all of the goods or services received in return. Since EcoCarbon shareholders have issued shares with a fair value in excess of the net assets received, IFRS 2 dictates that the difference is recognized in comprehensive loss as an RTO transaction cost. The fair value of the consideration in the Eco Transaction is determined by reference to the completed private placement at $0.05 per share. Accordingly, the value of the (30.82% or 24,500,000 shares) share capital owned by the former shareholders of CarbonOne Holdings at the time of the Eco Transaction was $1,225,000. The allocation of the purchase price of the reverse acquisition cost is as follows: Purchase price Shares held by former shareholders of CarbonOne Holdings 24,500,000 Share price $ 0.05 Total consideration $ 1,225,000 Fair value of net liabilities of CarbonOne Holdings prior to the RTO Cash $ 100,318 Shares subscribed (48,835) Accounts payables (215,942) Net liabilities assumed $ (164,459) Reverse acquisition cost $ 1,389,

9 2. REVERSE TAKEOVERS (continued) b) CarbonOne Holdings Acquisition 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 during the six months ended June 30, The total amount of $750,000 was repayable by CarbonOne Holdings by November 6, On May 12, 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 was 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 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

10 2. REVERSE TAKEOVERS (continued) b) CarbonOne Holdings Acquisition (continued) On July 23, 2015, the Company closed the business combination 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 in the aggregate amounts of $19,200 and 67,500 common shares of the Company were paid to arm s length finders. Upon completion of the Transaction, an additional finder s fees of 1,565,600 consolidated shares of the Company were 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. 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 7,783,406 stock options outstanding. The Resulting Issuer 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 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. Upon completion of the Transaction, the Company became the Resulting Issuer, changed its name to CarbonOne Technologies Inc., and continued trading on the TSX-V under the new trading symbol CX. Under the terms of the Transaction, the common shares of the Resulting Issuer held by individuals or entities that are principals of the Resulting Issuer were placed in escrow pursuant to the policies of the TSX-V, under the terms of a Tier 2 surplus security escrow agreement. Common shares of the Resulting Issuer that were issued to shareholders of CarbonOne Holdings pursuant to the CarbonOne Holdings acquisition were subject to additional voluntary pooling restrictions, such that 35% of the pooled shares would be released over a period of three years in 5% tranches every six months, with the first release occurring upon completion of the Transaction, and 65% of the pooled shares would be released based on the Resulting Issuer meeting cumulative gross revenue targets

11 2. REVERSE TAKEOVERS (continued) b) CarbonOne Holdings Acquisition (continued) i. CarbonOne Holdings RTO In accordance with IFRS 3, Business Combinations, the substance of the CarbonOne Holdings transaction was a reverse acquisition of a non-operating company. The transaction does not constitute a business combination since the Company does not meet the definition of a business under the standard. As a result, under IFRS the transaction is accounted for as a capital transaction with CarbonOne Holdings being identified as the acquirer and the transaction being measured at the fair value of the equity consideration issued to the Company. The fair value of the consideration in the CarbonOne Holdings Acquisition is determined by reference to the completed private placement at $0.20 per share. Accordingly, the value of the share capital owned by the former shareholders of the Company at the time of the Transaction was $1,610,921. The allocation of the purchase price of the reverse acquisition cost is as follows: Purchase price Shares held by former shareholders of Palo Duro 8,054,606 Share price $ 0.20 $ 1,610,921 Replacement share options as part of RTO 33,735 Total consideration $ 1,644,656 Fair value of net assets of CarbonOne prior to the RTO Cash 268,160 Other receivable 8,342 Prepaid 33,034 Promissory note receivable 750,000 Accounts payables (65,014) Net assets assumed $ 994,522 (650,134) Finder's fee (100,000) Reverse acquisition cost $ (750,134)

12 2. REVERSE TAKEOVERS (continued) b) CarbonOne Holdings Acquisition (continued) ii. Tapango Acquisition The acquisition of Tapango by the Company ( Acquisition ) constitutes an asset acquisition as Tapango does not meet the definition of a business, as defined in IFRS 3, Business Combinations. The Company acquired all of the issued and outstanding common shares of Tapango, being 7,803,652 common shares, by issuing common shares of the Company on a ratio of per CarbonOne share for one Tapango share. The fair value of the consideration in the Tapango Acquisition is determined by reference to the completed private placement at $0.20 per share. Accordingly, the value of the CarbonOne share capital issued to Tapango shareholders at the time of the Transaction was $1,560,730. The allocation of the purchase price of the reverse acquisition cost is as follows: Purchase price Shares issued by CarbonOne for Tapango Shares 7,803,652 Share price $ 0.20 $ 1,560,730 Replacement share-based awards issued as part of Acquisition 517,363 Total consideration $ 2,078,093 Fair value of net assets of Tapango prior to acquisition Cash 337,434 Prepaid 1,312 Promissory note receivable 780,000 Net assets assumed $ 1,118,746 (959,347) Finder's fee (213,120) Loss on acquisition $ (1,172,467) 3. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These condensed consolidated interim financial statements have been prepared in accordance with IFRS, as applicable to interim financial reports including IAS 34, Interim Financial Reporting, and should be read in conjunction with the Company s annual financial statements for the year ended December 31, 2014, which have been prepared in accordance with IFRS. These financial statements were approved by the Board of Directors for issue on November 24, The accounting policies followed in these condensed consolidated interim financial statements are consistent with those of the previous financial year

