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Three Sixty Solar Ltd. — Management Reports 2022
Dec 23, 2022
42916_rns_2022-12-23_0c79d2d9-2617-4703-a101-56310d48c112.pdf
Management Reports
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MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") of Three Sixty Solar Ltd. (formerly, Liberty One Lithium Corp.) (the "Company") is dated for December 22, 2022 and provides an analysis of the Company's audited financial statements for the years ended September 30, 2022, and September 30, 2021 (the "Financial Statements"). The Financial Statements and the financial information contained in this MD&A were prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the IASB. The information in this MD&A, should be read in conjunction to the Financial Statements. Unless otherwise noted, all currency amounts are expressed in Canadian dollars. Additional information relating to the Company is available on the Company's website at www.threesixtysolar.com. The Company's annual information form ("AIF") and other public filings made by the Company with Canadian securities regulatory authorities can be found under the Company's SEDAR profile at www.sedar.com.
Cautionary Note Regarding Forward-Looking Information
This MD&A includes certain statements that may be deemed "forward-looking statements". Forward-looking statements usually include words such as may, will, would, expect, plan, anticipate, budget, estimates, potential, believe, intend, or other similar words. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, continued availability of capital and financing and general economic, market or business conditions. The Company does not update or revise forward-looking information even if new information becomes available unless legislation requires the Company to do so. Investors should not place undue reliance on forward-looking statements. Additional details of the specific risks associated with the operations of the Company and such forward-looking statements are set out below under "Risks and Uncertainties". Investors are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements.
Non-IFRS Measures
This MD&A makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to compliment those IFRS measures by providing further understanding of the results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company's financial information reported under IFRS. Non-IFRS measures including "Working Capital" (calculated as current assets less current liabilities) were used in order to facilitate operating performance comparisons from period to period.
Overview and Nature of Operations
The Company was incorporated in Canada on February 12, 1996. The address of the Company's registered office and its head office is 1500, 1055 West Georgia Street, Vancouver, BC, V6E 4N7.
All of the Company's efforts are devoted to developing and selling a high-density clean energy solution. The Company's patent-pending vertical solar structures use up to 90% less land space than conventional methods allowing customers to implement a clean energy solution without harming the environment or surrounding habitats. The vertical solar structures provide a 10% power increase from heat dissipation through stack effect airflow within the towers and up to a 20% power increase from reflective and direct light, depending upon location and orientation, compared to conventional methods.
Key Events
Reverse Takeover ("RTO")
On February 10, 2022, the Company and 1345100 B.C. Ltd., a newly created subsidiary of the Company ("Newco"), and Three Sixty Solar Ltd. ("Opco") entered into an amalgamation agreement (the "Amalgamation Agreement"). The Amalgamation Agreement was amended on May 6, 2022. Under the Amalgamation Agreement, the Company consolidated all of its issued and outstanding common shares on a 2:1 basis and Newco amalgamated with Opco. All of the outstanding common shares of the Company were exchanged for common shares of Opco on a one for one basis. In addition, all of the outstanding convertible securities of Opco were exchanged for securities of the Company on a one for one basis and on substantially the same economic terms and conditions. The transaction was completed on August 4, 2022.
In consideration for the RTO, the Company issued a total of 19,413,447 common shares of the Company to shareholders of Opco. As part of the transaction, the Company issued 3,833,334 performance warrants. The performance warrants vest when the Company has achieved $10,000,000 in cumulative gross revenue.
Immediately after the completion of the transaction, the former holders of Opco's shares own 81% of the shares of the combined entity and the existing holders of the Company own 19% of the total combined entity shares. As a result of the RTO, the former shareholders of Opco acquired control of the Company, thereby constituting a reverse takeover of the Company. The RTO is considered a purchase of the Company's net assets by the shareholders of Opco.
Financings
On January 5, 2022, the Company completed a warrant financing of $0.01 warrants for proceeds of $205,000 and issued 20,500,000 warrants. Each warrant entitles the holder to purchase one common share at a price of $0.25 per share until August 15, 2025.
On January 5, 2022, the Company completed a private placement of common shares at $0.025 per share, issuing 6,416,653 common shares for total proceeds of $160,417.
