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EX-10.20 - CONVERTIBLE PROMISSORY NOTE DATED MARCH 10, 2016 - HWN, INC.f10q0216ex10xx_mantra.htm
EX-32.1 - CERTIFICATION - HWN, INC.f10q0216ex32i_mantra.htm
EX-10.19 - SECURITIES PURCHASE AGREEMENT DATED MARCH 10, 2016 - HWN, INC.f10q0216ex10xix_mantra.htm
EX-31.1 - CERTIFICATION - HWN, INC.f10q0216ex31i_mantra.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended February 29, 2016

 

  or

 

☐  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to  ___________

 

Commission File Number 000-53461

 

MANTRA VENTURE GROUP LTD.

 

(Exact name of registrant as specified in its charter)

 

British Columbia     26-0592672
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

#562 – 800 15355 24th Avenue, Surrey, British Columbia, Canada   V4A 2H9
(Address of principal executive offices)   (Zip Code)

 

(604) 560-1503

 

(Registrant’s telephone number, including area code)

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report) 

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 ☐ 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 ☐  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small 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 ☐     (Do not check if a smaller reporting company)

Smaller reporting company

☒ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

  ☐  YES ☒  NO

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS 

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

  ☐  YES ☒  NO 

APPLICABLE ONLY TO CORPORATE ISSUERS 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 87,696,955 common shares issued and outstanding as of May16, 2016.

 

 

 

 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II – OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Mine Safety Disclosures 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 18

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The unaudited interim consolidated financial statements of Mantra Venture Group Ltd. (“we”, “us”, “our” and “our company”) follow. All currency references in this report are in US dollars unless otherwise noted.

 

 1 
 

 

MANTRA VENTURE GROUP LTD.

Consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

Consolidated balance sheets as of February 29, 2016 and May 31, 2015 (unaudited) F-1
   
Consolidated statements of operations for the three and nine month period ended February 29, 2016 and 2015 (unaudited) F-2
   
Consolidated statements of cash flows for the three and nine month period ended February 29, 2016 and 2015 (unaudited) F-3
   
Notes to consolidated financial statements F-4 – F-19

  

 2 
 

 

MANTRA VENTURE GROUP LTD.

Consolidated balance sheets

(Expressed in U.S. dollars)

 

   February 29,
2016
$
   May 31,
2015
$
 
   (unaudited)     
ASSETS        
Current assets        
Cash   2,550    7,446 
Accounts receivable   7,062    25,527 
Deferred finance costs   4,068    7,085 
Prepaid expenses and deposits   4,790    126,146 
Total current assets   18,470    166,204 
           
Deposit   8,000    8,000 
Restricted cash   14,246    20,734 
Property and equipment, net   79,888    90,205 
Intangible assets, net   63,800    54,577 
Total assets   184,404    339,720 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities          
Accounts payable and accrued liabilities   759,029    613,875 
Due to related parties   115,340    112,193 
Loans payable   188,450    190,106 
Obligations under capital lease   7,613    17,325 
Convertible debentures (net of discount of $244,638 and $189,520, respectively)   453,302    237,333 
Derivative liability   618,845    353,668 
Total current liabilities   2,142,579    1,524,500 
Obligations under capital lease   5,270     
Total liabilities   2,147,849    1,524,500 
Stockholders’ deficit          
Mantra Venture Group Ltd. stockholders’ deficit          
Preferred stock Authorized: 20,000,000 shares, par value $0.00001 Issued and outstanding: Nil shares        
Common stock Authorized: 275,000,000 shares, par value $0.00001 Issued and outstanding: 83,979,687 (May 31, 2015 – 71,516,581) shares   841    715 
Additional paid-in capital   11,044,122    10,462,265 
Common stock subscribed   74,742    74,742 
Accumulated deficit   (12,857,662)   (11,529,916)
Total Mantra Venture Group Ltd. stockholders’ deficit   (1,737,957)   (992,194)
Non-controlling interest   (225,488)   (192,586)
Total stockholders’ equity deficit   (1,963,445)   (1,184,780)
Total liabilities and stockholders’ deficit   184,404    339,720 

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

 F-1 
 

 

MANTRA VENTURE GROUP LTD.

Consolidated statements of operations

(Expressed in U.S. dollars)

(unaudited)

 

   Three Months Ended
February 29,
   Three Months Ended
February 28,
   Nine Months Ended
February 29,
   Nine Months Ended
February 28,
 
  

2016

$

  

2015

$

  

2016

$

  

2015

$

 
                 
Revenue   30,299    39,116    81,067    116,912 
Cost of goods sold                
                     
Gross profit   30,299    39,116    81,067    116,912 
                     
Operating expenses                    
Consulting and advisory   35,751    135,735    182,344    395,319 
Depreciation and amortization   8,237    6,846    19,462    26,896 
Foreign exchange gain   (3,767)   (3,397)   (4,226)   (50,385)
General and administrative   37,775    90,514    193,875    471,801 
Management fees   35,335    76,957    153,773    192,956 
Professional fees   18,304    35,786    118,378    105,552 
Research and development   13,192    55,196    106,094    622,605 
Total operating expenses   144,827    397,637    769,700    1,764,744 
Loss before other expense   (114,528)   (358,521)   (688,633)   (1,647,832)
Other income (expense)                    
(Loss) gain on settlement of debt           (24,000)   1,759 
Accretion of discounts on convertible debentures   (42,017)   (27,563)   (360,724)   (49,391)
Loss on change in fair value of derivatives   (119,190)   (35,370)   (210,615)   (35,370)
Interest expense   (18,981)   (9,261)   (76,676)   (27,231)
Total other income expense   (180,188)   (72,194)   (672,015)   (110,233)
Net loss for the period   (294,716)   (430,715)   (1,360,648)   (1,758,065)
Less: net loss attributable to the non-controlling interest   3,756    18,523    32,902    59,608 
Net loss attributable to Mantra Venture Group Ltd.   (290,960)   (412,192)   (1,327,746)   (1,698,457)
Net loss per share attributable to Mantra Venture Group Ltd. common shareholders, basic and diluted   (0.00)   (0.01)   (0.02)   (0.02)
Weighted average number of shares outstanding used in the calculation of net loss attributable to Mantra Venture Group Ltd. per common share   80,407,995    71,333,248    75,562,065    70,789,507 

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

 F-2 
 

 

MANTRA VENTURE GROUP LTD.

Consolidated statements of cash flows

(Expressed in U.S. dollars)

(unaudited)

 

   Nine Months
Ended
February 29,
2016
$
   Nine Months
Ended
February 28,
2015
$
 
Operating activities        
         
Net loss   (1,360,648)   (1,758,065)
Adjustments to reconcile net loss to net cash used in operating activities:          
(Gain) loss on change in fair value of derivative liability   (199,277)   35,370 
Amortization of finance costs   16,017    470 
Accretion of discounts on convertible debentures   360,724    49,391 
Depreciation and amortization   19,462    26,896 
Foreign exchange loss (gain)   (7,458)   (8,342)
Initial derivative expenses   409,892     
Shares issued for services   30,001     
Stock-based compensation on options and warrants   11,042    323,455 
Loss (gain) on settlement of debt   24,000    (1,759)
Changes in operating assets and liabilities:          
Amounts receivable   18,465    123,445 
Prepaid expenses and deposits   121,357    304,972 
Accounts payable and accrued liabilities   182,654    (124,238)
Due to related parties   3,147    (82,143)
           
Net cash used in operating activities   (370,622)   (1,110,548)
           
Investing activities          
Purchase of property and equipment   (4,587)   (28,295)
Investment in intangible assets   (12,161)   (31,543)
           
Net cash used in investing activities   (16,748)   (59,838)
           
Financing activities          
Repayment of capital lease obligations   (5,487)   (8,243)
Repayment of loan payable   (50,000)   (54,809)
Proceeds from notes payable   55,961     
Proceeds from issuance of convertible debentures   367,000    115,500 
Proceeds from issuance of common stock and subscriptions received   15,000    253,787 
           
Net cash provided by financing activities   382,474    306,235 
           
Change in cash   (4,896)   (864,151)
           
Cash, beginning of period   7,446    931,886 
           
Cash, end of period   2,550    67,735 
           
Non-cash investing and financing activities:          
Common stock issued to relieve common stock subscribed       112,625 
Common stock issued to settle accounts payable and debt   24,000    9,019 
Common stock issued for conversion of notes payable   477,939     
Original issue discounts   26,087     
Debt issuance cost   13,000     
Original debt discount against derivative liability   389,755     
           
Supplemental disclosures:          
Interest paid   9,859    8,048 
Income taxes paid        

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

 F-3 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

1. Basis of Presentation

 

Mantra Venture Group Ltd. (the “Company”) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company continued its corporate jurisdiction out of the State of Nevada and into the province of British Columbia, Canada. The Company is in the business of developing and providing energy alternatives. The Company also provides marketing and graphic design services to help companies optimize their environmental awareness presence through the eyes of government, industry and the general public.