13 4. MACHINERY AND EQUIPMENT Machinery and Cost Equipment At December 31, 2013 $ 284,023 Purchases 151,272 Interest capitalized 20,000 Foreign exchange 30,371 At December 31, 2014 $ 485,666 Purchases 511,489 Cost related to research (442,996) Foreign exchange 81,978 At September 30, 2015 $ 636,137 Accumulated depreciation At December 31, 2013 $ - Depreciation - At December 31, 2014 $ - Depreciation - At September 30, 2015 $ - Total carrying value, December 31, 2013 $ 284,023 Total carrying value, December 31, 2014 $ 485,666 Total carrying value, September 30, 2015 $ 636,137 The Company did not recognize any depreciation during the period as the machinery and equipment were not ready for commercial use and were still in the construction stage. During the period ended September 30, 2015, the Company reclassified $442,996 in costs previously capitalized as equipment to research as this equipment related directly to research activities. Also $Nil interest was expensed relating to funding of construction for machinery and equipment (2014: $20,000)

14 5. RELATED PARTY TRANSACTIONS Key Management and Personnel Compensation Key management personnel include the directors and officers of the Company. Key management compensation consists of the following: September 30, 2015 September 30, 2014 Management fees $ 354,000 $ 210,000 $ 354,000 $ 210,000 During the nine-month period ended September 30, 2015, the Company accrued $264,000 in management fees owed to a private company controlled by the Chief Executive Officer and director. The Company also accrued $60,000 in management fees owed to another private company of which another director of the Company is also an officer (September 30, 2014: $Nil and $Nil respectively). These fees include administrative, finance, accounting, investor relations and management consulting services. An additional $30,000 was accrued for management fees payable to 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 current and former officers, which is included in accounts payable and accrued liabilities. As at September 30, 2015, $72,490 was owed to a private company controlled by the Chief Executive Officer and director 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 September 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. 6. LOANS On January 22, 2015, a US$50,000 ($62,500) loan was advanced to the Company by an officer of the Company. This loan bears interest at a rate of 5% per annum and accrued from the date the loan was entered into. The loan was payable at the earlier of either one year from the date of the loan or when the Company receives any equity or debt private placement financing. On May 21, 2015, this loan was converted to common shares of the Company by issuing 2,500,000 shares at $0.025 per share for $62,500. The remaining interest was written off. On February 5, 2015, a US$200,000 ($250,000) loan was advanced to the Company by a shareholder of the Company. This shareholder loan bears interest at a rate of 5% per annum and accrued from the date the loan was entered into. The loan was payable at the earlier of either one year from the date of the loan or when the Company receives any equity or debt private placement financing. On May 21, 2015, this loan was converted to common shares of the Company by issuing 10,000,000 shares at $0.025 per share for $250,000. The remaining interest was written off

