ITEM 1 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANTRA VENTURE GROUP LTD.
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Consolidated balance sheets as of August 31, 2016 (unaudited) and May 31, 2016
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F-2
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Consolidated statements of operations for the three month period ended August 31, 2016 and 2015 (unaudited)
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F-3
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Consolidated statements of cash flows for the three month period ended August 31, 2016 and 2015 (unaudited)
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F-4
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Notes to consolidated financial statements (unaudited)
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F-6 F-20
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F-1
MANTRA VENTURE GROUP LTD.
Consolidated balance sheets
(Expressed in U.S. dollars)
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August 31
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May 31,
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2016
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2016
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$
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$
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(unaudited)
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(as revised)
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ASSETS
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Current assets
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Cash
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4,126
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1,119
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Accounts receivable
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5
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7,358
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Prepaid expenses and deposits
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2,321
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4,789
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Total current assets
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6,452
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13,266
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Deposit
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-
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8,000
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Restricted cash
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-
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14,519
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Property and equipment, net
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66,292
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72,627
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Intangible assets, net
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61,430
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62,615
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Total assets
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134,174
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171,027
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities
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Accounts payable and accrued liabilities
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840,453
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836,982
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Due to related parties
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178,255
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154,560
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Loans payable
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208,138
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199,108
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Obligations under capital lease
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8,010
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8,123
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Convertible debentures (net of discount of $202,440 and $330,123, respectively)
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820,979
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668,921
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Derivative liability
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844,673
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978,245
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Total current liabilities
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2,900,508
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2,845,939
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Obligations under capital lease
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1,485
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3,308
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Total liabilities
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2,901,993
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2,849,247
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Stockholders' deficit
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Mantra Venture Group Ltd. stockholders deficit
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Preferred stock
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Authorized: 20,000,000 shares, par value $0.00001
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Issued and outstanding: Nil shares
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-
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-
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Common stock
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Authorized: 275,000,000 shares, par value $0.00001
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Issued and outstanding: 95,753,802 (May 31, 2016 - 88,559,024) shares
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958
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886
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Additional paid-in capital
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11,262,851
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11,163,514
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Common stock subscribed
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74,742
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99,742
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Accumulated deficit
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(13,863,959)
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(13,706,088)
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Total Mantra Venture Group Ltd. stockholders deficit
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(2,525,408)
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(2,441,946)
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Non-controlling interest
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(242,411)
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(236,274)
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Total stockholders equity deficit
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(2,767,819)
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(2,678,220)
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Total liabilities and stockholders deficit
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134,174
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171,027
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(The accompanying notes are an integral part of these unaudited consolidated financial statements)
F-2
MANTRA VENTURE GROUP LTD.
Consolidated statements of operations
(Expressed in U.S. dollars)
(unaudited)
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Three Months
Ended
August 31,
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Three Months
Ended
August 31,
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2016
$
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2015
$
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Revenue
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13,638
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Cost of goods sold
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Gross profit
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13,638
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Operating expenses
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Consulting and advisory
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5,000
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92,122
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Depreciation and amortization
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7,521
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3,431
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Foreign exchange loss (gain)
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438
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(727)
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General and administrative
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20,651
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87,575
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Management fees
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45,744
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67,268
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Professional fees
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335
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25,575
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Research and development
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9,305
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52,322
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Total operating expenses
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88,994
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327,566
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Loss before other expense
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(88,994)
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(313,928)
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Other income (expense)
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Loss on settlement of debt
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(24,000)
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Accretion of discounts on convertible debentures
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(167,183)
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(181,910)
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Gain on change in fair value of derivatives
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128,674
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206,696
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Interest expense
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(36,505)
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(23,548)
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Total other income (expense)
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(75,014)
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(22,762)
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Net loss for the period
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(164,008)
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(336,690)
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Less: net loss attributable to the non-controlling interest
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6,137
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15,967
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Net loss attributable to Mantra Venture Group Ltd.
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(157,871)
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(320,723)
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Net loss per share attributable to Mantra Venture Group Ltd. common shareholders, basic and diluted
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(0.00)
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(0.00)
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Weighted average number of shares outstanding used in the calculation of net loss attributable to Mantra Venture Group Ltd. per common share
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90,982,677
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72,566,328
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(The accompanying notes are an integral part of these unaudited consolidated financial statements)
F-3
MANTRA VENTURE GROUP LTD.