On January 5, 2022, the Company completed a unit private placement at $0.025 per unit, issuing 4,080,127 units for total proceeds of $102,003. Each unit consisted of one common share and one warrant, with each warrant entitling the holder to purchase one additional common share of the Company at a price of $0.10 per warrant until January 5, 2025.
On January 5, 2022, the Company completed a private placement of common shares at $0.02 per share, issuing 1,250,000 common shares for total proceeds of $25,000.
On August 4, 2022, the Company completed a private placement of 1,996,000 financing warrants (the "Financing Warrants"), concurrently with the close of the reverse takeover transaction. The Financing Warrants were issued at a price of $1.00 per warrant for net proceeds of $1,781,338 Each Financing Warrant is exercisable into one share of the Company at the option of the holder at any time following the closing of the transaction. If not earlier exercised, the Financing Warrants automatically convert to one unit six months following the closing date of the transaction of August 4, 2022. Each unit consists of one share and one warrant (the "Additional Warrant"). Each Additional Warrant allows the holder to purchase one share at an exercise price of $2.00 per share for 24 months following the date of issue. The Company also issued 100,345 broker warrants entitling the purchase of up to 100,345 common shares at a price of $2.00 per share until August 4, 2024 in connection with the private placement of Financing Warrants.
Appointment of Governance Team
On November 8, 2022, the Company announced the following appointments to the Board of Directors:
- Kyle Stevenson
- Scott McLeod
- Robert Birmingham
Results of Operations
The following tables set out selected annual financial information for the Company, which has been prepared in accordance with IFRS:
| For the year endedSeptember 30, 2022 | For the year endedSeptember 30, 2021 | |
|---|---|---|
| Total revenue | $- | $- |
| Net loss and comprehensive loss | $(3,339,795) | $(313,444) |
| Weighted average number of shares | 17,021,188 | 7,666,667 |
| Basic and diluted loss per share | $(0.20) | $(0.04) |
Income statement data
Balance sheet data
| As at | September 30, 2022 | September 30, 2021 |
|---|---|---|
| Total assets | $3,753,382 | $211,229 |
| Total liabilities | $706,933 | $339,638 |
| Shareholders' equity | $3,046,449 | $(128,409) |
Total assets as at September 30, 2022 and September 30, 2021 were $3,753,382 and $211,229, respectively. The increase in total assets of $3,542,153 was primarily due to increases in cash and prepaid expenses. The increase in cash (September 30, 2022 - $2,708,553, September 30, 2021 - $210,523), is derived from proceeds generated from the private placements completed during the year, and cash and term deposits assumed on the RTO. The increase in prepaids (September 30, 2022 - $782,873, September 30, 2021 - $nil), is due to the Company making deposits on contracts for marketing and investor relations services following the Company going public.
Total financial liabilities as at September 30, 2022 and September 30, 2021 were $706,933 and $339,638, respectively. The increase in total liabilities of $367,295 was primarily due to accounts payable, accrued liabilities, and a lease liability assumed on the RTO.
Shareholder's equity as at September 30, 2022 and September 30, 2021 were $3,046,449 and $(128,409) respectively. The increase in shareholder's equity is mainly due to additions to the Company's equity stemming from the various private placements taking place during the 2022 fiscal year, as well as the value attributed to the share exchange upon the closing of the RTO.
| September | September | Change | Change | |
|---|---|---|---|---|
| 30, | 30, | $ | % | |
| 2022 | 2021 | |||
| Operating expenses | ||||
| Corporate | $85,874 | $11,951 | $73,923 | 619% |
| Depreciation | 30,039 | 246 | 29,793 | 12111% |
| Marketing | 177,894 | 50,621 | 127,273 | 251% |
| Office | 87,031 | 1,492 | 85,539 | 5733% |
| Professional fees | 862,744 | 44,728 | 818,016 | 1829% |
| Research and development | 75,135 | 40,997 | 34,138 | 83% |
| Salaries and wages | 259,161 | 163,409 | 95,752 | 59% |
| Share based compensation | 642,896 | - | 642,896 | 100% |
| Travel, meals, and entertainment | 115,600 | - | 115,600 | 100% |
| Total operating expenses | $ (2,336,374) | $(313,444) | $ (2,022,930) | 644% |
| Other income (loss) | ||||
| Interest income | 7,998 | - | 7,998 | 100% |
| Foreign exchange gain (loss) | (326) | - | (326) | 100% |
| Listing expense | (1,011,093) | - | (1,011,093) | 100% |
| Net and Comprehensive Loss | $ (3,339,795) | $(313,444) | $ (3,026,351) | 966% |
Income statement variances for the years ended September 30, 2022 and 2021
During the year ended September 30, 2022, the Company incurred a net and comprehensive loss of $3,339,795 compared to a net and comprehensive loss of $313,444 for the year ended September 30, 2021. The increase in net and comprehensive loss of $3,026,351 is due to the following factors:
The increase in corporate expense of $73,923 is due to fees spent in preparation and maintenance of being publicly listed.
