POWERNOVA TECHNOLOGIES CORPORATION
#1010, 207 West Hastings Street
Vancouver, BC
V6B 1H7
Tel: 604.734.7488
November 9, 2010
MANAGEMENT DISCUSSION & ANALYSIS
This discussion and analysis should be read in conjunction with our interim consolidated financial statements and the accompanying notes for the three months ended August 31, 2010, as well as our audited consolidated financial statements and accompanying Management Discussion & Analysis for the year ended May 31, 2010, which have been prepared in accordance with Canadian generally accepted accounting principles. All amounts in the financial statements and this discussion and analysis are expressed in Canadian dollars, unless otherwise indicated.
FORWARD LOOKING INFORMATION
This management discussion and analysis (“MD&A”) contains certain forward-looking statements and information relating to PowerNova Technologies Corporation that are based on the beliefs of our management as well as assumptions made by and information currently available to us. When used in this document, the words “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as they relate to our company or our management, are intended to identify forward-looking statements. This MD&A contains forward-looking statements relating to, among other things, regulatory compliance, the sufficiency of current working capital, the estimated cost and availability of funding for the continued exploration and development of our exploration properties. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or our achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements.
Overview
PowerNova was incorporated in British Columbia on October 6, 1986 under the name “Aqua 1 Beverage Company Inc.”. On September 11th, 2003 we changed our name to “PowerNova Technologies Corporation”. Our shares were previously listed on the TSX Venture Exchange (“TSX”) until June 20th, 2003, when our shares were delisted for failure to pay the TSX’s annual sustaining fees. We elected not to pay the sustaining fees as our preference is to obtain a listing on the NASD Over-The-Counter Bulletin Board (“OTC BB”).
We recently submitted an application for listing and trading of its securities on the Canadian National Stock Exchange (“CNSX”). On September 15, 2010, we were notified by the CNSX that we were conditionally approved for listing on the CNSX. Listing is subject to completion of a private placement of securities to raise sufficient funds to meet a minimum working capital requirement of $100,000. We are proposing to complete a non-brokered private placement on terms to yet be determined.
In October 2003 we agreed to acquire all of the shares of Hydrogen Production Technologies Corporation (“HPTC”), a newly incorporated British Virgins Island company beneficially owned by Dr. Avtandil A. Koridze, our Vice-President and a director, and Mr. Bakytzhan Oralbekov, our President and a director. HPTC
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owned the intellectual property rights to a hydrogen production technology (the “Process”). The intellectual property rights that HPTC had in the Process were assigned us for $1.00 on November 5, 2005.
As consideration for the shares, we issued an aggregate of 20,000,000 common shares to Dr. Koridze and Mr. Oralbekov and agreed to issue a further 9,000,000 common shares upon our company achieving revenues of $10,000,000 as a direct result of the commercialization of the Process, provided such revenues are achieved with ten years of completion of the acquisition. This incentive bonus expires on October 30, 2013. In June 2005, patent number 6,909,009 B2 entitled “Alkane and Alkane Group Dehydrogenation with Organometallic Compounds” was issued for the Process by the United States Patent and Trademark Office in the name of the inventor, Dr. Avtandil Koridze, and we acquired all right to the United States patent number 6,909,009 B2 in consideration of $1.00.
Our Process is not commercially viable at this time. We intend to continue research and development and our goal is to have the Process include the following benefits:
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Low temperature conversion: If and when the Process is proven to be commercially viable, the Process’ operating temperature should be between 150o – 200o C, which is significantly lower than current industry standards.
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Emissions: If and when the Process is proven to be commercially viable, the only by-products of the chemical reaction of the Process are hydrogen and alpha-olefins. Therefore, there will be no greenhouse gas emissions using the Process.
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Cost: If and when the Process is proven to be commercially viable, the cost savings would include the following:
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lower energy input to produce hydrogen;
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use of existing infrastructure for refueling motor vehicles; and
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on-board and on-demand hydrogen production would become a more feasible system for motor vehicles.
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Efficiency: If and when the Process is proven to be commercially viable, the Process should be efficient enough to be cost competitive with competing fuel sources.
Our Process, if proven successful, also may have applications in other industries, including conventional petroleum and natural gas processing. Linear alkanes are by-products from both these processes, but because of their low value they are simply used as a fuel. However, with our Process, a simple, low temperature conversion of the linear alkanes to alkenes plus hydrogen may be possible. Alkenes are of much higher value since they are the precursors to many chemicals and polymers. In addition, the production of hydrogen from this step would give refiners the ability to process greater quantities of heavy crudes. The supply of hydrogen to refineries is of increasing importance as world stocks of light crudes decline and heavy oil production (e.g. the Canadian oil sands) increases significantly.
