Management s Discussion and Analysis For the three and nine months ended September 30, 2018 and 2017

Transcription

1 Management s Discussion and Analysis For the three and nine months ended September 30, 2018 and 2017

2 MANAGEMENT S DISCUSSION AND ANALYSIS This Management s Discussion and Analysis ( MD&A ) of Targeted Microwave Solutions Inc. (the Company ) provides analysis of the Company s financial results for the period ended September 30, The following information should be read in conjunction with the accompanying condensed interim consolidated financial statements and notes for the period ended September 30, 2018 prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, and the audited consolidated financial statements and accompanying notes for the year ended December 31, These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The Board of Directors of the Company have approved the information and disclosures contained in this MD&A. This MD&A is dated as at November 29, 2018, and as of this date, there were 113,024,439 common shares issued and outstanding, 2,965,000 stock options outstanding and no warrants outstanding. All figures are in United States dollars unless otherwise noted. References to "C$" are to Canadian dollars. Additional information relating to the Company is available on SEDAR at FORWARD-LOOKING STATEMENTS Except for statements of historical fact contained herein, the information presented in this MD&A constitutes "forward-looking statements" or "information" (collectively "forward-looking statements"). These statements relate to analyses and other information that are based upon forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as "expects" or "does not expect", "is expected", "anticipates" or "does not anticipate", "plans", "estimates" or "intends", or stating that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved) are not statements of historical fact and may be "forward-looking statements". Such forward-looking statements include, but are not limited to, those with respect to: the benefits of and development and commercialization, if at all, of the Company s microwave technology; financial information regarding the Company and/or its availability and use of funds; the Company s research into the drying potential of its microwave application to natural mineral aggregates, other naturally occurring raw materials and processed feedstock; demand for electricity generation; the status of environmental and other regulation; the timing, completion or benefits of any joint venture or similar arrangement; the effectiveness of new improvements in the Company s Generation 2.0 reactors and the Company s new Generation 3.0 reactors; and other factors and events described herein. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual plans, results, performance or achievements of the Company to be materially different from any future plans, results, performance or achievements expressed or implied by such forward-looking statements. Such risks and other factors include, among others: limited operating history; financing risks; shareholder influence; technical issues and delays; commercial viability of processed industrial materials; negative results of technology testing and development; commercial acceptance; construction of commercial plants; management of growth; joint ventures; relationships with strategic partners; foreign operations; foreign subsidiaries and repatriation of earnings; technology and protection of intellectual property; invalidation of patents; intellectual property infringement; environmental and safety regulations and risks; dependence on key management personnel, employees and consultants; anti-bribery and anti-corruption; capital cost estimates; increased demand for services and equipment; competition; currency fluctuations; natural and human caused disasters; litigation; possible conflicts of interest of directors and officers of the Company; market price and listing of common shares; regulatory risks; tax exposures; changes in laws and regulations; uninsurable risks; current global financial conditions; and other factors discussed under the heading "Risk Factors" in the Company s MD&A for the year ended December 31, Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements contained in this MD&A. Page 2