15 7. CONVERTIBLE NOTE On February 25, 2013, EcoCarbon entered into a convertible note agreement with an arm s length third party to loan to EcoCarbon an amount up to US$2,000,000 with a five-year term at an interest rate of 5% per year, payable annually. The loan was convertible into 10,000,000 common shares of EcoCarbon, at the option of the lender. EcoCarbon allocated the net proceeds to the equity and liability components based on the fair value of the note using the effective interest rate method. The effective interest rate of the note was 15% with a maturity date of five years from the date of issue. The fair value of the liability component was determined to be US$1,121,249 ($1,201,573) and the equity component to be US$228,751 ($242,117). The temporary difference associated with the liability component of US$61,212 ($63,048) as deferred tax was charged to the statement of loss as a deferred tax recovery. The discount on the note was amortized using the effective interest method over a period of five years. The Company accreted the carrying value of the note each month by recognizing accretion expense in the statement of loss and comprehensive loss and a credit to convertible note. As at December 31, 2013, a total of US$1,350,000 ($1,443,690) had been loaned to the Company. During the year ended December 31, 2014, the lender advanced an additional US$650,000 ($717,180) to the Company for a total of US$2,000,000. The fair value of the liability component for these advances was determined to be US$543,478 ($599,221) and the equity component to be US$106,522 ($117,439). In March 2014, the lender exercised its right to convert the US$2,000,000 debt into 10,000,000 common shares of the Company. As a result of the conversion, $179,166 of the equity component related to the setup of the convertible debt in 2013, $117,439 of the equity component arising from the additional advances in 2014, and $56,626 of the interest portion related to these advances were converted into shares and thus reclassified from contributed surplus into share premium. For the year ended December 31, 2014, there was an accretion of the debt discount of US$9,425 ($12,507). At the date of conversion, the value of the liability component was determined to be US$1,806,285 ($1,889,122). 8. SHARE CAPITAL Authorized Capital The Company is authorized to issue an unlimited number of common shares without par value. On April 29, 2015, the Company consolidated its issued and outstanding common shares such that every 10 existing shares have been consolidated into one new share. The Company s shares have been adjusted to account for the consolidation ( the Consolidation ). Prior to the Consolidation, the Company had 89,500,000 common shares outstanding. There were no stock options and warrants outstanding. The resulting number of shares outstanding postconsolidation was 8,950,001. All comparative references to the number of shares, weighted average number of common shares and loss per share have been restated for the Consolidation. Issued Capital On August 2013, the Company issued 1,500,000 shares to certain accredited investors at the price of $0.01 per common share, for net proceeds of $15,000 which was received in On March 17, 2014, the Company issued 1,000,000 common shares to settle the convertible debt outstanding of $1,889,122 (Note 7). On October 15, 2014, on completion of the RTO, the Company held 2,450,000 common shares with an estimated total fair value of $1,225,000 at $0.50 per common share. The difference between this share-based payment and the fair value of the assets and liabilities of the Company has been recorded as a reverse acquisition transaction cost in the Company s consolidated statement of loss and comprehensive loss in the fourth quarter of

16 8. SHARE CAPITAL (continued) Issued Capital (continued) On October 15, 2014, the Company issued 1,000,000 common shares at $0.50 in a non-brokered private placement for total consideration of $500,000. 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 business combination 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 in the aggregate amounts of $19,200 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 was paid. On July 23, 2015, concurrent with the closing of the Transaction, the Company 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. Following completion of the Transaction on July 23, 2015, the Company issued 8,054,606 and 7,803,652 outstanding shares to former shareholders of CarbonOne and Tapango, respectively. Loss per Share Loss per share calculations use the basic and diluted weighted average number of common shares outstanding for the period ending September 30, 2015, which was 36,430,361 for both basic and diluted. Share Options The Company grants share options in accordance with its share option plan and the policies of the TSX-V. The number of shares reserved for issuance under the plan shall not exceed 10% of the issued and outstanding common shares of the Company. The terms of the option, including the vesting terms and the option price, are fixed by the directors at the time of grant subject to the price not being less than the market price of the Company s shares on the date of grant. The share options granted are exercisable for a period of up to 5 years. Pursuant to the Transaction, all of the outstanding former CarbonOne Stock Options were consolidated on a 4:1 basis. As a result, these CarbonOne options now have an expiry date of July 23, 2016 with an exercise price of $0.40. All other terms and conditions of the stock options remained unchanged from previous Company grants. Tapango Stock Options were exchanged for the Company s options on July 23, 2015 whereby each Tapango Option holder received CarbonOne Options with an exercise price of $0.47 for each one Tapango Stock Option held

17 8. SHARE CAPITAL (continued) A summary of the Company s outstanding share options granted upon the close of the Transaction on July 23, 2015 is presented in the following table: Number of Options Exercise Price Expiry Date CarbonOne Options 6,825,000 $ 0.20 July 22, 2020 Replacement Palo Duro Options 300,000 $ 0.20 July 23, 2016 Replacement Palo Duro Options 112,500 $ 0.40 March 27, 2017 Options - Palo Duro director 125,000 $ 0.20 July 22, 2020 Replacement Tapango Options 420,906 $ 0.47 July 22, 2020 Total outstanding at September 30, ,783,406 $ 0.22 Number of options exercisable at September 30, ,166,191 $ 0.22 The average remaining contractual life of the options is 4.81 years Option pricing models require the input of subjective assumptions including the expected price volatility and expected option life. Management has calculated expected price volatility using data from the Company s share price history. Changes in underlying assumptions can materially affect the fair value estimates. The following weighted average assumptions were used for the Black-Scholes valuation of share options granted during the period ended September 30, 2015: September 30, 2015 Risk-free interest rate 0.59% Expected life of options (in years) Annualized volatility % % Share price $0.20 Fair value of options granted $ $0.16 Forfeiture rate - Dividend rate