Over-The-Counter Bulletin Board Listing Status
We have filed Form 20-F Registration Statement with the Securities and Exchange Commission and are now reporting in the United States as a “foreign private issuer”.
We intend to retain a market maker to make an application with The Financial Industry Regulatory Authority (FINRA) to list our securities on the OTC Bulletin Board.
Plan of Operation
Research and Development Work
Our goal is to complete our research and development work. This work involves the development of a new type of catalyst which may allow the rapid and selective dehydrogenation of organic liquids such as propane, butane and cycloalkanes. We believe that if this catalyst is discovered the resulting formulation may make available the catalyst required for the commercial production of hydrogen. The goal of the catalyst is create a chemical reaction to break the bond between hydrogen and carbon in hydrocarbons so that the by-products of the reaction may be used in commercial applications. Establishing a firm completion date for the research and development is currently unrealistic due to the nature of the work involved. The inventor of the Process is doing pioneering work in these chemical processes and thus cannot determine when he will finish.
This work is being conducted in Russia at the Russian Academy of Sciences in Moscow and at the State University of Tbilisi under the direction of Dr. Avtandil Koridze, our Vice President. The technical challenge of achieving a commercially viable chemical catalyst to produce hydrogen and alpha-olefins is being addressed by the research and development program lead by Dr. Koridze, our Chief Technology Officer, Vice President of Research and Development, and the inventor of the Process.
Tests on the Process
After successful completion of the research and development work, our next goal is to complete the tests on the Process.
Evaluation by Independent Source
If our research and development is successful, and there is no guarantee that it will be successful, we plan to have the results evaluated by an independent source to determine the commercial feasibility of the process. We have already contacted Nexant Chemsystem, a consulting firm that specializes in working with clients engaged in the energy market and described our work to them. Based on these discussions, representatives of Nexant Chemsystems have expressed an interest in examining the results.
Prototype
After successful testing of the Process, our goal would be to establish a prototype of the Process.
Issuing License for Commercial Production
After the successful establishment of the prototype, our goal would be to commence issuing licenses to industrial customers.
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Summary of Quarterly Results
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Description | Three months ended Aug. 31, 2010 $ | Three months ended May 31, 2010 $ | Three months ended Feb. 28, 2010 $ | Three months ended Nov. 30, 2009 $ | Three months ended Aug. 31, 2009 $ | Three months ended May 31, 2009 $ | Three months ended Feb. 29, 2009 $ | Three months ended Nov. 30, 2008 $ |
Net Revenues | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Income or loss before other items |
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Total | (8,615) | (55,384) | (28,971) | (6,993) | (17,337) | (16,328) | (12,504) | (17,622) |
Net income or loss for period |
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Total | (8,615) | (7,388) | (28,971) | (6,993) | (17,337) | (10,193) | (12,504) | (17,622) |
Per share | (0.001) | (0.001) | (0.001) | (0.001) | (0.001) | (0.001) | (0.01) | (0.001) |
Results of Operations
For the three months ended August 31, 2010 we reported a net loss of $8,615 or $0.01 per common share. The net loss for the three months ended August 31, 2009 was $17,337 or $0.001 per common share. The decrease in the net loss during fiscal 2009 was mainly due to decreased investor relations activities as our focus has been on completing our listing on the CNSX.
Revenues for the three months ended August 31, 2010 were $Nil compared with $Nil for the three months ended August 31, 2009. Revenue from the sale and licensing of our hydrogen production technology is not expected until the research and development program has been completed successfully.
General and administrative expenses were $8,615 for the three months ended August 31, 2010 compared with $17,337 for the nine months ended August 31, 2009.
Liquidity and Capital Resources
At August 31, 2010, we had cash of $Nil compared with $Nil at May 31, 2009. As of August 31, 2010, we had a working capital deficiency of $194,706, compared to a working capital deficit of $375,160 as at May 31, 2010. Our working capital deficit has decreased significantly as a result of certain related parties agreeing to defer payment of the outstanding amounts due to them as long term liabilities.