- The increase in depreciation expense of $29,793 is due to the depreciation on a right-ofuse asset, leasehold improvements, and furniture assumed on the RTO.
- The increase in marketing expense of $127,273 is due to increased costs derived from higher trade show and conference attendance in fiscal 2022 than in fiscal 2021 as well as the Company receiving new services in fiscal 2022 for social media, investor relations and general marketing to generate interest in the Company.
- The increase in office expense of $85,539 is primarily due to the Company's growth in operational activity. In the 2022 fiscal year, the Company has outlaid amounts for insurance, talent acquisition services, an equipment rental, software and IT related services, and other items. Costs for such items were not incurred in the 2021 comparative fiscal year. Also contributing to the increase in office expense are expenses assumed under the RTO for items such as insurance, an office lease, and other office-related costs.
- The increase in professional fees expense of $818,016 was mostly due to the Company requiring additional accounting, audit, and legal services in support of the Company's RTO and various private placements occurring in fiscal 2022, as well as new management and consulting services supporting the Company's development and growth received in 2022.
- The increase in research and development expense of $34,138 is due to additional amounts spent for designing, prototyping, and optimizing the Company's solar tower designs.
- The increase in salaries and wages expense of $95,752 is mostly due to the hiring of the Company's CEO, Brian Roth.
- The increase in share-based compensation expense of $642,896 is derived from the issuance and vesting of options during the 2022 fiscal year. There were no options issued or outstanding in the comparative 2021 fiscal year.
- The increase in travel, meals, and entertainment expense of $115,600 is mostly due to the relaxation of COVID restrictions allowing for increased travel associated with attending trade shows and other business matters, amounts spent in support acquiring investment, and amounts spent in support of procuring contracts with customers in fiscal 2022.
- The listing expense of $1,011,093 stems from the RTO and is representative of the difference in consideration issued to acquire the net assets of the Company and the value of the net assets of the Company.
| September | September | Change | Change | |
|---|---|---|---|---|
| 30,2022 | 30,2021 | $ | % | |
| Operating expenses | ||||
| Corporate | $75,414 | $7,327 | $68,087 | 929% |
| Depreciation | 29,856 | 62 | 29,794 | 48055% |
| Marketing | 104,751 | 30,516 | 74,235 | 243% |
| Office | 34,902 | 722 | 34,180 | 4734% |
| Professional fees | 340,767 | 36,933 | 303,834 | 823% |
| Research and development | 8,497 | 40,425 | (31,928) | (79%) |
| Salaries and wages | 52,762 | 115,928 | (63,166) | (54%) |
| Share based compensation | 642,896 | - | 642,896 | 100% |
| Travel, meals, and entertainment | 97,131 | - | 97,131 | 100% |
| Total operating expenses | $ (1,386,976) | $(231,913) | $ (1,155,063) | 498% |
| Other | ||||
| Interest income | 7,998 | - | 7,998 | 100% |
| Foreign exchange gain (loss) | (498) | - | (498) | 100% |
| Listing expense | (1,011,093) | - | (1,011,093) | 100% |
| Net and Comprehensive Loss | $ (2,390,569) | $(231,913) | $ (2,158,656) | 931% |
Income statement variances for the three months ended September 30, 2022 and 2021
During the three months ended September 30, 2022, the Company incurred a net and comprehensive loss of $2,390,569 compared to a net and comprehensive loss of $231,913 for the three months ended September 30, 2021. The increase in net and comprehensive loss is due to the following factors:
- The increase in corporate expense of $68,087 is due to fees spent in preparation and maintenance of being publicly listed.
- The increase in depreciation expense of $29,794 is due to the depreciation on a right-ofuse asset, leasehold improvements, computers, and furniture assumed on the RTO.
- The increase in marketing expense of $74,235 is mostly due to marketing services received by the Company during the three month period ending September 30, 2022 for social media, investor relations, and general marketing to keep current and potential external stakeholders informed about the Company now that the Company is publicly traded.
- The increase in office expense of $34,180 is primarily due to expenses assumed under the RTO for items such as insurance, an office lease, and other office-related costs. Such costs were not incurred in the comparative three month period ending September 30, 2021.
- The increase in professional fees of $303,834 is mostly attributed to increased accounting, audit, and legal services required in for the RTO, the private placement of 1,996,000 financing warrants, and the preparation and maintenance of being publicly listed. Consulting and project management services were also received in the quarter, relating to
the Company's operations, development, and growth, in conjunction with professional fees assumed on the RTO. Such services and fees were not were incurred in the comparative three month period ending September 30, 2021.
- Higher research and development expense was recorded during the three month period ending September 30, 2021 as the Company expensed costs incurred in relation to building the Company's first solar tower to be used as a proof of concept and demo unit. These costs were expensed in during the three month period ending September 30, 2021 as it was determined that the costs did not meet the criteria for capitalization as an intangible asset during that period.
- Higher salaries and wages expense was recorded during the three month period ending September 30, 2021 was mostly due to a signing bonus payable to the CEO and salary amounts incurred for the Director of Sales. Such amounts were not incurred during the three month period ending September 30, 2022 (the Director of Sales separated from the Company in June 2022), resulting in lower salaries and wages expenses.
- The increase in share-based compensation expense of $642,896 is derived from the issuance and vesting of options during the three months ended September 30, 2022. There were no vesting options in the comparative three month period ending September 30, 2021.
- The increase in travel, meals, and entertainment expense of $97,131 is mostly due to the relaxation of COVID restrictions allowing for increased travel associated with attending trade shows and other business matters, amounts spent in support acquiring investment, and amounts spent in support of procuring contract with customers.
- The listing expense of $1,011,093 stems from the RTO and is representative of the difference in consideration issued to acquire the net assets of the Company and the value of the net assets of the Company.
| Total | Net and | Basic loss per | |
|---|---|---|---|
| revenue | comprehensive loss | share | |
| $ | ($) | ($) | |
| September 30, 2022 (Q4, 2022) | Nil | (2,390,569) | (0.13) |
| June 30, 2022 (Q3, 2022) | Nil | (401,342) | (0.02) |
| March 31, 2022 (Q2, 2022) | Nil | (325,280) | (0.02) |
| December 31, 2022 (Q1, 2022) | Nil | (222,604) | (0.03) |
| September 30, 2021 (Q4, 2021) | Nil | (231,913) | (0.03) |
| June 30, 2021 (Q3, 2021) | Nil | (26,336) | (0.00) |
| March 31, 2021 (Q2, 2021) | Nil | (41,881) | (0.01) |
| December 31, 2020 (Q1, 2021) | Nil | (13,314) | (0.00) |
Summary of Quarterly Results
Historical quarterly results of operations and loss per share data do not necessarily reflect any recurring expenditure patterns or predictable trends. The Company's expenditures have to date
been subject to the availability of financing to fund continued operations. Quarterly net loss has remained relatively consistent with the exception of the current quarter ended September 30, 2022 which reflected professional and regulatory fee costs associated with the RTO and the fair value of the shares issued in consideration for the RTO.
Off-Balance Sheet Arrangements
As at the date of this MD&A, the Company has not entered into any off-balance sheet or income statement arrangements.
Proposed Transactions
As at the date of this MD&A, the Company is not examining any proposed transactions.
Liquidity and Capital Resources
The following table summarizes the Company's cash flows for the years ended September 30, 2022 and September 30, 2021.
| For the year ended | For the year ended | |
|---|---|---|
| September 30, 2022 | September 30, 2021 | |
| Cash used in operating activities | $(2,505,124) | $(161,458) |
| Cash provided by investing activities | 3,011,117 | - |
| Cash provided by financing activities | 1,992,307 | 371,711 |
| Increase in cash | 2,498,300 | 210,253 |
| Cash, beginning of period | 210,253 | - |
| Cash, end of period | $2,708,553 | $210,253 |
Cash used in operating activities for the year ended September 30, 2022 of $2,505,124 was higher by $2,343,666 in comparison to the cash use in operating activities for the year ended September 30, 2021. The increase in cash used in 2022 is mainly due to incurring and paying higher operating expenses in fiscal 2022 as a result of increased operational and business development activity during the period. Also contributing to the increase in cash used in operating activities are amounts spent on professional services in support of the RTO and various private placements, as well as amounts spent on prepaid deposits associated with marketing and investor relations work.
Cash provided by investing activities for the year ended September 30, 2022 was $3,011,117. No cash was used in or provided by investing activities for the year ended September 30, 2021. Substantially all cash provided by investing activities in fiscal 2022 was cash assumed on the RTO.
Cash provided by financing activities for the year ended September 30, 2022 of $1,992,307 was higher by $1,620,596 in comparison to the cash use in operating activities for the year ended September 30, 2021. Substantially all cash provided by financing activities in fiscal 2022 was derived from various unit, warrant and common share financings that were completed during the fiscal year.
Although the Company anticipates it will have positive cash flows from operating activities in future periods, to the extent that the Company has negative cash flows in any future periods, net
proceeds from future financings may be used to fund such negative cash flows from operating activities, if any.
As at September 30, 2022, the Company had accumulated losses of $3,962,968 (2021 - $623,173). As at September 30, 2022, the Company had a cash balance of $2,708,553 (2021 – $210,253) and working capital of $2,893,785 (2021 – negative working capital of $129,385). The Company does not have any commitments for capital expenditures.
To fund operations, the Company has depended on cash assumed from the RTO which closed on August 4, 2022, its parent company and external financing including equity issuances and debt financing. Management will determine whether to accept any future offer for financing, weighing such factors as the financing terms, share price at the time and current market conditions, among others. Circumstances that could impair the Company's ability to raise additional funds include general economic conditions, and the other factors set forth below under "Risk Factors".
On an ongoing basis, management evaluates and adjusts its planned level of activities to maintain adequate levels of working capital.
Going Concern
The Company's financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to meet its commitments, continue operations, and realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception, has no recurring source of revenue and, as at September 30, 2022, had accumulated losses of $3,962,968. These results cast significant doubt upon the Company's ability to continue as a going concern.
To fund future operations and to cover administrative expenses, if required, the Company will take part in additional financings including, but not limited to, the issuance of debt and additional equity. However, the Company has no assurance that such financing will be available when required or if such financing will be available on favourable terms. Factors that could affect the availability of financing include the Company's performance, the state of international debt and equity markets, investor perceptions and expectations and the global financial markets.
Related Party Transactions
The Company's related parties are its key management personnel and the companies controlled by its key management personnel. Key management personnel include those persons having authority and responsibility for planning, directing, and controlling the activities of the Company as a whole. The Company has determined that key management personnel consist of members of the Company's Board of Directors and corporate officers.
During the year ended September 30, 2022 and 2021 the Company incurred the following related party transactions:
- Salaries and wages expense of $193,070 (2021 $85,398) to the Company's CEO, Brian Roth.
- Salaries and wages expense of $2,125 (2021 $Nil) to Robert Birmingham, a director of the Company.
- Salaries and wages expense of $4,283 (2021 $Nil) to Kyle Stevenson, a director of the Company.
- Professional fees of $9,000 (2021 $Nil) to the Company's CFO, Austin Thornberry, for CFO and consulting work.
- Professional fees of $20,567 (2021 $Nil) to Krueger Electric Ltd., for consulting work. Krueger Electric Ltd. is a company controlled by Peter Sherba, who is also a director of the Company.
- Professional fees of $72,600 (2021 $Nil) to Number Eight Management Ltd. for project management work. Matt Chatterton is a director of Number Eight Management Ltd. and was a director of the Company until the closing of the RTO.
During the year ended September 30, 2022, the Company also incurred the following share-based compensation expenses with related parties:
| Brian Roth, CEO | $82,688 |
|---|---|
| Austin Thornberry, CFO | 41,344 |
| Peter Sherba, Director | 20,672 |
| Robert Birmingham, Director | 24,806 |
| Kyle Stephenson, Director | 31,008 |
| Scott Mcleod, Director | 41,344 |
| Total | $241,862 |
No share-based compensation expenses were incurred with related parties during the year ended September 30, 2021.
