HIGH WIRE NETWORKS, INC. - Quarter Report: 2017 February (Form 10-Q)

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 28, 2017

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

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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.

274,998,800 common shares issued and outstanding as of June 2, 2017

Table of Contents

PART I – FINANCIAL INFORMATION

The unaudited interim consolidated financial statements of our company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars, unless otherwise noted.

MANTRA VENTURE GROUP LTD.

MANTRA VENTURE GROUP LTD.

Consolidated balance sheets

(Expressed in U.S. dollars)

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

MANTRA VENTURE GROUP LTD.

Consolidated statements of operations

(Expressed in U.S. dollars)

(unaudited)

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

MANTRA VENTURE GROUP LTD.  

Consolidated statements of cash flows

(Expressed in U.S. dollars)

(unaudited) 

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

MANTRA VENTURE GROUP LTD.

Notes to the consolidated financial statements

February 28, 2017

(Expressed in U.S. dollars)

(unaudited)

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 February 28, 2017, the Company has an accumulated loss of $14,785,181, and a working capital deficit of $3,459,688. 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.

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.

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 28, 2017, the Company had 490,147,327 (November 30, 2015 – 34,949,950) dilutive potential shares outstanding.

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.

Restricted cash represents cash pledged as security for the Company’s credit cards. At February 28, 2017, the Company no longer pledged cash as security as the credit cards have been surrendered.

During the nine months ended February 28, 2017 and February 29, 2016, the Company recorded $20,774 and $16,524, respectively, of amortization expense. 

During the nine months ended February 28, 2017 and February 29, 2016, the Company recorded $3,555 and $2,938, respectively, of amortization expense.

Estimated Future Amortization Expense:

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 28, 2017:

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

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. 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 February 28, 2017, the other remaining debenture of $59,853 remained outstanding and past due.

On October 5, 2016, the holder of the convertible debentures 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. At February 28, 2017, $45,000 of the note had been assigned to the third party.

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 nine months ended February 28, 2017, the Company issued 18,440,200 shares of common stock upon the conversion of $60,075 of principal. During the nine months ended February 28, 2017, the Company recorded a default fee of $10,276 increasing the carrying value of the note to $31,451 and the note remained outstanding and past due.

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 nine months ended February 28, 2017, the Company recorded accretion of $185,913 increasing the carrying value of the note to $382,608.

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 $82,560 and recorded a default of fee of $26,250 increasing the carrying value of the note to $48,690.

During the nine months ended February 28, 2017, the recorded accretion of $82,560 increasing the carrying value of the note to $131,250.

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 nine months ended February 28, 2017, the Company received additional tranches of $107,339. The initial fair value of the conversion feature of $208,033 resulted in a discount to the note payable of $107,339 and the recognition of a loss on derivatives of $100,694. During the nine months ended February 28, 2017, the Company recorded accretion of $96,783, and recorded a default fee of $22,375 increasing the carrying value of the note to $159,590.

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 $121,902 resulted in a discount to the note payable of $45,000 and the recognition of a loss on derivatives of $76,902. During the nine months ended February 28, 2017, the Company recorded accretion of $13,859, increasing the carrying value of the note to $13,859.

The embedded conversion option of the convertible debenture described in Note 9(f) 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(f), 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(f), 9(g), 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.

During the nine months ended February 28, 2017, the Company reclassified 350,000 options exercisable at $0.03 until March 16, 2017 with a fair value of $2,350 and 2,000,000 warrants exercisable at $0.03 until August 29, 2018 with a fair value of $13,745 that qualified for treatment as derivative liabilities.

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

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:

Stock transactions during the nine months ended February 28, 2017:

The following table summarizes the continuity of share purchase warrants:

As at February 28, 2017, the following share purchase warrants were outstanding:

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

Additional information regarding stock options as of February 28, 2017 is as follows:

The Company did not grant any stock options or record any stock-based compensation for options granted during the nine month period ended February 28, 2017 or February 29, 2016.

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.

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

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 ($) 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 "$" 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 and Mantra Energy Alternatives Ltd., unless otherwise indicated.

Business Overview

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.

We are a technology incubator that takes innovative emerging technologies and moves them towards commercialization. Our subsidiary Mantra Energy Alternatives is developing electrochemical technologies designed to make reducing greenhouse gas emissions profitable. Through our acquisition of AW Solutions (as described below), we provide comprehensive turnkey outsourced wireless and wireline infrastructure services with licensing across the United States, Canada and the Caribbean.

Acquisition of AW Solutions

On April 25, 2017, we entered into and closed on an Asset Purchase Agreement (the “Asset Purchase Agreement”) with InterCloud Systems, Inc. (“InterCloud”), a Delaware corporation. Pursuant to the terms the Asset Purchase Agreement, InterCloud agreed to sell, and the Company agreed to purchase, 80.1% of the assets associated with InterCloud’s “AW Solutions” business (the “AW Solutions”) including, but not limited to, fixed assets, real property, intellectual property, and accounts receivables (collectively, the “Assets”). AW Solutions provides professional, multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry.

The purchase price paid by the Company for the Assets includes the assumption of certain liabilities and contracts associated with the Business, the issuance to AW Solutions of a convertible promissory note in the aggregate principal amount of $2,000,000, and a potential earn-out after six months in an amount equal to the lesser of (i) three times EBITDA (as defined in the Asset Purchase Agreement) of the Business for the six-month period immediately following the closing and (ii) $1,500,000. In addition, the Asset Purchase Agreement contains a working capital adjustment.

Pursuant to the Asset Purchase Agreement, Patrick Dodd, Jonathan Boughen and Larry Kristof resigned as members of the Company’s board of directors and Keith Hayter and Roger Ponder were appointed to the Company’s Board, effective as of the consummation of the Asset Sale. Each of the members of the Board will serve until the Company’s 2017 annual meeting of shareholders or until his earlier death, resignation or removal.

