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EX-31.1 - METHES ENERGIES INTERNATIONAL LTDex31-1.htm
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EX-32.1 - METHES ENERGIES INTERNATIONAL LTDex32-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended August 31, 2015

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-35652

 

METHES ENERGIES INTERNATIONAL LTD.

(Exact name of registrant as specified in its charter)

 

NEVADA   71-1035154
(State of other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

3651 Lindell Road, Suite D-272, Las Vegas, Nevada, 89103

(Address of principal executive offices)

 

(702) 932-9964

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

As of October 15, 2015, the registrant has 13,860,431 shares of Common Stock issued and outstanding.

 

 

 

   
 

  

METHES ENERGIES INTERNATIONAL LTD.

 

FORM 10-Q

 

INDEX

 

      Page No.
     
PART I FINANCIAL INFORMATION    
       
ITEM 1. Condensed Consolidated Financial Statements - Unaudited   1
       
  Condensed Consolidated Balance Sheets as of November 30, 2014 and August 31, 2015   1
  Condensed Consolidated Statements of Operations for the Three and Nine Months ended August 31, 2014 and 2015   2
  Condensed Consolidated Statements of Stockholders’ Equity for the Year ended November 30, 2014 and the Nine Months ended August 31, 2015   3
  Condensed Consolidated Statements of Cash Flows for the Nine Months ended August 31, 2014 and 2015   4
  Notes to Condensed Consolidated Financial Statements   5
       
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
       
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk   26
       
ITEM 4. Controls and Procedures   26
       
PART II OTHER INFORMATION    
       
ITEM 6. Exhibits   27

 

 ii 
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This Form 10-Q contains “forward looking information” within the meaning of applicable securities laws. Such statements include, but are not limited to, statements with respect to the Company’s beliefs, plans, strategies, objectives, goals and expectations, including expectations about the future financial or operating performance of the Company and its projects, capital expenditures, capital needs, government regulation of the industry, environmental risks, limitations of insurance coverage, and the timing and possible outcome of regulatory matters, including the granting of patents and permits. Words such as “expect,” “anticipate,” “intend,” “attempt,” “may,” “will,” “plan,” “believe,” “seek,” “estimate” and variations of such words and similar expressions are intended to identify such forward looking information. These statements are not guarantees of future performance and involve assumptions, risks and uncertainties that are difficult to predict.

 

These statements are based on and were developed using a number of factors and assumptions including, but not limited to: stability in the U.S. and other foreign economies; stability in the availability and pricing of raw materials, energy and supplies; stability in the competitive environment; the continued ability of the Company to access cost effective capital when needed; and no unexpected or unforeseen events occurring that would materially alter the Company’s current plans. All of these assumptions have been derived from information currently available to the Company including information obtained by the Company from third party sources. Although management believes that these assumptions are reasonable, these assumptions may prove to be incorrect in whole or in part. As a result of these and other factors, actual results may differ materially from those expressed, implied or forecasted in such forward looking information, which reflect the Company’s expectations only as of the date hereof.

 

Factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward-looking information include risks associated with general business, economic, competitive, political and social uncertainties; risks associated with changes in project parameters as plans continue to be refined; risks associated with failure of plant, equipment or processes to operate as anticipated; risks associated with accidents or labor disputes; risks associated in delays in obtaining governmental approvals or financing, or in the completion of development or construction activities; risks associated with financial leverage and the availability of capital; risks associated with the price of commodities and the inability of the Company to control commodity prices; risks associated with the regulatory environment within which the Company operates; risks associated with litigation including the availability of insurance; and risks posed by competition. These and other factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward looking information are discussed in more detail in Item 1A under “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended November 30, 2014, as may be supplemented or amended from time to time and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 in this document.

 

The Company does not intend to, and the Company disclaims any obligation to, update any forward-looking information (including any financial outlooks), whether written or oral, or whether as a result of new information, future events or otherwise, except as required by law.

 

All references in this Form 10-Q to “Company,” “Methes,” “we,” “us,” or “our” refer to Methes Energies International Ltd. and its wholly owned subsidiaries Methes Energies Canada Inc. and Methes Energies USA Ltd. unless the context otherwise indicates.

 

We have rights to the trademarks Methes Energies and Design, Methes, The Biodiesel Company and Denami.

  

 iii 
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

 

METHES ENERGIES INTERNATIONAL LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) AS OF NOVEMBER 30, 2014 AND AUGUST 31, 2015

(EXPRESSED IN US$)

 

   November 30, 2014   August 31, 2015 
       
ASSETS          
Current assets          
Cash and cash equivalents  $65,649   $353,664 
Accounts receivable, net (notes 11, 12 and 14)   247,771    231,304 
Inventories (note 3)   410,699    434,647 
Prepaid expenses and deposits   41,692    53,839 
Total current assets   765,811    1,073,454 
           
Deposits   18,891    20,392 
Property, plant and equipment, net (notes 4 and 17)   7,845,745    7,025,354 
Intangible assets, net   372,811    357,658 
Total assets  $9,003,258   $8,476,858 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable (note 12)  $634,466   $682,657 
Accrued liabilities   214,240    131,211 
Customer deposits   144,640    7,601 
Mortgage loan - July 2013 (note 6)   1,180,035    1,026,135 
Total current liabilities   2,173,381    1,847,604 
           
Term loan (note 7)   1,837,188    1,926,708 
Payable to related party (note 5)   853,652    910,538 
Total liabilities   4,864,221    4,684,850 
           
Stockholders’ equity          
Preferred stock, $0.001 par value, 10,000,000 shares authorized; 111,822 and 111,822 shares issued and outstanding as at November 30, 2014 and August 31, 2015, respectively (note 9)   112    112 
Common stock, $0.001 par value, 75,000,000 shares authorized; 11,510,431 and 13,860,431 shares issued and outstanding at November 30, 2014 and August 31, 2015, respectively (note 9)   11,509    13,859 
Additional paid-in capital   26,342,831    27,566,636 
Accumulated deficit   (22,215,415)   (23,788,599)
Total stockholders’ equity   4,139,037    3,792,008 
Total liabilities and stockholders’ equity  $9,003,258   $8,476,858 

Going concern (note 1)

Commitments (note 13)

Subsequent events (note 18) 

          

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 1 
 

 

METHES ENERGIES INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED AUGUST 31, 2014 AND 2015

(EXPRESSED IN US$)

 

  

Three Months Ended

August 31, 2014

  

Three Months Ended

August 31, 2015

  

Nine Months ended

August 31, 2014

  

Nine Months ended

August 31, 2015

 
                 
Revenue                    
Biodiesel sales  $2,115,715   $5,598   $2,741,546   $52,810 
Feedstock sales   52,310        148,651    3,357 
Glycerin sales   33,671        57,517    3,893 
Government incentives (note 14)   179,594        218,185    1,637 
Equipment sales (note 17)       574,829    1,397    574,829 
Royalties   8,096        19,550    5,976 
Blenders’ Tax Credit and other (note 11)   11,261    1,055    31,682    843,638 
    2,400,647    581,482    3,218,528    1,486,140 
Cost of goods sold   2,833,008    520,587    3,497,547    582,664 
Gross profit   (432,361)   60,895    (279,019)   903,476 
                     
Operating expenses                    
                     
Selling, general and administrative
expenses (notes 4, 9, 10 and 12)
   1,501,875    687,257    4,409,575    2,227,511 
Loss before rental income, interest expense and income taxes   (1,934,236)   (626,362)   (4,688,594)   (1,324,035)
                     
Other income (expenses)                    
Rental income               8,364 
Interest expense (notes 5, 6, 7, and 16)   (96,858)   (97,618)   (390,786)   (257,513)
Loss before income taxes   (2,031,094)   (723,980)   (5,079,380)   (1,573,184)
                     
Income taxes                
Net loss for the period  $(2,031,094)  $(723,980)  $(5,079,380)  $(1,573,184)
                     
Net Loss Per Common Share - Basic and Diluted  $(0.18)  $(0.06)  $(0.54)  $(0.13)

Weighted average number of common shares - Basic and Diluted

   11,443,673    13,076,758    9,436,267    12,027,068 

 

See accompanying notes to unaudited condensed consolidated financial statements

  

 2 
 

 

METHES ENERGIES INTERNATIONAL LTD.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED NOVEMBER 30, 2014 AND THE NINE MONTHS ENDED AUGUST 31, 2015 (Unaudited)

(EXPRESSED IN US$)

 

  

Common Stock

  

Preferred Stock

   Additional Paid-in    Accumulated     
    Shares   Amount    Shares     Amount    Capital   Deficit    Total 
Balance at November 30, 2013   7,231,417   $7,231    260,782   $261   $18,532,803   $(15,892,703)  $2,647,592 
Issuance of Common Stock units under private placement (note 9)   1,081,161    1,081            2,161,240        2,162,321 
Issuance of Common Stock under public offering (note 9)   2,800,000    2,800            5,597,200        5,600,000 
Issuance Cost - Common Stock                   (949,358)       (949,358)
Issuance of Common Stock units upon conversion of Preferred Stock units (note 9)   148,960    149    (148,960)   (149)            
Issuance of Common Stocks upon conversion of dividends on Preferred Stock (note 9)   7,205    7            16,229    (16,236)    
Issuance of Common Stock units for cash (note 9)   16,129    16            99,984        100,000 
Issuance of Common Stock for services (note 9)   183,871    184            545,566        545,750 
Issuance of Common Stock for loan settlement (note 9)   34,688    34            127,965        127,999 
Issuance of Common Stock upon conversion of placement agent Warrants (note 9)   7,000    7            13,993        14,000 
Stock-based compensation                   197,209        197,209 
Net loss for the year                       (6,306,476)   (6,306,476)
Balance at November 30, 2014   11,510,431   $11,509    111,822   $112   $26,342,831   $(22,215,415)  $4,139,037 
Stock based compensation (note 10)                   1,925        1,925 
Issuance of common stock warrants (note 9)                   67,680        67,680 
Issuance of Common Stock/ units for services (note 9)   50,000    50            18,950        19,000 
Issuance of Common Stock units under private offering (note 9)   2,300,000    2,300            1,247,750        1,250,050 
Issuance cost - Common Stock/unit                       (112,500)       (112,500)
Net loss for the period                       (1,573,184)   (1,573,184)