Consolidated statements of cash flows
(Expressed in U.S. dollars)
(unaudited)
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Three Months
Ended
August 31,
2016
$
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Three Months
Ended
August 31,
2015
$
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Operating activities
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Net loss
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(164,008)
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(336,690)
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Adjustments to reconcile net loss to net cash used in operating activities:
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(Gain) on change in fair value of derivative liability
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(149,189)
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(416,963)
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Amortization of finance costs
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8,562
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Accretion of discounts on convertible debentures
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167,183
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181,910
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Depreciation and amortization
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7,521
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3,431
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Foreign exchange loss (gain)
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438
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(6,586)
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Initial derivative expenses
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20,515
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210,267
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Shares issued for services
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30,001
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Interest related to cash redemption premium on convertible notes
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9,875
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Stock-based compensation on options and warrants
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15,610
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Loss on settlement of debt
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24,000
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Due to related parties
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23,695
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1,324
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Changes in operating assets and liabilities:
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Amounts receivable
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7,353
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20,757
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Prepaid expenses and deposits
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10,468
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28,887
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Accounts payable and accrued liabilities
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18,307
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59,691
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Net cash used in operating activities
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(47,842)
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(175,799)
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Investing activities
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Investment in intangible assets
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(682)
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Net cash used in investing activities
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(682)
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Financing activities
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Repayment of capital lease obligations
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(2,651)
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(1,527)
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Proceeds from notes payable
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9,000
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50,000
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Proceeds from issuance of convertible debentures
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39,500
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100,000
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Checks issued in excess of funds on deposit
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13,562
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Finance costs
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(8,000)
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Proceeds from issuance of common stock and subscriptions received
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5,000
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15,000
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Net cash provided by financing activities
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50,849
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169,035
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Change in cash
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3,007
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(7,446)
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Cash, beginning of period
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1,119
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7,446
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Cash, end of period
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4,126
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F-4
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Non-cash investing and financing activities:
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Common stock issued to relieve common stock subscribed
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25,000
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Common stock issued to settle accounts payable and debt
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24,000
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Common stock issued for conversion of notes payable
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69,409
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43,404
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Original debt discount against derivative liability
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39,500
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109,755
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Supplemental disclosures:
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Interest paid
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364
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726
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Income taxes paid
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(The accompanying notes are an integral part of these unaudited consolidated financial statements)
F-5
MANTRA VENTURE GROUP LTD.
Notes to the consolidated financial statements
August 31, 2016
(Expressed in U.S. dollars)
(unaudited)
1.
Organization and Going Concern
Mantra Venture Group Ltd. (the Company) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company continued its corporate jurisdiction out of the State of Nevada and into the province of British Columbia, Canada. The Company is in the business of developing and providing energy alternatives. The Company also provides marketing and graphic design services to help companies optimize their environmental awareness presence through the eyes of government, industry and the general public.
The accompanying unaudited consolidated interim financial statements of the Company should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission in the Companys 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 Companys financial position and the results of its operations and its cash flows for the periods shown.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. The results of operations and cash flows for the periods shown are not necessarily indicative of the results to be expected for the full year.
These unaudited consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has yet to acquire commercially exploitable energy related technology, and is unlikely to generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As at August 31, 2016, the Company has an accumulated loss of $13,863,959, and a working capital deficit of $2,894,056. These factors raise substantial doubt regarding the Companys ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be no certainty that these sources will provide the additional funds required for the next twelve months.
F-6
2.
Significant Accounting Policies
a.
Basis of Presentation/Principles of Consolidation
These unaudited consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc. All the subsidiaries are wholly-owned with the exception of Climate ESCO Ltd., which is 64.55% owned and Mantra Energy Alternatives Ltd., which is 88.21% owned. All inter- company balances and transactions have been eliminated.
b.
Loss Per Share
The Company computes loss per share in accordance with ASC 260, "Earnings per Share" which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti- dilutive. As at August 31, 2016, the Company had 243,619,532 (August 31, 2015 10,761,804) dilutive potential shares outstanding.
c.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
Restricted Cash
Restricted cash represents cash pledged as security for the Companys credit cards.
4.
Property and Equipment
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Cost
$
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Accumulated depreciation
$
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August 31,
2016
Net carrying value
$
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May 31,
2016
Net carrying value
$
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Furniture and equipment
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2,496
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1,082
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1,414
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1,539
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Computer
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5,341
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5,341
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Research equipment
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143,129
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90,941
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52,188
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56,655
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Vehicles under capital lease
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72,690
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60,000
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12,690
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14,433
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223,656
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157,364
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66,292
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72,627
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During the three months ended August 31, 2016, the Company recorded $6,336 (2015 - $2,979) of amortization expense.
F-7
5.
Intangible Assets
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Cost
$
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Accumulated amortization
$
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August 31,
2016
Net carrying value
$
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May 31,
2016
Net carrying value
$
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Patents
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70,789
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9,359
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61,430
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62,615
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During the three months ended August 31, 2016, the Company recorded $1,185 (2015 - $452) of amortization expense.
Estimated Future Amortization Expense:
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For year ending May 31, 2017
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3,553
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For year ending May 31, 2018
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4,738
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For year ending May 31, 2019
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4,738
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For year ending May 31, 2020
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4,738
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For year ending May 31, 2021
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4,738
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6.
Related Party Transactions
a)
During the three months ended August 31, 2016, the Company incurred management fees of $34,308 (2015 - $35,902) to the President of the Company.
b)
During the three months ended August 31, 2016, the Company incurred management fees of $11,436 (2015 - $12,298) to the spouse of the President of the Company.
c)
During the three months ended August 31, 2016, the Company incurred research and development fees of $0 (2015 - $ 17,663) to a director of the Company.
d)
During the three months ended August 31, 2016, the Company recorded $0 (2015 - $19,068) of management fees for the vesting of options previously granted to officers and directors.
e)
As at August 31, 2016, the Company owes a total of $160,427 (May 31, 2016 - $136,723) to the President of the Company and his spouse, and a company controlled by the President of the Company which is non-interest bearing, unsecured, and due on demand.
f)
As at August 31, 2016, the Company owes $17,828 (May 31, 2016 - $17,837) to an officer and a director of the Company, which is non-interest bearing, unsecured, and due on demand.
7.
Loans Payable
(a)
As at August 31, 2016, the amount of $48,259 (Cdn$63,300) (May 31, 2016 - $48,285 (Cdn$63,300)) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
(b)
As at August 31, 2016, the amount of $17,500 (May 31, 2016 - $17,500) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
F-8
(c)
As at August 31, 2016, the amount of $15,000 (May 31, 2016 - $15,000) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
(d)
As at August 31, 2016, the amount of $14,406 (Cdn$18,895) (May 31, 2016 -$14,413 (Cdn$18,895)) is owed to a non-related party, which is non-interest bearing, unsecured, and due on demand.
(e)
As at August 31, 2016, the amounts of $7,500 and $28,209 (Cdn$37,000) (May 31, 2016 - $7,500 and $28,224, (Cdn$37,000)) are owed to a non-related party which are non-interest bearing, unsecured, and due on demand.
(f)
As at August 31, 2016, the amount of $4,490 (May 31, 2016 - $4,490) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
(g)
As at August 31, 2016, the amounts of $13,774 (Cdn$18,066) (May 31, 2016 - $13,696 (Cdn$18,066)) was advanced by a non-related party. The amount owing is non-interest bearing, unsecured, and due on demand.
(h)
In March 2012, the Company received $50,000 for the subscription of 10,000,000 shares of the Companys common stock. During the year ended May 31, 2013, the Company and the subscriber agreed that the shares would not be issued and that the subscription would be returned. The subscription has been reclassified as a non-interest bearing demand loan until the funds are refunded to the subscriber.
(i)
On August 4, 2015, the Company borrowed $50,000 pursuant to a promissory note. The note was due on September 4, 2015. The note bears interest at 120% per annum prior September 4, 2015, and at 180% per annum after September 4, 2015. The holder of the note was also granted the rights to buy 100,000 shares of the Companys common stock at a price of $0.15 per share until August 4, 2017. During the year ended May 31, 2016, the Company repaid the $50,000 note and $1,200 of accrued interest remains owing.
The rights issued with the note qualified for derivative accounting under ASC 815-15
Derivatives and Hedging
. The initial fair value of the warrants of $9,755 resulted in a discount to the note payable of $9,755. As of May 31, 2016, the Company recorded accretion of $9,755.
(j)
As at August 31, 2016, the amount of $9,000 (May 31, 2016 - $0) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
F-9
8.
Obligations Under Capital Lease
On July 31, 2012 and December 21, 2012, the Company entered into two agreements to lease two vehicles for three years each. In August 2015, the July 31, 2012 lease was renewed for an additional two years and on December 28, 2015, the December 21, 2012 lease was also renewed for an additional two years. The vehicle leases are classified as a capital leases. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of August 31, 2016:
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Year ending May 31:
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$
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2017
|
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6,883
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2018
|
|
3,442
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|
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Net minimum lease payments
|
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10,325
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Less: amount representing interest payments
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(830)
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Present value of net minimum lease payments
|
|
9,495
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Less: current portion
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(8,010)
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|
|
Long-term portion
|
|
1,485
|
At the end of the leases, the Company has the option to purchase the two vehicles for $1 each.
9.
Convertible Debentures
(a)
In October 2008, the Company issued three convertible debentures for total proceeds of $250,000 which bear interest at 10% per annum, are unsecured, and due one year from date of issuance. The unpaid amount of principal and accrued interest can be converted at any time at the holders option into 625,000 shares of the Companys common stock at a price of $0.40 per share. The Company also issued 250,000 detachable, non-transferable share purchase warrants. Each share purchase warrant entitles the holder to purchase one additional share of the Companys common stock for a period of two years from the date of issuance at an exercise price of $0.50 per share.
In accordance with ASC 470-20,
Debt with Conversion and Other Options
, the Company determined that the convertible debentures contained no embedded beneficial conversion feature as the convertible debentures were issued with a conversion price higher than the fair market value of the Companys common shares at the time of issuance.
In accordance with ASC 470-20, the Company allocated the proceeds of issuance between the convertible debt and the detachable share purchase warrants based on their relative fair values. Accordingly, the Company recognized the fair value of the share purchase warrants of $45,930 as additional paid-in capital and an equivalent discount against the convertible debentures. The Company had recorded accretion expense of $45,930, increasing the carrying value of the convertible debentures to $250,000.
On January 19, 2012, the Company entered into a settlement agreement with one of the debenture holders to settle a $50,000 convertible debenture and $122,535 in accounts payable and accrued interest with the debt holder. Pursuant to the agreement, the debt holder agreed to reduce the debt to Cdn$100,000 on the condition that the Company pays the amount of Cdn$2,500 per month for 40 months, beginning March 1, 2012 and continuing on the first day of each month thereafter.
F-10
On July 18, 2012, the Company entered into a settlement agreement with the $150,000 debenture holder. Pursuant to the settlement agreement, the lender agreed to extend the due date until April 11, 2013 and the Company agreed to pay $43,890 of accrued interest within five days of the agreement (paid), pay the accruing interest on a monthly basis (paid), and pay a $10,000 premium in addition to the $150,000 principal outstanding on April 11, 2013. On April 29, 2013, the Company entered into an amended settlement agreement whereby the lender agreed to extend the due date to September 15, 2013 and the Company agreed to pay $6,836 of interest for the period from April 1 to September 15, 2013 upon execution of the agreement (paid) and granted the lender 100,000 stock options exercisable at $0.12 per share for a period of two years.
On November 15, 2013, the Company entered into a second settlement agreement amendment. Pursuant to the second amendment, on November 15, 2013, the Company agreed to pay interest of $4,438 (paid) and commencing February 1, 2014, the Company would make monthly payments of $10,000 on the outstanding principal and interest. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.
The Company evaluated the modifications and determined that the creditor did not grant a concession. In addition, as the present value of the amended future cash flows had a difference of less than 10% of the cash flows of the original debt, it was determined that the original and new debt instruments are not substantially different. As a result, the modification was not treated as an extinguishment of the debt and no gain or loss was recognized because the fair value of the old debt and new debt remained the same. The Company recorded the fair value of $12,901 for the stock options as additional paid-in capital and a discount. During the year ended May 31, 2014, the Company repaid $40,000 of the debenture. As at May 31, 2014 the Company had accreted $12,901 of the discount bring the carrying value of the convertible debenture to $114,661. During the year ended May 31, 2015, the Company repaid $54,808 decreasing the carrying value to $59,853. At August 31, 2016, the other remaining debenture of $59,853 remained outstanding and past due.
(b)
On August 19, 2013, the Company issued a convertible debenture for total proceeds of $10,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holders option into shares of the Companys common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $10,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $10,000. As at August 31, 2016, the carrying value of the convertible promissory note was $10,000 and the note remained outstanding and in default.
(c)
On September 11, 2013, the Company issued a convertible debenture for total proceeds of $58,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holders option into shares of the Companys common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $58,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $58,000. As at August 31, 2016, the carrying value of the convertible promissory note was $58,000 and the note remained outstanding and in default.
F-11
(d)
On October 18, 2013, the Company issued a convertible debenture for total proceeds of $94,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holders option into shares of the Companys common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $94,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $94,000. As at August 31, 2016, the carrying value of the convertible promissory note was $94,000 and the note remained outstanding and in default.
(e)
On December 27, 2013, the Company issued three convertible debentures for total proceeds of $15,000, which bear interest at 10% per annum, are unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holders option into shares of the Companys common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion features of $15,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $15,000. As at August 31, 2016, the carrying value of the convertible promissory note was $15,000 and the note remained outstanding and in default.
(f)
On February 4, 2014, the Company issued a convertible debenture for total proceeds of $15,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holders option into shares of the Companys common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $15,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $15,000. As at August 31, 2016, the carrying value of the convertible promissory note was $15,000 and the note remained outstanding and in default.
(g)
On June 1, 2015, the Company issued a convertible note in the principal amount of $100,000 due on demand on or after December 1, 2015. The note has a cash redemption premium of 130% of the principal amount in the first 90 days following the execution date, of 135% for days 90-120 following the execution date, and 140% after the 120th day. After 140 days cash redemption is only available upon approval by the holder. The note bears interest at 12% per annum and is convertible into common shares of the Company at the lower of a 42% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 42% discount to the lowest trading price during the previous 20 trading days before the date the note was executed. In no event shall the conversion price be lower than $0.00001. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $310,266 resulted in a discount to the note payable of $100,000 and the recognition of a loss on derivatives of $210,266. During the year ended May 31, 2016, the Company issued 6,303,475 shares of common stock upon the conversion of $45,000 of principal. During the year ended May 31, 2016, the Company recorded accretion of $100,000 and recorded the cash redemption premium of $26,250 increasing the carrying value of the note to $81,250.
During the three months ended August 31, 2016, the Company issued 5,194,778 shares of common stock upon the conversion of $25,000 of principal. At August 31, 2016, the carrying value of the note was $56,250 and the note remained outstanding and past due.
F-12
(h)
On September 8, 2015, the Company issued a convertible note in the principal amount of $326,087. During the year ended May 31, 2016, the Company received the initial tranches of $280,000 net of a $26,087 original issue discount. The note bears interest at 10% per annum and is convertible into common shares of the Company at a 65% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 65% discount to the lowest trading price during the previous 20 trading days before the date the note was executed.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $479,626 resulted in a discount to the note payable of $280,000 and the recognition of a loss on derivatives of $204,626. During the year ended May 31, 2016, the Company recorded accretion of $120,175 and recorded a default fee of $76,522 increasing the carrying value of the note to $190,696.
During the three months ended August 31, 2016, the Company recorded accretion of $121,939 increasing the carrying value of the note to $318,635.
(i)
On December 4, 2015, the Company issued a convertible note in the principal amount of $105,000 as an inducement to the holder of the convertible notes described in Note 9(g), to enter into an agreement to sell and assign the remaining outstanding principal to a third party. The note included a $10,000 original issue discount. The note bears interest at 10% per annum and is convertible into common shares of the Company at a 52% discount to the lowest trading price during the previous 30 trading days to the date of conversion; or a 52% discount to the lowest trading price during the previous 30 trading days before the date the note was executed.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $216,108 resulted in a discount to the note payable of $95,000 and the recognition of a loss on derivatives of $111,108. During the year ended May 31, 2016, the Company recorded accretion of $22,440 and recorded a default of fee of $26,250 increasing the carrying value of the note to $48,690.
During the three months ended August 31, 2016, the recorded accretion of $25,899 increasing the carrying value of the note to $74,589.
(j)
On March 10, 2016, the Company issued a convertible note in the principal amount of up to $166,666. During the year ended May 31, 2016, the Company received initial tranches of $65,000 net of a $16,666 original issue discount. The note bears interest at 10% per annum and is convertible into common shares of the Company at a 65% discount to the lowest trading price during the previous 20 trading days to the date of conversion; or a 65% discount to the lowest trading price during the previous 20 trading days before the date the note was executed.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $218,785 resulted in a discount to the note payable of $81,666 and the recognition of a loss on derivatives of $158,785. During the year ended May 31, 2016, the Company recorded accretion of $20,015, and recorded a default fee of $20,417 increasing the carrying value of the note to $40,432.
During the three months ended August 31, 2016, the Company received additional tranches of $39,500.
The initial fair value of the conversion feature of $60,015 resulted in a discount to the note payable of $39,500 and the recognition of a loss on derivatives of $20,515. During the three months ended August 31, 2016, the Company recorded accretion of $19,345, and recorded a default fee of $9,875 increasing the carrying value of the note to $69,652.
F-13
10.
Derivative Liabilities
The embedded conversion option of the convertible debenture described in Note 9(g) contains a conversion feature that qualifies for embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.
Upon the issuance of the convertible note payable described in Note 9(g), the Company concluded that it only has sufficient shares to satisfy the conversion of some but not all of the outstanding convertible notes, warrants and options. The Company elected to reclassify contracts from equity with the earliest inception date first. As a result, none of the Companys previously outstanding convertible instruments qualified for derivative reclassification, however, any convertible securities issued after the election, including the convertible note described in Notes 9(h), 9(i) and 9(j), and the rights described in Note 7(i) would qualify for treatment as derivative liabilities. The Company reassesses the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The table below sets forth a summary of changes in the fair value of the Companys Level 3 financial liabilities:
|
|
|
|
|
|
|
August 31, 2016
|
|
May 31, 2016
|
|
|
|
|
|
Balance at the beginning of period
|
$
|
978,245
|
$
|
353,668
|
|
|
|
|
|
Original discount limited to proceeds of notes
|
|
39,500
|
|
541,755
|
Fair value of derivative liabilities in excess of notes proceeds received
|
|
20,515
|
|
692,785
|
Conversion of derivative liability
|
|
(44,409)
|
|
(414,246)
|
Change in fair value of embedded conversion option
|
|
(149,178)
|
|
(195,717)
|
|
|
|
|
|
Balance at the end of the period
|
$
|
844,673
|
$
|
978,245
|
The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of the Companys common stock (as quoted on the Over the Counter Markets), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
|
|
|
|
|
|
Expected Volatility
|
Risk-free Interest Rate
|
Expected Dividend Yield
|
Expected Life (in years)
|
|
|
|
|
|
|
|
|
|
|
At issuance
|
134-213%
|
0.07-0.74%
|
0%
|
0.50-2.00
|
At August 31, 2016
|
195-279%
|
0.61%
|
0%
|
0.02-1.00
|
F-14
11.
Common Stock
(a)
As at May 31, 2016 and 2015, the Company had received proceeds of $2,080 at $0.08 per unit for subscriptions for 26,000 units. Each unit consisted of one share of common stock and one-half of one share purchase warrant. Each whole share purchase warrant is exercisable at $0.20 per common share for a period of two years or five business days after the Companys common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.40 per share for seven consecutive trading days.
(b)
As at May 31, 2016 and 2015 the Companys subsidiary, Mantra Energy Alternatives Ltd., had received subscriptions for 67,000 shares of common stock at Cdn$1.00 per share for proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of the non-controlling interest portion of $7,231.
(c)
As at May 31, 2016 and 2015, the Companys subsidiary, Climate ESCO Ltd., had received subscriptions for 210,000 shares of common stock at $0.10 per share for proceeds of $21,000, which is included in common stock subscribed, net of the non-controlling interest portion of $7,384.
(d)
On February 2, 2016, the Company revised its authorized share capital to increase the number of authorized common shares from 100,000,000 common shares with a par value of $0.00001, to 275,000,000 common shares with a par value of $0.00001.
Stock transactions during the three months ended August 31, 2016:
(a)
On July 1, 2016, the Company issued 2,368,322 shares of common stock upon the conversion of $15,000 of principal of the convertible note described in Note 9(g).
(b)
On August 15, 2016, the Company issued 2,826,456 shares of common stock upon the conversion of $10,000 of principal of the convertible note described in Note 9(g).
(c)
On August 29, 2016, the Company issued 2,000,000 units at $0.015 per unit for proceeds of $30,000. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable at $0.03 per share of common stock for a period of two years or thirty calendar days after the Companys common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or above $0.03 per share for five consecutive trading days. As at May 31, 2016, the Company had received proceeds of $25,000 at $0.015 per unit for subscriptions for 1,666,666 units which was included in common stock subscribed.
F-15
12.
Share Purchase Warrants
The following table summarizes the continuity of share purchase warrants:
|
|
|
|
Number of
warrants
|
Weighted average exercise price
$
|
|
|
|
Balance, May 31, 2015
|
5,258,333
|
0.44
|
|
|
|
Issued
|
1,766,667
|
0.04
|
|
|
|
Balance, May 31, 2016
|
7,025,000
|
0.34
|
|
|
|
Issued
|
333,334
|
0.03
|
|
|
|
Balance, August 31, 2016
|
7,358,334
|
0.33
|
As at May 31, 2016, the following share purchase warrants were outstanding:
|
|
|
Number of warrants
|
Exercise
price
$
|
Expiry date
|
|
|
|
150,000
|
0.60
|
November 18, 2016
|
500,000
|
0.60
|
February 27, 2017
|
333,333
|
0.80
|
June 4, 2017
|
200,000
|
0.80
|
July 11, 2017
|
1,000,000
|
0.03
|
April 15, 2018
|
666,667
|
0.03
|
May 4, 2018
|
100,000
|
0.15
|
August 4, 2017
|
4,075,000
|
0.37
|
April 10, 2019
|
333,334
|
0.03
|
August 29, 2016
|
|
|
|
7,358,334
|
|
|
F-16
13.
Stock Options
The following table summarizes the continuity of the Companys stock options:
|
|
|
|
|
|
Number
of options
|
Weighted
average
exercise price
$
|
Weighted average remaining contractual life (years)
|
Aggregate
intrinsic
value
$
|
|
|
|
|
|
Outstanding, May 31, 2015
|
1,675,000
|
0.17
|
|
|
|
|
|
|
|
Granted
|
350,000
|
0.03
|
|
|
Expired
|
(525,000)
|
0.20
|
|
|
|
|
|
|
|
Outstanding, May 31, 2016
|
1,500,000
|
0.16
|
|
|
|
|
|
|
|
Expired
|
(550,000)
|
0.20
|
|
|
|
|
|
|
|
Outstanding, August 31, 2016
|
950,000
|
0.14
|
0.89
|
|
Exercisable, August 31, 2016
|
950,000
|
0.14
|
0.89
|
|
|
|
|
Non-vested stock options
|
Number of Options
|
Weighted Average
Grant Date
Fair Value
|
|
|
$
|
Non-vested at May 31, 2015
|
550,000
|
|
|
|
|
Granted
|
350,000
|
0.03
|
Expired
|
(50,000)
|
0.20
|
Vested
|
(800,000)
|
0.14
|
|
|
|
Non-vested at May 31, 2016
|
50,000
|
0.30
|
Expired
|
(50,000)
|
0.30
|
|
|
|
Non-vested at August 31, 2016
|
|
|
Additional information regarding stock options as of May 31, 2016 is as follows:
|
|
|
Number of
options
|
Exercise
price
$
|
Expiry date
|
|
|
|
200,000
|
0.20
|
November 1, 2016
|
400,000
|
0.20
|
March 16, 2017
|
350,000
|
0.03
|
May 17, 2018
|
|
|
|
950,000
|
|
|
The Company did not grant any stock options or record any stock-based compensation for options granted during the three month period ended August 31, 2016 or 2015.
F-17
14.
Commitments and Contingencies
(a)
On September 2, 2009, the Company entered into an agreement with a company to acquire a worldwide, exclusive license for the Mixed Reactant Flow-By Fuel Cell technology. The term of the agreement is for twenty years or the expiry of the last patent licensed under the agreement, whichever is later. The Company agreed to pay the licensor the following license fees:
·
an initial license fee of Cdn$10,000 payable in two installments: Cdn$5,000 upon execution of the agreement (paid) and Cdn$5,000 within thirty days of September 2, 2009 (paid);
·
a further license fee of Cdn$15,000 (paid) to be paid within ninety days of September 2, 2009; and
·
an annual license fee, payable annually on the anniversary of the date of the agreement as follows:
|
|
September 1, 2010
|
Cdn$10,000 (paid)
|
September 1, 2011
|
Cdn$20,000 (accrued)
|
September 1, 2012
|
Cdn$30,000(accrued)
|
September 1, 2013
|
Cdn$40,000 (accrued)
|
September 1, 2014
and each successive anniversary
|
Cdn$50,000 (accrued)
|
The Company is to pay the licensor a royalty calculated as 2% of the gross revenue and 15% of any and all consideration directly or indirectly received by the Company from the grant of any sublicense rights. The Company will pay interest at a rate of 1% per month on any amounts past due. In addition, the Company is responsible for the timely payment of all future costs relating to patent expenses and any new or useful art, process, machine, manufacture or composition of matter arising out of any licensor improvements or joint improvements licensed under this agreement and identified by the licensor as potentially patentable. The Company must also invest a minimum of Cdn$250,000 in research and development directly associated with the technology.
(b)
On May 23, 2012, a former employee of the Company delivered a Notice of Application seeking judgment against the Company for approximately $55,000. The hearing of that Application took place on July 31, 2012, at which time the former employee obtained judgment in the approximate amount of $55,000. The Company did not defend the amount of the judgment and the amount is included in accounts payable, but claims a complete set-off on the basis that the former employee retains 1,000,000 shares of common stock of the Company as security for payment of the outstanding consulting fees owed to him. On August 31, 2012, the Company commenced a separate action against the former employee seeking a return of the 1,000,000 shares of common stock and a stay of execution of the judgment. That application is pending and has not yet been heard or determined by the court. The payment of the judgment claim of approximately $55,000 is dependent upon whether the former employee will first return the 1,000,000 shares of common stock noted above. The probable outcome of the Companys claim for the return of the shares cannot yet be determined.
(c)
On November 15, 2013, the Company entered into a second settlement agreement with the $150,000 debenture holder described in Note 9(a). Pursuant to the second amendment, on November 15, 2013, the Company agreed to make monthly payments of $10,000 on the outstanding principal and interest. Payments were made until December 2014, but have not been made after. The plaintiff is seeking relief of amounts owed along with 10% interest per annum, from the date of judgments. All amounts are recorded in these financial statements.
(d)
On September 3, 2015, a former prospective employee of the Company delivered a Notice of Claim seeking judgment against the Company for approximately $11,400. The Company believes the claim is without merit and intends to defend itself.
(e)
On March 14, 2016, the Company entered into a consulting agreement. Pursuant to the agreement, the Company will pay the consultant $10,000 per month ($20,000 paid) and issue 550,000 shares per month for a period of three months. At May 31, 2016, the Company had not issued the shares to the consultant due to non-performance.
(f)
On July 15, 2016, the Company entered into an agreement to lease office space for $430 ($564CAD) per month until June 30, 2017.
F-18
16.
Revision of Prior Year Financial Statements
The Company identified an error relating to the non-recognition of the convertible note described in Note 9(i) during the year ended May 31, 2016. The effect of the error is to increase net loss by $275,295 for the year ended May 31, 2016.
In accordance with the guidance provided by the SECs Staff Accounting Bulletin 99,
Materiality
and Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited consolidated financial statements. Accordingly, these changes are disclosed herein and will be disclosed prospectively.
As a result of the aforementioned correction of accounting errors, the relevant annual financial statements have been revised as follows:
Effects on financials for the Year Ended May 31, 2016:
|
|
|
|
|
May 31, 2016
|
Consolidated Balance Sheet
|
As Previously Reported
|
Adjustment
|
As Revised
|
Accounts payable and accrued liabilities
|
$
810,575
|
$
26,407
|
$
836,982
|
Convertible debentures
|
620,231
|
48,690
|
668,921
|
Derivative liability
|
778,047
|
200,198
|
978,245
|
Accumulated deficit
|
(13,430,793)
|
(275,295)
|
(13,706,088)
|
Total Mantra Venture Group Ltd. stockholders deficit
|
(2,166,651)
|
(275,295)
|
(2,441,946)
|
Total stockholders deficit
|
(2,402,925)
|
(275,295)
|
(2,678,220)
|