3 Forward-looking statements are made based upon Management's beliefs, estimates and opinions on the date the statements are made, and the Company undertakes no obligation to update any forward-looking statement if these beliefs, estimates and opinions or other circumstances should change, except as may be required by applicable law. COMPANY BACKGROUND AND DESCRIPTION OF THE BUSINESS The Company is a microwave process developer specializing in clean emission, high-throughput industrial drying solutions. Industrial drying is a vital manufacturing process used by heavy industry to transform bulk aggregates such as minerals, biomass and fossil fuels into finished commercial products. The prevailing industrial drying technology in the market today is the fossil-fuel combustion rotary kiln. This technology generates heat by combusting fossil fuels such as coal, bunker fuel and natural gas, which results in the production of polluting carbon emissions. It is generally accepted that increasingly stringent environmental regulations are having a dramatic impact on the competitiveness and profitability of the industrial sector worldwide. The Company believes that the market for a clean emission, digital drying technology represents a global economic opportunity. The Company s microwave drying technology represents a challenge to the dominance of fossil-fuel combustion dryers in the market. Unlike rotary kilns for example, the Company s drying technology generates minimal to no fossil fuel combustion emissions. Instead, the Company uses digital microwave heating processes within a proprietary, vertical chamber system, to dry industrial materials on a continuous basis being developed to perform at a high throughput capacity. The Company believes that its technology has the potential to deliver a safer, higher efficiency and more controllable drying process that will allow the heavy industrial sector to challenge the mainstream narrative that large-scale industry is incompatible with responsible, environmental policy. The core of the Company s technology is a proprietary microwave delivery and process control system designed to achieve uniform moisture reduction across a wide range of industrial aggregates, including those with challenging bulk densities, particle sizes and flow characteristics. Unlike conventional thermal drying technologies, the Company s process generates heat within the input material, as opposed to wasting energy by first heating the environment around the target material. This unique approach allows for significantly cooler ambient temperatures during processing, which helps substantially mitigate combustion risk and prevents the unwanted release of volatile gases that generate polluting greenhouse emissions. In initial continuous trials conducted at the Company s former commercial demonstration facility in King William, Virginia (the "King William Plant"), the Company s system has shown heat transfer efficiency rates better than competing conventional thermal drying technologies. Additionally, the Company s microwave drying solutions use power only when needed and can be turned on or off almost instantaneously, making the process compatible for automatic control and real-time calibration based on key control factors, such as moisture targets, microwave power levels and feed rate. The Company s current "Generation 3.0" system, which was previously installed at the King William Plant in November 2016, is designed to occupy a small footprint and integrate easily into a variety of manufacturing operations and can deliver up to 2,500 kilowatts of concentrated gigahertz microwave power to a variety of target feedstocks (such as industrial minerals, low-rank coal and wood chips) on a continuous feed basis. Despite its light-industrial characteristics, the Company s Generation 3.0 system can achieve processing throughput rates traditionally associated with heavy industrial equipment by utilizing a proprietary vertical processing design and in-house processing controls software. The Company has run a variety of processing trials of low-rank coal, wood biomass, and industrial clay and aims to work with industry partners in an effort to commercialize its technology. Currently, the Company has suspended all operations, disposed the King William Plant (including all research and testing at that site), closed its U.S. offices and has terminated all employee personnel. Due to the Company s current challenges, in 2018, the Company will continue to prioritize the restructuring and settlement of the Company's debt and liabilities. As part of this process, securing access to capital will continue to drive the Company's decision-making process with respect to go-forward business opportunities. Page 3

4 In 2018 the Company will be looking outside its traditional core focus area of microwave drying in order to pursue potential sources of revenue and funding partners. SIGNIFICANT ACCOUNTING POLICIES A complete summary of the Company s significant accounting policies is provided in the consolidated financial statements for the year ended December 31, The accounting policies in the unaudited condensed interim consolidated financial statements for the nine months ended September 30, 2018 are consistent with those applied in the consolidated financial statements for the year ended December 31, CRITICAL JUDGEMENTS AND ESTIMATES The preparation of the condensed interim consolidated financial statements requires that the Company s Management to make assumptions and estimates of effects of uncertain future events on carrying amounts of the Company s assets and liabilities at the end of the reporting period. Actual future outcomes could differ from present estimates and assumptions, potentially having material future effects on the Company s consolidated financial statements. Estimates are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company s assets and liabilities are accounted for prospectively. The Company is also required to make critical judgements in applying certain accounting policies. The critical judgements and estimates applied in the preparation of the Company s condensed interim consolidated financial statements for the nine months ended September 30, 2018 are consistent with those applied and disclosed in its audited consolidated financial statements for the year ended December 31, SIGNIFICANT DEVELOPMENTS IN THE THREE MONTHS ENDED SEPTEMBER 30, 2018 During the three months ended September 30, 2018, the Company continued its efforts to re-structure the Company and formulate potential go-forward strategies for the Company. RESULTS OF OPERATIONS: THREE AND NINE-MONTH RESULTS The table below summarizes selected financial information from the Company s condensed interim consolidated financial statements for the three and nine-month period ended September 30, 2018, compared to the three and nine months ended September 30, Three months ended Sep 30 Nine months ended Sep $ $ $ $ Operating expenses 87, , ,463 3,275,887 Other expenses - 338,623 12,228 2,905,458 Net loss and comprehensive loss 87, , ,691 6,181,345 Net loss attributable to shareholders of the 87, , ,691 6,174,820 company Loss per share (0.00) (0.01) (0.00) (0.13) During the nine months ended September 30, 2018, the Company s primary focus was on reducing Company overhead, negotiating the settlement pertaining to the Company s King William Plant assets, pursuing financing options and formulating potential go-forward strategies for the Company. Research and technology development costs are included in various expense line items included in the Company s condensed interim consolidated financial statements. Research and development costs during the nine months ended September 30, 2018 and 2017 was approximately $nil and $1,408,000, respectively. These costs in the prior year primarily consisted of facility related costs, compensation for technical staff and Page 4

5 operating supplies at both the Virginia and Maryland offices. Research and technology development costs were not capitalized or deferred as at September 30, 2018 and Operating Expenses Operating expenses for the three and nine-month period ended September 30, 2018 compared to the three and nine months ended September 30, 2017 are as follows: Three months ended Sep 30 Nine months ended Sep $ $ $ $ Site supplies, services and other - 19,403 (7,560) 224,836 Plant and equipment depreciation - 55, ,817 Consulting, management and director fees 31,000 92,439 83, ,402 Foreign exchange loss (gain) - 5,194 (3,518) (7,083) Office, rent and other 20,289 64,918 57, ,407 Investor relations, filing and compliance fees 7,351 10,872 37, ,874 Professional fees 2,450 24,356 (20,290) 221,284 Salaries and benefits ,857 Share-based compensation 397 (149,293) 2, ,827 Interest expense 25, ,735 43, ,557 Travel and promotion - 1,666-81,109 Total 87, , ,463 3,275,887 Site Supplies, Services and Other Site supplies, services and other expenses decreased by $19,403 to $nil for the three-month period ended September 30, 2018 from $19,403 for the comparable period in Site supplies, services and other expenses decreased by $232,396 to $(7,560) for the nine-month period ended September 30, 2018 from $224,836 for the comparable period in The decrease in site supplies, services and other expenses for the three and nine months ended September 30, 2018 compared to the same periods last year is attributable to the King William Plant operational expenses which was not in operation during the nine months ended September 30, The Company suspended operations of the King William Plant during the period ended September 30, Operations and testing at the King William Plant have not resumed since that time. The $(7,560) benefit recognized in the nine months ended September 30, 2018 relates to the reversal of King William site expenses that were accrued in the prior year. Plant and Equipment Depreciation Plant and equipment depreciation decreased by $55,464 to $nil for the three-month period ended September 30, 2018 from $55,464 for the comparable period in Plant and equipment depreciation decreased by $424,817 to $nil for the nine-month period ended September 30, 2018 from $424,817 for the comparable period in The decrease in plant and equipment depreciation for the three and nine months ended September 30, 2018 compared to the same periods last year is primarily attributable to a reduced asset balance subject to depreciation after the recognition of the impairment losses on the King William Plant. During the period ended June 30, 2018, the King William Plant was disposed, and prior to disposal, the remaining classes of depreciable property and equipment (i.e. plant and equipment assets) had no remaining useful life with the remaining balance representing the asset s residual value. Consulting, Management and Director Fees Consulting, management and director fees decreased by $61,439 to $31,000 for the three-month period ended September 30, 2018 from $92,439 for the comparable period in Consulting, management and director fees decreased by $495,902 to $83,500 for the nine-month period ended September 30, 2018 from $579,402 for the comparable period in The decrease in these fees for the three and nine months ended September Page 5

6 30, 2018 compared to the same periods last year is primarily attributable to a reduction in the Company s executive consulting fees (i.e. fees paid to the CFO, COO and CTO) that were not incurred in the period ended September 30, This decrease in 2018 was further impacted by the forfeiture of previously accrued CEO compensation and the forfeiture of previously accrued Board of Director compensation effective December 31, 2017 (these expenses were not reversed during the period ended September 30, 2017). Foreign Exchange Loss (Gain) The foreign exchange loss decreased by $5,194 to $nil for the three-month period ended September 30, 2018 from a loss of $5,194 for the comparable period in The foreign exchange gain decreased by $3,565 to $(3,518) for the nine-month period ended September 30, 2018 from a gain of $(7,083) for the comparable period in The change in the foreign exchange losses and gains for the three and nine months ended September 30, 2018 compared to the periods in the prior year is primarily attributable to the change in the Canadian/U.S. foreign exchange rates on vendor balances owing, as well as Canadian dollar denominated bank balances and the sales tax receivable balance. Office, Rent and Other Office, rent and other expenses decreased by $44,629 to $20,289 for the three-month period ended September 30, 2018 from $64,918 for the comparable period in Office, rent and other expenses decreased by $292,919 to $57,488 for the nine-month period ended September 30, 2018 from $350,407 for the comparable period in The decrease in these expenses for the three and nine months ended September 30, 2018 compared to the same periods last year is due to decreased spending in office expenses and overhead (e.g. telephone, cell phones, office supplies, head office rent, lease for the King William site, internal accounting and bookkeeping). This decreased spending in 2018 was also the result of suspended operations, elimination of Company staff and closure of the Gaithersburg, Maryland research and development office which occurred after the period ended September 30, Investor Relations, Filing and Compliance Fees Investor relations, filing and compliance fees decreased by $3,521 to $7,351 for the three-month period ended September 30, 2018 from $10,872 for the comparable period in Investor relations, filing and compliance fees decreased by $94,588 to $37,286 for the nine-month period ended September 30, 2018 from $131,874 for the comparable period in The decrease in these fees for the three and nine months ended September 30, 2018 compared to the same periods last year is primarily attributable to additional expenses pertaining to a Canadian investor relations campaign, which occurred during the nine months ended September 30, 2017 and overall reduced spending on investor relations in Professional Fees Professional fees decreased by $21,906 to $2,450 for the three-month period ended September 30, 2018 from $24,356 for the comparable period in Professional fees decreased by $241,574 to a benefit of $(20,290) for the nine-month period ended September 30, 2018 from $221,284 for the comparable period in The decrease in these fees for the three and nine months ended September 30, 2018 compared to the same periods last year is primarily attributable to decreased legal fees associated with the Company s general corporate matters and decreased patent expense fees. The benefit recognized in the nine months ended September 30, 2018 of $(20.290) relates primarily to the reversal of legal fees that were recognized in the prior year. Salaries and Benefits Salaries and benefits remained unchanged at $nil for the three-month period ended September 30, 2018 compared to the same period in Salaries and benefits decreased by $424,857 to $nil for the nine-month period ended September 30, 2018 from $424,857 for the comparable period in The decrease in these expenses for the nine months ended September 30, 2018 compared to the same period last year is attributable to the elimination of all salaried positions in the Company s Gaithersburg, Maryland office that occurred in Page 6

7 Share-Based Compensation Share-based compensation increased by $149,690 to $397 for the three-month period ended September 30, 2018 from a benefit of $(149,293) for the comparable period in Share-based compensation decreased by $382,155 to $2,672 for the nine-month period ended September 30, 2018 from $384,827 for the comparable period in The change in the share-based compensation for the three and nine months ended September 30, 2018 compared to the same periods last year is attributable to the number of instruments granted in a period, the fair value of those instruments and the vesting terms. There were no options granted in 2018 with 12,500 options that vested in the nine months ended September 30, Interest Expense Interest expense decreased by $114,927 to $25,808 for the three-month period ended September 30, 2018 from $140,735 for the comparable period in Interest expense decreased by $415,672 to $43,885 for the nine months ended September 30, 2018 from $459,557 for the comparable period in The decrease in interest expense for the three and nine months ended September 30, 2018 compared to the same periods in the prior year is primarily attributable to the conversion of SOHL s and Dr. James Young s loan balances as at December 31, 2017 which resulted in a lower loan balance subject to interest in The loans payable balance held by Dr. James Young was approved to be converted into 26,369,601 common shares, however the common shares have not yet been physically issued as at September 30, 2018 (refer to Subsequent Events below). Travel and Promotion Travel and promotion expenses decreased by $1,666 to $nil for the three-month period ended September 30, 2018 from $1,666 for the comparable period in Travel and promotion expenses decreased by $81,109 to $nil for the nine-month period ended September 30, 2018 from $81,109 for the comparable period in The decrease in these fees for the three and nine months ended September 30, 2018 compared to the same periods last year is attributable to decreased business development expenses and general corporate travel incurred in the current year. Other Expenses (Income) Other expenses (income) for the three and nine-month period ended September 30, 2018 compared to the three and nine months ended September 30, 2017 are as follows: Three months ended Sep 30 Nine months ended Sep $ $ $ $ Interest income - (84) - (96) Other income (25,536) Fair value change in derivative liability - (133) (7,772) (38,819) Loss on disposal of assets ,000 - Impairment loss on plant and related assets - 338,840-2,969,909 Total - 338,623 12,228 2,905,458 Other expenses decreased by $338,623 to $nil for the three-month period ended September 30, 2018 from $338,623 for the comparable period in Other expenses decreased by $2,893,230 to $12,228 for the nine-month period ended September 30, 2018 from $2,905,458 for the comparable period in The decrease in other expenses for the three and nine months ended September 30, 2018 compared to the same periods last year is primarily attributable to the recognition of an impairment loss on the Company s King William Plant and related assets and the difference in the fair value change of the derivative liability. This decrease was partially offset by the loss on disposal recognized on the King William Plant and related assets recognized in the current year and the receipt of a GST settlement in 2017 (recognized as other income in 2017). Page 7

8 Net Loss Due to the factors set forth above, net loss decreased by $517,082 to $87,295 for the three months ended September 30, 2018 from $604,377 in the comparable period last year. For the nine months ended September 30, 2018, net loss decreased by $5,975,654 to $205,691 from $6,181,345 for the same nine-month period last year. Net Loss Attributable to Shareholders of the Company Due to the factors set forth above, net loss attributable to shareholders of the Company decreased by $516,323 to $87,295 for the three months ended September 30, 2018 from $603,618 for the comparable period last year. For the nine months ended September 30, 2018, net loss attributable to shareholders of the Company decreased by $5,969,129 to $205,691 from $6,174,820 for the same nine-month period last year. Net Loss Attributable to Non-Controlling Interests The net loss attributable to non-controlling interests for the three and nine months ended September 30, 2018 was $nil and $nil, respectively, for the 49% non-controlling interest in Targeted Microwave Solutions Hong Kong Limited not held by the Company s shareholders. QUARTERLY INFORMATION The following table presents the unaudited summarized financial information for the last eight quarters: Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 F2018 F2018 F2018 F2017 F2017 F2017 F2017 F2016 $ $ $ $ $ $ $ $ Operating expenses 87,295 52,242 53, , ,754 1,419,846 1,590,287 1,639,625 Other expenses - 15,875 (3,647) 324, ,623 2,596,388 (29,553) 932,431 Loss before income taxes 87,295 68,117 50, , ,377 4,016,234 1,560,734 2,572,056 Income Taxes Net loss 87,295 68,117 50, , ,377 4,016,234 1,560,734 2,572,056 Non-controlling interest ,114 2,652 34,245 Net loss attributable to shareholders of the Company 87,295 68,117 50, , ,618 4,013,120 1,558,082 2,537,811 Loss per Share (0.00) (0.00) (0.00) (0.01) (0.01) (0.09) (0.03) (0.07) The quarterly fluctuations in net loss are generally correlated to the level of activities related to the construction, testing and commissioning of the King William Plant, as well as new technology design, fabrication, installation and Company staffing requirements. Net loss is also impacted by the non-cash fluctuations in the fair value of derivative liabilities in the period, non-cash impairment losses, share based compensation and the Company s corporate costs associated with investor relations and executive compensation (among other operating expenses). LIQUIDITY AND CAPITAL RESOURCES The Company generally manages its liquidity risk by preparing cash flow forecasts and anticipating investing and financing activities. Management and the Board are involved in the review, planning and approval of budgets and significant expenditures and commitments (refer to section below on liquidity risk). As at September 30, 2018, the Company had a consolidated cash balance of $7,624 (December 31, $1,445). At present, the Company is actively seeking additional financing in the form of debt or equity (or both) to fund potential go forward options and to settle existing obligations. Should the Company be unsuccessful in raising funds, it may not be able to fund future growth or satisfy the existing financial obligations as noted in note 2(b) of the condensed interim consolidated financial statements. Page 8

9 On March 27, 2018, the loans payable balance held by SOHL, representing a total balance of $1,616,543 was converted into common shares at the lowest price permitted by the TSX-V. This resulted in the issuance of 39,834,828 common shares at a share price of C$0.05. The US dollar to Canadian dollar foreign exchange rate used for this transaction was The loans payable balance held by Dr. James Young, representing a total balance of $1,070,107 as at December 31, 2017, was approved to be converted into 26,369,601 common shares, however the common shares have not yet been physically issued as at September 30, 2018 (refer to Subsequent Events below). This conversion was at the lowest price permitted by the TSX-V (share price of C$0.05) consistent with the foreign exchange rate applied to SOHL s loan conversion noted above. Cash Flows The table below sets forth a summary of cash flow activity and should be read in conjunction with the Company s cash flow statements: Three months ended Sep 30 Nine months ended Sep $ $ $ $ Cash outflow from operating activities (125,751) (67,817) (405,046) (1,566,815) Cash outflow from investing activities (52,428) Cash inflow from financing activities - 65, , ,000 Increase (decrease) in cash during the period (125,751) (2,817) 6,179 (1,204,243) Cash, beginning of period 133,375 24,847 1,445 1,226,273 Cash, end of period 7,624 22,030 7,624 22,030 The cash flow deficit from operating activities increased by $57,934 to $(125,751) for the three months ended September 30, 2018 from $(67,817) for the same comparable period last year. The cash flow deficit from operating activities for the nine months ended September 30, 2018 improved by $1,161,769 to $(405,046) compared to $(1,566,815) for the nine months ended September 30, The cash flow deficit from operating activities represents cash flows from net losses, excluding expenses not affecting cash, principally depreciation, accrued interest, share-based compensation expense, accretion expense and other finance expenses in addition to net changes in non-cash balances relating to operations. Cash used for investing activities were $nil and $nil for the three months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018 and 2017, the Company did not invest in the acquisition of plant and equipment. Cash used for investing activities for the nine months ended September 30, 2018 and 2017, were $nil and $52,428, respectively. During the nine months ended September 30, 2018 and 2017, the Company invested $nil and $52,428 in the acquisition of plant and equipment. Cash flows generated from financing activities were $nil and $65,000 for the three months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2017, the Company received $65,000 in loan proceeds from related parties for working capital purposes. Cash flows generated from financing activities for the nine months ended September 30, 2018 and 2017, were $411,225 and $415,000, respectively. During the nine months ended September 30, 2018, the Company received $425,000 in loan proceeds from related parties for working capital purposes which was reduced by share-issuance costs of $13,775. During the nine months ended September 30, 2017, the Company received $415,000 in loan proceeds from related parties. TRANSACTIONS WITH RELATED PARTIES The Company's related parties include its subsidiaries and key management personnel. At September 30, 2018, the Company owed a total of $3,000 to directors (December 31, $nil). Effective July 1, 2017, Dr. James Young, CEO, will no longer be receiving compensation for his services in the form of common shares. Under the original compensation agreement, the majority of the CEO s compensation was to be issued in Company common shares, payable monthly based on the volume-weighted average trading price of the Company s shares. Page 9

10 The Company received loans from related parties and owed a total of $1,512,995 of principal and accrued interest at September 30, 2018 (December 31, $2,686,650). FINANCIAL INSTRUMENTS RISK AND EXPOSURE The Company s risks related to financial instruments, including credit risk, liquidity risk, currency risk and interest rate risk, including the Company s strategy to manage those risks, are described in note 15 of the Company s consolidated financial statements for the year ended December 31, As at the date hereof, the Company believes that there were no significant changes to those risks during the three and nine months ended September 30, Further, the Company s interest rate risk primarily pertains to its loans with related parties. Liquidity Risk The Company manages its liquidity risk by preparing and reviewing forecasted expenditure and cash flow budgets. As noted above, the Company had a consolidated cash balance of $7,624 as at September 30, 2018 (December 31, $1,445) with a working capital deficit of $1,510,156 (December 31, 2017 working capital deficit of $3,274,020). This working capital deficit balance includes the Company s current loan payable balance of $1,496,605 as at September 30, 2018, of which $1,070,107 in related party loans will be converted to equity (refer to Subsequent Events below). As such, the Company is exposed to liquidity risk. In order to address this liquidity risk, the Company is actively seeking additional financing in the form of debt or equity (or both). Should the Company be unsuccessful in raising funds, it may not be able to satisfy its existing financial obligations or fund future growth. The Company s current ongoing working capital requirements have been significantly reduced due to the implementation of the cost reduction strategy and the further elimination of Company staff. The following table summarizes the remaining contractual maturities of the Company's financial obligations as at September 30, 2018: Within 1 year 2 to 5 years Over 5 years September 30, 2018 December 31, 2017 Accounts payable and accrued liabilities $ 54,881 $ - $ - $ 54,881 $380,553 Loan repayments 1,496, ,496,605 2,686,650 $1,551,486 $ - $ - $1,551,486 $3,067,203 Currency Risk During the nine months ended September 30, 2018 and 2017, the Company recognized a net foreign exchange (gain) of ($3,518) and $(7,083), respectively. The Company s net foreign currency exposures at September 30, 2018 have remained relatively consistent with the December 31, 2017 year-end and are primarily related to Canadian dollar cash balances, Canadian dollar sales tax receivables and Canadian dollar accounts payable. As such, as at September 30, 2018, the Company does not have significant assets or liabilities denominated in foreign currencies, which will not result in significant currency risk. OTHER RISKS FACTORS AND UNCERTAINTIES A comprehensive discussion of risk factors is included in the Company s MD&A for the year ended December 31, 2017, a copy of which is available on SEDAR at OFF-BALANCE SHEET ARRANGEMENTS As at September 30, 2018 the Company did not have any off-balance sheet arrangements. Page 10

11 SUBSEQUENT EVENTS On October 29, 2018, the Company secured an additional loan of $56,000 from SOHL to provide short-term working capital. In connection with this loan, the previous loan agreement from SOHL was amended. The amended loan agreement increases the aggregate principal amount under the loan to $481,000. The loan matures on December 31, 2018 and accrues interest at 8% per annum from the date of advance of the loan, calculated semi-annually. On November 1, 2018, Gurminder Sangha was appointed as CEO and Director of the Company. Dr. James Young announced his resignation as CEO, Interim CFO and Director of the Company, effective November 1, On November 1, 2018, the Company issued 26,369,601 common shares at a deemed price per share of C$0.05 in satisfaction of the proposal approved by the TSX-V on February 16, 2018 to settle the outstanding debt owing to Dr. Young in the amount of $1,070,107 (C$1,318,480). Following this issuance, the total issued and outstanding number of common shares of the Company increased to 113,024,439. On November 1, 2018, SOHL transferred and assigned the total balance of SOHL s loans ($499,326 including accrued interest) by way of a private debt assignment transaction. Page 11