Balance at August 31, 2015

   13,860,431   $13,859    111,822   $112   $27,566,636   $(23,788,599)  $3,792,008 

  

See accompanying notes to unaudited condensed consolidated financial statements

 

 3 
 

  

METHES ENERGIES INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED AUGUST 31, 2014 AND 2015

(EXPRESSED IN US$)

 

  

Nine Months

Ended

August 31, 2014

  

Nine Months

Ended

August 31, 2015

 
Cash flows from operating activities:          
Net loss for the period  $(5,079,380)  $(1,573,184)
Adjustments to reconcile net loss to net cash used in operations          
Depreciation and amortization   333,287    315,555 
Stock-based compensation   195,769    1,925 
Unrealized foreign exchange gain   (49,209)   (153,900)
Deferred financing fees amortization   49,139     
Accrued interest   127,118    134,767 
Bad debts   35,662    (35,662)
Issuance of common stock/units for consulting services   459,337    19,000 
Issuance of common stock warrants to a lender       67,680 
Unrealized loss on call options   11,169     
Changes in operating assets and liabilities:          
Accounts receivable   456,377    52,129 
Inventories   (49,670)   (23,949)
Prepaid expenses and deposits   34,493    (13,648)
Accounts payable and accrued liabilities   (1,775,824)   (34,838)
Customer deposits   144,002    (137,039)
Net cash used in operating activities   (5,107,730)   (1,381,164)
           
Cash flows from investing activities:          
Proceeds from sale of equipment        519,989 
Additions to property, plant and equipment   (90,027)    
Purchase of call options   (24,480)    
Net cash (used in) provided by investing activities   (114,507)   519,989 
           
Cash flows from financing activities:          
Repayment of credit facility   (1,019,513)    
Repayments of term loans   (493,175)    
Advances from related parties and others   172,000    31,640 
Repayments to related parties and others   (33,835)   (20,000)
Issuance of common stock/units under private placement (net of issuance cost)   1,212,963    1,137,550 
Issuance of common stock/units under public offering   5,600,000     
Issuance of common stock/units for cash   100,000     
Issuance of common stock upon conversion of placement agent warrants   14,000     
Net cash provided by financing activities   5,552,440    1,149,190 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   330,203    288,015 
Cash and cash equivalents, beginning of period   174,084    65,649 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $504,287   $353,664 
           
Supplemental disclosures of cash flow information          
Interest paid  $255,212   $111,910 
Common shares issued as repayment of loan  $128,000   $ 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 4 
 

  

METHES ENERGIES INTERNATIONAL LTD.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

As of August 31, 2015

(Expressed in US$)

 

NOTE 1 - NATURE OF THE BUSINESS AND GOING CONCERN

 

Methes Energies International Ltd. (the “Company”, or “Methes”) was incorporated on June 27, 2007 in the State of Nevada. Methes, through its operations in Canada and the United States, is a biodiesel processing equipment provider and a biodiesel producer. The Company has developed biodiesel processing equipment to produce biodiesel from recycled oils as well as pre-treatment technology to clean oils for the production of biodiesel. The Company, through its wholly-owned subsidiary Methes Energies Canada Inc. (“Methes Canada”), owns a biodiesel manufacturing facility capable of producing 13.0 million gallons per year (mgy) of biodiesel located in Sombra, Ontario. In addition to Methes Canada, Methes Energies USA Ltd. (“Methes USA”) was incorporated as the wholly-owned subsidiary of the Company on June 27, 2007. All references in this Form 10-Q to “Company,” “Methes,” “we,” “us,” or “our” refer to Methes Energies International Ltd. and its wholly owned subsidiaries Methes Canada and Methes USA unless the context otherwise indicates.

 

As at August 31, 2015, due in large part to the funds spent to develop and build its Sombra facility as well as minimal sales of biodiesel, the Company had an accumulated deficit of $23,788,599 and significant losses and negative cash flows from operations in prior periods. During the nine months ended August 31, 2015, the Company incurred a loss of $1,573,184 and had negative cash flows from operations of $1,381,164. The Sombra facility is now idle because of a lack of demand for biodiesel at favorable prices. If put back into commercial production and under better market conditions, the Company anticipates that its Sombra facility will generate positive cash flow from operations and will operate profitably once a sufficient level of commercial operations is achieved. However, there is uncertainty that this will occur in the near future so as to enable the Company to meet its obligations as they come due. As a result, there is substantial doubt regarding the Company’s ability to continue as a going concern. The Company may require additional financing to fund its operations, which may not be available at acceptable terms or at all. During the nine months ended August 31, 2015, the Company sold the Denami 600 biodiesel processor located at its Mississauga facility and a PP-MEC pre-treatment system as described in note 17. In addition, the Company expects to start offering Epoxidized Soybean Oil (“ESO”) and Natural Polyol before the end of 2015. On May 19, 2015, the Company announced, via press release, that it will start offering ESO and Natural Polyol in order to expand its bio-based product line. On June 29, 2015, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with six accredited investors for a registered direct placement and the issuance and sale of an aggregate of 2,300,000 shares of its Common Stock and warrants to purchase up to an additional 1,781,292 shares of its Common Stock (the “Offering”) for gross proceeds of $1,250,050.

 

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The condensed consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the full fiscal year.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Methes Canada and Methes USA. All significant inter-company transactions and balances have been eliminated.

 

 5 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Shipping and Handling Costs

 

The Company accounts for shipping and handling fees in accordance with FASB ASC 705 “Cost of Sales and Services”. Shipping and handling costs for the three and nine Months ended August 31, 2015 were $746 and $12,449, respectively (three and nine months ended August 31, 2014 were $96,362 and $119,965, respectively). Costs related to raw materials purchased, are included in inventory or cost of goods sold, as appropriate. While amounts charged to customers for shipping product are included in revenues, the related outbound freight costs are included in expenses as incurred.

 

Income Taxes and Uncertain Tax Positions

 

The Company accounts for income taxes under ASC 740 Accounting for Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC 740-10-05, Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.

 

For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

 

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Potential tax benefits from net operating losses and foreign tax credit carry forwards are not recognized by the Company until their realization is more likely than not. The Company assesses the validity of conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause the Company to change their judgment regarding the likelihood of a tax position’s sustainability under audit. The Company has determined that there were no material uncertain tax positions as at November 30, 2014 and August 31, 2015.

 

Per Share Data

 

Basic earnings per share (“EPS”) is determined by dividing net earnings available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. In computing diluted EPS, the average number of shares of Common Stock outstanding is increased by Common Stock options and warrants outstanding if the exercise prices were lower than the average market price of Common Stocks using the treasury stock method. Diluted earnings per share exclude all potentially dilutive shares if their effect is anti-dilutive. Potentially dilutive shares include 3,923,149 warrants, 445,071 Common Stock options and 111,822 shares of Preferred Stock issued and outstanding as at August 31, 2014 and 5,854,441 warrants, 326,819 Common Stock options and 111,822 shares of Preferred Stock issued and outstanding as at August 31, 2015. All outstanding warrants, preferred shares and options have an anti-dilutive effect on the loss per share and are therefore excluded from the determination of the diluted loss per share calculation for the three and nine months ended August 31, 2014 and 2015.

 

Comparative figures

 

Certain comparative amounts have been reclassified to conform to the basis of presentation used in the current period. These reclassifications had no effect on the reported results of operations.

 

 6 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

New Accounting Pronouncements

 

All recent pronouncements issued by the FASB or other authoritative standards groups with future effective dates are either not applicable or are not expected to be significant to the condensed consolidated financial statements of the Company.

 

NOTE 3 - INVENTORIES

 

Inventories consisted of the following:

 

   As at
November 30,  2014
   As at
August 31,  2015
 
         
Raw materials  $199,669   $225,085 
Finished goods   199,664    139,152 
Equipment   11,366    70,410 
   $410,699   $434,647 

 

 7 
 

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

  

As at August 31, 2015 

   As at
November 30, 2014
 
   Cost    Accumulated Depreciation    Net Book
Value
   Net Book
Value
 
                 
Sombra site:                    
Land  $409,134   $   $409,134   $409,134 
Building   2,944,356    370,725    2,573,631    2,628,838 
Equipment   775,865    573,114    202,751    283,201 
Equipment - Denami 3000    4,254,995    486,687    3,768,308    3,895,956 
Computer equipment   11,835    11,835        937 
Vehicle   11,622    2,325    9,297    10,169 
Mississauga site:                    
Computer equipment   23,464    23,464        1 
Leasehold improvements   102,201    73,795    28,406    36,200 
Equipment and fixtures   255,463    221,636    33,827    51,721 
Equipment - Denami 600 (note 17)                529,588 
                     
   $8,788,935   $1,763,581   $7,025,354   $7,845,745 

 

Total depreciation expense included in selling, general and administrative expenses in the unaudited consolidated statements of operations related to property, plant and equipment for the three and nine months ended August 31, 2015 was $95,983 and $300,402, respectively (three and nine months ended August 31, 2014 was $106,039 and $318,134, respectively).

 

NOTE 5 - PAYABLE TO RELATED PARTY

 

Payable to related party is comprised of the following:

 

   As at
November 30, 2014
   As at
August 31, 2015
 
           
Michel G. Laporte (stockholder and Director)  $853,652   $910,538 

 

Interest expense incurred during the three and nine months ended August 31, 2015 was $15,093 and $45,247, respectively (three and nine months ended August 31, 2014 - $13,260 and $39,780, respectively).

 

Payable to related party includes promissory notes due to Michel G. Laporte, the chief executive officer, a stockholder and director of the Company. The promissory notes bear interest at 8% per annum and are unsecured. Mr. Laporte has agreed not to demand payment until March 1, 2017.

 

The principal amount outstanding as at August 31, 2015 was an aggregate of $754,640 and the total accrued interest was $155,898 (as at November 30, 2014, principal of $663,000 and interest of $109,270).

 

 8 
 

 

NOTE 6 - MORTGAGE LOAN - JULY 2013

 

   As at
November 30, 2014
   Interest Accrued    Repayments    Foreign Exchange
Adjustments
   As at
August 31, 2015
 
                          
Mortgage loan (July 2013)  $1,180,035   $   $   $(153,900)  $1,026,135 

 

On July 12, 2013, Methes Canada entered into a term loan facility agreement with a lender (the “Agreement”) pursuant to which Methes Canada was able to borrow up to $1,600,000 CDN (USD$1,216,160) for a term of 12 months at an interest rate of 12% per annum (the “July 2013 Facility”). Under the terms of the Agreement, interest is payable monthly and outstanding principal is due at maturity. Outstanding principal would be prepayable after nine months upon 30 days’ notice and payment of a penalty equal to one-month’s interest. The July 2013 Facility is collateralized by a security agreement from Methes Canada on certain of its assets except for accounts receivable and inventory and a first collateral mortgage on its real property located at Sombra, Ontario. The July 2013 Facility prohibits payment of debt owed by the Company to certain of its stockholders, a director and an unrelated Corporation (see notes 5 and 7) during the life of the facility and contains other customary debt covenants.

 

On June 23, 2015, the Agreement was amended to extend its term to July 1, 2016, with all other provisions to continue in full force and effect including monthly payment of interest. The principle amount outstanding as at August 31, 2015 was $1,350,000 CDN (as at November 30, 2014, principal of $1,350,000 CDN).

 

Interest expense incurred during the three and nine months ended August 31, 2015 was $31,605 and $97,304, respectively (three and nine months ended August 31, 2014 - $44,250 and $131,818, respectively).

 

NOTE 7 - TERM LOAN

 

Term loan includes promissory notes due to an unrelated Corporation. The promissory notes bear interest at 8% per annum and are unsecured. The unrelated Corporation has agreed not to demand payment until March 1, 2017.

 

The principal amount outstanding as at August 31, 2015 was an aggregate of $1,492,000 and the total accrued interest was $434,708 (as at November 30, 2014, principal of $1,492,000 and total interest of $345,188).

 

Interest expense incurred during the three and nine months ended August 31, 2015 was $29,840 and $89,520, respectively (three and nine months ended August 31, 2014 - $29,040 and $84,938, respectively).

 

NOTE 8 - CREDIT FACILITY

 

On August 28, 2014, the Company entered into a feedstock credit facility with a major provider of credit to the renewable fuels industry (the “Lender”), which will provide the Company all the feedstock required to run at full capacity and allow the Company to fulfill future orders for biodiesel that it receives from its customers that have been approved by the credit department of the Lender. The Company had also agreed to a biodiesel sales contract subject to the Lender’s approval and subject to a tripartite payment and Assignment Agreement. The facility bears interest at 5% per annum. The facility will initiate upon payment by the Company of a $400,000 deposit that is required as collateral for the feedstock. As at August 31, 2015 the deposit had not been made.

 

During the 2014 fiscal year, the Company began entering into certain derivative contracts with the Lender to hedge its exposure to price risk related to feedstock oil. The Company recorded realized losses during the three and nine months ended August 31, 2015 of $nil and $nil (three and nine months ended August 31, 2014 - $ 245,346) as part of cost of goods sold upon expiry of these contracts. As at August 31, 2015 and November 30, 2014, no derivative futures contracts or call options were outstanding.

 

 9 
 

 

NOTE 9 - STOCKHOLDERS’ EQUITY

 

COMMON STOCK

 

The Company is authorized to issue 75,000,000 shares of Common Stock with a par value of $0.001 and had 13,860,431 shares of Common Stock issued and outstanding as of August 31, 2015 (11,510,431 as of November 30, 2014).

 

   No. of Shares    Price per Share  
Common Stock           
           
Balance as at November 30, 2013   7,231,417      
Issuance of shares under private placement   1,081,161   $2.00 
Issuance of shares under public offering   2,800,000   $2.00 
Issuance of shares upon conversion of Preferred Stocks units   148,960   $2.26 
Issuance of shares upon conversion of accrued dividends on Preferred Stocks units   7,205   $2.26 
Issuance of shares for cash   16,129     See below 
Issuance of shares for services   183,871     See below 
Issuance of shares for loan settlement   34,688   $3.69 
Issuance of shares upon conversion of Placement Agent Warrant   7,000   $2.00 
Balance as at November 30, 2014   11,510,431      
Issuance of shares under private placement   2,300,000   $0.54 
Issuance of shares for services   50,000    See below 
Balance as at August 31, 2015   13,860,431      

 

During the year ended November 30, 2014, the following issuances were completed:

 

Issuance of Common Stock units under Private Placement

 

During the month of December 2013 the Company issued a total of 1,081,161 units (each a “Unit”) to accredited investors at a price of $2.00 per Unit under a private placement and raised net proceeds of approximately $1.87 million, after deducting the sales commission and fees (the “December 2013 Private Placement”). Each Unit consists of one share of Common Stock and one five year Common Stock Warrant to purchase one share of Common Stock at an exercise price of $4.00 per share (“Common Stock Warrant”). (See Stock Warrant Table below).

 

In connection with the December 2013 Private Placement, the Company issued compensatory warrants (the “Placement Agent Warrant”) to the Placement Agents for the offering exercisable for an aggregate of 108,116 Units. Each of these warrants is exercisable to acquire a Unit at an exercise price of $2.00 per Unit. The fair value of these warrants at the grant date was $257,553. This amount was estimated using the Black-Scholes option pricing model with an expected life of 5 years, risk free interest rates between 1.66% and 1.74%, a dividend yield of 0%, and an expected volatility of 75%. (See Stock Warrant Table below).

 

Issuance of Common Stock upon conversion of Preferred Stock units and accrued dividends

 

i) Series A-2 Preferred Stock Conversions

 

On March 13, 2014, two holders of our Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”) converted 20,876 shares of outstanding Series A-2 Preferred with an aggregate stated value of approximately $49,139 (including accrued dividends of $1,750). The Series A-2 Preferred was converted into 21,648 shares of Common Stock at a price of $2.27 per share, which included the issuance of 772 shares of Common Stock attributable to the conversion of the accrued dividends.

 

On May 9, 2014, a holder of our Series A-2 Preferred converted 10,438 shares of outstanding Series A-2 Preferred with an aggregate stated value of approximately $26,250 (including accrued dividends of $1,250). The Series A-2 Preferred was converted into 10,989 shares of Common Stock at a price of $2.27 per share, which included the issuance of 551 shares of Common Stock attributable to the conversion of the accrued dividends.

 

ii) Series A-1 Preferred Stock Conversions

 

On March 17, 2014, two holders of our Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) converted 117,646 shares of outstanding Series A-1 Preferred with an aggregate stated value of approximately $293,235 (including accrued dividends of $13,235). The Series A-1 Preferred was converted into 123,528 shares of Common Stock at a price of $2.25 per share, which included the issuance of 5,882 shares of Common Stock attributable to the conversion of the accrued dividends.

 

 10 
 

 

NOTE 9 - STOCKHOLDERS’ EQUITY (CONTINUED)

 

Issuance of Common Stock under Public Offering

 

On May 27, 2014, the Company closed an underwritten public offering of 2,500,000 shares of Common Stock and raised net proceeds of $4.5 million, after deducting Underwriter’s fees and estimated offering expenses. Under the terms of the Underwriting Agreement, the Underwriter had an option through June 26, 2014, to purchase up to an additional 375,000 shares of Common Stock under the same terms as the public offering to cover over-allotments (the “Over-Allotment Option”), if any.

 

On May 28, 2014, the Underwriter partially exercised the Over-Allotment Option for 300,000 shares of Common Stock raising approximately $550,000 of additional net proceeds for the Company.

 

Issuance of Common Stock for cash and services rendered

 

On January 3, 2014, the Company issued 25,000 shares of Common Stock in the second installment quarterly payment of consulting fees for services to be rendered by a consultant for over a year which were valued at $87,250, based on the closing market price of $3.49 per share on the day of issuance. On May 1, 2014, the Company issued 25,000 shares of Common Stock in the third quarterly installment payment of consulting fees for services to be rendered by the consultant which were valued at $61,250, based on the closing market price of $2.45 per share on the date of issuance. On August 1, 2014, the Company issued 25,000 shares of Common Stock in the final quarterly installment payment of consulting fees for services to be rendered by the consultant which were valued at $42,500, based on the closing market price of $1.70 per share on the date of issuance.

 

On January 10, 2014, the Company sold 50,000 Units to an accredited investor in a private placement for a purchase price of $125,000 (or $2.50 per Unit) of which $100,000 was paid in cash and $25,000 was settled through services rendered to the Company, which was included in the selling, general and administrative expenses. The aggregate fair value of the Units sold in this offering was $310,000 (or $6.20 per Unit), based on the closing market price of $3.58 per share of Common Stock on the day of issuance, and the fair value of the Common Stock Warrants of $2.62 per warrant. The Common Stock allocated to cash portion was 16,129 Common Stock ($100,000/$310,000 x 50,000 units) and the services portion allocated was 33,871 Common Stock. The fair value of the Common Stock Warrants was estimated using the Black-Scholes option pricing model with an expected life of 5 years, risk free interest rates of 1.64%, a dividend yield of 0%, and an expected volatility of 100%. The excess of the estimated fair value over the purchase price in the amount of $185,000 was included in the selling, general and administrative expenses. (See Stock Warrant Table below).

 

On January 28, 2014, the Company issued 25,000 shares of Common Stock in payment of consulting fees for services to be rendered by a consulting corporation for a term of nine months. These shares of Common Stock were valued at $88,750, based on the closing market price of $3.55 per share on the date of issuance.

 

On November 20, 2014, the Company issued 50,000 shares of Common Stock for services rendered by a consultant which were valued at $56,000, based on the closing market price of $1.12 per share on date of issuance.

 

Issuance of Common Stock for loan settlement

 

On January 17, 2014, the Company issued 34,688 shares of Common Stock to a note holder at $3.69 per share of Common Stock upon conversion of $128,000 of a note payable by the Company. The note was repaid in full during the year ended November 30, 2014.