 

The accompanying unaudited consolidated interim financial statements of the Company should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2015. In the opinion of management, the accompanying financial statements reflect all adjustments of a recurring nature considered necessary to present fairly the Company’s financial position and the results of its operations and its cash flows for the periods shown.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. The results of operations and cash flows for the periods shown are not necessarily indicative of the results to be expected for the full year.

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has yet to acquire commercially exploitable energy related technology, and is unlikely to generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As at February 29, 2016, the Company has an accumulated loss of $12,857,662, a working capital deficit of $2,124,109. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be no certainty that these sources will provide the additional funds required for the next twelve months.

 

2. Significant Accounting Policies

 

(a)Basis of Presentation/Principles of Consolidation

 

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc. All the subsidiaries are wholly-owned with the exception of Climate ESCO Ltd., which is 64.55% owned and Mantra Energy Alternatives Ltd., which is 88.21% owned. All inter- company balances and transactions have been eliminated.

 

 F-4 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

(b)Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, valuation of inventory, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

(c)Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.

 

(d)Accounts Receivable

 

The Company recognizes allowances for doubtful accounts to ensure accounts receivable are not overstated due to the inability or unwillingness of its customers to make required payments. The allowance is based on historical bad debt expense, the age of receivable and the specific identification of receivables the Company considers at risk. The Company had no allowance for doubtful accounts as of February 29, 2016 and May 31, 2015.

 

(e)Property and Equipment

 

Property and equipment are stated at cost. The Company depreciates the cost of property and equipment over their estimated useful lives at the following annual rates:

 

  Automotive 3 years straight-line basis
  Computer equipment 3 years straight-line basis
  Leasehold improvements 5 years straight-line basis
  Office equipment and furniture 5 years straight-line basis
  Research equipment 5 years straight-line basis

 

(f)Intangible Assets

 

Intangible assets consist of patents and are stated at cost and have a definite life. Intangible assets are amortized over their estimated useful lives. The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.

 

(g)Long-lived Assets

 

In accordance with ASC 360, “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

 

 F-5 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

(h)Foreign Currency Translation

 

Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.

 

The Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.

 

(i)Income Taxes

 

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

As of February 29, 2016 and May 31, 2015, the Company did not have any amounts recorded pertaining to uncertain tax positions.

 

The Company files federal and provincial income tax returns in Canada and federal, state and local income tax returns in the U.S., as applicable. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010 to 2015. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of the Company’s, or its subsidiaries’, income tax returns for the open taxation years noted above.

 

The Company recognizes interest and penalties related to uncertain tax positions in tax expense. During the nine month periods ended February 29, 2016 and 2015, there were no charges for interest or penalties.

 

(j)Technology Development Revenue Recognition

 

The Company performs research and development services. The Company recognizes revenue under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability of the contract price is considered reasonably assured and can be reasonably estimated. Revenue is based on direct labor hours expended at contract billing rates plus other billable direct costs.

 

(k)Research and Development Costs

 

Research and development costs are expensed as incurred.

 

 F-6 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

(l)Stock-based Compensation

 

The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.

 

(m)Loss Per Share

 

The Company computes loss per share in accordance with ASC 260, "Earnings per Share" which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As at February 29, 2016, the Company had 63,641,611 (May 31, 2015 – 8,838,205) dilutive potential shares outstanding.

 

(n)Comprehensive Loss

 

ASC 220, “Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at February 29, 2016 and 2015, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the consolidated financial statements.

 

(o)Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

(p)Fair Value Measurements

 

The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:

 

Level 1 – quoted prices for identical instruments in active markets.

 

Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and.

 

 F-7 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the nine months ended February 29, 2016 and 2015. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 10 for additional information.

 

(q)Derivative Liabilities

 

The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As at February 29, 2016 and May 31, 2015, the Company had a $618,845 and $353,668 derivative liability, respectively.

 

3. Restricted Cash

 

Restricted cash represents cash pledged as security for the Company’s credit cards.

 

4. Property and Equipment

 

     Cost
$
   Accumulated depreciation
$
   February 29,
2016 
Net carrying value
$
   May 31,
2015 
Net carrying value
$
 
  Furniture and equipment   2,496    832    1,664    2,039 
  Computer   5,341    5,301    40    829 
  Research equipment   143,129    82,007    61,122    69,739 
  Vehicles under capital lease   72,690    55,628    17,062    17,598 
      223,656    143,768    79,888    90,205 

  

 F-8 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

5.Intangible Assets

 

     Cost
$
   Accumulated amortization 
$
   February 29,
2016
Net carrying value
$
   May 31,
2015
Net carrying value 
$
 
  Patents   70,789    6,989    63,800    54,577 

 

Estimated Future Amortization Expense:

 

     $ 
  For year ending May 31, 2016   1,302 
  For year ending May 31, 2017   5,208 
  For year ending May 31, 2018   5,208 
  For year ending May 31, 2019   5,208 
  For year ending May 31, 2020   5,208 

 

6.Related Party Transactions

 

  a) During the nine months ended February 29, 2016, the Company incurred management fees of $98,053 (2015 - $124,997) to the President of the Company.

 

  b) During the nine months ended February 29, 2016, the Company incurred management fees of $34,735 (2015 - $42,264) to the spouse of the President of the Company.

 

  c) During the nine months ended February 29, 2016, the Company incurred research and development fees of $28,920 (2015 - $57,859) to a director of the Company.

 

  d) The Company recorded $20,985 of management fees for the vesting of options previously granted to officers and directors.

 

  e) As at February 29, 2016, the Company owes a total of $98,060 (May 31, 2015 - $93,418) to the President of the Company and his spouse, and a company controlled by the President of the Company which is non-interest bearing, unsecured, and due on demand.

 

  f) As at February 29, 2016, the Company owes $17,280 (May 31, 2015 - $18,775) to an officer and a director of the Company, which is non-interest bearing, unsecured, and due on demand.

 

7.Loans Payable

 

  (a) As at February 29, 2016, the amount of $46,779 (Cdn$63,300) (May 31, 2015 - $50,738 (Cdn$63,300)) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

 

  (b) As at February 29, 2016, the amount of $17,500 (May 31, 2015 - $17,500) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

 

  (c) As at February 29, 2016, the amount of $15,000 (May 31, 2015 - $15,000) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

 

  (d) As at February 29, 2016, the amount of $13,963 (Cdn$18,895) (May 31, 2015 -$15,171 (Cdn$18,895)) is owed to a non-related party, which is non-interest bearing, unsecured, and due on demand.

 

 F-9 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  (e) As at February 29, 2016, the amounts of $7,500 and $27,343 (Cdn$37,000) (May 31, 2015 - $7,500 and $29,707, (Cdn$37,000)) are owed to a non-related party which are non-interest bearing, unsecured, and due on demand.

 

  (f) As at February 29, 2016, the amount of $4,490 (May 31, 2015- $4,490) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

 

  (g)

During the nine months ended February 29, 2016, the amounts of $5,961 (Cdn$8,066) (May 31, 2015 - $Nil) was advanced by a non-related party. The amount owing is non-interest bearing, unsecured, and due on demand.

 

  (h) In March 2012, the Company received $50,000 for the subscription of 10,000,000 shares of the Company’s common stock. During the year ended May 31, 2013, the Company and the subscriber agreed that the shares would not be issued and that the subscription would be returned. The subscription has been reclassified as a non-interest bearing demand loan until the funds are refunded to the subscriber.

 

  (i) On August 4, 2015, the Company borrowed $50,000 pursuant to a promissory note. The note was due on September 4, 2015. The note bears interest at 120% per annum prior September 4, 2015, and at 180% per annum after September 4, 2015. The holder of the note was also granted the rights to buy 100,000 shares of the Company’s common stock at a price of $0.15 per share until August 4, 2017. During the nine months ended February 29, 2016, the Company repaid the $50,000 note and $1,200 of accrued interest remains owing.

 

The rights issued with the note qualified for derivative accounting under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the warrants of $9,755 resulted in a discount to the note payable of $9,755. During the nine months ended February 29, 2016, the Company recorded accretion of $9,755.

 

8. Obligations Under Capital Lease

 

On July 31, 2012 and December 21, 2012, the Company entered into two agreements to lease two vehicles for three years each. In August 2015, the July 31, 2012 lease was renewed for an additional two years and on December 28, 2015 the December 21, 2012 lease was also renewed for an additional two years. The vehicle leases are classified as a capital leases. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of February 29, 2016:

  

  Year ending May 31:  $ 
  2016   2,224 
  2017   8,896 
  2018   3,336 
  Net minimum lease payments   14,456 
  Less: amount representing interest payments   (1,573)
  Present value of net minimum lease payments   12,883 
  Less: current portion   (7,613)
  Long-term portion   5,270 

  

At the end of the leases, the Company has the option to purchase the two vehicles for $1 each.

 

 F-10 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

9.Convertible Debentures

 

  (a) In October 2008, the Company issued three convertible debentures for total proceeds of $250,000 which bear interest at 10% per annum, are unsecured, and due one year from date of issuance. The unpaid amount of principal and accrued interest can be converted at any time at the holder’s option into 625,000 shares of the Company’s common stock at a price of $0.40 per share. The Company also issued 250,000 detachable, non-transferable share purchase warrants. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock for a period of two years from the date of issuance at an exercise price of $0.50 per share.

 

In accordance with ASC 470-20, “Debt with Conversion and Other Options”, the Company determined that the convertible debentures contained no embedded beneficial conversion feature as the convertible debentures were issued with a conversion price higher than the fair market value of the Company’s common shares at the time of issuance.

 

In accordance with ASC 470-20, the Company allocated the proceeds of issuance between the convertible debt and the detachable share purchase warrants based on their relative fair values. Accordingly, the Company recognized the fair value of the share purchase warrants of $45,930 as additional paid-in capital and an equivalent discount against the convertible debentures. The Company had recorded accretion expense of $45,930, increasing the carrying value of the convertible debentures to $250,000.

 

On January 19, 2012, the Company entered into a settlement agreement with one of the debenture holders to settle a $50,000 convertible debenture and $122,535 in accounts payable and accrued interest with the debt holder. Pursuant to the agreement, the debt holder agreed to reduce the debt to Cdn$100,000 on the condition that the Company pays the amount of Cdn$2,500 per month for 40 months, beginning March 1, 2012 and continuing on the first day of each month thereafter.

 

On July 18, 2012, the Company entered into a settlement agreement with the $150,000 debenture holder. Pursuant to the settlement agreement, the lender agreed to extend the due date until April 11, 2013 and the Company agreed to pay $43,890 of accrued interest within five days of the agreement (paid), pay the accruing interest on a monthly basis (paid), and pay a $10,000 premium in addition to the $150,000 principal outstanding on April 11, 2013. On April 29, 2013, the Company entered into an amended settlement agreement whereby the lender agreed to extend the due date to September 15, 2013 and the Company agreed to pay $6,836 of interest for the period from April 1 to September 15, 2013 upon execution of the agreement (paid) and granted the lender 100,000 stock options exercisable at $0.12 per share for a period of two years.

 

On November 15, 2013, the Company entered into a second settlement agreement amendment. Pursuant to the second amendment, on November 15, 2013, the Company agreed to pay interest of $4,438 (paid) and commencing February 1, 2014, the Company would make monthly payments of $10,000 on the outstanding principal and interest.

 

The Company evaluated the modifications and determined that the creditor did not grant a concession. In addition, as the present value of the amended future cash flows had a difference of less than 10% of the cash flows of the original debt, it was determined that the original and new debt instruments are not substantially different. As a result, the modification was not treated as an extinguishment of the debt and no gain or loss was recognized. The Company recorded the fair value of $12,901 for the stock options as additional paid-in capital and a discount. During the year ended May 31, 2014, the Company repaid $40,000 of the debenture. As at May 31, 2014 the Company had accreted $12,901 of the discount bring the carrying value of the convertible debenture to $114,661. During the year ended May 31, 2015, the Company repaid $54,808 decreasing the carrying value to $59,853. At February 29, 2016, the other remaining debenture of $50,000 remained outstanding and past due.

 

 F-11 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  (b) On August 19, 2013, the Company issued a convertible debenture for total proceeds of $10,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $10,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $10,000. As at February 29, 2016, the carrying value of the convertible promissory note was $10,000 and the note remained outstanding and in default.

 

  (c) On September 11, 2013, the Company issued a convertible debenture for total proceeds of $58,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $58,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $58,000. As at February 29, 2016, the carrying value of the convertible promissory note was $58,000 and the note remained outstanding and in default.

 

  (d) On October 18, 2013, the Company issued a convertible debenture for total proceeds of $94,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $94,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $94,000. As at February 29, 2016, the carrying value of the convertible promissory note was $94,000 and the note remained outstanding and in default.

 

  (e) On December 27, 2013, the Company issued three convertible debentures for total proceeds of $15,000, which bear interest at 10% per annum, are unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion features of $15,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $15,000. As at February 29, 2016, the carrying value of the convertible promissory note was $15,000and the note remained outstanding and in default.

 

  (f) On February 4, 2014, the Company issued a convertible debenture for total proceeds of $15,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $15,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $15,000. As at February 29, 2016, the carrying value of the convertible promissory note was $15,000 and the note remained outstanding and in default.

 

 F-12 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  (g) On February 17, 2015, the Company issued a convertible note in the principal amount of $125,000. The note has a cash redemption premium of 130% of the principal amount in the first 90 days following the execution date, of 135% for days 90-120 following the execution date, and 140% after the 120th day. After 140 days cash redemption is only available upon approval by the holder. The note bears interest at 12% per annum and is convertible into common shares of the Company at the lower of a 42% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 42% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $160,244 resulted in a discount to the note payable of $125,000 and the recognition of a loss on derivatives of $35,244. During the nine months ended February 29, 2016, the Company issued 10,195,218 shares of common stock upon the conversion of $125,000 of principal and $7,739 of interest. During the nine months ended February 29, 2016, the Company recorded accretion of $125,000 and the note was fully converted.

 

  (h) On June 1, 2015, the Company issued a convertible note in the principal amount of $100,000 due on demand on or after December 1, 2015. The note has a cash redemption premium of 130% of the principal amount in the first 90 days following the execution date, of 135% for days 90-120 following the execution date, and 140% after the 120th day. After 140 days cash redemption is only available upon approval by the holder. The note bears interest at 12% per annum and is convertible into common shares of the Company at the lower of a 42% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 42% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. In no event shall the conversion price be lower than $0.00001. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $310,266 resulted in a discount to the note payable of $100,000 and the recognition of a loss on derivatives of $210,266. During the nine months ended February 29, 2016, the Company issued 1,724,138 shares of common stock upon the conversion of $10,000 of principal. During the nine months ended February 29, 2016, the Company recorded accretion of $100,000, increasing the carrying value of the note to $90,000.At February 29, 2015, the note remained outstanding and past due.

 

  (i) On September 8, 2015, the Company issued a convertible note in the principal amount of $326,087. During the nine months ended February 29, 2016, the Company received the initial tranches of $280,000 net of a $26,087 original issue discount. The note bears interest at 12% per annum and is convertible into common shares of the Company at a 65% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 65% discount to the lowest trading price during the previous 20 trading days before the date the note was executed.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $479,626 resulted in a discount to the note payable of $280,000 and the recognition of a loss on derivatives of $22,425. During the nine months ended February 29, 2016, the Company recorded accretion of $61,449, increasing the carrying value of the note to $61,449.

 

 F-13 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

10. Derivative Liabilities

 

The embedded conversion option of the convertible debenture described in Note 9(g) contains a conversion feature that qualifies for embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

 

Upon the issuance of the convertible note payable described in Note 9(g), the Company concluded that it only has sufficient shares to satisfy the conversion of some but not all of the outstanding convertible notes, warrants and options. The Company elected to reclassify contracts from equity with the earliest inception date first. As a result, none of the Company’s previously outstanding convertible instruments qualified for derivative reclassification, however, any convertible securities issued after the election, including the convertible note described in Notes 9(h) and 9(i), and the rights described in Note 7(h) would qualify for treatment as derivative liabilities. The Company reassesses the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:

 

     February 29, 2016   May 31, 2015 
  Balance at the beginning of period  $353,668   $ 
  Addition of new derivative liabilities (embedded conversion options)   799,647    160,244 
  Conversion of derivative liability   (335,193)    
  Change in fair value of embedded conversion option   (199,277)   193,424 
             
  Balance at the end of the period  $618,845   $353,668 

 

The following table summarizes the change in fair value of derivatives:

 

     February 29, 2016  

May 31,

2015

 
  Fair value of derivative liabilities in excess of note proceeds received  $(409,892)  $ 
  Change in fair value of derivative liabilities during period   199,277     
  Change in fair value of derivatives  $(210,615)  $ 

 

The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Markets), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:

 

     Expected Volatility   Risk-free Interest Rate   Expected Dividend Yield   Expected Life (in years) 
  At issuance   134-206   0.07-0.74   0%   0.50-2.00 
  At February 29, 2016   171-234 %   0.25-0.62 %   0%   0.53-1.00 

 

 F-14 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

11.Common Stock

 

  (a) On February 2, 2016, the Company revised its authorized share capital to increase the number of authorized common shares from 100,000,000 common shares with a par value of $0.00001, to 275,000,000 common shares with a par value of $0.00001.

 

Stock transactions during the nine months ended February 29, 2016:

 

  (a) On July 1, 2015, the Company issued 150,000 common shares with a fair value of $30,000 pursuant to a consulting agreement.

 

  (b) On July 20, 2015, the Company issued 93,750 common shares at $0.16 per share for proceeds of $15,000.

 

  (c) On July 22, 2015, the Company issued 300,000 shares to settle $24,000 owed to a creditor. The shares had a fair value of $48,000 and the Company recorded a loss on settlement of debt of $24,000.

 

  (d) On August 24, 2015, the Company issued 322,872 shares of common stock upon the conversion of $15,000 of principal of the convertible note described in Note 9(g).

 

  (e) On September 21, 2015, the Company issued 676,132 shares of common stock upon the conversion of $20,000 of principal of the convertible note described in Note 9(g).

 

  (f) On October 22, 2015, the Company issued 1,581,778 shares of common stock upon the conversion of $20,000 of principal of the convertible note described in Note 9(g).

 

  (g) On November 9, 2015, the Company issued 3,497,506 shares of common stock upon the conversion of $44,222 of principal of the convertible note described in Note 9(g).

 

  (h) On December 22, 2015, the Company issued 1,000,000 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(g).

 

  (i) On January 1, 2016, the Company issued 1,000,000 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(g).

 

  (j) On January 27, 2016, the Company issued 1,538,462 shares of common stock upon the conversion of $5,778 of principal and $4,222 of accrued interest of the convertible note described in Note 9(g).

 

 F-15 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  (k) On February 12, 2016, the Company issued 578,468 shares of common stock upon the conversion of $3,523 of accrued interest of the convertible note described in Note 9(g).

 

  (l) On February 22, 2016, the Company issued 1,724,138 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(h).

 

12.Share Purchase Warrants

 

The following table summarizes the continuity of share purchase warrants:

  

     Number of 
warrants
   Weighted average exercise price
$
 
           
  Balance, May 31, 2015   5,258,333    0.44 
  Issued   100,000    0.15 
  Balance, February 29, 2016   5,358,333    0.44 

  

As at February 29, 2016, the following share purchase warrants were outstanding:

  

  Number of warrants   Exercise 
price
$
   Expiry date  
   150,000    0.60   November 18, 2016  
   500,000    0.60   February 27, 2017  
   333,333    0.80   June 4, 2017  
   200,000    0.80   July 11, 2017  
   100,000    0.15   August 4, 2017  
   4,075,000    0.37   April 10, 2019  
   5,358,333           

  

13.Stock Options

 

During the nine months ended February 29, 2016, the Company recorded $11,042 related to the vesting of previously granted stock options.

 

The following table summarizes the continuity of the Company’s stock options:

 

     Number
of options
   Weighted
average
exercise price
$
   Weighted average remaining contractual life (years)   Aggregate
intrinsic
value
$
 
  Outstanding, May 31, 2015   1,675,000    0.20           
  Expired   (350,000)   0.20           
  Outstanding, February 29, 2016   1,325,000    0.20    0.65     
  Exercisable, February 29, 2016   1,125,000    0.25    0.64     

 

 F-16 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

A summary of the changes of the Company’s non-vested stock options is presented below:

 

  Non-vested stock options  Number of Options   Weighted Average
Grant Date
Fair Value
$
 
  Non-vested at May 31, 2015   550,000    0.23 
  Expired   (50,000)   0.23 
  Vested   (300,000)   0.19 
             
  Non-vested at February 29, 2016   200,000    0.17 

 

As at February 29, 2016, there was $633 of unrecognized compensation cost related to non-vested stock option agreements. This cost is expected to be recognized over a weighted average period of 0.12 years.

 

Additional information regarding stock options as of February 29, 2016 is as follows:

 

  Number of
options
   Exercise
price
$
   Expiry date  
   175,000    0.20   April 28, 2016  
   200,000    0.30   July 17, 2016  
   200,000    0.10   August 1, 2016  
   200,000    0.20   November 1, 2016  
   150,000    0.20   December 9, 2016  
   400,000    0.20   March 16, 2017  
   1,325,000           

 

The fair values for stock options granted have been estimated using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:

 

     February 29, 2016   May 31,
2015
 
  Risk-free interest rate       0.48%
  Expected life (in years)       1.97 
  Expected volatility       111%

 

During the nine month period ended February 29, 2016, the Company recorded stock-based compensation of $Nil (2015 - $281,695) for stock options granted.

 

The weighted average fair value of the stock options granted for the nine month period ended February 29, 2016 was $Nil (2015 - $0.42) per option.

 

  14. Commitments and Contingencies

 

  (a) On September 2, 2009, the Company entered into an agreement with a company to acquire a worldwide, exclusive license for the Mixed Reactant Flow-By Fuel Cell technology. The term of the agreement is for twenty years or the expiry of the last patent licensed under the agreement, whichever is later. The Company agreed to pay the licensor the following license fees:

 

  an initial license fee of Cdn$10,000 payable in two installments: Cdn$5,000 upon execution of the agreement (paid) and Cdn$5,000 within thirty days of September 2, 2009 (paid);

 

  a further license fee of Cdn$15,000 (paid) to be paid within ninety days of September 2, 2009; and

  

 F-17 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  an annual license fee, payable annually on the anniversary of the date of the agreement as follows:

 

  September 1, 2010 Cdn$10,000 (paid)
  September 1, 2011 Cdn$20,000 (accrued)
  September 1, 2012 Cdn$30,000 (accrued)
  September 1, 2013 Cdn$40,000 (accrued)
 

September 1, 2014

and each successive anniversary

Cdn$50,000 (accrued)

 

The Company is to pay the licensor a royalty calculated as 2% of the gross revenue and 15% of any and all consideration directly or indirectly received by the Company from the grant of any sublicense rights. The Company will pay interest at a rate of 1% per month on any amounts past due. In addition, the Company is responsible for the timely payment of all future costs relating to patent expenses and any new or useful art, process, machine, manufacture or composition of matter arising out of any licensor improvements or joint improvements licensed under this agreement and identified by the licensor as potentially patentable. The Company must also invest a minimum of Cdn$250,000 in research and development directly associated with the technology.