We intend to actively build and develop the AW Solutions business in the future, which we anticipate will generate revenues during the year.

Other businesses

Overview

Due to the acquisition of AW Solutions and our inability to obtain further funding to develop mixed-reactant fuel cell (“MRFC”) technology, we intend to revisit our pursuit of this line of business during the next quarter and may consider the sale, disposition or restructuring of this business unit to focus on pursuing the AW Solutions business. We have not made any decision on the future of our other businesses 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. (“MEA”) has itself undertaken financing activities to raise money for research and development by issuing common shares. During the year, MEA and the Company have sought funding to develop a prototype unit for the MRFC technology, which is described below.

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.

An overview of our technologies is as follows:

MRFC Technology

We develop technologies and services that provide a carbon reduction in the environment. Through a partially owned subsidiary, have acquired and own a process for the electro-reduction of carbon dioxide and have the exclusive world license for a MRFC. We are developing these technologies toward commercial applications.

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 MEA through which we develop and research technologies related to alternative energy and chemical production to reduce greenhouse gas emissions and resource consumption.

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.

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.

Results of Operations for the Three and Nine Month Periods Ended February 28, 2017 and February 29, 2016

Revenues

Our operating results for the three and six month periods ended February 28, 2017 and February 29, 2016 are summarized as follows:

Our net income for the three months ended February 28, 2017 was $926,698 of which a loss of $4,866 was attributable to the minority interest. Our net loss for nine months ended February 28, 2017 was $ 1,093,709 of which $14,616 was attributable to the minority interest.

Revenue generated during the three months ended February 28, 2017 was nil compared to revenue of $30,299 during the same period in 2016. Revenue generated during the nine months ended February 28, 2017 was nil compared to revenue of $81,067 during the same period in 2016. The decrease in revenues is due to the expiry of our contract with Alstom, which was not renewed.

Expenses

Our operating expenses for the three and nine month periods ended February 28, 2017 and February 29, 2016 are summarized as follows:

During the three months ended February 28, 2017 our operating expenses were $195,847 compared to operating expenses of 144,827 for the three month period ended February 29, 2016. The increase of operating expenses of $51,020 during this period primarily consisted of an increase in consulting and advisory fees and management fees, partially offset by a decrease in general and administrative, professional fees and research and development. Consultancy and advisory fees increased because we hired consultants to assist us with business change and the proposed acquisition of AW Solutions and other corporate changes. General and administrate expense decreased due to a staffing reduction. Research and development expenses decreased as we did not conduct any research or development during the quarter.

During the nine months ended February 28, 2017 our operating expenses were $ 435,379 compared to operating expenses of $769,700 for the nine month period ended February 29, 2016. The decrease of operating expenses of $ 334,321 during this period primarily consisted of a decrease in general and administrative, professional fees and research and development. General and administrative fees decreased because we employed cost cutting resulting in less staff and overhead. Research and development decreased because of working capital constraints and our inability to raise funding for same. Professional fees decreased primarily due to reduced legal fees, less activity in the company and by using management to perform some of the same activities.

The basic weighted average number of shares outstanding were 116,654,010 and 80,407,995 for the three months ended February 28, 2017 and February 29, 2016, respectively.

Liquidity and Capital Resources

Working Capital

Cash Flows

As of February 28, 2017, we had no cash in our bank accounts and a working capital deficit of $(3,419,063). As of May 31, 2016 we had cash of $1,119 and a working capital deficit of $(2,832,673).

Cash Flows from Operating Activities

We have not generated positive cash flows from operating activities. For the nine months ended February 28, 2017, net cash flows used in operating activities was $187,215 compared to $370,622 for the nine months ended February 29, 2016. 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 28, 2017 compared to the nine months ended February 29, 2016.

Cash Flows from Investing Activities

For the nine months ended February 28, 2017 cash flows used in investing activities were nil compared to $16,748 for the nine months ended February 29, 2016. The decrease in cash used in investing activities was a result of a decrease in cash available to invest in assets during the nine months ended February 28, 2017 compared to the nine months ended February 29, 2016.

Cash Flows from Financing Activities

For the nine months ended February 28, 2017 cash flows from financing activities were $186,096 compared to $382,474 for the nine months ended February 29, 2016. The decrease in cash provided by financing activities is as a result of the diminished receipts from financing related to the issuance of notes payable and convertible debentures during the nine months ended February 28, 2017. 

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 regards we have historically raised additional capital through equity offerings and loan transactions.

We expect that our total expenses will increase over the next year as we increase our business operations and commence operations of AW Solutions.

We have not been able to reach the break-even point since our inception and have had to rely on outside capital resources. We anticipate making significant revenues during the next year through AW Solutions operations. Over the next 12 months, we plan to primarily concentrate on developing the AW Solutions business and determining whether commercializing our ERC technology and associated projects is feasible, which will be dependent upon the availability for financing these projects.

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 issue convertible securities and 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 summary of some of these policies is included in note 2 of the notes to our financial statements, however, not all of our accounting policies are stated in our interim 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

Our consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. Our 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. Our company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. Our 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 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. Our company had no allowance for doubtful accounts as of February 28, 2017 and May 31, 2016.

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.

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

Revenue

Our company has recently acquired the AW Solutions business from Intercloud, and intends to generate significant revenues from the acquisition. Other than our AW Solutions business, we primarily perform 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.

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.

Loss Per Share

Our 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.

Recent Accounting Pronouncements

Our 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.

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

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 February 28, 2017, 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:

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 28, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

We are not presently involved in any legal proceedings.

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

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 our company or executive officers of our company, and transfer was restricted by our company 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.

None.

Not applicable.

None.

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.

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