Our current cash and cash equivalents are not sufficient to meet our cash requirements for the next twelve months or to continue with our research and development of the Process. We will require additional financing to fund our administrative expenses and to carry on with our research and development. We have historically satisfied our capital needs primarily by issuing equity securities or by loans from related parties.
We have no funding commitments or arrangements for additional financing at this time and there is no assurance that we will be able to obtain any additional financing on terms acceptable to us, if at all. Any additional funds raised will be used for general and administrative expenses and to carry on with our research and development. The quantity of funds to be raised and the terms of any equity financing that may be undertaken will be negotiated by management as opportunities to raise funds arise.
Transactions with Related Parties
During the three month period ended August 31, 2010, officers and directors made contributions to capital for management fees in the amount of $4,500 (2009 - $4,500) and rent in the amount of $1,500 (2009 - $1,500).
As at August 31, 2010, the amounts due to related parties include $178,809 (2009 - $220,786) due to shareholders and/or officers/directors, of which $147,595 has been deferred as a long term liability.
During the three month period ended August 31, 2010, we issued 3,560,737 common shares at $0.01 per share to a 10% shareholder by way of a settlement of debts in the aggregate amount of $35,607.
Amounts due to related parties are non-interest bearing, unsecured and have no fixed terms of repayment.
Directors and Officers
Our Board of Directors is as follows:
Dr. Avtandil Koridze
Stuart Lew
Chris Tay
Hans-Christian Behm
John Patrick Nicol
Our officers are:
Stuart Lew
President and Chief Executive Officer
Chris Tay
Chief Financial Officer and Corporate Secretary
Dr. Avtandil Koridze
Vice President and Chief Technology Officer
Our audit committee consists of:
Chris Tay
Hans-Christian Behm
John Patrick Nicol
Share Capital
Our authorized share capital consists of 50,000,000 common shares without par value. As of November 9, 2010, the total number of issued and outstanding common shares is 48,314,780 common shares.
During the three months ended August 31, 2010 a total of 3,560,737 common shares were issued by way of a settlement of debt in the amount of $35,607. During the three months ended August 31, 2009 we issued 258,868 common shares valued at $0.18 per share related to $46,596 share subscriptions received in advance. We also issued 30,000 common shares valued at $11,179 related to the exercise of 30,000 special warrants granted during the year ended 31 May 2005.
During the three months ended August 31, 2010 and the three months ended August 31, 2009 no stock options were granted or outstanding. As at August 31, 2010, we received $74 related to the exercise of 408 common share purchase warrants. During the three months ended August 31, 2009, we issued 30,000 common shares valued at $11,179 related to the exercise of 30,000 special warrants granted during the year ended 31 May 2005.
The following share purchase warrants were outstanding at August 31, 2010:
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Number of warrants | Exercise price $ | Expiry Date |
1,725,773 | 1.00 | October 9, 2010 |
2,190,724 | 0.18 | October 9, 2010 |
The 1,725,773 share purchase warrants that expired on October 9, 2010 were convertible into common shares at a price of $1.00 per share. The 2,190,724 share purchase warrants that expired on October 9, 2010 were convertible into common shares at a price of $0.18 per share.
Approval
Our Board of Directors have approved the disclosures in this MD&A. A copy of this MD&A will be provided to anyone who requests it.
Dependence on Management
We are dependent on a relatively small number of key personnel, the loss of any of whom could have an adverse effect on our business. We do not maintain key employee insurance on any of our employees.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Increased Costs and Compliance Risks
Legal, accounting and other expenses associated with public company reporting requirements have increased significantly in the past few years. We anticipate that costs may continue to increase with recently adopted corporate governance requirements. Like many smaller public companies, we face a significant impact from compliance with the requirement for management to evaluate the effectiveness of internal control over financial reporting. Any failure to effectively implement new or improved internal controls, or to resolve difficulties in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting. Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our share price.
IFRS Implementation Plan
We have commenced the development of an IFRS implementation plan to prepare for the transition, and are currently in the process of analyzing the key areas where changes to current accounting policies may be required. While an analysis will be required for all current accounting policies, the initial key areas of assessment will include:
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Property and equipment (measurement and valuation);
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Stock-based compensation;
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Accounting for income taxes; and
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First-time adoption of International Financial Reporting Standards (IFRS 1).
As the analysis of each of the key areas progresses, other elements of our IFRS implementation plan will also be addressed, including: the implication of changes to accounting policies and processes and financial statement note disclosure. The table below summarizes the expected timing of activities related to our transition to IFRS:
