HIGH WIRE NETWORKS, INC. - Quarter Report: 2016 August (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended August 31, 2016

 

or

 

¨ TRANSITION REPORT PURSUANT TO 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)		(I.R.S. Employer Identification No.)

 

#1562 128^th Street

Surrey, British Columbia, Canada V4A 3T7

(Address of principal executive offices) (zip code)

 

(604) 560-1503

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a 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   x.

 As of December 1^st, 2016, there were 108,087,384 shares of registrant’s common stock outstanding.

1

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MANTRA VENTURE GROUP LTD.

 

INDEX

  

PART I.	FINANCIAL INFORMATION
	ITEM 1	Financial Statements
		Consolidated balance sheets as of August 31, 2016 (unaudited) and May 31, 2016		F-2
		Consolidated statements of operations for the three months ended August 31, 2016 and 2015 (unaudited)		F-3
		Consolidated statements of cash flows for the three months ended August 31, 2016 and 2015 (unaudited)		F-4
		Notes to consolidated financial statements (unaudited)		F-6 –F-20
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		10
	ITEM 4.	Controls and Procedures		11
PART II.	OTHER INFORMATION
	ITEM 1.	Legal Proceedings		12
	ITEM 1A.	Risk Factors		12
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		12
	ITEM 3.	Defaults Upon Senior Securities		13
	ITEM 4.	Mine Safety Disclosures		13
	ITEM 5.	Other Information		13
	ITEM 6.	Exhibits		13
	SIGNATURES			14

 

2

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 ITEM 1 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANTRA VENTURE GROUP LTD.

Consolidated balance sheets as of August 31, 2016 (unaudited) and May 31, 2016	F-2
Consolidated statements of operations for the three month period ended August 31, 2016 and 2015 (unaudited)	F-3
Consolidated statements of cash flows for the three month period ended August 31, 2016 and 2015 (unaudited)	F-4
Notes to consolidated financial statements (unaudited)	F-6 – F-20

F-1

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MANTRA VENTURE GROUP LTD.

Consolidated balance sheets

(Expressed in U.S. dollars)

	August 31	May 31,
	2016	2016
	$	$
	(unaudited)	(as revised)
ASSETS
Current assets
Cash	4,126	1,119
Accounts receivable	5	7,358
Prepaid expenses and deposits	2,321	4,789
Total current assets	6,452	13,266
Deposit	-	8,000
Restricted cash	-	14,519
Property and equipment, net	66,292	72,627
Intangible assets, net	61,430	62,615
Total assets	134,174	171,027
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities	840,453	836,982
Due to related parties	178,255	154,560
Loans payable	208,138	199,108
Obligations under capital lease	8,010	8,123
Convertible debentures (net of discount of $202,440 and $330,123, respectively)	820,979	668,921
Derivative liability	844,673	978,245
Total current liabilities	2,900,508	2,845,939
Obligations under capital lease	1,485	3,308
Total liabilities	2,901,993	2,849,247
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: 95,753,802 (May 31, 2016 - 88,559,024) shares	958	886
Additional paid-in capital	11,262,851	11,163,514
Common stock subscribed	74,742	99,742
Accumulated deficit	(13,863,959)	(13,706,088)
Total Mantra Venture Group Ltd. stockholders’ deficit	(2,525,408)	(2,441,946)
Non-controlling interest	(242,411)	(236,274)
Total stockholders’ equity deficit	(2,767,819)	(2,678,220)
Total liabilities and stockholders’ deficit	134,174	171,027

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

F-2

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MANTRA VENTURE GROUP LTD.

Consolidated statements of operations

(Expressed in U.S. dollars)

(unaudited)

			Three Months  Ended August 31,	Three Months  Ended August 31,
			2016 $	2015 $
Revenue			–	13,638
Cost of goods sold			–	–
Gross profit			–	13,638
Operating expenses
Consulting and advisory			5,000	92,122
Depreciation and amortization			7,521	3,431
Foreign exchange loss (gain)			438	(727)
General and administrative			20,651	87,575
Management fees			45,744	67,268
Professional fees			335	25,575
Research and development			9,305	52,322
Total operating expenses			88,994	327,566
Loss before other expense			(88,994)	(313,928)
Other income (expense)
Loss on settlement of debt			–	(24,000)
Accretion of discounts on convertible debentures			(167,183)	(181,910)
Gain on change in fair value of derivatives			128,674	206,696
Interest expense			(36,505)	(23,548)
Total other income (expense)			(75,014)	(22,762)
Net loss for the period			(164,008)	(336,690)
Less: net loss attributable to the non-controlling interest			6,137	15,967
Net loss attributable to Mantra Venture Group Ltd.			(157,871)	(320,723)
Net loss per share attributable to Mantra Venture Group Ltd. common shareholders, basic and diluted			(0.00)	(0.00)
Weighted average number of shares outstanding used in the calculation of net loss attributable to Mantra Venture Group Ltd. per common share			90,982,677	72,566,328

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

F-3

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MANTRA VENTURE GROUP LTD.

Consolidated statements of cash flows

(Expressed in U.S. dollars)

(unaudited)

	Three Months Ended August 31, 2016 $	Three Months Ended August 31, 2015 $
Operating activities
Net loss	(164,008)	(336,690)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) on change in fair value of derivative liability	(149,189)	(416,963)
Amortization of finance costs	–	8,562
Accretion of discounts on convertible debentures	167,183	181,910
Depreciation and amortization	7,521	3,431
Foreign exchange loss (gain)	438	(6,586)
Initial derivative expenses	20,515	210,267
Shares issued for services	–	30,001
Interest related to cash redemption premium on convertible notes	9,875	–
Stock-based compensation on options and warrants	–	15,610
Loss on settlement of debt	–	24,000
Due to related parties	23,695	1,324
Changes in operating assets and liabilities:
Amounts receivable	7,353	20,757
Prepaid expenses and deposits	10,468	28,887
Accounts payable and accrued liabilities	18,307	59,691
Net cash used in operating activities	(47,842)	(175,799)
Investing activities
Investment in intangible assets	–	(682)
Net cash used in investing activities	–	(682)
Financing activities
Repayment of capital lease obligations	(2,651)	(1,527)
Proceeds from notes payable	9,000	50,000
Proceeds from issuance of convertible debentures	39,500	100,000
Checks issued in excess of funds on deposit	–	13,562
Finance costs	–	(8,000)
Proceeds from issuance of common stock and subscriptions received	5,000	15,000
Net cash provided by financing activities	50,849	169,035
Change in cash	3,007	(7,446)
Cash, beginning of period	1,119	7,446
Cash, end of period	4,126	–

F-4

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Non-cash investing and financing activities:
Common stock issued to relieve common stock subscribed	25,000	–
Common stock issued to settle accounts payable and debt	–	24,000
Common stock issued for conversion of notes payable	69,409	43,404
Original debt discount against derivative liability	39,500	109,755
Supplemental disclosures:
Interest paid	364	726
Income taxes paid	–	–

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

F-5

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MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

August 31, 2016

(Expressed in U.S. dollars)

(unaudited)

1.

Organization and Going Concern

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, 2016. 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 unaudited 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 August 31, 2016, the Company has an accumulated loss of $13,863,959, and a working capital deficit of $2,894,056. 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.

F-6

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2.

Significant Accounting Policies

a.

Basis of Presentation/Principles of Consolidation

These unaudited 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.

b.

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 August 31, 2016, the Company had 243,619,532 (August 31, 2015 – 10,761,804) dilutive potential shares outstanding.

c.

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.

3.

Restricted Cash

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

4.

Property and Equipment

	Cost $	Accumulated depreciation $	August 31, 2016 Net carrying value $	May 31, 2016 Net carrying value $
Furniture and equipment	2,496	1,082	1,414	1,539
Computer	5,341	5,341	–	–
Research equipment	143,129	90,941	52,188	56,655
Vehicles under capital lease	72,690	60,000	12,690	14,433
	223,656	157,364	66,292	72,627

During the three months ended August 31, 2016, the Company recorded $6,336 (2015 - $2,979) of amortization expense.

F-7

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5.

Intangible Assets

	Cost $	Accumulated amortization $	August 31, 2016 Net carrying value $	May 31, 2016 Net carrying value $
Patents	70,789	9,359	61,430	62,615

During the three months ended August 31, 2016, the Company recorded $1,185 (2015 - $452) of amortization expense.

Estimated Future Amortization Expense:

For year ending May 31, 2017	3,553
For year ending May 31, 2018	4,738
For year ending May 31, 2019	4,738
For year ending May 31, 2020	4,738
For year ending May 31, 2021	4,738

6.

Related Party Transactions

a)

During the three months ended August 31, 2016, the Company incurred management fees of $34,308 (2015 - $35,902) to the President of the Company.

b)

During the three months ended August 31, 2016, the Company incurred management fees of $11,436 (2015 - $12,298) to the spouse of the President of the Company.

c)

During the three months ended August 31, 2016, the Company incurred research and development fees of $0 (2015 - $ 17,663) to a director of the Company.

d)

During the three months ended August 31, 2016, the Company recorded $0 (2015 - $19,068) of management fees for the vesting of options previously granted to officers and directors.

e)

As at August 31, 2016, the Company owes a total of $160,427 (May 31, 2016 - $136,723) 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 August 31, 2016, the Company owes $17,828 (May 31, 2016 - $17,837) 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 August 31, 2016, the amount of $48,259 (Cdn$63,300) (May 31, 2016 - $48,285 (Cdn$63,300)) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

(b)

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

F-8

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(c)

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

(d)

As at August 31, 2016, the amount of $14,406 (Cdn$18,895) (May 31, 2016 -$14,413 (Cdn$18,895)) is owed to a non-related party, which is non-interest bearing, unsecured, and due on demand.

(e)

As at August 31, 2016, the amounts of $7,500 and $28,209 (Cdn$37,000) (May 31, 2016 - $7,500 and $28,224, (Cdn$37,000)) are owed to a non-related party which are non-interest bearing, unsecured, and due on demand.

(f)

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

(g)

As at August 31, 2016, the amounts of $13,774 (Cdn$18,066) (May 31, 2016 - $13,696 (Cdn$18,066)) 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 year ended May 31, 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. As of May 31, 2016, the Company recorded accretion of $9,755.

(j)

As at August 31, 2016, the amount of $9,000 (May 31, 2016 - $0) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.

F-9

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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 August 31, 2016:

Year ending May 31:		$
2017		6,883
2018		3,442
Net minimum lease payments		10,325
Less: amount representing interest payments		(830)
Present value of net minimum lease payments		9,495
Less: current portion		(8,010)
Long-term portion		1,485

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

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.

F-10

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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. 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 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 because the fair value of the old debt and new debt remained the same. 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 August 31, 2016, the other remaining debenture of $59,853 remained outstanding and past due.

(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 August 31, 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 August 31, 2016, the carrying value of the convertible promissory note was $58,000 and the note remained outstanding and in default.  

F-11

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(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 August 31, 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 August 31, 2016, the carrying value of the convertible promissory note was $15,000 and 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 August 31, 2016, the carrying value of the convertible promissory note was $15,000 and the note remained outstanding and in default.

(g)

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 year ended May 31, 2016, the Company issued 6,303,475 shares of common stock upon the conversion of $45,000 of principal. During the year ended May 31, 2016, the Company recorded accretion of $100,000 and recorded the cash redemption premium of $26,250 increasing the carrying value of the note to $81,250.  

During the three months ended August 31, 2016, the Company issued 5,194,778 shares of common stock upon the conversion of $25,000 of principal. At August 31, 2016, the carrying value of the note was $56,250 and the note remained outstanding and past due.

F-12

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(h)

On September 8, 2015, the Company issued a convertible note in the principal amount of $326,087. During the year ended May 31, 2016, the Company received the initial tranches of $280,000 net of a $26,087 original issue discount. 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.

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 $204,626.  During the year ended May 31, 2016, the Company recorded accretion of $120,175 and recorded a default fee of $76,522 increasing the carrying value of the note to $190,696.

During the three months ended August 31, 2016, the Company recorded accretion of $121,939 increasing the carrying value of the note to $318,635.

(i)

On December 4, 2015, the Company issued a convertible note in the principal amount of $105,000 as an inducement to the holder of the convertible notes described in Note 9(g), to enter into an agreement to sell and assign the remaining outstanding principal to a third party. The note included a $10,000 original issue discount. The note bears interest at 10% per annum and is convertible into common shares of the Company at a 52% discount to the lowest trading price during the previous 30 trading days to the date of conversion; or a 52% discount to the lowest trading price during the previous 30 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 $216,108 resulted in a discount to the note payable of $95,000 and the recognition of a loss on derivatives of $111,108.  During the year ended May 31, 2016, the Company recorded accretion of $22,440 and recorded a default of fee of $26,250 increasing the carrying value of the note to $48,690.