18 8. SHARE CAPITAL (continued) Share Purchase Warrants As part of the Transaction, all of the outstanding Tapango Warrants were exchanged for the Company s Warrants on July 23, 2015 whereby each Tapango Warrant holder received CarbonOne Warrants with an exercise price of $0.19 for each Tapango Warrant held. On July 23, 2015, the Company issued 3,569,998 share purchase warrants which have an expiry date of March 24, As at September 30, 2015, these warrants had a weighted average exercise price of $0.19 and years remaining in warrant contractual life. Warrant pricing models require the input of subjective assumptions including the expected price volatility and expected option life. Management has calculated expected price volatility using data from the Company s share price history. Changes in underlying assumptions can materially affect the fair value estimates. The following weighted average assumptions were used for the Black-Scholes valuation of share purchase warrants granted during the period ended September 30, 2015: September 30, 2015 Risk-free interest rate 0.59% Expected life of warrants (in years) Annualized volatility % Share price $0.20 Fair value of warrants granted $0.06 Forfeiture rate - Dividend rate - 9. NON-CONTROLLING INTEREST The Company has an 80% interest in C1 Pultrusions LLC ( C1 Pultrusions ), a manufacturing company incorporated in Delaware for the purpose of research, development and production of high performance construction and manufacturing materials. CarbonOne Holdings owns 80% of C1 Pultrusions, with the remaining 20% of C1 Pultrusions equity and total comprehensive loss allocated to the non-controlling interest. The non-controlling interest is composed of the following amounts: Set up of 20% of non-controlling interest $ 107 Non-controlling interests' share of C1 Pultrusions' loss (709) Foreign exchange translation (26) Balance, December 31, 2014 $ (628) Non-controlling interests' share of C1 Pultrusions' loss (21,702) Foreign exchange translation 1,717 Balance, September 30, 2015 $ (20,613)

19 10. 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 was required to pay US$200,000 to maintain exclusivity. This minimum investment amount has been paid by the Company. In addition, the Company must pay a royalty of 5% of net sales of licensed products that are sold commercially. There are annual minimum royalties to retain exclusivity once a licensed product reaches profitability. This has not yet been achieved. The annual minimum royalties are as follows: Period after reaching profitability Annual minimum royalty payable (US$) 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 US$2,000,000 payable in cash or common shares of the Company. b) By agreement dated June 10, 2015 for the license agreement with United Materials Inc. ( 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

20 10. COMMITMENTS (continued) The following is a summary of the minimum expenditure amounts, minimum royalties payable and buyout amounts: Licensed Technology 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 $120,000 $240,000 $480,000 $840,000 $3,000,000 Panel January 23, Machine 2016 (used) $125,000 $Nil $Nil $Nil $Nil $Nil $Nil Panel Machine (new) July 23, 2017 $750,000 $120,000 $600,000 $1,200,000 $2,400,000 $4,200,000 $25,000,000 Microwave N/A $Nil $48,000 $240,000 $480,000 $960,000 $1,680,000 $5,000,000 Pump N/A $Nil $Nil $Nil $Nil $Nil $Nil $1,500,000 Spray Dryer July 23, 2017 $125,000 $18,000 $90,000 $180,000 $360,000 $630,000 $1,000,000 Milling July 23, 2017 $75,000 $42,000 $210,000 $420,000 $840,000 $1,470,000 $10,000,000 Reactor Thermal Conversion Reactor January 23, 2018 Fiber Spinner January 23, 2018 Software January 23, 2018 Armor April 23, FINANCIAL INSTRUMENTS $150,000 $48,000 $240,000 $480,000 $960,000 $1,680,000 $10,000,000 $250,000 $18,000 $90,000 $180,000 $360,000 $630,000 $3,000,000 $150,000 $18,000 $90,000 $180,000 $360,000 $630,000 $3,000,000 $45,000 $30,000 $150,000 $300,000 $600,000 $1,200,000 $7,500,000 The classification, carrying amounts and fair values of financial instruments are as follows: September 30, 2015 December 31, 2014 Carrying amount Fair value Carrying amount Fair value Cash and receivables Cash 1,302,310 1,302, , ,282 Receivables 52,600 52,600 3,900 3,900 Other financial liabilities Accounts payable and accrued liabilities 400, ,132 1,514,705 1,514,705 Loans , ,000 The Company s financial instruments consist of cash, receivables, accounts payable and loans. The carrying amount of cash, receivables, accounts payable and loans on the statement of financial position approximate their fair value because of the limited term of these instruments except for cash