ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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Forward Looking Statements
This report on Form 10-Q contains certain forward-looking
statements. All statements other than statements of historical fact are
forward-looking statements for purposes of these provisions, including any
projections of earnings, revenues, or other financial items; any statements of
the plans, strategies, and objectives of management for future operation; any
statements concerning proposed new products, services, or developments; any
statements regarding future economic conditions or performance; statements of
belief; and any statement of assumptions underlying any of the foregoing. Such
forward-looking statements are subject to inherent risks and uncertainties, and
actual results could differ materially from those anticipated by the
forward-looking statements.
These forward-looking statements involve significant risks and
uncertainties, including, but not limited to, the following: competition,
promotional costs and the risk of declining revenues. Our actual results could
differ materially from those anticipated in such forward-looking statements as a
result of a number of factors. These forward-looking statements are made as of
the date of this filing, and we assume no obligation to update such
forward-looking statements. The following discusses our financial condition and
results of operations based upon our consolidated financial statements which
have been prepared in conformity with accounting principles generally accepted
in the United States. It should be read in conjunction with our financial
statements and the notes thereto included elsewhere herein.
Results of Operations
Three Months Ended April 30, 2014 and 2013 and from
February 10, 2010 (Date of Inception) to April 30, 2014
We are still in our development stage and did not generate any
revenues during the three months ended April 30, 2014. During the three months
ended April 30, 2013, we generated $3,612 in revenue at a cost of sales of $740,
for a gross margin of $2,872. From February 10, 2010 (date of inception) to
April 30, 2014 we generated $5,691 in revenue at a cost of sales of $1,132 for a
gross margin of $4,559. All of revenue we have generated since our inception
relates to the sale of produce.
We incurred operating expenses of $522,056 during the three
months ended April 30, 2014, compared with $197,350 during the three months
ended April 30, 2013. The increase in our operating expenses of $324,706 was due
to increases in our research and development expenses and general and
administrative expenses due to higher operating costs incurred as we prepare to
open our first growing facility this year., and an increase in the depreciation
incurred during the period related to our R&D growing machines.
We incurred a net loss of $618,887 during the three months
ended April 30, 2014, compared with a net loss of $197,410 during the three
months ended April 30, 2013. In addition to our loss from operations of $522,056
during the current period, we incurred $4,715 in interest expense for accrued
interest on loans and convertible debentures, $32,500 in accretion expenses
relating to our convertible debentures, and a $71,438 loss on the settlement of
accounts payable offset by a gain on the change in fair value of derivative
liabilities of $11,822. During the same period in the prior year we only
incurred $2,932 in other expenses. Our net loss from February 10, 2010 (date of
inception) to April 30, 2014 was $3,564,192.
Nine Months Ended April 30, 2014 and 2013
We did not generate any revenues during the nine months ended
April 30, 2014; however, during the nine months ended April 30, 2013, we
generated $4,390 in revenue at a cost of sales of $1,132, for a gross margin of
$3,258.
During the nine months ended April 30, 2014 we incurred
operating expenses of $1,156,097, compared with $1,064,153 during the nine
months ended April 30, 2013. The increase in our operating expenses of $91,944
was primarily due to an increase in research and development expenses and
professional fees due to higher operating costs and activity.
We incurred a net loss of $1,474,139 during the nine months
ended April 30, 2014 compared with a net loss of $1,615,591 during the nine
months ended April 30, 2013. In addition to our loss from operations of
$1,156,097, we incurred $26,912 in interest expense (nine months ended April 30,
2013 - $7,123) for accrued interest on loans and convertible debentures, $76,781
in accretion expenses (nine months ended April 30, 2013 - $132,798) relating to
our convertible debentures, a loss on the change in fair value of derivative
liabilities of $140,048 (nine months ended April 30, 2013 - gain of $132,408)
and a $71,438 loss on the settlement of accounts payable (nine months ended
April 30, 2013 - $1,957), for a total of $318,042 in other expenses, During the nine months ended April 30, 2013,
we also incurred a $540,788 loss on the conversion of a convertible debenture.
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Liquidity and Capital Resources
The following table provides selected financial data about our
company for the quarter ended April 30, 2014:
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April 30,
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July 31,
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2014
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2013
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$
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$
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Cash
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307,303
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29,617
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Current Assets
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373,196
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56,045
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Total Assets
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1,048,739
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341,388
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Current Liabilities
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174,992
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644,152
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Accumulated Deficit
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(3,699,177
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)
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(2,225,038
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)
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As of April 30, 2014, we had cash of $307,303, total current
assets of $373,196, total current liabilities of $174,992 and a working capital
surplus of $198,204, compared to cash of $29,617, total current assets of
$56,045, total current liabilities of $644,152, and a working capital deficit of
$588,107 as of July 31, 2013. The increase in our working capital is due to our
receipt of additional invested funds as we prepare to open our first growing
facility this year, and the settlement of outstanding liabilities through the
issuance of common shares.
During the nine months ended April 30, 2014, we received net
cash of $1,349,144 from financing activities, compared to net cash received of
$466,200 from financing activities during the nine months ended April 30, 2013.
The increase is primarily due to $1,500,000 in proceeds we received from the
issuance of our common shares (as offset by $80,000 in share issuance costs),
$32,500 in proceeds we received from the issuance of a convertible note payable,
and $48,424 in proceeds we received from related parties and offset by $151,780
we repaid to related parties. During the same period in the prior year we only
received $473,750 in proceeds from the issuance of our common shares, as offset
by $7,550 in share issuance costs.
During the nine months ended April 30, 2014, we used net cash
of $636,751 on operating activities compared to $309,198 during the nine months
ended April 30, 2013. The increase in net cash used was due to our increased
operating expenses as we prepare to open our first growing facility this
year.
During the nine months ended April 30, 2014, we used net cash
of $434,707 on investing activities compared to $144,786 during the period ended
April 30, 2013. The increase in cash used was due to our increased purchase of
equipment as we prepare to open our first growing facility this year as well as
payment for patents on our intellectual property.
From February 10, 2010 (inception) to April 30, 2014, our
accumulated deficit was $3,699,177. We are dependent on the funds raised through
our equity or debt financing, investing activities, and revenue generated
through the sales of our products to fund our operations.
We anticipate that we will meet our ongoing cash requirements
by retaining income as well as through equity or debt financing. We plan to
cooperate with various individuals and institutions to acquire the financing
required to produce and distribute our products and anticipate this will
continue until we accrue sufficient capital reserves to finance all of our
productions independently.
Plan of Operation
s
Our 2014 operating plan is focused on revenue generation,
product line development and machine design refinement. We recently completed
our first growing facility in the Montreal area and have begun commercial scale
operations and sales. We will continue research and development activities at
our Langley, British Columbia facility, as well as in Montreal with McGill
University.
The Montreal growing facility consists of 12 machines and,
although small, will have considerable production and associated sales. This new
facility is fully operational and will begin shipping product in June.
In addition to the commercial barn operation we will be
collaborating with McGills McDonald campus to research optimization of the
variables of controlled environment agriculture (CEA) and apply those
improvements to the new facility. McGill has set up two machines on their campus as
well as two machines within our Montreal growing facility. McGill will conduct
research in conjunction with their recent NSERC Collaborative Research &
Development grant with industry support from us.
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The Langley site will continue work on the development of new
product lines, machine development and the barn setup process.
We estimate that our expenses over the next 6 months will be
approximately $485,000 as summarized in the table below. These estimates may
change significantly depending on the nature of our future business activities
and our ability to raise capital from investors or other sources.
Description
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Potential
Completion Date
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Estimated
Expenses
($)
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Cost of sales
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6 months
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175,000
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Sales & marketing expenses
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6 months
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50,000
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Staff and consultanting expenses
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6 months
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135,000
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General and administrative expenses
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6 months
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125,000
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Total
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485,000
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Our general and administrative expenses for the year will
consist of professional fees, office maintenance, communication expenses
(cellular, internet, fax and telephone), bank charges, courier and postage
costs, office supply costs and fees related to our website. Our professional
fees will include legal, accounting and auditing fees related to our regulatory
filings throughout the year.
Based on our planned expenditures, we require additional funds
of $485,000 to proceed with our business plan over the next 6 months. If we are
not able to obtain additional financing on a timely basis, we will be unable to
conduct our operations as planned, and we will not be able to meet our
obligations as they become due. In such event, we will be forced to scale down
or perhaps even cease our operations.
Inflation
The amounts presented in the financial statements do not
provide for the effect of inflation on our operations or financial position. The
net operating losses shown would be greater than reported if the effects of
inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation adjustments.
Off-Balance Sheet Arrangements
As of April 30, 2014 we had one off balance sheet transactions
that will have or is reasonably likely to have a current or future effect on our
financial condition, changes in our financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources. In
collaboration with McGill University researcher Dr. Mark Lefsrud of the Faculty
of Agricultural and Environmental Sciences, we will further develop an indoor
plant growth system aimed at expanding locally grown food. With industrial
support from us, McGill University was recently awarded an NSERC Collaborative
Research & Development (CRD) grant in the amount of $240,000 in order to
continue the development of this important project. The grant will run for an
initial period of two years with the aim of optimizing light emitting diodes to
assess photosynthetic efficiency of horticultural plants. The project is focused
on the refinement of the photosynthetically active radiation efficiency (PAR
curve) of plants using light emitting diodes (LEDs), and the basic science
research will be used to optimize the lighting in our cubic farming system to
maximize production and reduce energy costs.
Critical Accounting Policies
Our financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. A complete summary of these policies are included in note 2 of the
Notes to our Financial Statements. We have identified below the accounting
policies that are of particular importance in the presentation of our financial
position, results of operations and cash flows, and which require the
application of significant judgment by our management.
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Inventory
Inventory is comprised of seeds for growing agricultural
products and is recorded at the lower of cost or net realizable value on a
first-in first-out basis. The Company establishes inventory reserves for
estimated obsolete or unsaleable inventory equal to the difference between the
cost of inventory and the estimated realizable value based upon assumptions
about future and market conditions.
Intangible Assets
Intangible assets consist of patent development costs.
Intangible assets acquired are initially recognized and measured at cost and
amortized over its expected useful life once the patents are in use. Impairment
tests are conducted annually or more frequently if events or changes in
circumstances indicate that the asset may be impaired. The impairment test
compares the carrying amount of the intangible asset with its fair value, and an
impairment loss is recognized in income for the excess, if any. The amortization
methods and estimated useful lives of intangible assets are reviewed
annually.
Foreign Currency Translation
The Companys functional and reporting currency is the U.S.
dollar. Monetary assets and liabilities of integrated operations and other
monetary assets and liabilities denominated in foreign currencies are translated
to U.S. dollars at exchange rates in effect at the balance sheet date.
Non-monetary assets and liabilities are translated at historical rates. Revenues
and expenses are translated at average rates for the period, except for
amortization, which is translated on the same basis as the related asset. The
resulting exchange gains or losses are recognized in income.