During the three months ended August 31, 2016, the recorded accretion of $25,899 increasing the carrying value of the note to $74,589.

(j)

On March 10, 2016, the Company issued a convertible note in the principal amount of up to $166,666. During the year ended May 31, 2016, the Company received initial tranches of $65,000 net of a $16,666 original issue discount. 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.

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 $218,785 resulted in a discount to the note payable of $81,666 and the recognition of a loss on derivatives of $158,785.  During the year ended May 31, 2016, the Company recorded accretion of $20,015, and recorded a default fee of $20,417 increasing the carrying value of the note to $40,432.

During the three months ended August 31, 2016, the Company received additional tranches of $39,500. The initial fair value of the conversion feature of $60,015 resulted in a discount to the note payable of $39,500 and the recognition of a loss on derivatives of $20,515.  During the three months ended August 31, 2016, the Company recorded accretion of $19,345, and recorded a default fee of $9,875 increasing the carrying value of the note to $69,652.

F-13

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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), 9(i) and 9(j), and the rights described in Note 7(i) 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:

		August 31, 2016		May 31, 2016
Balance at the beginning of period	$	978,245	$	353,668
Original discount limited to proceeds of notes		39,500		541,755
Fair value of derivative liabilities in excess of notes proceeds received		20,515		692,785
Conversion of derivative liability		(44,409)		(414,246)
Change in fair value of embedded conversion option		(149,178)		(195,717)
Balance at the end of the period	$	844,673	$	978,245

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	134-213%	0.07-0.74%	0%	0.50-2.00
At August 31, 2016	195-279%	0.61%	0%	0.02-1.00

F-14

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11.

Common Stock

(a)

As at May 31, 2016 and 2015, the Company had received proceeds of $2,080 at $0.08 per unit for subscriptions for 26,000 units.  Each unit consisted of one share of common stock and one-half of one share purchase warrant.  Each whole share purchase warrant is exercisable at $0.20 per common share for a period of two years or five business days after the Company’s common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.40 per share for seven consecutive trading days.

(b)

As at May 31, 2016 and 2015 the Company’s subsidiary, Mantra Energy Alternatives Ltd., had received subscriptions for 67,000 shares of common stock at Cdn$1.00 per share for proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of the non-controlling interest portion of $7,231.

(c)

As at May 31, 2016 and 2015, the Company’s subsidiary, Climate ESCO Ltd., had received subscriptions for 210,000 shares of common stock at $0.10 per share for proceeds of $21,000, which is included in common stock subscribed, net of the non-controlling interest portion of $7,384.

(d)

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 three months ended August 31, 2016:

(a)

On July 1, 2016, the Company issued 2,368,322 shares of common stock upon the conversion of $15,000 of principal of the convertible note described in Note 9(g).

(b)

On August 15, 2016, the Company issued 2,826,456 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(g).

(c)

On August 29, 2016, the Company issued 2,000,000 units at $0.015 per unit for proceeds of $30,000. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable at $0.03 per share of common stock for a period of two years or thirty calendar days after the Company’s common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.03 per share for five consecutive trading days. As at May 31, 2016, the Company had received proceeds of $25,000 at $0.015 per unit for subscriptions for 1,666,666 units which was included in common stock subscribed.

F-15

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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	1,766,667	0.04
Balance, May 31, 2016	7,025,000	0.34
Issued	333,334	0.03
Balance, August 31, 2016	7,358,334	0.33

As at May 31, 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
1,000,000	0.03	April 15, 2018
666,667	0.03	May 4, 2018
100,000	0.15	August 4, 2017
4,075,000	0.37	April 10, 2019
333,334	0.03	August 29, 2016
7,358,334

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13.

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	0.17
Granted	350,000	0.03
Expired	(525,000)	0.20
Outstanding, May 31, 2016	1,500,000	0.16
Expired	(550,000)	0.20
Outstanding, August 31, 2016	950,000	0.14	0.89	–
Exercisable, August 31, 2016	950,000	0.14	0.89	–

Non-vested stock options	Number of Options	Weighted Average Grant Date Fair Value
		$
Non-vested at May 31, 2015	550,000
Granted	350,000	0.03
Expired	(50,000)	0.20
Vested	(800,000)	0.14
Non-vested at May 31, 2016	50,000	0.30
Expired	(50,000)	0.30
Non-vested at August 31, 2016	–

Additional information regarding stock options as of May 31, 2016 is as follows:

Number of options	Exercise price $	Expiry date
200,000	0.20	November 1, 2016
400,000	0.20	March 16, 2017
350,000	0.03	May 17, 2018
950,000

The Company did not grant any stock options or record any stock-based compensation for options granted during the three month period ended August 31, 2016 or 2015.

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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

·

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 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.

(d)

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.

(e)

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 ($20,000 paid) and issue 550,000 shares per month for a period of three months. At May 31, 2016, the Company had not issued the shares to the consultant due to non-performance.

(f)

On July 15, 2016, the Company entered into an agreement to lease office space for $430 ($564CAD) per month until June 30, 2017.

F-18

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16.

Revision of Prior Year Financial Statements

The Company identified an error relating to the non-recognition of the convertible note described in Note 9(i) during the year ended May 31, 2016. The effect of the error is to increase net loss by $275,295 for the year ended May 31, 2016.

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited consolidated financial statements.  Accordingly, these changes are disclosed herein and will be disclosed prospectively.  

As a result of the aforementioned correction of accounting errors, the relevant annual financial statements have been revised as follows:

Effects on financials for the Year Ended May 31, 2016:

	May 31, 2016
Consolidated Balance Sheet	As Previously Reported	Adjustment	As Revised
Accounts payable and accrued liabilities	$ 810,575	$ 26,407	$ 836,982
Convertible debentures	620,231	48,690	668,921
Derivative liability	778,047	200,198	978,245
Accumulated deficit	(13,430,793)	(275,295)	(13,706,088)
Total Mantra Venture Group Ltd. stockholder’s deficit	(2,166,651)	(275,295)	(2,441,946)
Total stockholders’ deficit	(2,402,925)	(275,295)	(2,678,220)

F-19

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17.

Subsequent Events

(a)

On September 30, 2016, the Company issued 4,920,400 shares of common stock upon the conversion of the two convertible notes of $58,000 and $94,000 described in Note 9(c) and (d) and $44,816 of accrued interest.  

(b)

On October 3, 2016, the Company issued 4,413,181 shares of common stock upon the conversion of the note payable of $14,406 (CAD - $18,895) described in Note 7(d) and $735 (CAD - $964) of accrued interest.  

(c)

On October 4, 2016, the Company issued 3,000,000 shares of common stock upon the conversion of the $15,000 loan described in Note 7(c).

(d)

On October 5, 2016, the holder of the convertible debentures described in Notes 9(g) and (i) 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.

(e)

On October 11, 2016, the Company issued a convertible note in the principal amount of up to $249,999. Subsequent to August 31, 2016, the Company received initial tranches of $45,000 net of a $16,666 original issue discount. 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)

On October 17, 2016, the Company entered into a consulting agreement for the provision of consulting services until April 17, 2017.  Pursuant to the agreement the Company will pay the consultant $35,000 per month and upon the conclusion of the first 30 day period of the agreement, the Company shall issue 2,000,000 shares of common stock to the consultant.

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

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

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.

Description of Business

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 1562 128th Street, Surrey, British Columbia, Canada, V4A 3T7. Our telephone number is (604) 560-1503. Our fiscal year end is May 31.

Our business is to develop technologies that we hope to lead to commercially feasible products and services which are intended to mitigate negative environmental and health consequences that arise from the production of energy and the consumption of resources.

We plan to develop or acquire technologies and services that provide a carbon reduction in 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 may spin out or divest of technologies from time to time as they mature to improve cash flow, or when they are mature enough to become a self sustaining business.

Through a partially owned subsidiary, 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.

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In the past we have contracted out our development work to various laboratories. During the year, we conducted research and development related work from time to time on these technologies at our offices and with own staff in Vancouver, B.C.

Our 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 out the majority of our business through our subsidiary, Mantra Energy Alternatives Ltd. (“MEA”), through which we develop and research technologies related to alternative energy and chemical production to reduce greenhouse gas emissions and resource consumption.

We also have a number of inactive subsidiaries, which we may engage in various businesses in the future but have no current plans to do so at this time.

Since our inception, we have incurred operational losses and we have completed several rounds of financing to fund our operations. Our partially owned subsidiary Mantra Energy Alternatives Ltd. has itself undertaken financing activities to raise money for research and development by issuing common shares. Presently, MEA and the Company is seeking funding to develop a prototype unit for the MRFC technology.

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 co-operated in one or more research and development projects related to MEA’s ERC technology. Through this cooperation, the development of technologies and processes for the conversion of CO₂ to chemical products and the investigation of the feasibility of scale-up and commercialization of these processes occurred.

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 option under the agreement to acquire a license to use 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.

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.

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 CO2 emissions on Earth’s environment by converting CO2 into chemicals with a broad range of commercial applications. These include a fuel for a next generation of fuel cells, and synthetic gas (“syngas”), which is a cornerstone intermediate in the chemical industry, and can be further upgraded to products such as diesel or jet fuel. Powered by electricity, the ERC process combines captured carbon dioxide with water to produce materials such as formate salts, syngas, 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.

Whereas ERC has been shown to produce a range of compounds, the efficiency for generation of each compound depends on the experimental conditions, and most importantly on the material of the cathode, which catalyzes the electrochemical reactions.

 

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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, formate salts have been obtained on tin cathodes with current efficiencies above 80%, at industrially relevant conditions. Current efficiencies exceeding 80% have also been obtained on proprietary silver cathodes for carbon monoxide, the key constituent of syngas.

Established and Emerging Market for ERC and its Chemical Products

The technology behind ERC can be applied to any scale commercial venture which outputs CO2 into 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 CO2 management 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.

However, if the ERC process reaches market acceptance as a way to deal with CO2 emissions 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.

On the other hand, the ERC process to syngas suffers from very few market limitations. The market for synthetic gas is currently estimated at around $ 36 billion, and growing. Due to the large number of products which can be produced from syngas, including gasoline, diesel, jet fuel or methanol, we anticipate the demand for an environmentally-conscious pathway to these chemicals will grow rapidly into the future.

Energy Storage

Formate salts and formic acid, which can be produced from CO₂ via 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.

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Results of Operations for the Three Month Periods Ended August 31, 2016 and August 31, 2015.

The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the quarter ended August 31, 2016 which are included herein.

Revenues

Our operating results for three month periods ended August 31, 2016 and August 31, 2015 are summarized as follows:

								Difference Between
								Three Month Period
								Ended
		Three Months			Three Months			August 31, 2016
		Ended			Ended			and
		August 31, 2016			August 31, 2015			August 31, 2015
		($)			($)			($)
Revenue	$	-		$	13,638		$	(13,690)
Operating expenses	$	88,994		$	327,566		$	(238,527)
Other expenses	$	75,014		$	(22,762)		$	(97,776)
Net loss	$	(164,008)		$	(336,690)		$	(172,682)

For the three months ended August 31, 2016, we generated no revenues compared to revenues of $13,638 during the same period in 2015. Revenues decreased in 2016, our revenue-generating project ceased in prior periods.

Expenses

Our operating expenses for the three month periods ended August 31, 2016 and August 31, 2015 are summarized as follows:

		Three Months Ended
			August 31,	August 31,
			2016	2015
			($)	($)
Consulting and advisory			5,000	92,122
Depreciation and amortization			7,521	3,431
Foreign exchange loss (gain)			438	(727)
General and administrative			20,651	87,575
Management fees			45,744	67,268
Professional fees			335	25,575
Research and development			9,305	52,322

For the three months ended August 31, 2016, we incurred total operating expenses of $88,994, compared to total operating expenses for the three months ended August 31, 2015 of $327,566. The decrease is due to the following. A decrease in General and administrative expense for $66,924 which primarily related to reduced staff and overhead. Further, decrease of $87,122 in expenses related to consulting and advisory services occurred due to lesser activity. The reduction in research and development expenses for $43,017 was from reduced activity on our primary research projects. Also contributing to this decrease was a decrease of $25,240 in professional fees.

Net Loss

For the three months ended August 31, 2016, we incurred a net loss of $164,008, compared to a net loss of $$336,690 for the same period in 2015.

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Liquidity and Capital Resources

As of August 31, 2016, our total current assets were $134,174 and our total current liabilities were $2,900,508, resulting in a working capital deficit of $2,894,056 compared to a working capital deficit of $2,832,673 as at May 31, 2016.

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.

Cash Flows

		Three Months Ended			Three Months Ended
		August31,			August31,
		2015			2015
Net Cash Used in Operating Activities	$	(47,842)		$	(175,799)
Net Cash Used In Investing Activities	$	-		$	(682)
Net Cash Provided by Financing Activities	$	50,849		$	169,035
Cash (decrease) increase during the period	$	3,007		$	(7,446)

The increase in cash that we experienced during the three months ended August 31, 2016 was insignificant. Our cash position is poor. The reduction of $127,957 in cash used for operations reflects decrease in operating activities for the period ending in 2016 compared with the same prior period in 2015. The reduction of $118,186 in cash provided by financing activities reflects the lesser amount of borrowing due to reduced operations and lack of profitability. We expect that our total expenses will increase over the next year as we increase our business operations, which is subject to raising additional funds, for which we currently have no commitments. 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 making significant revenues for the next year. Over the next 12 months, subject to raising additional funds, we plan to primarily concentrate on commercializing our ERC technology and associated projects.

In order to fully carry out our business plan and improve liquidity, we need additional financing of approximately $3,650,000 for future expenditures and $1,350,000 for the next 12 months, totaling $5,000,000. 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.

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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 can be found in the May 31, 2016 audited financials. 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 our company and our 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. Our 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. Our company bases our estimates and assumptions on current facts, historical experience and various other factors that we believe 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 our company may differ materially and adversely from our company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Accounts Receivable

            Our 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 our company considers at risk.

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. Our 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. Our company has no intangibles with indefinite lives.

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Long-lived Assets

            In accordance with ASC 360, “Property, Plant and Equipment”, our 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

            Our company performs research and development services. Our 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.

Research and Development Costs

            Research and development costs are expensed as incurred.

Stock-based Compensation

            Our 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.

            Our company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by our company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to our 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.

Recent Accounting Pronouncements

We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required under Regulation S-K for “smaller reporting companies.”

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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.

 

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 August 31, 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 August 31, 2015 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

 

We are currently not a party to any material legal proceedings or claims.

 

Item 1A. Risk Factors

 

Not required under Regulation S-K for “smaller reporting companies.”

 

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

(a)

As at May 31, 2016 and 2015, the Company had received proceeds of $2,080 at $0.08 per unit for subscriptions for 26,000 units.  Each unit consisted of one share of common stock and one-half of one share purchase warrant.  Each whole share purchase warrant is exercisable at $0.20 per common share for a period of two years or five business days after the Company’s common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.40 per share for seven consecutive trading days.

(b)

As at May 31, 2016 and 2015 the Company’s subsidiary, Mantra Energy Alternatives Ltd., had received subscriptions for 67,000 shares of common stock at Cdn$1.00 per share for proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of the non-controlling interest portion of $7,231.

(c)

As at May 31, 2016 and 2015, the Company’s subsidiary, Climate ESCO Ltd., had received subscriptions for 210,000 shares of common stock at $0.10 per share for proceeds of $21,000, which is included in common stock subscribed, net of the non-controlling interest portion of $7,384.

(d)

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 three months ended August 31, 2016:

(d)

On July 1, 2016, the Company issued 2,368,322 shares of common stock upon the conversion of $15,000 of principal of the convertible note described in Note 9(g).

(e)

On August 15, 2016, the Company issued 2,826,456 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(g).

(f)

On August 29, 2016, the Company issued 2,000,000 units at $0.015 per unit for proceeds of $30,000. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable at $0.03 per share of common stock for a period of two years or thirty calendar days after the Company’s common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.03 per share for five consecutive trading days. As at May 31, 2016, the Company had received proceeds of $25,000 at $0.015 per unit for subscriptions for 1,666,666 units which was included in common stock subscribed.

* All of the above offerings and sales were deemed to be exempt under either rule 506 of Regulation D and Section 4(a)(2) or Rule 902 of Regulation S of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Mantra Venture Group or executive officers of Mantra Venture Group, and transfer was restricted by Mantra Venture Group in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section are unaffiliated with us.

  

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Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.01	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS	XBRL Instance Document
101 SCH	XBRL Taxonomy Extension Schema Document
101 CAL	XBRL Taxonomy Calculation Linkbase Document
101 LAB	XBRL Taxonomy Labels Linkbase Document
101 PRE	XBRL Taxonomy Presentation Linkbase Document
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

 

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

 

	MANTRA VENTURE GROUP LTD.
Date: December 2, 2016	By:	/s/ LARRY KRISTOF
		Larry Kristof
		Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

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