 

Issuance of Common Stock upon conversion of Placement Agent Warrants

 

On May 9 and 19, 2014, two holders of Placement Agent Warrants exercised their warrants for an aggregate of 7,000 Units at a price of $2.00 per Unit or an aggregate stated value of $14,000, which included 7,000 shares of Common Stock and 7,000 Warrants (each at an exercise price of $4.00).

 

During the nine month period ended August 31, 2015, the following issuances were completed:

 

Issuance of Common Stock Warrants to a lender

 

On December 18, 2014, the Company issued a 5-year common stock warrant exercisable for up to 150,000 shares at a price of $0.95 per share to a lender (see note 6). The fair value of this warrant was estimated using the Black-Scholes option pricing model with an expected life of 5 years, risk free interest rates of 1.68%, a dividend yield of 0%, and an expected volatility of 95%. The estimated fair value of $67,680 is included in the selling, general and administrative expenses. (See Stock Warrant Table below).

 

 11 
 

 

NOTE 9 - STOCKHOLDERS’ EQUITY (CONTINUED)

 

Issuance of Common Stock for services rendered

 

On July 16, 2015, the Company issued 30,000 shares of Common Stock as payment of consulting fees for services to be rendered by a consultant. These shares of Common Stock were valued at $12,000, based on the closing market price of $0.40 on the date of issuance. On July 31, 2015 the Company issued an additional 20,000 shares of Common Stock as payment of consulting fees for services to be rendered by a consultant. These shares of Common Stock were valued at $7,000, based on the closing market price of $0.35 on the date of issuance.

 

Issuance of Common Stock under Private Offering

 

On July 1, 2015, the Company consummated a registered direct offering with select institutional investors for the issuance and sale of an aggregate of 2,300,000 shares of Common Stock and warrants to purchase up to an additional 1,781,292 shares of its Common Stock (the “July Offering”). The Common Stock and warrants were sold in units (each a “July Unit”), with each July Unit consisting of one share of Common Stock and a warrant to purchase 0.7745 of one share of Common Stock at an exercise price of $0.882 per share of Common Stock (“July Warrant”). Each July Warrant will be exercisable starting nine months after July 1, 2015 and has a term of 5.5 years (see Stock Warrant Table below). Gross proceeds from the July Offering were $1,250,050. The net proceeds to the Company from the Offering, after deducting fees and estimated offering expenses, and excluding the proceeds, if any, from the exercise of the July Warrants, were approximately $1.1 million.

 

The July Offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-195271) previously filed with the Securities and Exchange Commission and declared effective on May 14, 2014, and a prospectus supplement thereunder, and pursuant to that certain Rule 462(b) Registration Statement (No. 333-205367) previously filed with the Securities and Exchange Commission on June 30, 2015.

 

PREFERRED STOCK

 

The Company is also authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001 and had 111,822 and 111,822 shares of preferred stock issued or outstanding as of November 30, 2014 and August 31, 2015.

 

As at August 31, 2015, total accumulated dividends are $47,095 that have not been declared or accrued (November 30, 2014 - $23,004).

 

 12 
 

 

NOTE 9 - STOCKHOLDERS’ EQUITY (CONTINUED)

 

STOCK WARRANT TABLE:

 

   Grant Date  Exercise Period  No of Warrants   Exercise Price
per share
   Fair Value of Broker Warrants 
Balance as at November 30, 2013         2,678,872           
Common Stock Warrants issued – Private Placement  Dec. 20, 2013  5 years from grant date   1,081,161   $4.00      
Placement Agent Warrant – Private Placement  Dec. 20 2013  5 years from grant date   108,116   $2.00   $257,553 
Placement Agent Warrant – Private Placement (November 27, 2013)  Dec. 20 2013  5 years from grant date   5,000   $2.00   $6,403 
Common Stock Warrant issued-accredited investor  Jan. 10, 2014  5 years from grant date   50,000   $4.00      
Placement Agent Warrant exercise         (7,000)  $2.00      
Common Stock Warrant issued upon exercise of Placement Agent Warrant   May 9 and 14, 2014   Dec. 20, 2018   7,000   $4.00      
Balance as at November 30, 2014         3,923,149           
Common Stock Warrant issued (note 9)  December 18, 2014  5 years from grant date   150,000   $0.95      
Common Stock Warrants issued – Private Placement (note 9)  July 1, 2015  5.5 years from grant date   1,781,292   $0.8820      
Balance as at August 31, 2015         5,854,441           

 

NOTE 10 - STOCK-BASED COMPENSATION

 

2008 Option Plan:

 

The Company’s Amended and Restated the 2008 Directors, Officers and Employees Stock Option Plan, which was originally approved by the stockholders at the annual general meeting of the Company held on December 5, 2007, and subsequently amended by the stockholders on July 23, 2008. This plan was established to enable the Company to attract and retain the services of highly qualified and experienced directors, officers, employees and consultants and to give such persons an interest in the success of the Company and its subsidiaries. The total number of shares currently authorized under the plan is 391,134. The options and awards will be granted at the discretion of the Board of Directors. Options issued under the plan that are deemed to be incentive stock options will be priced at not less than 100% of the fair market value of the common shares at the date of the grant, subject to certain limitations for 10 percent stockholders. The fair value of each option granted was estimated at the time of grant using the Black-Scholes option pricing model. There were no options granted during the nine months ended August 31, 2014 and 2015.

 

All the grants vest quarterly over a two year period and expire on the tenth anniversary of the grant date. The following table summarizes the stock option activities of the Company.

 

    Number of options  
Outstanding as of November 30, 2013     365,931  
Granted      
Exercised      
Cancelled/forfeited     (33,897)  
Outstanding as of November 30, 2014     332,034  
Granted      
Exercised      
Cancelled/forfeited     (105,605)  
Outstanding as of August 31, 2015     226,429  

 

The stock-based compensation for the three and nine Months ended August 31, 2015 was $292 and $1,925, respectively (three and nine months ended August 31, 2014 - $2,051 and $9,747, respectively). The Company recorded this in selling, general and administrative expenses with the corresponding credit to additional paid-in capital.

 

 13 
 

 

NOTE 10 - STOCK-BASED COMPENSATION (CONTINUED)

 

2008 Option Plan (Continued)

 

As of November 30, 2014, the Company has a total of 332,034 options outstanding to purchase Common Stock held by employees, directors and advisory board members, of which 328,284 are vested and exercisable. All of these outstanding stock options have an exercise price above the average market price. As of November 30, 2014, the total fair value of the options granted to employees at the respective grant dates was $1,172,498, of which the unrecognized portion of $295 related to the unvested shares associated with these stock option grants will be recognized over a period of one year.

 

As of August 31, 2015, the Company has a total of 226,429 options outstanding to purchase Common Stock held by employees, directors and advisory board members, of which 226,429 are vested and exercisable. All of these outstanding stock options have an exercise price above the average market price. As of August 31, 2015, the total fair value of the options granted to employees at the respective grant dates was $787,256 of which the unrecognized portion of $nil related to the unvested shares associated with these stock option grants.

 

2012 Option Plan:

 

Under the Company’s 2012 Directors, Officers and Employees Stock Option Plan (the “2012 Plan”), the Company granted a total of 100,000 options to purchase Common Stock to its four independent directors and chief financial officer on April 2, 2013. The total number of shares currently authorized under the plan is 400,000. The options and awards will be granted at the discretion of the Board. Options issued under this plan that are deemed to be incentive stock options will be priced at not less than 100 percent of the fair market value of the shares of Common Stock underlying the options at the date of the grant, subject to certain limitations for 10 percent stockholders. The fair value of each option granted was estimated at the time of grant using the Black-Scholes option pricing model.

 

All the options granted under the 2012 Plan, vest yearly at the rate of one-third per year, starting on the first year anniversary of the grant date and expire on the fifth anniversary of the grant date. On August 5, 2014, vesting period was amended and all the options are fully vested and exercisable. The following table summarizes the stock option activities of the Company:

 

Outstanding as at November 30, 2013     100,000  
Granted      
Exercised      
Cancelled/forfeited      
Outstanding as of November 30, 2014 and August 31, 2015     100,000  

 

The share-based compensation for the three months and nine months ended August 31, 2015 was $nil and $nil, respectively (three and nine months ended August 31, 2014 - $97,970 and $186,022, respectively). The Company recorded this in selling, general and administrative expenses with the corresponding credit to additional paid-in capital.

 

As of August 31, 2015, the Company has options outstanding to purchase a total of 100,000 shares of Common Stock at an exercise price of $3.94 per share, to its four independent directors and chief financial officer, all of which are currently outstanding and are vested and exercisable. All of these outstanding stock options have an exercise price equal to the fair market price on the date of grant. As of August 31, 2015, the total fair value of the options granted to the independent directors and chief financial officer at the respective grant dates was $292,174, all of which has been fully recognized as they are fully vested.

 

NOTE 11 - OTHER REVENUE

 

During the three and nine months ended August 31, 2015, the Company recognized $1,055 and $843,638, respectively (three and nine months ended August 31, 2014 - $11,261 and $31,682, respectively) as other revenue, mainly comprising of the Blenders Tax Credit (“BTC”) to applicable invoices issued to customers during fiscal 2014 amounting to $828,177. The accounts receivable as at August 31, 2015 include $161,292 relating to the BTC.

 

 14 
 

 

NOTE 12 - FAIR VALUE MEASUREMENTS, CONCENTRATIONS AND RISK

 

a) The Company’s cash and cash equivalents, which are carried at fair values, are classified as a level 1 financial instrument at November 30, 2014 and August 31, 2015.

 

b) The Company is exposed to the following concentrations of risk:

 

Major Customers

 

Two major customers comprised 99% and 79% of total revenue for the three and nine months ended August 31, 2015, respectively (three and nine months ended August 31, 2014 - two major customers comprised 77% and 72% of total revenue, respectively).

 

As at August 31, 2015, the accounts receivable balance from two major customers was $NIL and $185,486, respectively. (November 30, 2014: $24,306 and $24,194, respectively).

 

Major Vendors

 

The Company has an exclusive agreement to manufacture biodiesel processor equipment with a third party equipment manufacturer. During the three months and nine months ended August 31, 2015, the Company made purchases of $nil and $nil, respectively (three and nine months ended August 31, 2014 - $nil and $nil, respectively) from this equipment manufacturer. As of November 30, 2014 and August 31, 2015, the Company had accounts payable of $6,837 and $nil owing to this equipment manufacturer, respectively.

 

The Company’s purchases of feedstock oil and biodiesel from third parties for the three and nine months ended August 31, 2015 were $nil and $nil, respectively (three and nine months ended August 31, 2014 - $2,549,354 and $2,549,354, respectively).

 

As at November 30, 2014, the accounts payable balance to these two major vendors were $nil, and $6,398, respectively.

 

As at August 31, 2015, the accounts payable balance to these two major vendors were $nil and $nil, respectively.

 

Economic and Political Risks

 

The Company faces a number of risks and challenges as a result of having primary operations and marketing in Canada and sales in the United States. Changing political climates in Canada and the United States could have a significant effect on the Company’s business.

 

Credit Risk

 

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with institutions of high creditworthiness. The carrying value of the financial assets represents the maximum credit exposure.

 

The Company minimizes credit risk by routinely reviewing the credit risk of the counterparty to the arrangement and has maintained an allowance for doubtful accounts of $30,000 related to credit risk as at August 31, 2015 ($65,661 as at November 30, 2014), which is considered adequate.

 

Currency Risk

 

The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The Company’s functional currency is U.S. dollars. A significant change in the currency exchange rates between the U.S. dollar relative to the Canadian dollar could have an effect on the Company’s results of operations, financial position and cash flows. The Company has not entered into any derivative financial instruments to manage exposures to currency fluctuations.

 

Included in selling, general and administrative expenses are foreign currency gains for the three and nine months ended August 31, 2015 of $70,520 and $207,823, respectively (three and nine months ended August 31, 2014 of $2,822 and $33,031, respectively).

 

 15 
 

 

NOTE 12 - FAIR VALUE MEASUREMENTS, CONCENTRATIONS AND RISK (CONTINUED)

 

The Canadian dollar balances and exchange differences are as follows:

 

    CDN$     USD$ Historical     USD –August 31, 2015  
Note 6: Term loan (“July 2013”) - Principal   $ 1,350,000     $ 1,299,915     $ 1,026,135  
Note 17: Receivable from sale of equipment     275,000       227,083       227,083  

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a working capital deficiency, and is exposed to this risk mainly in respect of its accounts payable and accrued liabilities (see note 1).

 

NOTE 13 - COMMITMENTS

 

Building Leases:

 

Methes Canada is a party to a lease agreement for the Mississauga facility and to a sublease agreement for a unit adjacent to its Mississauga facility. On September 28, 2012, the Company re-negotiated and renewed a combined five year lease term for both of these facilities starting from January 1, 2013 to December 31, 2017.

 

As at August 31, 2015, Methes Canada must pay in addition to other amounts, such as its pro rata share of taxes, the following amounts over the term of the lease:

 

    Annual  
    Minimum Rent  
       
Fiscal 2015   $ 27,546  
Fiscal 2016   $ 110,182  
Fiscal 2017   $ 110,182  
Fiscal 2018   $ 9,182  

 

Railroad Car Leases:

 

As at August 31, 2015, the Company is a party to the following lease agreements for railcars at its Sombra facility:

 

  Start Date   End Date   Term
Four railcars at $3,100 per month August 1, 2013   July 31, 2018   60 months
Four railcars at $3,100 per month April 1, 2013   March 31, 2018   60 months
Four railcars at $3,140 per month December 1, 2011   November 30, 2016   60 months

 

   

Annual

Minimum Rent

 
       
Fiscal 2015   $ 28,020  
Fiscal 2016   $ 112,080  
Fiscal 2017   $ 74,400  
Fiscal 2018   $ 37,200  

 

 16 
 

 

NOTE 14 - CONTRIBUTION AGREEMENTS WITH MINISTER OF NATURAL RESOURCES OF CANADA

 

Mississauga Facility:

 

In 2009, the Company entered into a Non-Refundable Contribution Agreement with the Minister of Natural Resources of Canada for the Mississauga facility under the ecoENERGY for Biofuels program. Under this agreement, as amended, the Company was eligible to receive up to $4,112,141 (CDN$5,410,000) in the years from 2009 to 2016 from the Canadian government in biodiesel production incentives when biodiesel is produced and sold. The contribution from the Canadian Government is non-refundable by the Company. On December 24, 2014 the Natural Resources of Canada terminated the Contribution Agreement for the Mississauga facility as it was not being used to meet the minimum production requirement.

 

Since entering into the program to August 31, 2015, the Company has claimed and received total incentives of $1,458,286.

 

Sombra Facility:

 

In 2010, the Company applied for an incentive under the ecoENERGY for Biofuels program for its Sombra facility and was approved by the Canadian government. The final Contribution Agreement with the Minister of Natural Resources of Canada for the Sombra facility under the ecoENERGY for Biofuels program was signed by the Company and the Canadian Government on December 6, 2011. Under this agreement, as amended, the Company may receive a total of up to $3,800,500 (CDN$5,000,000) during program years 2015-2016 and 2016-2017, from the Canadian government in biodiesel production incentives when biodiesel is produced and sold. The contribution from the Canadian Government is non-refundable by the Company.

 

For the three and nine months ended August 31, 2015, the Company claimed incentives of $nil and $1,637 (three and nine months ended August 31, 2014 - $179,594 and $218,185). Since entering into the program to August 31, 2015, the Company has claimed total incentives of $904,473 and has received a total of $902,836.

 

Included in accounts receivable as at November 30, 2014 and August 31, 2015, is an amount receivable of $147,776 and $1,637, respectively, due from the Minister of Natural Resources of Canada.

 

NOTE 15 - SEGMENT INFORMATION

 

The Company reports a single operating segment, being a producer and seller of biodiesel fuel and biodiesel processing equipment.

 

Geographic segments:

 

The Company’s assets and operating facilities, other than cash and cash equivalents balances of $4,943 at November 30, 2014 and $123,776 at August 31, 2015, are all located in Canada. The Company services the majority of its customers in the United States. The Company derives its revenue geographically as follows:

 

  

Three Months
Ended

August 31, 2014

  

Three Months
Ended

August 31, 2015

  

Nine Months
ended

August 31, 2014

  

Nine Months
ended

August 31, 2015

 
Revenue                    
United States  $2,137,870   $   $2,708,390   $836,353 
Canada   262,777    581,482    510,138    649,787 
                     
   $2,400,647   $581,482   $3,218,528   $1,486,140 

 

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NOTE 16 - INTEREST EXPENSE

 

Interest expense table as follows:

 

   Three Months
Ended
August 31, 2014
   Three Months
Ended
August 31, 2015
   Nine Months
ended
August 31, 2014
   Nine Months
ended
August 31, 2015
 
Interest accrued on promissory notes  $43,100    44,933   $133,951    134,766 
Interest paid on mortgage loan (Note 6)   44,250    31,605    131,817    97,304 
Interest paid on vendor payables   6,401    13,882    116,561    10,007 
Financing fees   3,107    7,208    8,604    15,453 
    96,858    97,628    390,933    257,531 
Interest income       10    147    18 
Total expense  $96,858   $97,618   $390,786   $257,513 

 

NOTE 17 - SALE OF EQUIPMENT

 

On March 25, 2015, the Company entered into an agreement with a Canadian client for the sale of the Denami 600 biodiesel processor located at its Mississauga facility and a PP-MEC pre-treatment system for a total sale price of $819,897 (CDN$1,025,000) and received an initial payment of $199,950 (CDN$250,000) from the purchaser. The agreement provides for the payment of the purchase price over five installments, commencing on the date of the agreement. The agreement also includes certain performance conditions from both parties including that the Purchaser may terminate the agreement if the equipment is not installed and operational. As at August 31, 2015, the Company is yet to receive a CDN$250,000 payment due on the completion of the installation and positive ASTM lab report of the PP-MEC pre-treatment system and the final CDN$25,000 payment within 12 months of receiving a positive ASTM lab report.

 

In the quarter ended August 31, 2015, the Denami 600 biodiesel processor was installed and became operational at the Canadian client’s premises. Accordingly, the Company recognized related revenue of $574,829 in the income statement.

 

As a result of this sale, the Company no longer has biodiesel production capacity at its Mississauga facility.

 

NOTE 18 - SUBSEQUENT EVENTS

 

On January 19, 2015, the Company signed a Technology Licensing Agreement (the “Agreement”) with a U.S. based entity (the “Licensee”). Licensee is no longer seeking to close that Agreement but alternatively is negotiating the purchase of two Denami 3000 processors from the Company for approximately $4 million. As of October 15, 2015, the parties have not yet entered into a binding agreement and negotiations are continuing.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Some of the statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See “Cautionary Statement Regarding Forward-Looking Information” following the Table of Contents of this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a renewable energy company that offers a variety of products and services to biodiesel fuel producers, including Denami® biodiesel processors that are unique, compact, fully automated and state-of-the-art, which can produce biodiesel from a wide variety of feedstocks in a continuous flow process. We also offer pre-treatment equipment and our proprietary PP-MEC Catalyst that enable various feedstocks, including non-food grade corn oil, to be converted into biodiesel more efficiently, with less catalyst, increased yields and without separate degumming or wax removal, than other pre-treatment processes. In the case of biodiesel produced from corn oil, our PP-MEC Catalyst also eliminates the red coloration, an undesirable feature causing confusion between red biodiesel for off-road use and biodiesel saleable for use in on-road vehicles. In addition, we expect to start offering Epoxidized Soybean Oil (“ESO”) and natural polyol before the end of 2015.

 

We market and sell biodiesel fuel produced at our 13 million gallons per year (mgy) facility in Sombra, Ontario, to customers in U.S. and Canada, as well as providing multiple biodiesel fuel solutions to our clientele. Among our services are selling commodities to our network of biodiesel producers, selling our biodiesel production, providing clients with proprietary software to operate and control their processors. We also remotely monitor the quality and characteristics of our clients’ biodiesel production, upgrade and repair their processors and advise our clients on adjusting their processes to use varying feedstock to improve the quality of their biodiesel.

 

Network members produce biodiesel through use of Denami 600 processors purchased from us, which have a maximum rated capacity of 1.3 mgy of biodiesel. We now offer new network members Denami 3000 processors, designed to produce up to 6.5 mgy of biodiesel. Denami processors are designed to meet the needs of 2 to 20 mgy biodiesel producers. We believe that these small and medium-scale producers will be the fastest growing segment of the biodiesel market. Our processors are flexible and can use a variety of virgin vegetable oils, used vegetable oil and rendered animal fat feedstock, allowing operators to take advantage of feedstock buying opportunities and, through use of the PP-MEC Catalyst can more efficiently convert certain feedstocks into biodiesel. Denami processors can be easily retrofitted to take full advantage of the PP-MEC Catalyst, have low production and labor costs, minimize electrical use and utilize water only in closed loop components for cooling purposes. The absence of waste water discharge has facilitated obtaining environmental permits for our facilities and those of our customers.

 

Currently, our Sombra facility is idle because of a lack of demand for biodiesel at favorable prices. On May 29, 2015, the U.S. Environmental Protection Agency (EPA) announced new preliminary requirements for use of biodiesel in 2015, 2016 and 2017. We believe that when these minimum requirements are finalized later this year, it will increase demand for biodiesel and may improve market prices.

 

ESO and Natural Polyol

 

We expect to start producing and offering ESO and natural polyol from our Sombra facility before the end of 2015. We believe that these two bio-based products will provide for much better margins than biodiesel. Some of the equipment at our Sombra facility are being adapted for the production of ESO and natural polyol with minimal capital expenditure. We believe that the demand for both ESO and natural polyol are increasing and now accounts for a combined market value in excess of one billion dollars in North America. Both ESO and natural polyol help address growing global demand for the replacement of non-sustainable products, with natural or “green” products across a wide range of industries. ESO can be used, among other things, in the production of polyvinyl chloride (PVC) plastics and natural polyol in the production of paints, coatings, moldings (cast plastic parts or items) as well as insulating foams.

 

Sale of Denami 600 and PP-MEC Pre-treatment System

 

In March 2015, we sold the Denami 600 biodiesel processor located at our Mississauga facility and a PP-MEC pre-treatment system to an Ontario based biodiesel producer. Upon completion of installation at the purchaser’s facility, the equipment will be the first fully operational Denami processor with a PP-MEC pre-treatment system. As a result of this sale, we no longer have biodiesel production capacity at our Mississauga facility, however, the purchaser has agreed to allow us to use its facility as a demonstration site to promote future sales of the Denami processors with the PP-MEC pre-treatment system.

 

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On January 19, 2015, the Company signed a Technology Licensing Agreement (the “Agreement”) with a U.S. based entity (the “Licensee”). Licensee is no longer seeking to close that Agreement but alternatively is negotiating the purchase of two Denami 3000 processors from the Company for approximately $4 million. As of October 15, 2015, the parties have not yet entered into a binding agreement and negotiations are continuing.

 

Historically, our revenue sources include the sale of biodiesel produced at our own facility, the sale of biodiesel that we purchase from network members and other third-party producers, the sale of biodiesel equipment, the sale of feedstock to network members and other third-party biodiesel producers, Canadian government incentive payments, royalties from our network members, and revenue from other services we provide related to the production of biodiesel.

 

During the nine months ended August 31, 2015, revenue from the sale of biodiesel was significantly reduced since our Sombra facility was idle due to lack of demand for biodiesel at favorable prices. Additionally, we sold the Denami 600 biodiesel processor located at our Mississauga facility in March 2015 and one of our main sources of revenue was from the Blenders Tax Credit (the “BTC”). On December 19, 2014, the BTC was reinstated retroactively to January 2014. During the nine months ended August 31, 2015, $828,177 of our revenues was attributable to the BTC, which represents our negotiated share of the BTC on applicable invoices issued to customers during fiscal 2014.

 

During the nine months ended August 31, 2015, we incurred a loss of $1,573,184, and had negative cash flow from operations of $1,381,164. Our Sombra facility is approved by the U.S. Environmental Protection Agency (“EPA”) as a Foreign Renewable Fuel Producer and as a result the biodiesel produced at this facility is eligible for export to the United States. Obtaining this approval from the EPA enables us to sell our biodiesel into the U.S., and provides our U.S. importers, including our U.S. wholly-owned subsidiary, the ability to generate Renewable Identification Numbers (“RINs”). RINs are used in the U.S. to track compliance with Renewable Fuel Standard 2 (“RFS2”) and are generated when a gallon of biodiesel is produced in or imported into the U.S.

 

Subsequent to the consummation of our initial public offering (“IPO”) on October 30, 2012, we have raised aggregate net proceeds of approximately $10.6 million from the sale of our equity securities including the following:

 

net proceeds of approximately $2.24 million from a private placement completed in December 2013;
   
net proceeds of approximately $125,000 (including, $25,000 of services rendered to us) from a private placement completed in January 2014;
   

net proceeds of approximately $5.05 million from a public offering completed in May 2014; and

   

net proceeds of approximately $1.1 million from the registered direct offering completed in July 2015.

 

Factors Influencing Our Results of Operations

 

The principal factors affecting our results of operations are as follows:

 

Biodiesel and feedstock price fluctuations

 

Biodiesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biodiesel prices have historically been correlated to petroleum-based diesel fuel prices. Accordingly, biodiesel prices have generally been affected by the same factors that affect petroleum prices, such as worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters. Recently enacted government requirements and incentive programs, such as RFS2 and the BTC, which expired on December 31, 2014, have reduced this correlation, although it remains a significant factor in the market price of our product.

 

Our operating results also generally reflect the relationship between the price of biodiesel and the price of the feedstock used to produce biodiesel. Spot market prices for virgin vegetable oil or used vegetable oil or rendered animal fat may increase, which would adversely affect our gross margins. The price of vegetable oil, as with most other products made from crops, is affected by weather, disease, changes in government incentives, demand and other factors. A significant reduction in the supply of vegetable oil because of weather or disease, or increases in the demand for vegetable oil, could result in higher feedstock prices. The price of vegetable oil and other feedstock has fluctuated significantly in the past and may fluctuate significantly in the future.

 

Government programs related to biodiesel production and use

 

Biodiesel has been more expensive to produce than petroleum-based diesel fuel and as a result the industry depends on Canadian and U.S. federal and, to a lesser extent, provincial and state usage requirements and tax incentives.

 

On July 1, 2010, RFS2 was implemented, stipulating Renewable Volume Obligations (“RVOs”) requirements for the amount of biomass-based diesel that must be utilized in the United States each year. Under RFS2, obligated parties, including petroleum refiners and fuel importers, must show compliance with these standards. The RFS2 program required the domestic use of 800 million gallons of biodiesel in 2011, one billion gallons in 2012 and 1.28 billion gallons in 2013. On May 29, 2015, the EPA announced that it would propose to increase the RVO for the following years as follow: 1.63 billion gallons for 2014, 1.7 billion gallons for 2015, 1.8 billion gallons for 2016 and 1.9 billion gallons for 2017. The proposal is subject to public comments and possible further increase in RVO until finalized later this year.

 

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Renewable Identification Numbers (“RINs”)

 

RINs are used to track compliance with RFS2 and are generated when a gallon of biodiesel is produced in or imported to the U.S. In late 2011 and early 2012 the EPA announced that some U.S. producers had generated and sold invalid RINs. The loss of integrity and confidence in the RINs market affected the demand as well as the price of biodiesel. As a result, the demand for RINs from small and medium size biodiesel producers declined dramatically. As a small and medium size producer, we and our existing customers have been directly affected by this situation. A portion of the price of a gallon of biodiesel includes a dollar value attributed to RINs. If a buyer of biodiesel cannot verify the integrity of the RINs attached to the biodiesel the buyer might not want to purchase or might ask for a discount creating a situation for the producer where it is not profitable to produce biodiesel.

 

In February 2013, the EPA introduced a new Quality Assurance Program (“QAP”) that would allow for buyers of RINs to verify their validity. The QAP provides a clear path and system for independent third parties, approved by the EPA, to audit and monitor, on an ongoing basis, the production of biodiesel and verify that RINs have been correctly generated. The QAP, once fully in place, will be retroactive to January 1, 2013. In September 2014, we attained the Quality Assurance Plan (QAP-B) RINs assurance status which will allow buyers to verify the validity of our RINs.

 

Seasonal fluctuations

 

Our operating results are influenced by seasonal fluctuations in the price of biodiesel. Our sales tend to decrease during the winter season due to perceptions that biodiesel will not perform adequately in colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean, canola or inedible corn oil. Reduced demand in the winter for our higher cloud point biodiesel may result in excess supply of such higher cloud point biodiesel or lower prices for such higher cloud point biodiesel. In addition, our production facilities are located in Canada and our costs of shipping biodiesel to warmer climates generally increase in cold weather months.

 

Dependence on significant customers

 

A large part of our revenue is generated from a few large customers. The sales to these customers are made at spot market prices, and we have no binding purchase agreements for our biodiesel, which could affect the consistency of our revenues. Potential customers for biodiesel regularly bid for biodiesel in the spot market at prices that are quoted on a daily basis. As a matter of convenience, we prefer to deal with customers with whom we have had a past relationship, although the specific customers to whom we sell have varied over time. The loss of one or more customers who have been among our largest customers historically would not have a material adverse effect on our business because we believe that a customer or customers could be replaced by one or more new customers regularly bidding for biodiesel, and we believe this will continue to be the case. For example, in the nine months ended August 31, 2015, 67% of our total revenue was from one major customer who was also our largest customer during the year ended November 30, 2014. This customer accounted for 60% of our total revenue during the same period in fiscal 2014.

 

Lengthy sales cycle

 

The sale of one of our Denami processors in a particular financial period would have a significant effect on our quarter-to-quarter and year-to-year results. The purchase of our Denami processors involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our Denami processors is typically lengthy, varying from 6 to 18 months. The lengthy sales cycles of our equipment sales, as well as the size and timing of orders, make it difficult to forecast our future results of operations.

 

Three and nine months ended August 31, 2014 compared to the three and nine months ended August 31, 2015

 

Revenue. Our total revenues for the three months ended August 31, 2014 and August 31, 2015 were $2,400,000 and $581,000, respectively, representing a decrease of $1,819,000 or 76%. Our total revenues for the nine months ended August 31, 2014 and August 31, 2015 were $3,218,500 and $1,486,000, respectively, representing a decrease of $1,732,500 or 54%. The reasons for this decrease are described below. Outlined below are the sales results for each of our sources of revenue for the three and nine month periods ended August 31, 2014 and August 31, 2015.

 

Biodiesel. Biodiesel sales for the three months ended August 31, 2014 and August 31, 2015, excluding government incentives, were $2,115,700 and $5,600, respectively, a decrease of approximately $2,110,100, or 99%. For the three months ended August 31, 2014 and August 31, 2015, our resales of biodiesel purchased from third party producers were $nil and $nil. Revenue from our internal production, excluding government incentives, for the three months ended August 31, 2014 and August 31, 2015 was $2,115,700 and $5,600, respectively, a decrease of $2,110,100 or 99%. For the three months ended August 31, 2014 and August 31, 2015, our average sales price per gallon for 100 percent biodiesel (“B100”) was $3.33 and $nil, respectively. Gallons sold for the three months ended August 31, 2014 and 2015 were 635,057 and nil gallons, respectively, a decrease of 100%.

 

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Biodiesel sales for the nine months ended August 31, 2014 and August 31, 2015, excluding government incentives, were $2,741,000 and $52,800 respectively, a decrease of approximately $2,688,200 or 98%. For the nine months ended August 31, 2014 and August 31, 2015, our resales of biodiesel purchased from third party producers were $125,000 and $nil, respectively, a decrease of 100%. Revenue from our internal production, excluding government incentives, for the nine months ended August 31, 2014 and August 31, 2015 was $2,620,000 and $36,640, respectively, a decrease of $2,583,360 or 99%. For the nine months ended August 31, 2014 and August 31, 2015, our average sales price per gallon for 100 percent biodiesel (“B100”) was $3.54 and $5.46, respectively, an increase of $1.92 per gallon or 54%. Gallons sold for the nine months ended August 31, 2014 and 2015 were 773,586 and 6,709 gallons, respectively, a decrease of 766,877 gallons, or 99%.

 

During the three and nine months ended August 31, 2015, revenue from the sale of biodiesel was significantly reduced since our Sombra facility was idle during the three months ended August 31, 2015 due to lack of demand for biodiesel at favorable prices and we sold the Denami 600 biodiesel processor located at our Mississauga facility in March 2015.

 

The BTC provides a $1.00 refundable tax credit per gallon of 100% pure biodiesel, or B100, to the first blender of biodiesel with petroleum-based diesel fuel until its initial expiration on December 31, 2013. The expiration of the BTC had a negative effect on biodiesel production and sales in 2014. Furthermore, the delay, by the EPA, in establishing the 2014, 2015 and 2016 RVOs has greatly affected the demand for biodiesel so far this year.

 

In December 2014, the BTC was reinstated retroactively to January 1, 2014. Its reinstatement has had a positive effect on the biodiesel industry and on our financial results as we have been successful at negotiating for a share of the BTC to be paid back to us. During the nine months ended August 31, 2015, $828,177 of our revenue was attributable to the BTC, which represents our negotiated share of the BTC on applicable invoices issued to customers less discounts where applicable during fiscal 2014. There is no indication yet if the BTC will be reinstated for 2015 and beyond.

 

Feedstock. For the three months ended August 31, 2014 and August 31, 2015, feedstock sales were $52,300 and $nil, respectively, a decrease of $52,300, or 100%. For the nine months ended August 31, 2014 and August 31, 2015, feedstock sales were $148,600 and $3,400, respectively, a decrease of $145,200, or 98%. In the more recent period, with some variations in quantities, we were able to source additional feedstock as well as other products related to the production of biodiesel on the spot market that we resold immediately to our customers in Canada at a profit. We intend to continue with this strategy as opportunities arise to generate additional profit.

 

Glycerin. For the three months ended August 31, 2014 and August 31, 2015, Glycerin sales were $33,700 and $nil, respectively. For the nine months ended August 31, 2014 and August 31, 2015, Glycerin sales were $57,500 and $3,900, respectively, a decrease of $53,600, or 93%.

 

Government incentives. For the three months ended August 31, 2014 and August 31, 2015 we received $179,600 and $nil, respectively. This decrease was related to the decrease in the sales volume of biodiesel in the current quarter. For the nine months ended August 31, 2014 and August 31, 2015 we received $218,000 and $1,600, respectively, a decrease of $216,400, or 99%.

 

Equipment sales. For the three months ended August 31, 2014 and August 31, 2015 we generated $nil and $575,000, respectively. For the nine months ended August 31, 2014 and August 31, 2015 we generated $1,400 and $575,000, respectively. The revenue during the three months ended August 31, 2015 represents partial contract amount recognized on an equipment sale contract for a Denami 600 processor which was delivered and installed in the quarter at a third party customer’s plant.

 

Effective January 30, 2014, we entered into a sale and licensing agreement with an Aruba company pursuant to which they agreed to the purchase of a Denami 600 processor and license our software and monitoring system. We believe that the Denami 600 will be used for the local production of biodiesel in Aruba and is expected to be built and delivered to Aruba in fiscal 2016.

 

Royalties. For the three months ended August 31, 2014 and August 31, 2015 we received royalties of $8,100 and $nil, respectively. For the nine months ended August 31, 2014 and August 31, 2015 we received royalties of $19,500 and $6,000, respectively. Our customers own the Denami 600 processors, but license the software and monitoring system from us in exchange for an ongoing royalty payment of $0.11 per gallon of biodiesel produced by their Denami 600 processors.

 

Other. Other revenue for the three months ended August 31, 2014 and August 31, 2015 was $11,300 and $1,055, respectively. Other revenue for the nine months ended August 31, 2014 and August 31, 2015 was $31,700 and $843,700, respectively, an increase of $812,000. This increase is primarily due to the reinstatement of BTC during the nine months ended August 31, 2015. Its reinstatement has had a positive effect on the biodiesel industry and on our financial result as we have been successful at negotiating for a share of the BTC to be paid back to us.

 

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Cost of goods sold. Our cost of goods sold for the three months ended August 31, 2014 and August 31, 2015 were $2,833,000 and $520,600, respectively, a decrease of $2,312,400, or 82%. Our cost of goods sold for the nine months ended August 31, 2014 and August 31, 2015 were $3,497,500 and $582,700, respectively, a decrease of $2,914,800, or 83%.

 

Biodiesel cost of goods sold decreased by $2.64 million to $nil, for the three months ended August 31, 2015 compared to the three months ended August 31, 2014. This decrease was primarily due to our Sombra facility being idle during the three months ended August 31, 2015 because of a lack of demand for biodiesel at favorable prices, and the sale of the Denami 600 biodiesel processor located at our Mississauga facility in March 2015.

 

Biodiesel cost of goods sold decreased by $3.16 million to $18,900, or 96%, for the nine months ended August 31, 2015 compared to cost of goods sold of $3.18 million for the nine months ended August 31, 2014. If the average feedstock price and the price paid for biodiesel purchased from other biodiesel producers in Canada remained constant for the three months ended August 31, 2015 compared to the same fiscal period in 2014, the decrease in gallons of biodiesel sold would have resulted in $3,153,950 decrease in the related biodiesel cost of goods sold. The decrease in average feedstock prices from the quarter ended August 31, 2014 to the end of the same period in 2015 resulted in $8,648 of the decrease in biodiesel cost of goods sold.

 

All other costs of goods sold, excluding biodiesel cost of goods sold, for the three months ended August 31, 2014 and August 31, 2015 were $189,967 and $520,600, respectively, and for the nine months ended August 31, 2014 and August 31, 2015 were $316,032 and $563,800, respectively.

 

Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended August 31, 2014 and August 31, 2015, were $1.5 million and $687,300, respectively, a decrease of $812,700, or 54%. This decrease was mainly related to a decrease in salaries and wages of $312,400 as a result of layoffs, a decrease in professional fees of $48,700 as a result of a decrease in investor relations, a decrease in stock option expense of $99,700, a decrease in utilities of $78,000, decrease in equipment rent of $81,400 as a result of less railcar rentals, a decrease in lab and shop supplies of $34,000 and an increase in currency gain of $68,000.

 

Our selling, general and administrative expenses for the nine months ended August 31, 2014 and August 31 2015, were $4.4 million and $2.2 million, respectively, a decrease of $2.2 million, or 50%. This decrease was mainly related to a decrease in salaries and wages of $706,300 as a result of layoffs, a decrease in professional fees of $569,000 as a result of a decrease in investor relations consulting services, a decrease in utilities and office and general expenses of $223,700, a decrease in equipment rent of $211,300 as a result of less railcar rentals, a decrease in lab and shop supplies of $91,300 and an increase in currency gain of $174,800.

 

Other expenses and income. For the three months ended August 31, 2014 and August 31, 2015, we incurred interest expenses of $96,900 and $97,600, respectively. These amounts relate to accruals for interest expense associated with our outstanding loans. For the three months ended August 31, 2014 and August 31, 2015, we paid term loan interest of $44,249 and $31,605, respectively.

 

For the nine months ended August 31, 2014 and August 31, 2015, we incurred interest expenses of $390,800 and $257,500, respectively. These amounts relate to accruals for interest expense associated with our outstanding loans. For the nine months ended August 31, 2014 and August 31, 2015, we paid term loan interest of $ 131,818 and $97,304, respectively.

 

Income taxes. No income tax expense or benefit was recorded during the three and nine months ended August 31, 2014 and August 31, 2015 due to ongoing taxable losses. As of August 31, 2015, we were not subject to any uncertain tax exposures.

 

Net loss. For the three months ended August 31, 2015, our net loss decreased by $1.3 million resulting in a net loss of $724,000 from a net loss of $2.03 million for the three months ended August 31, 2014. The decrease in net loss for the three months ended August 31, 2015 was primarily due to decrease of $812,700 of selling, general and administrative expenses.

 

For the nine months ended August 31, 2015, our net loss decreased by approximately $3.5 million, resulting in a net loss of $1,573,000 from $5.08 million for the nine months ended August 31, 2014. The decrease in net loss for the nine months ended August 31, 2015 was primarily due to the $2.2 million decrease in selling, general and administrative expenses and $1.18 million increase in gross profit as a result of the reinstatement of BTC during the nine months ended August 31, 2015.

 

Liquidity and Capital Resources

 

Sources of liquidity. Since inception, a significant portion of our operations was financed through the sale of our capital stock. At November 30, 2014 and August 31, 2015, we had cash and cash equivalents of $65,649 and $353,664, respectively.

 

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Subsequent to the consummation of our IPO on October 30, 2012, we have raised aggregate net proceeds of approximately $10.6 million from the sale of our equity securities including the following (also, see note 9 of the unaudited condensed consolidated financial statements elsewhere in this report):

 

  net proceeds of approximately $2.24 million from a private placement completed in December 2013;
     
  net proceeds of approximately $125,000 (including, $25,000 of services rendered to us) from a private placement completed in January 2014;
     
 

net proceeds of approximately $5.05 million from a public offering completed in May 2014; and 

     
 

net proceeds of approximately $1.1 million from the registered direct offering completed in July 2015. 

 

On August 28, 2014, we entered into a feedstock credit facility with a major provider of credit to the renewable fuels industry (the “Lender”), which will provide us all the feedstock that is required to run at full current capacity and allow us to fulfill future orders for biodiesel from customers that have been approved by the credit department of the Lender (the “Feedstock Credit Facility”). The facility bears interest at 5% per annum. The facility will initiate upon payment by us of a $400,000 deposit that is required as collateral for the feedstock. As at August 31, 2015, the deposit had not been made.

 

On January 19, 2015, the Company signed a Technology Licensing Agreement (the “Agreement”) with a U.S. based entity (the “Licensee”). Licensee is no longer seeking to close that Agreement but alternatively is negotiating the purchase of two Denami 3000 processors from the Company for approximately $4 million. As of October 15, 2015, the parties have not yet enter into a binding agreement and negotiations are continuing.

 

On March 25, 2015, we entered into an agreement with a Canadian purchaser for the sale of the Denami 600 biodiesel processor located at our Mississauga facility and a PP-MEC pre-treatment system and received an initial payment of $199,950 (CDN$250,000) from the purchaser. The agreement provides for the payment of the purchase price over five installments, commencing on the date of the agreement. On April 23, 2015, an additional $163,560 (CDN$200,000) was received in regards to the equipment sale. On June 26 and August 5, 2015, additional payments of $121,725 (CDN$150,000) and $113,805 (CDN$150,000) were received in regards to the equipment sale. As at August 31, 2015, we are yet to receive CDN$250,000 payment due on the completion of the installation and positive ASTM lab report of the PP-MEC pre-treatment system and the final CDN$25,000 payment within 12 months of receiving a positive ASTM lab report.

 

On June 29, 2015, we consummated a registered direct offering with select institutional investors for the issuance and sale of an aggregate of 2,300,000 shares of Common Stock and warrants to purchase up to an additional 1,781,292 shares of our Common Stock (the “Offering”). The Common Stock and warrants were sold in units (each a “Unit”), with each Unit consisting of one share of Common Stock and a warrant to purchase 0.7745 of one share of Common Stock at an exercise price of $0.882 per share of Common Stock (“Warrant”). Each Warrant will be exercisable on January 1, 2016 and has a term of 5.5 years. Gross proceeds from the Offering were $1,250,050. The net proceeds to the Company from the Offering, after deducting fees and estimated offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants, were approximately $1.1 million.

 

The Offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-195271) previously filed with the Securities and Exchange Commission and declared effective on May 14, 2014, and a prospectus supplement thereunder, and pursuant to that certain Rule 462(b) Registration Statement (No. 333-205367) previously filed with the Securities and Exchange Commission on June 30, 2015.

 

Cash flow. The following table presents information regarding our cash flows and cash and cash equivalents for the nine months ended August 31, 2014 and August 31, 2015:

 

  

(Amounts rounded to nearest thousands)

Nine Months ended

August 31 and August 31

 
   2014   2015 
Net cash flows used in operating activities  $(5,108)  $(1,381)
Net cash flows (used in) provided by investing activities   (115)   520 
Net cash flows provided by financing activities   5,553    1,149 
Net change in cash and cash equivalents   330    288 
Cash and cash equivalents, end of period  $504   $354 

 

Operating activities. Net cash used in operating activities was $5.11 million for the nine months ended August 31, 2014. For the nine months ended August 31, 2014, the net loss was $5.08 million, which includes total non-cash items for depreciation, amortization, stock compensation expense, unrealized foreign exchange gain, deferred financing fees amortization, accrued interest, bad debts, issuance of common stock for services and unrealized loss on call options of $1.16 million. The net cash used in operating activities included a net working capital increase of $1.2 million. The working capital increase was a result of a decrease in accounts payable and accrued liabilities of $1.77 million and increase in inventories of $49,670 offset by decreases in accounts receivable of $456,377, deposit and employee loan of $34,493 and customer deposits of $144,002.

 

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Net cash used in operating activities was $1.38 million for the nine months ended August 31, 2015. For the nine months ended August 31, 2015, the net loss was $1.57 million which includes total non-cash items for depreciation, amortization, stock compensation expense, unrealized foreign exchange gain, amortization, accrued interest, bad debts, issuance of common stock warrants to an investor and issuance of common stock for services of $349,365. The net cash used in operating activities included a net working capital increase of $157,345. The working capital increase was a result of a decrease in accounts payable of $34,838, increase in prepaid expenses and deposits of $13,648, decrease in customer deposits of $137,039 and increase in inventories of $23,949 offset by a decrease in accounts receivable of $52,129.

 

The net result was cash used in operations of $1.38 million. Our current operating cash requirement is approximately $232,000 per month. However, once we commence production of ESO and Natural Polyol as well as the sale of equipment and PP-MEC catalyst, we expect to generate positive cash flow from operations.

 

Investing activities. Net cash used in investing activities for the nine months ended August 31, 2014 was $114,507, consisting of additions to property, plant and equipment amounting to $90,027, mainly representing costs related to our Sombra facility and purchase of call options amounting to $24,480. Net cash provided by investing activities for the nine months ended August 31, 2015 was $519,989, representing proceeds from the sale of the Denami 600 equipment.

 

Financing activities. Net cash provided by financing activities for the nine months ended August 31, 2014 was $5.55 million, which mainly included issuance of common stock/units under private placement, net of issuance costs of $1.21 million and issuance of common stock under public offering of $5.6 million offset by payment of financing from credit facility of $1.02 million. Net cash provided by financing activities for the nine months ended August 31, 2015 was $1.15 million, which mainly consisted of issuance of the Units in the Offering.

 

As at August 31, 2015, due in large part to the funds spent to develop and build our Sombra facility as well as minimal sales of biodiesel, we had an accumulated deficit of $23,788,599 and significant losses and negative cash flows from operations in prior periods. Further, our Sombra facility is now idle because of lack of demand for biodiesel at favorable prices. When put back into commercial production, we anticipate that our Sombra facility will generate positive cash flow from operations and will operate profitably once a sufficient level of commercial operations is achieved. However, there is uncertainty that this will occur in the near future so as to enable us to meet our obligations as they come due. As a result, there is substantial doubt regarding our ability to continue as a going concern. We may require additional financing to fund our operations, which may not be available at acceptable terms if at all. During the nine months ended August 31, 2015, we sold the Denami 600 biodiesel processor located at our Mississauga facility and a PP-MEC pre-treatment system, as described in sources of liquidity above. We plan on utilizing the existing feedstock credit facility once our Sombra facility recommences commercial operations. In addition, we expect to start producing and offering ESO and natural polyol from our Sombra facility before the end of 2015.

 

Capital Expenditures. We have expended $8.47 million to purchase our Sombra facility, retrofit that facility and equip it so it can begin full scale production of biodiesel. These funds were expended as follows: $2.03 million for the original purchase price of the facility; $1.56 million for the costs of retrofitting and $4.88 million for Denami 3000 processors, storage tanks and other production equipment. The funds used to purchase and complete the Sombra facility were provided by the cash proceeds from sale of our equity securities, monies borrowed from a stockholder and a term loan.

 

Future commitments. We have no material commitments for future capital expenditures.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing commitments.

 

Recent Accounting Pronouncements

 

For a discussion of new accounting pronouncements affecting the Company, refer to “Note 2 - Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements included elsewhere in this report.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide the information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of both of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and chief financial officer each concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC) rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

Exhibit Number   Description
4.1   Form of Warrant issued in the registered direct offering consummated on July 1, 2015(1)
     
10.1   Extension Agreement extending the term of the July 2013 Facility to July 1, 2016(2)
     
10.2   Form of Securities Purchase Agreement, dated as of June 29, 2015, between Methes Energies International Ltd and each of the Purchasers (as defined therein)(1)
     
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
     
32.2   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
     
101.INS   XBRL Instance Document*
     
101.SCH   XBRL Taxonomy Extension Schema Document*
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*

 

 

* Filed herewith.

** Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.

(1) Filed as an exhibit to our Current Report on Form 8-K on July 1, 2015 and incorporated herein by reference.

(2) Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2015 and incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Methes Energies International Ltd.
   
Dated: October 15, 2015 /s/ Michel G. Laporte
  Michel G. Laporte, Chief Executive Officer
  (Principal Executive Officer)
   
Dated: October 15, 2015 /s/ Edward A. Stoltenberg
  Edward A. Stoltenberg, Chief Financial Officer
  (Principal Financial Officer)

 

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