 

  (b) On May 23, 2012, a former employee of the Company delivered a Notice of Application seeking judgment against the Company for approximately $55,000. The hearing of that Application took place on July 31, 2012, at which time the former employee obtained judgment in the approximate amount of $55,000. The Company did not defend the amount of the judgment and the amount is included in accounts payable, but claims a complete set-off on the basis that the former employee retains 1,000,000 shares of common stock of the Company as security for payment of the outstanding consulting fees owed to him. On August 31, 2012, the Company commenced a separate action against the former employee seeking a return of the 1,000,000 shares of common stock and a stay of execution of the judgment. That application is pending and has not yet been heard or determined by the court. The payment of the judgment claim of approximately $55,000 is dependent upon whether the former employee will first return the 1,000,000 shares of common stock noted above. The probable outcome of the Company’s claim for the return of the shares cannot yet be determined.

 

  (c) On May 7, 2014, the Company entered into a two year office space lease commencing July 1, 2014. Pursuant to the lease, the Company is required to pay Cdn$2,683 plus taxes per month. In addition, on June 1, 2014, the Company entered into a two year office space lease commencing June 1, 2014. Pursuant to the lease, the Company is required to pay Cdn$1,240 plus taxes per month. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the minimum lease payments as of February 29, 2016:

 

  Fiscal year ending May 31:  $ 
  2016   11,445 
  2017   1,983 
      13,428 

 

  (d) On November 1, 2014, the Company’s subsidiary entered into an employment agreement. Pursuant to the agreement, the employee will perform services for a term of one year for base remuneration of $80,000 per annum. In addition, the Company granted to the employee 100,000 stock options exercisable at a price of $0.20 per share. These options are non-transferrable, vest immediately, and expire upon the earlier of 24 months, or upon termination of the employment agreements.

 

  (e) On November 1, 2014, the Company’s subsidiary entered into an employment agreement. Pursuant to the agreement, the employee will perform services for a term of one year for base remuneration of $86,000 per annum. In addition, the Company granted to the employee 100,000 stock options exercisable at a price of $0.20 per share. These options are non-transferrable, vest immediately, and expire upon the earlier of 24 months, or upon termination of the employment agreements.

 

 F-18 
 

 

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2016

(Expressed in U.S. dollars)

(unaudited)

 

  (f) On November 15, 2013, the Company entered into a second settlement agreement with the $150,000 debenture holder described in Note 9(a). Pursuant to the second amendment, on November 15, 2013, the Company agreed to make monthly payments of $10,000 on the outstanding principal and interest. Payments were made until December 2014, but have not been made after. The plaintiff is seeking relief of amounts owed along with 10% interest per annum, from the date of judgments. All amounts are recorded in these financial statements.

 

  (g) On June 15, 2015, the Company entered into a consulting agreement pursuant to which the consultant will provide consulting services for nine months in consideration for $65,000 per year.

 

  (h) On September 3, 2015, a former prospective employee of the Company delivered a Notice of Claim seeking judgment against the Company for approximately $11,400. The Company believes the claim is without merit and intends to defend itself.

 

16. Subsequent Events

 

  (a) On March 14, 2016, the Company entered into a consulting agreement. Pursuant to the agreement, the Company will pay the consultant $10,000 per month and issue 550,000 shares per month for a period of three months.

 

  (b) On March 22, 2016, the Company issued 1,499,251 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(h).

 

  (c) On March 29, 2016, the Company issued 2,218,017 shares of common stock upon the conversion of $15,000 of principal of the convertible note described in Note 9(h).

 

  (d) On March 10, 2016, the Company issued a convertible note in the principal amount of up to $166,666 net of an original issuance discount of 8%. The note bears interest at 10% per annum and is convertible into common shares of the Company at a 65% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 65% discount to the lowest trading price during the previous 20 trading days before the date the note was executed.

  

 F-19 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plan”", “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our unaudited consolidated financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

 

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "US$" refer to United States dollars and all references to "common stock" refer to the common shares in our capital stock.

 

As used in this quarterly report, the terms “we”, “us”, “our” and “our company” mean Mantra Venture Group Ltd. and our wholly owned subsidiaries Carbon Commodity Corporation, Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc., as well as our majority owned subsidiary Climate ESCO Ltd. and Mantra Energy Alternatives Ltd., unless otherwise indicated.

 

Business Overview

 

We were incorporated in Nevada on January 22, 2007. On December 8, 2008 we continued our corporate jurisdiction out of the state of Nevada and into the Province of British Columbia, Canada. Our principal offices are located at #562 – 800 15355 24th Avenue, Surrey, British Columbia, Canada, V4A 2H9. Our telephone number is (604) 560-1503. Our fiscal year end is May 31.

 

We are building a portfolio of companies and technologies that mitigate negative environmental and health consequences that arise from the production of energy and the consumption of resources.

 

Our mission is to develop and commercialize alternative energy technologies and services to enable the sustainable consumption, production and management of resources on residential, commercial and industrial scales. We plan to develop or acquire technologies and services which include electrical power system monitoring technology, wind farm electricity generation, online retail of environmental sustainability solutions through a carbon reduction marketplace, and media solutions to promote awareness of corporate actions that support the environment. To carry out our business strategy we intend to acquire or license from third parties technologies that require further development before they can be brought to market. We also intend to develop such technologies ourselves, and we anticipate that to complete commercialization of some technologies we will enter into joint ventures, partnerships, or other strategic relationships with third parties who have expertise that we may require. We also plan to enter into formal relationships with consultants, contractors, retailers and manufacturers who specialize in the areas of environmental sustainability in order to carry out our online retail strategy.

 

 3 
 

 

We have acquired and own a process for the electro-reduction of carbon dioxide (“ERC”) and have the exclusive world license for a mixed-reactant fuel cell (“MRFC”). We are developing these technologies toward commercial applications.

  

In the past we have contracted out our development work to various laboratories. As of July 1, 2014, we have been carrying out research and development on these technologies in our own internal laboratory with our own staff in Vancouver, BC. These activities include: experimentation to improve the process performance; process and economic modeling to optimize the costs of a commercial system; design and simulation of pilot systems for technology demonstration and validation; business development activities such as the establishment of strategic and technology development partners; and the design and fabrication of laboratory prototypes, among others.

 

We currently carry on our business through our subsidiary, Mantra Energy Alternatives Ltd. (“MEA”), through which we identify, acquire, develop and market technologies related to alternative energy production and reduction of greenhouse gas emissions and resource consumption. We also have a number of inactive subsidiaries, which we plan to engage in various businesses in the future.

 

Since our inception, we have incurred operational losses and we have completed several rounds of financing to fund our operations.

 

On May 25, 2015, we released a demonstration video of our MRFC technology. This video showcased the fuel cell powering an electric scooter, and was designed to demonstrate the capabilities of the technology to strategic partners and investors.

 

Collaboration with Alstom (Switzerland) Ltd.

 

On June 24, 2013, we entered into an agreement with Alstom (Switzerland) Ltd. concerning the joint research and development projects relating to (1) a pilot plant for the conversion of carbon dioxide to formate at a Lafarge cement plant (the “Lafarge pilot project”); and (2) the development of processes for the conversion of carbon dioxide to other valuable chemicals.

 

Pursuant to the agreement with Alstom, MEA and Alstom will co-operate in one or more research and development projects related to MEA’s ERC technology. Prospective projects will be associated with the development of technologies and processes for the conversion of COto chemical products and the investigation of the feasibility of scale-up and commercialization of these processes. Prior to undertaking any research and development project under the agreement, MEA and Alstom will mutually agree to special terms and conditions governing the purpose, aims and objectives of any such project, including technical descriptions, the designation of work phases and project managers, and the allocation of responsibilities and costs between the parties. The commencement of any work phase for any project will be at the sole discretion of Alstom.

 

Intellectual Property Management

  

MEA and Alstom also will establish an intellectual property committee to oversee and manage all intellectual property issues and activities resulting from the agreement, including the protection of any new intellectual property. Each party will have exclusive right and discretion to prosecute all patents and patent applications resulting from its work on any project. The parties will jointly prosecute any intellectual property in jointly-owned results. Alstom will have the additional option under the agreement to acquire an exclusive license to intellectual property created by MEA under the agreement, and to a license to MEA’s ERC technology as may be reasonably required to exploit intellectual property assumed by Alstom. The agreement does not affect ownership of any underlying intellectual property of either party.

 

Lafarge Pilot Project and Carbon Dioxide to Alternative Products

 

The agreement with Alstom will remain valid for five years or the completion of the last active project, whichever last occurs, and may be extended at any time by the written agreement of both parties. The first joint research and development project under the agreement is the Lafarge pilot project, which plans for the design, construction, and installation of a pilot plant for the conversion of 100 kg/day carbon dioxide to formate, followed by a commercialization scale-up study. Alstom’s contribution to the Lafarge pilot plant project will be approximately CDN$250,000 for in-kind services.

 

 4 
 

 

A second integrated research and development project will study carbon dioxide conversion to alternative chemical products by electrochemical reduction, with a focus on catalyst materials and lifetime. This project has, for the past two years, been our only source of revenue. From Phases 1 to3 (lasting from September 2013 to September 2015), we received approximately CDN$611,125. The Phase 3 review occurred in September 2015 and tentatively approved for advancement into Phase 4. The timeline and structure of Phase 4 will depend upon the results, expected in October 2015, of a large-scale funding application submitted to the European Union in June 2015. If successful, this funding will cover Phases 4 and 5 of the current project. The original budget for Phase 4 was CDN$35,375, while Phase 5 was to-be-determined based on the results of the previous phases. Mantra and Alstom continue to pursue additional funding opportunities.

 

Electro Reduction of Carbon Dioxide (“ERC”)

 

We previously acquired 100% ownership in and to a certain chemical process for the electro-reduction of carbon dioxide. The reactor at the core of the chemical process, referred to as the electrochemical reduction of carbon dioxide (CO2), or “ERC”, has been proven functional through small-scale prototype trials and limited scale-up trials. ERC offers a possible solution to reduce the impact of COemissions on Earth’s environment by converting COinto chemicals with a broad range of commercial applications, including a fuel for a next generation of fuel cells. Powered by electricity, the ERC process combines captured carbon dioxide with water to produce materials, such as formic acid, formate salts, oxalic acid and methanol, that are conventionally obtained from the thermo-chemical processing of fossil fuels. However, while thermo-chemical reactions must be driven at relatively high temperatures that are normally obtained by burning fossil fuels, ERC operates at near ambient conditions and is driven by electric energy that can be taken from an electric power grid supplied by hydro, wind, solar or nuclear energy.

 

ERC has been shown to produce a range of compounds, including formic acid, formate salts, oxalic acid, and methanol. The efficiency for generation of each compound depends on the experimental conditions, most importantly the material of the cathode, which catalyzes the electrochemical reactions.

 

Until appropriate cathodes are found some products of CO2 reduction (methanol, for instance) are obtained at efficiencies too low for practical use. Other products can be generated on known cathodes with high current yields that could support valuable practical processes. For example, formic acid and its salts have been obtained on tin cathodes with current efficiencies above 80%, at industrially relevant conditions.

 

ERC Development to Date

 

In October of 2008, we completed our first ERC prototype reactor capable of processing 1 kilogram of COper day. We anticipate that commercialization of ERC will require us to develop reactors capable of processing not less than 100 tons of COper day; however, there is no guarantee that we will successfully produce reactors of that size. Production of commercially viable ERC reactors will depend on continued research and development, successful testing of small-scale ERC reactors, and securing of additional financing. This testing is underway in our research facilities, and is complemented by the parallel engineering of a scaled-up demonstration plant by BC Research Inc.

 

Established and Emerging Market for ERC and its Chemical Products

 

The technology behind ERC can be applied to any scale commercial venture which outputs COinto the atmosphere, though it is expected to be most effective when applied to large scale stationary sources. We anticipate that, once fully commercialized, we will be able to offer ERC as a CO2management system to various industry including steel, cement, fermentation processes, power generation and pulp and paper.

  

As described, the ERC process can be used to produce a variety of different chemical products from CO2. The first products that Mantra are targeting are formic acid and its salts. These products have existing markets as commodity chemicals and sell for between $1,000 and $1,500 per tonne, with global consumption being in excess of 600,000 tonnes per year. Formic acid and its salts are used in a variety of industrial applications, including silage preservation, leather tanning, textiles production, oil well drilling, and de-icing, and show enormous potential for market expansion through their use in chemical energy storage.

 

 5 
 

 

However, if the ERC process reaches market acceptance as a way to deal with COemissions from industry facilities, it will likely lead to supply of formic acid in excess of current market demand. We have identified several potential future applications for formic acid, which may lead to an expansion in current market demand. The application we have identified and are currently focusing on is energy storage.

 

Mixed-Reactant Fuel Cell (MRFC)

 

We retain the exclusive worldwide license for the MRFC technology. The MRFC is a novel fuel cell architecture that utilizes a mixture of the fuel and oxidant, and as a result, does not need a membrane. Conventional fuel cells (typically powered by hydrogen or methanol) must keep the fuel and oxidant separate, leading to several complications: a costly, failure-prone ion-selective membrane must be used to separate but ionically connect the cathode and anode chambers; complex reactant distribution and manifolding; and heavy, thick bipolar plates for separating cells. By contract, the MRFC has no membrane, has a simple reactant distribution mechanism, and contains no bipolar plates; as a result, the system is projected to be cheaper, lighter, and more robust than conventional fuel cells.

 

The MRFC thus offers the potential to provide distributed or grid-connected clean, affordable heat and power. Being very versatile due to its simplicity, the MRFC can address several markets, including emergency backup power, stationary combined heat and power, industrial vehicles such as forklifts, and transportation. The first target market for this technology is distributed emergency backup power for telecommunications.

 

The MRFC was invented and developed at the University of British Columbia by Professor Emeritus Colin Oloman and his team. In July 2014, we brought the technology into our internal lab for development, which culminated in May 2015 in a video we released showcasing an electric scooter powered exclusively by our MRFC technology. This video was intended to promote the technology to strategic partners and investors. Much of our research budget and activity over the period of January to May 2015 was dedicated to the design and construction of this scooter and the subsequent production of the demonstration video. We are currently exploring possibilities for joint development of the fuel cell with strategic partners.

  

Energy Storage

  

Formate salts and formic acid, which can be produced from COvia ERC, are excellent energy carriers and effective fuels for the MRFC. Thus, the integration of ERC and MRFC represents an energy storage solution whereby intermittent renewable electricity can be stored as formate/formic acid when it is available, and liberated when it is needed. The availability of energy storage is widely recognized as the next most critical factor for increased renewables penetration.

 

 6 
 

 

 

Recent Business and Corporate Developments

 

On November 3, 2015, our Board of Directors approved the an amendment to our Notice of Articles to increase the authorized number of our shares of common stock from 100,000,000 shares of common stock, par value $0.00001 to 275,000,000 shares of common stock, par value of $0.00001 per share .

 

On November 4, 2015, subsequent to the approval by our Board of Directors of the, the holder of the majority of the outstanding shares of our corporation entitled to vote gave us written consent for the amendment to our Notice of Articles. The increase in our authorized capital subsequently became effective with the filing of the amendment to our Notice of Articles on February 2, 2016.

 

 7 
 

 

On March 10, 2016, we entered into a securities purchase agreement pursuant to which we issued to one investor a convertible note in the principal amount of up to $166,666 net of an original issuance discount of 8%. The note bears interest at 10% per annum and is convertible into common shares of our Company at a 65% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 65% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. As at the date of this report the note holder has advanced $45,000 in consideration pursuant to the convertible note.

 

On March 14, 2016, we entered into a consulting agreement to acquire business planning, and investor and public relations services. Pursuant to the agreement, we will pay the consultant $10,000 per month and issue 550,000 shares per month for a period of three months.

 

Results of Operations for the Three and Nine Months Ended February 29, 2016 and February 28, 2015

 

The following summary of our results of operations should be read in conjunction with our unaudited financial statements for the Nine months ended February 29, 2016 and February 28, 2015.

 

Our operating results for the three and nine months ended February 29, 2016 and February 28, 2015 are summarized as follows:

 

   Three Months Ended   Nine Months Ended 
   February 29 2016
$
   February 28 2015
$
   February 29 2016
$
   February 28 2015
$
 
Revenue   30,299    39,116    81,067    165,262 
Operating expenses   144,827    397,637    769,700    1,764,744 
Other expense   180,188    72,194    672,015    110,233 
Net Loss   294,716    430,715    1,360,648    1,758,065 

 

Revenues

 

For the three months ended February 29, 2016, we generated $30,299 in revenue compared to revenue of $39,116 generated during the comparative period in 2015. For the nine months ended February 29, 2016, we generated $81,067 in revenue compared to revenue of $165,262 generated during the comparative period in 2014. Our revenue decreased during fiscal 2016 due to reduced activity following the completion of projects during fiscal 2015.

 

Expenses

 

Our operating expenses for the three and nine month periods ended February 29, 2016 and February 28, 2015 are summarized as follows:

 

   Three Months Ended   Nine Months Ended 
  

February 29
2016

 $

  

February 28
2015

 $

  

February 29
2016

 $

  

February 28
2015 

$

 
Consulting and advisory   35,751    135,735    182,344    395,319 
Depreciation and amortization   8,237    6,846    19,462    26,896 
Foreign exchange gain   (3,767)   (3,397)   (4,226)   (50,385)
General and administrative   37,775    90,514    193,875    471,801 
Management fees   35,335    76,957    153,773    192,956 
Professional fees   18,304    35,786    118,378    105,552 
Research and development   13,192    55,196    106,094    622,605 

 

 8 
 

 

During the three months ended February 29, 2016 our operating expenses were $144,827 compared to operating expenses of $397,637 for the three month period ended February 28, 2015.  The decrease of operating expenses of $252,810 during the most recent period resulted from a decrease in consulting and advisory fees, general and administrative expenses, management fees, professional fees and research and development expense.

 

During the nine months ended February 29, 2016 our operating expenses were $769,700 compared to operating expenses of $1,764,744 for the nine month period ended February 28, 2015.  The decrease of operating expenses of $995,044 during the most recent period resulted from a decrease in consulting and advisory fees, general and administrative expenses, management fees, professional fees and research and development expense.

 

Consulting and advisory fees decreased during fiscal 2016 as a result of scaling back the number of consultants under contract.  General and administrative expenses decreased during fiscal 2016 as a result of reduced travel and incidental expenses to seek new proposals, and an overall reduction of expenses to accommodate a reduced budget.   Research and development decreased during fiscal 2016 due to our Company having moved past the research phase of our current projects.

 

The weighted average number of shares outstanding was 80,407,995 and 71,333,248 for the three months ended February 29, 2016 and February 28, 2015, respectively.

 

The weighted average number of shares outstanding was 75,562,065 and 70,789,507 for the nine months ended February 29, 2016 and February 28, 2015, respectively

 

Liquidity and Financial Condition

 

Working Capital        
   At February 29   At May 31, 
    2016    2015 
           
Current Assets  $18,470   $166,204 
Current Liabilities  $2,142,579   $1,524,500 
Working Capital Deficit  $2,124,109   $1,358,296 

 

Cash Flows        
   At February 29   At February 28, 
   2016   2015 
         
Net cash used in operating activities  $(370,622)  $(1,110,548)
Net cash (used in) provided by investing activities  $(16,748)  $(59,838)
Net cash (used in) provided by financing activities  $382,474   $306,235 
Increase (Decrease) in Cash During the Period  $(4,896)  $(864,151)

 

As at February 29, 2016, our total current assets were $18,470 compared to $166,204 in total current assets at May 31, 2015. The decrease in current assets during fiscal 2016 resulted primarily from a decrease in prepaid expenses and deposits. As at February 29, 2016, our current liabilities were $2,142,579 compared to $1,524,500 in current liabilities as at May 31, 2015. The increase in current liabilities during the current period resulted primarily from increase in debt underlying convertible debentures issued by our Company, an increase in accounts payable and accrued liabilities, and a increase in derivative liability. We had a working capital deficit of $2,124,109 as of February 29, 2016 compared to a working capital deficit of $1,358,296 as of May 31, 2015.

 

 9 
 

 

Cash Flows from Operating Activities

 

We have not generated positive cash flows from operating activities. For the nine months ended February 29, 2016, net cash used in operating activities was $370,622 compared to $1,110,548 for the nine months ended February 28, 2015. The decrease in net cash used in operating activities was primarily a result of a decrease in cash used to fund operating losses during the nine months ended February 29, 2016 compared to the nine months ended February 28, 2015.

 

Cash Flows from Investing Activities

 

For the nine months ended February 29, 2016 cash used in investing activities was $16,748 compared to $59,838 for the nine months ended February 28, 2015. The decrease in cash used in investing activities was a result of a decrease in cash used to purchase property plant and equipment and invest in intangible assets during the nine months ended February 29, 2016 compared to the nine months ended February 28, 2015.

 

Cash Flows from Financing Activities

 

For the Nine months ended February 29, 2016 cash provided by financing activities was $382,474 compared to $306,235 for the Nine months ended February 28, 2015.

 

Plan of Operation and Future Financings

 

We have suffered recurring losses from operations.  The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed.  In this regard we have historically raised additional capital through equity offerings and loan transactions. We expect that working capital requirements will continue to be funded through a combination of further issuances of equity securities and debt instruments.

 

We expect that our total expenses will increase over the next year as we increase our business operations. We have not been able to reach the break-even point since our inception and have had to rely on outside capital resources. We do not anticipate generating significant revenues for the next year. Over the next 12 months, we plan to primarily concentrate on commercializing our ERC technology and associated projects.

 

Cash Requirements

 

We estimate our operating expenses and working capital requirements for the twelve month period to be as follows:

 

Description  Estimated
expenses
($)
 
      
Research and Development   500,000 
Consulting Fees   250,000 
Commercialization of ERC   3,000,000 
Shareholder communication and awareness   200,000 
Professional Fees   300,000 
Wages and Benefits   200,000 
Management Fees   150,000 
Total   4,600,000 

 

 10 
 

 

In order to fully carry out our business plan, we need additional financing of approximately $4,600,000 for the next 12 months. In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders’ loans. We do not presently have sufficient financing to undertake our planned business activities. Issuances of additional shares will result in dilution to our existing shareholders.

 

We currently do not have any arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to be within the amount of capital resources that are available to us.

 

Off-Balance Sheet Arrangements

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Inflation

 

The effect of inflation on our revenue and operating results has not been significant.

 

Critical Accounting Policies

 

Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management.

 

Basis of Presentation/Principles of Consolidation

 

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc. All the subsidiaries are wholly-owned with the exception of Climate ESCO Ltd., which is 64.55% owned and Mantra Energy Alternatives Ltd., which is 88.21% owned. All inter- company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, valuation of inventory, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

 11 
 

 

Accounts Receivable

 

The Company recognizes allowances for doubtful accounts to ensure accounts receivable are not overstated due to the inability or unwillingness of its customers to make required payments. The allowance is based on historical bad debt expense, the age of receivable and the specific identification of receivables the Company considers at risk. The Company had no allowance for doubtful accounts as of February 29, 2016 and May 31, 2015.

 

Intangible Assets

 

Intangible assets consist of patents and are stated at cost and have a definite life. Intangible assets are amortized over their estimated useful lives. The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.

 

Long-lived Assets

 

In accordance with ASC 360, “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

 

Technology Development Revenue Recognition

 

The Company performs research and development services. The Company recognizes revenue under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability of the contract price is considered reasonably assured and can be reasonably estimated. Revenue is based on direct labor hours expended at contract billing rates plus other billable direct costs.

 

Stock-based Compensation

 

The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.

 

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Loss Per Share

 

The Company computes loss per share in accordance with ASC 260, "Earnings per Share" which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As at February 29, 2016, the Company had 62,607,549 (May 31, 2015 – 8,838,205) dilutive potential shares outstanding.

 

Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

Derivative Liabilities

 

The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As at February 29, 2016 and May 31, 2015, the Company had a $618,845 and $353,668 derivative liability, respectively.

 

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 our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

  

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Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of February 29, 2016, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

 

a) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis;

  

b) We do not have a functioning audit committee. As a result, there is ineffective independent oversight in the establishment and monitoring of required internal controls and procedures; and

 

c) We do not have any formally adopted internal controls surrounding its cash and financial reporting procedures.

  

We are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters. In addition, when funds are available, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $100,000 per annum. As our operations are relatively small and we continue to have net cash losses each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. We currently engage an outside accounting firm to assist us in the preparation of our consolidated financial statements and anticipate doing so until we have a sufficient number of internal accounting personnel to achieve compliance. As necessary, we will engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.

 

Due to the fact that our internal accounting staff consists solely of a chief executive officer, who functions as our principal accounting officer, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

b) Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended February 29, 2016 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 1. Legal Proceedings

 

On September 3, 2015, a former prospective employee of our company delivered a Notice of Claim seeking judgment against our company for approximately $11,400. We believe that the claim is without merit and we intend to defend the claim.

 

Item 1A. Risk Factors

 

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 17, 2015, we issued a convertible note in the principal amount of $125,000. The note has a cash redemption premium of 130% of the principal amount in the first 90 days following the execution date, of 135% for days 90-120 following the execution date, and 140% after the 120th day. After 140 days cash redemption is only available upon approval by the holder. The note bears interest at 12% per annum and is convertible into common shares of our Company at the lower of a 42% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 42% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party.

 

On December 22, 2015, we issued 1,000,000 shares of common stock upon the conversion of $10,000 of principal of the convertible note issued February 17, 2015.

 

On January 1, 2016, we issued 1,000,000 shares of common stock upon the conversion of $10,000 of principal of the convertible note issued February 17, 2015.

 

On January 27, 2016, we issued 1,538,462 shares of common stock upon the conversion of $5,778 of principal and $4,222 of accrued interest of the convertible note issued February 17, 2015.

 

On February 12, 2016, we issued 578,468 shares of common stock upon the conversion of $3,523 of accrued interest of the convertible note issued February 17, 2015.

 

On February 22, 2016, we issued 1,724,138 shares of common stock upon the conversion of $10,000 of principal of the convertible note issued February 17, 2015.

 

On June 1, 2015, we issued a convertible note in the principal amount of $100,000 due on demand on or after December 1, 2015. The note has a cash redemption premium of 130% of the principal amount in the first 90 days following the execution date, of 135% for days 90-120 following the execution date, and 140% after the 120th day. After 140 days cash redemption is only available upon approval by the holder. The note bears interest at 12% per annum and is convertible into common shares of our Company at the lower of a 42% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 42% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. In no event shall the conversion price be lower than $0.00001. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party.

 

On March 22, 2016, we issued 1,499,251 shares of common stock upon the conversion of $10,000 of principal of the convertible note issued June 1, 2015.

 

On March 29, 2016, we issued 2,218,017 shares of common stock upon the conversion of $15,000 of principal of the convertible note issued June 1, 2015.

 

We issued the common shares pursuant to the conversion of the above described convertible promissory notes in reliance on Rule 506 of Regulation D of the Securities Act of 1933, as amended, on the basis that the holders of the convertible notes represented to our company that they were an “accredited investor” as such term is defined in Rule 501(a) of Regulation D.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number   Exhibit Description
(2)   Plan of acquisition, reorganization, arrangement, liquidation or succession
2.1   Plan of Conversion of Mantra Venture Group Ltd. from a Nevada Corporation into a British Columbia Corporation dated October 29, 2008. (incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 4, 2008)
(3)   Articles of Incorporation, Bylaws
3.1   Articles of Conversion of Mantra Venture Group Ltd. dated October 28, 2008 (incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 4, 2008)
3.2   British Columbia Table 1 Articles adopted on December 4, 2008 (incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 12, 2008)
3.3   British Columbia Notice of Articles (incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 12, 2008)
(10)   Material Contracts
10.1   Revolving Line of Credit Agreement with Larry Kristof dated October 15, 2008 (incorporated by reference to our Quarterly Report on Form 10-Q filed on January 14, 2009)
10.2   2009 Stock Compensation Plan and 2009 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed on November 24, 2009)
10.3   Subscription Agreement with Mantra Energy Alternatives Ltd. dated February 29, 2012 (incorporated by reference to our Current Report on Form 8-K filed on March 9, 2012)
10.4   Service Contract with PowerTech Labs Inc. dated June 19, 2012 (incorporated by reference to our Current Report on Form 8-K filed on June 25, 2012)
10.5   Settlement Agreement with StichtingAdministratiekantoor Carlos Bijl dated July 16, 2012 (incorporated by reference to our Current Report on Form 8-K filed on July 23, 2012)
10.6   Master Services Agreement between our subsidiary, Mantra Energy Alternatives Ltd., and Tekion (Canada), Inc. dated July 31, 2012 (incorporated by reference to our Current Report on Form 8-K filed on August 30, 2012)
10.7   Statement of Work between our subsidiary, Mantra Energy Alternatives Ltd. and Tekion (Canada), Inc. dated July 31, 2012 (incorporated by reference to our Current Report on Form 8-K filed on August 30, 2012)
10.8   Employment Agreement with and Larry Kristof dated January 8, 2013 (incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013)
10.9   Employment Agreement between our subsidiary, Mantra Energy Alternatives Ltd., and Larry Kristof dated January 8, 2013 (incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013)
10.10   Sublease Agreement with BC Research Inc. dated February 25, 2013 (incorporated by reference to our Current Report on Form 8-K filed on March18, 2013)

 

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Exhibit Number   Exhibit Description
10.11   Letter of Engagement with BC Research Inc. dated March 13, 2013 (incorporated by reference to our Current Report on Form 8-K filed on March18, 2013)
10.12   Amendment to Settlement Agreement with StichtingAdministratiekantoor Carlos Bijl dated April 29, 2013 (incorporated by reference to our Current Report on Form 8-K filed on May 22, 2013)
10.13   Director Agreement with Patrick Dodd dated May 7, 2013 (incorporated by reference to our Current Report on Form 8-K filed on May 10, 2013)
10.14   Consulting Agreement with BC0798465 BC Ltd. dated July 1, 2013 (incorporated by reference to our Current Report on Form 8-K filed on September 12, 2013)
10.15   Employment Agreement between our subsidiary, Mantra Energy Alternatives Ltd., and Sona Kazemi dated October 17, 2013 (incorporated by reference to our Current Report on Form 8-K filed on October 28, 2013)
10.16   Framework Agreement between our subsidiary, Mantra Energy Alternatives Ltd., and Alstom (Switzerland) Ltd. (incorporated by reference to our Current Report on Form 8-K filed on November 19, 2013)
10.17   Consulting Agreement with DCC Consulting dated March 13, 2014 (incorporated by reference to our Current Report on Form 8-K filed on March 24, 2013)
10.18   Letter of Engagement with BC Research Inc. dated March 25, 2014 (incorporated by reference to our Current Report on Form 8-K filed on April 1, 2013)
10.19*   Securities Purchase Agreement dated March 10, 2016
10.20*   Convertible Promissory Note dated March 10, 2016
(14)   Code of Ethics
14.1   Code of Ethics and Business Conduct (incorporated by reference to our Registration Statement on Form S- 1 filed on February 26, 2008)
(21)   List of Subsidiaries
21.1   Carbon Commodity Corporation (wholly owned)
    Mantra China Inc. (wholly owned)
    Mantra China Limited (wholly owned)
    Mantra Media Corp. (wholly owned)
    Mantra NextGen Power Inc. (wholly owned)
    Mantra Wind Inc. (wholly owned)
    Climate ESCO Ltd. (majority owned)
    Mantra Energy Alternatives Ltd. (majority owned)
(31)   (i) Rule 13a-14(a)/ 15d-14(a) Certifications (ii) Rule 13a-14(d)/ 15d-14(d) Certifications
31.1*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer
(32)   Section 1350 Certifications
32.1*   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer
(99)   Additional Exhibits
99.1   Audit Committee Charter adopted April 20, 2010 (incorporated by reference to our Annual Report on Form 10-K filed with the SEC on September 14, 2010)
(101)*   Interactive Data Files
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Filed herewith.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Mantra Venture Group Ltd.
                  (Registrant)
     
Date: May 16, 2016   /s/ Larry Kristof
    Larry Kristof
    President, Chief Executive Officer, Chief Financial
    Officer, Secretary, Treasurer and Director
    (Principal Executive Officer, Principal Financial Officer
    and Principal Accounting Officer)

 

 

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