Related Party Balances
As at September 30, 2022, included in accounts payable and accrued liabilities is $11,845 in vacation and expense reimbursements payable to Brian Roth, CEO of the Company. As at September 30, 2021, included in accounts payable and accrued liabilities was $45,592 payable to Brian Roth, which consisted of accrued wages, vacation payable, and a bonus payable.
As at September 30, 2022, included in loans payable is $12,700 (September 30, 2021 - $12,700) due to Peter Sherba, a director of the Company. The amount is non-interest bearing, unsecured and payable on demand.
As at September 30, 2022, the due to related parties balance is $nil. As at September 30, 2021, due to related parties contained a balance of $45,145 which was owed to Krueger Electric Ltd. for expense reimbursements. Krueger Electric Ltd. is a company controlled by Peter Sherba, a director of the Company.
Outstanding Share Data
The Company is authorized to issue an unlimited number of common shares.
At September 30, 2022, the Company had a total of 24,084,730 issued and outstanding common shares as well as the following warrants and options:
| Outstanding | Exercisable | Exercise price | Expiry date |
|---|---|---|---|
| number of options | number of options | ||
| 25,000 | 25,000 | $3.00 | August 15, 2023 |
| 50,000 | 50,000 | $3.00 | August 16, 2023 |
| 1,555,000 | 1,555,000 | $1.00 | August 9, 2024 |
| 100,000 | - | $1.00 | September 30, 2024 |
| 1,730,000 | 1,630,000 |
| Outstanding | Exercise price | Expiry date |
|---|---|---|
| number of warrants | ||
| 20,500,000 | $0.25 | August 4, 2025 |
| 4,080,127 | $0.10 | January 25, 2025 |
| 100,345 | $2.00 | August 4, 2024 |
| 3,833,334 | $0.05 | August 4, 2027 |
| 28,513,806 |
In addition, the Company also had a total of 1,996,000 Financing Warrants outstanding as at September 30, 2022. Each Financing Warrant is exercisable for $1.00 for a period of 6 months from August 4, 2022. If not exercised by this date, each Financing Warrant will convert to one unit where each unit consists of one share and one Additional Warrant. Each Additional Warrant allows the holder to purchase one share at an exercise price of $2.00 per share for 24 months following the date of issue.
As at the date of this MD&A, the Company had a total of 25,329,655 issued and outstanding common shares as well as the following warrants and options:
| Outstandingnumber of options | Exercisablenumber of options | Exercise price | Expiry date |
|---|---|---|---|
| 25,000 | 25,000 | $3.00 | August 15, 2023 |
| 50,000 | 50,000 | $3.00 | August 16, 2023 |
| 1,555,000 | 1,555,000 | $1.00 | August 9, 2024 |
| 100,000 | - | $1.00 | September 30, 2024 |
| 350,000 | 350,000 | $0.62 | October 25, 2024 |
| 75,000 | - | $1.00 | December 2, 2024 |
| 2,155,000 | 1,980,000 |
| Outstandingnumber of warrants | Exercise price | Expiry date |
|---|---|---|
| 20,483,000 | $0.25 | August 4, 2025 |
| 2,882,202 | $0.10 | January 25, 2025 |
| 100,345 | $2.00 | August 4, 2024 |
| 3,833,334 | $0.05 | August 4, 2027 |
| 27,298,881 |
In addition, the Company had 350,000 restricted share units outstanding. Each restricted share unit is to vest and be exercised on January 7, 2023.
As at the date of this MD&A, there is 1,966,000 Financing Warrants outstanding.
Internal Controls Over Financial Reporting
Internal control over financial reporting should include those policies and procedures that establish the following:
- maintenance of records in reasonable detail that accurately and fairly reflect the transactions and dispositions of assets;
- reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable IFRS;
- receipts and expenditures are only being made in accordance with authorizations of management or the Board; and
- reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial instruments.
The Company's management, with the participation of the CEO and the CFO, assessed the effectiveness of the Company's internal controls over financial reporting and concluded that as at September 30, 2022, the Company's internal control over financial reporting was effective.
During the year ended September 30, 2022, the Company did not make any significant changes to its internal controls over financial reporting that would have materially affected, or reasonably likely to materially affect, its internal controls over financial reporting.
Disclosure Controls
Management is also responsible for the design and operation of disclosure controls and procedures to provide reasonable assurance that material information related to the Company, including its consolidated subsidiaries, is made known to the Company's certifying officers. The Company's Chief Executive Officer and Chief Financial Officer have each evaluated the design and effectiveness of the Company's disclosure controls and procedures as of the date of this report and have concluded that these controls and procedures are effective.
Significant Accounting Policies, Estimates, and Judgements
The significant accounting policies, estimates, and judgements followed by the Company are set out in notes 2 and 3 of the Financial Statements. There have been no changes in accounting policies as of the date of this MD&A.
Risks Arising from Financial Instruments
The Company's financial instruments are comprised of cash, other receivables, accounts payable and accrued liabilities, loans payable and lease liabilities. Fair values of financial instruments are classified in a fair value hierarchy based on the inputs used to determine fair values. The levels of the fair value hierarchy are as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 – Inputs that are not based on observable market data (unobservable inputs).
As at September 30, 2022 the fair value of cash held by the Company was based on Level 1 of the fair value hierarchy. The fair values of other receivables, accounts payable and accrued liabilities, loans payable lease liabilities approximate their carrying values due to their short-term maturity.
The Company's risk exposures and the impact on the Company's financial instruments are summarized below:
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows associated with a financial instrument will fluctuate because of changes to market interest rates. Within the Company's cash balance are short-term, highly liquid investments that bear interest at a fixed rate. Due to the fixed rate of interest, there is no interest rate risk on these investments. The Company also has lease liabilities whereby an incremental borrowing rate was used to measure the lease liabilities. There is no interest rate risk associated with the lease liabilities, as variations in the incremental borrowing rate would not impact cashflow. The Company has no other interest-bearing debt, or interest-generating assets. Overall, Management does not believe the Company is exposed to significant interest rate risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from cash and other receivables. The exposure to credit loss on other receivables is limited as other receivables consist mostly of refundable goods and services tax which bears minimal credit risk as it is receivable from the Canadian Government. Overall, Management does not believe the Company is exposed to significant credit risk.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company seeks to ensure there is sufficient capital in order to meet short-term business requirements, after taking into account cash flows from operations and the Company's holdings of cash. As at September 30, 2022, the Company had a cash balance of $2,708,553 to settle current liabilities of $706,933.
Foreign currency risk
Foreign exchange risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company is exposed to foreign currency risk on its foreign currency denominated cash. As at September 30, 2022, the Company had CAD $3,201 (2021 - $Nil) in cash denominated in the United States Dollar. Assuming all other variables remain constant, a 10% change in the value of the Canadian dollar against the US dollar would result in an approximate $320 change in profit or loss.
Risks and Uncertainties
Limited Operating History
The Company is subject to many of the risks common to early-stage enterprises, including undercapitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders' investment and the likelihood of success must be considered during these early stages of operations. The Company expects to generate earnings in the near future. The success of the Company will depend entirely on the expertise, ability, judgment, discretion, integrity and good faith of its management.
Risks Related to the COVID-19 Pandemic
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally. It is not possible for the Company to predict further adverse effects attributable to COVID-19 or the magnitude of the effects on the Company's business at this time.
Inability to Protect Intellectual Property
The Company's success is heavily dependent upon its intangible property and technology. The Company relies upon patents, trade secrets, unpatented proprietary know-how and continuing innovation to protect the intangible property, technology and information that are considered important to the development of the business.
The Company relies on various methods to protect its proprietary rights, including confidentiality agreements with consultants, service providers and management that contain terms and conditions prohibiting unauthorized use and disclosure of confidential information. However, despite efforts to protect intangible property rights, unauthorized parties may attempt to copy or replicate intangible property, technology, or processes. There can be no assurances that the steps taken by
the Company to protect its intangible property, technology and information will be adequate to prevent misappropriation or independent third-party development of the Company's intangible property, technology, or processes. It is likely that other companies can duplicate a process similar to the Company's. To the extent that any of the above would occur, revenue could be negatively affected, and in the future, the Company may have to litigate to enforce its intangible property rights, which could result in substantial costs and divert management's attention and other resources.
The Company's ability to successfully implement its business plan depends in part on its ability to obtain, maintain and build brand recognition using its trademarks, service marks, trade dress, domain names and other intellectual property rights, including the Company's names and logos. If the Company's efforts to protect its intellectual property are unsuccessful or inadequate, or if any third party misappropriates or infringes on its intellectual property, the value of its brands may be harmed, which could have a material adverse effect on the Company's business and might prevent its brands from achieving or maintaining market acceptance.
The Company may be unable to obtain registrations for its intellectual property rights for various reasons, including refusal by regulatory authorities to register trademarks or other intellectual property protections, prior registrations of which it is not aware, or it may encounter claims from prior users of similar intellectual property in areas where it operates or intends to conduct operations. This could harm its image, brand or competitive position and cause the Company to incur significant penalties and costs.
Competition
The industry in which the Company operates is highly competitive, is evolving and is characterized by technological change. Current or future competitors may have longer operating histories, larger customer bases, greater brand recognition and more extensive commercial relationships in certain jurisdictions, and greater financial, technical, marketing and other resources than the Company. As a result, the Company's competitors may be able to develop products better received by customers or may be able to respond more quickly and effectively than the Company can to new or changing opportunities, technologies, regulations or customer requirements. In addition, larger competitors may be able to leverage a larger installed customer base and distribution network to adopt more aggressive pricing policies and offer more attractive sales terms, which could cause the Company to lose potential sales or to sell its solutions at lower prices.
Competition may intensify as the Company's competitors enter into business combinations or alliances or raise additional capital, or as established companies in other market segments or geographic markets expand into the Company's market segments or geographic markets. The Company also expects to face additional competition from new entrants. To remain competitive, the Company will require a continued high level of investment in research and development, marketing, sales and customer support. If the Company cannot compete against existing and future competitors, its business, results of operations and financial condition could be materially and adversely affected.
The Company's success will be dependent on its ability to market its products and services. There is no guarantee that the Company's products and services will remain competitive. Unforeseen
competition, and the inability of the Company to effectively develop and expand the market for its products and services, could have a significant adverse effect on the growth potential of the Company. The Company cannot assure that it will be able to compete effectively against existing and future competitors. In addition, competition or other competitive pressures may result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on the Company's business, financial condition or results of operations.
Reliance on Management
The success of the Company is currently largely dependent on the performance of its directors and officers. There is no assurance that the Company can maintain the services of its directors, officers or other qualified personnel required to operate its business.
Reporting Issuer Status
On becoming a reporting issuer, the Company is subject to reporting requirements under applicable securities law, the listing requirements of the NEO Exchange and other applicable securities rules and regulations. Compliance with these requirements has increased legal and financial compliance costs, made some activities more difficult, time consuming or costly, and increased demand on existing systems and resources. Among other things, the Company is required to file annual, quarterly and current reports with respect to its business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and, if required, improve disclosure controls and procedures and internal controls over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns, which could harm the Company's business and results of operations. The Company may need to hire additional employees to comply with these requirements in the future, which would increase its costs and expenses.
Financial Risk
Negative Operating Cash Flow
The Company reported negative operating cash flow for the year ended September 30, 2022. It is anticipated that the Company will continue to report negative operating cash flows in future periods.
Additional Financing
The continued development of the Company may require additional financing. There is no guarantee that the Company will be able to achieve its current business strategy. The Company intends to fund its business objectives by way of additional offerings of equity or debt financing as well as through anticipated positive cash flow from operations in the future. The failure to raise or procure such additional funds or the failure to achieve positive cash flow could result in the delay or indefinite postponement of current business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. If additional funds are raised by offering equity securities, existing shareholders could suffer significant dilution. The Company will require additional
financing to fund its operations until positive cash flow is achieved.
Going Concern Risk
The Company's financial statements have been prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business. The Company's future operations are dependent upon the identification and successful completion of equity or debt financings and the achievement of profitable operations at an indeterminate time in the future. There can be no assurances that the Company will be successful in completing equity or debt financings or in achieving profitability. The financial statements do not give effect to any adjustments relating to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
Difficulty in Forecasting
The Company must rely largely on its own market research to forecast revenues as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. Market research and projections by the Company are based on assumptions from limited and unreliable market data. A failure in demand could materialize as a result of competition, technological change or other factors and could have a material adverse effect on the business, results of operations and financial condition of the Company.
Internal control systems
Internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation.