Forward-Looking Statements. Overview of Business

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1 This ( MD&A ) has been prepared as of August 21, 2007 and should be read in conjunction with the unaudited consolidated financial statements of ZENN Motor Company Inc. (the Company ) for the three and nine months ended, the audited consolidated financial statements and management s discussion and analysis for Feel Good Cars Corporation for the year ended September 30, 2006 and the Annual Information Form (AIF) dated January 23, Unless otherwise stated, all amounts are expressed in Canadian dollars. Forward-Looking Statements This MD&A includes certain forward-looking statements that are based upon current expectations which involve risks and uncertainties associated with the Company s business and the economic environment in which the business operates. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements, including those identified by the expressions anticipate, believe, plan, estimate, expect, intend and similar expressions to the extent they relate to the Company or its management. The forward-looking statements are not historical facts, but reflect the Company s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed under Risks and Uncertainties below. Overview of Business The Company's primary business is the assembly and distribution of a low speed electric vehicle called the ZENN - an acronym for Zero Emission, No Noise. This class of vehicle is referred to by a number of descriptive names such as Neighbourhood Electric Vehicle (NEV) and Low Speed Vehicle (LSV). In the United States, the Company s primary market at this time, the Federal Government through the National Highway Traffic Safety Administration (NHTSA) approved LSVs for mixed, on-road use some 10 years ago and since then, over 40 States have enacted regulations to embrace the use of LSVs in their jurisdictions. In Canada, although similar legislation to NHTSA was introduced for LSVs, Transport Canada has not provided its broad approval at this time for their use on Canadian roads although British Columbia has regulations supporting LSVs. A key element in the definition of LSVs is a limit on their speed to 25 miles/40 km per hour and certain restrictions on the type and speed limit of roads on which they can travel. The Company s business model involves purchasing prefabricated host vehicles or gliders and fitting the gilders with an integrated fully electric drive train using commercially available electric components such as batteries, electric motors and transmissions. The gliders are manufactured in Europe by Microcar S.A.S. ("Microcar") and supplied to the Company substantially pre-assembled. The Company also has certain rights with respect to a power storage technology being developed by EEStor, Inc. ("EEStor") which if proven successful, is expected to provide for greater power density and recharging speed than currently available battery systems. The benefit of such capabilities include greater range, greater speed where allowed by law and shorter down time for recharging the on board power source. The Company s rights are contingent upon payments being made as the power storage technology developer achieves defined benchmarks in the product s development as verified by third parties. 1

2 The Company has been marketing its vehicles under the ZENN Motor Company trade name since As part of the Company s branding strategy, in March, 2007, the shareholders of Feel Good Cars Corporation approved management s request to change the Company s name to ZENN Motor Company Inc. The name change was effected in May 2007 through Articles of Amendment. In a similar manner, the operating subsidiary Feel Good Cars Inc. has changed its name to ZENN Motor Company Limited. ZENN Motor Company Inc. is an early stage company (see Risks and Uncertainties ). Prior to being acquired in January 2006 by MCL Capital Inc., a Capital Pool Company, Feel Good Cars Inc. operated with limited funds and efforts were primarily restricted to marketing and prototype development. Upon completion of the Qualifying Transaction in January 2006, the Company began to re-engineer the early prototypes in preparation for commercial production and began to establish its assembly facilities in Saint-Jerome, Quebec. In October, 2006, the Company shipped its first production vehicles. Highlights and Summary The Electric Vehicle industry continues to grow globally as both the price of oil-based fuels and concerns over global warming remain high. With the benefit of its experience of actively selling in the marketplace, the Company continues to hone its sales, marketing and publicity activities. Based upon additional market research and experience, increased focus is being given to certain selected geographic markets and consumer demographics. The Company s marketing initiatives are similarly being aligned to aggressively support the sales effort towards these target markets including the engagement of a California-based publicist to help reach key media outlets in the markets. Fleet sale opportunities, both in the public and private sectors, is another area where the Company is increasing its focus. Although the LSV class of vehicle has existed for some time, in many respects the ZENN redefines the category by virtue of its fully-enclosed, feature-rich design and hence, it can effectively be used as an alternative mode of transportation. As such, there is a requirement by the Company to educate the potential consumer market about the new LSV world and why customers might consider the ZENN as part of their overall transportation solution. Increasing consumers level of awareness and understanding of LSVs in general, and the ZENN in particular, is a key aspect of the Company s strategy. In the three months ended and up to the date of this MD&A, the Company continued to invest in the development of the business. Revenues for the quarter were $862,000 compared to $131,000 in the previous quarter and $1,646,000 year to date. There was no revenue in the prior year. The Company also continues to develop its business infrastructure in line with its business strategy. Accordingly, the loss in the period was $1,567,000 compared to a loss of $1,476,000 in the previous quarter and $814,000 in the corresponding quarter of The Company s investment earlier this year in the expansion of its sales department has started to deliver the anticipated improved results. The Company s retailer network now includes 34 locations, up from 15 at March 31, Orders from retailers, and in-turn end customers, correspondingly improved. While new retailers drive unit sales from their initial orders, on a year to date basis, over 35% of unit sales are subsequent or followon sales. This number is expected to increase in coming quarters. In July, the Company added further strength to its sales team with the addition of Daniel Stiller as Director, North America Sales. Daniel has extensive retailer development experience in the automotive industry with Honda, Hyundai and Ford. In the three months ended, the Company s financial results have been negatively impacted by the strengthening of the Canadian dollar relative to the US dollar. Substantially all of the Company s sales are to US markets and billed in US dollars. From March to, relative to the US dollar, the Canadian dollar has increased by approximately 8%. While the Company does purchase some production items in US 2

3 dollars, the net effect has been a reduction in Canadian dollar yield on US dollar sales and margins. The Company is looking at alternative supply strategies to compensate for the change in exchange rates. The increase in the Canadian dollar has also put pressure on the valuation of certain inventory items as their net realizable value falls below carrying costs. As a result, the Company took a charge in the period of $182,000 to write-down the value of inventory to reflect specific net realizable values. Effective the Company has elected to adopt the provisions of the Canadian Institute of Chartered Accountants (CICA) Section 3031 providing guidance in accounting for Inventories. While the section will apply to interim and annual statements for fiscal years beginning on or after January 1, 2008, the early adoption of the section, recommended by the CICA, has had no effect on the accounting for inventories for prior periods. In April 2007, the Company completed an equity investment in EEStor, Inc. The Company acquired approximately 3.8% of EEStor, Inc. for an investment of USD $2.5 million and has an option to acquire additional equity subsequent to EEStor meeting its next development milestone third-party verified permittivity levels. The equity investment in EEStor is separate from and does not have any impact on the technology license rights the Company enjoys. The Company saw an opportunity for its shareholders to participate in the broader potential that EEStor represents. The funding for the initial equity investment in EEStor came from current operating capital. In order to preserve cash, the Company entered into a bought deal engagement with Paradigm Capital Inc. for an offering of common shares to raise $5 million to replenish the funds. The financing transaction closed on May 25 th (See Liquidity and Capital Resources ) With its headquarters based in Canada, the Company is often asked about opportunities in the Canadian market. At present, while British Columbia has enabling regulations, the Federal Government has not fully endorsed LSVs for use on public roads. The Company has met with senior Ontario and Canadian Government officials during the third quarter of fiscal 2007 to try and advance the acceptance of LSVs in Ontario. While these meetings were very positive, there remains regulatory resistance at the Federal level for LSVs in Canada. Further lobbying is necessary and the Company in conjunction with Electric Mobility Canada (an industry association) are working to eliminate these roadblocks. No date is currently anticipated to rectify this situation in Canada. In June 2007, the Company announced the addition of Stephen Rodgers to its Board of Directors. Mr. Rodgers brings an extensive background in the automotive industry having held senior positions at General Motors and Magna International. Participation at trade shows and public events is an integral part of supporting the Company s retailer network; getting the ZENN known in the marketplace, The Company participated in several trade events during the period including the Clean Cities National Show held in April in Anaheim California, and the Mexico City EV FORUM, in May. Also in May, the Company participated in the Government Sales GSA event in Orlando Florida, the largest general equipment and vehicle show of its kind in the USA. The ZENN was well received at all of these events and the events were considered a success in meeting the intended public relations goals. 3

4 Select Financial Information The following operating data are for the three and nine month periods ended and 2006: Thousands of Dollars Except per share amounts Three Month Period Ended Nine Month Period Ended Net revenues $ 862 $ nil $ 1,646 $ nil Gross profit $ 4 $ nil $ 23 $ nil Net loss in period $ (1,567) $ (814) $ (4,316) $ (2,329) Loss per share $ (0.06) $ (0.04) $ (0.17) $ (0.15) Weighted average number of shares outstanding 27,575,573 21,131,064 25,013,421 15,053,687 As at and September 30, 2006: Thousands of Dollars As at As at September 30, 2006 (audited) Total assets on hand $ 15,013 $ 5,225 Cash and cash equivalents $ 7,253 $ 2,217 Long term debt $ 16 $ 19 Dividends The Company has not paid any dividends and does not foresee paying dividends in the immediate future. 4

5 Discussion of Operating Results The following table summarizes the Company s operating results for the three and nine month periods ended compared to the corresponding prior year s periods. The comparative 2006 data includes the results of Feel Good Cars Inc. for the period October 1, 2005 to January 30, 2006, prior to its acquisition by the Company (then MCL Capital Inc.). Thousands of Dollars Except per share amounts Three Month Period Ended Nine Month Period Ended Revenues $ 862 $ nil $ 1,646 $ nil Cost of sales 858 nil 1,623 nil Gross profit 4 nil 23 nil Marketing and sales , Modification and engineering General and administration ,740 1,174 Inventory write-down Amortization Interest on long term debt Interest income (56) (19) (100) (44) Net loss for the period $ (1,567) $ (814) $ (4,316) $ (2,329) Loss per share $ (0.06) $ (0.04) $ (0.17) $ (0.15) Revenue In the three and nine months ended the Company s revenues totaled $862,000 and $1,646,000, respectively. In the first five months of the calendar year, the Company added four regional sales managers in an effort to provide a wider variety of Retailers and to provide them with more hands on support. As a result, the number of retailer outlets from 15 at March 31, 2007 to 34 at. The Company is still underrepresented in some key markets and is actively looking for quality retailers. In those markets with retailer coverage, the Company is anticipating some retailer churn as some retailers are replaced for a variety of reasons including insufficient marketing and sales efforts in their territories. As such, the absolute number of retail locations will likely increase at a slower rate in coming quarters in response to the Company s goal of deeper market penetration where there is representation. Follow-on orders, which are orders placed after the initial order, are a sign of sell-through to end users and is one indicator of acceptance of the ZENN in the marketplace. For the nine months ended th, % of all orders were follow-on from existing retailers, a sign of acceptance for a still relatively unknown product. In 5

6 addition, while initial orders tend to favor the Basic model, the LX model has a higher demand in subsequent follow-on orders by a margin of 2:1. With all revenues billed in US dollars, the Company is subject to foreign exchange fluctuation risk. in recent weeks, the value of the Canadian dollar has reached 30 year highs in relation to the US dollar. To put the change and the speed with which it happened into perspective, on March 31, 2007, a US$1,000 sale would have yielded revenue of C$1,155. The same sale on would have yielded only C$1,063 in revenue, a decline of C$92 or nearly 8%. While management is taking steps to control the foreign exchange exposure, the relative strength of the Canadian dollar compared to the US dollar will add pressure to margins. Cost of Sales Cost of sales in the three and nine months ended was $858,000 and $1,623,000, respectively. There were no sales in the corresponding periods of the prior year. Cost of sales includes the following cost components: The landed cost of the materials and parts sold; Allocation of direct labour and overhead based on standard costs; A reserve for warranty claims; and, Cost of shipping ZENNs to retailer locations. The cost components reflect certain buying realities inherent in an early stage company. It is difficult to get best pricing terms without buying history or commitments to volumes. Management has exercised caution in making commitments and sees opportunities to drive down costs and increase margins when reasonable production and procurement run rates are established. In addition, the Company has engineering and procurement projects underway which include the objective of lowering costs. It is expected that margins should improve Marketing and Sales Thousands of Dollars Three Month Period Ended Nine Month Period Ended Salaries and benefits $ 244 $ 119 $ 598 $ 219 Retailer support, publicity, trade shows Other marketing costs Total $ 375 $ 132 $ 1,012 $ 357 In the three months ended the Company continued its efforts to put in place a strong sales and marketing team. The regional sales team hired last quarter started to deliver tangible results in the quarter. Marketing efforts in the period continue to promote the ZENN brand and create the sales support material for the retailer network. Retailer support costs include travel costs related to retailer development, trade show registrations and associated costs. Other marketing costs include the development of a Retailer sales training program, state registration fees, marketing materials, web site costs, sales incentives costs and marketing specific administration costs such as direct mail and couriers 6

7 The expenses in the prior year related primarily to retailer marketing efforts. Modification and Engineering Thousands of Dollars Three Month Period Ended Nine Month Period Ended Salaries and benefits $ 94 $ 32 $ 259 $ 47 Engineering consulting Other engineering costs Total $ 128 $ 173 $ 396 $ 668 The Company is engaged in ongoing design modification and tuning of the product and the costs in the period reflect the ongoing nature of these activities. In the nine months ended third party costs totaling $60,720 related to the development of an air conditioning system have been deferred and will be amortized over the first year s production of the product. The Company continues to use engineering consulting services, but to a lesser extent than in the prior year. In the corresponding periods in 2006, the nature of the activities focused on developing prototypes and early commercialization efforts. In these periods, the Company incurred significant consulting and prototype material expenses included in Other engineering costs which are not being incurred to the same extent in the current year. General and Administration Thousands of Dollars Three Month Period Ended Nine Month Period Ended Salaries and benefits $ 508 $ 299 $ 1,485 $ 502 Rent Insurance Legal, audit, regulatory Other costs Total $ 918 $ 520 $ 2,740 $ 1,174 General and Administration is a broad grouping of costs including salaries and benefits not specifically captioned elsewhere, rent, telecommunications, insurance, corporate compliance, legal, audit etc. The broad category includes the head office facilities costs for Toronto and the production facilities in Saint Jerome. Expenses have been allocated from this category to both inventory and costs of sales for direct labour and overhead. Labour is 7

8 allocated based on current production experience and the average cost per hour. Overhead is allocated based on standard costs and the practical production capacity of the facility. Since the Company is not operating at full production, there are unallocated production facilities costs that remain in this cost category. In the three and nine month periods ended production facility costs not allocated to inventory and cost of sales remaining in this category amounted to $252,000 and $863,000, respectively. In the corresponding period in 2006, the Company was not in production and did not allocate any costs. Rental costs in 2007 reflect the Toronto head office and Saint-Jerome facilities. Insurance costs in 2007 reflect product liability coverage not required in the prior year and an increase in property insurance on the Company s insurable assets. Other costs include telephone, data connectivity, travel and systems operating costs. Inventory Write-down The relative strength of the Canadian dollar has resulted in a reduction of the net realizable value of some inventory items below their respective carrying costs. As a result, in the three months ended, the Company wrote down the carrying value of specific inventory items by $182,000. Total inventory write-down for the nine months ended was $227,000. Quarterly Financial Information The following table sets out the quarterly results for the past seven quarters: (thousands of dollars except per share amounts) Three months ended Revenues (3) Expenses (2) Loss in period Loss per share Dec. 31, 2005 (1) $nil $696 $(696) $(0.09) Mar. 31, 2006 $nil $836 $(811) $(0.05) Jun. 30, 2006 $nil $833 $(814) $(0.04) Sept. 30, 2006 $nil $1,260 $(1,243) $(0.06) Dec. 31, 2006 $653 $1,296 $(1,272) $(0.06) Mar. 31, 2007 $131 $1,518 $(1,476) $(0.06) $862 $1,627 $(1,567) $(0.06) Notes: (1) The period ended December 31, 2005 includes the results for Feel Good Cars Inc. (FGCI) prior to being acquired by the Company (then MCL Capital Inc.). Prior to the acquisition, FGCI was a private company and did not prepare quarterly statements. (2) Expenses are operating expenses and do not include cost of sales. (3) Interest income is not shown in this table. The trend in expenses shows the development in the Company. In the quarters ending March and June 2006, the Company s focus was on preparing the product for market. Expenses increased in the quarter ended September 30, 2006 reflecting the Company s ramping up the production facilities in Saint-Jerome, Quebec. 8

9 Analysis of Use of Funds On February 15, 2007, the Company completed a prospectus offering of common shares raising gross proceeds of $10.0 million. The indicated use of proceeds (other than general working capital) from the offering and the actual expenditures to 2007 are set out in the following table: (thousands of Canadian dollars unless otherwise indicated) Item Indicated Use of Proceeds Actual to Comments Commissions $700 $700 Commission rate was 7% of gross proceeds Share issuance costs Repayment of short term unsecured loans Milestone payments to EEStor Product development $2,100 (US$1,750) $250 $248 Costs, excluding the value of the warrants were consistent with estimates $270 $270 Short term loan was repaid upon closing of transaction $643 (US$550) The Company made the milestone payment relating to the purity test results. There remains two further payments to be made when milestones are achieved $500 $264 The Company has a number of projects underway to enhance the ZENN offering including air conditioning and unit cost reductions On May 25, 2007, the Company concluded a bought deal financing with Paradigm Capital Inc. 1,562,500 shares at $3.20 per share for gross proceeds of $5.0 million were issued and sold. (see Liquidity and Capital Resources - Financing ). Share issuance costs relating to the transaction totaled $531,000 and net proceeds were $4,469,000. The indicated use of proceeds was for the investment in EEStor shares and for general corporate purposes. Of the net proceeds of $4,469,000, $2,858,000 was expended on the investment and related costs and the balance of $1,611,000 will be retained for general corporate purposes. 9

10 Liquidity and Capital Resources The Company s financial liquidity is currently supported by cash and cash equivalents. The Company is in the developmental stage and is not cash flow positive. The Company s ongoing ability to remain liquid will depend on a number of factors including timing and volume of sales, future profit margins and investments in non-cash working capital (see Risks and Uncertainties ). In the three and six months ended and up to the date of this MD&A, the Company incurred increased costs and demands on its cash resources as it increased its activity levels. Equity Investment in EEStor, Inc. On April 30, 2007, the Company completed an equity investment in EEStor, Inc. The Company acquired a 3.8% interest for a cash investment of US$2,500,000. The terms of the investment provide the Company with a right, exercisable at its sole discretion, to invest an additional amount in the range of US$1,000,000 to US$5,000,000 within 30 days of EEStor announcing its permittivity test results, at the same price per share. The size of the Company s possible additional investment may be limited in this range depending on the participation of other EEStor shareholders in the raise. Management believes this was a unique investment opportunity by allowing the Company and its shareholders to benefit from the broader potential that the EEStor s technology may deliver, aside from the specific automotive related opportunities under license. The investment was made through a wholly owned subsidiary, ZENN Capital Inc., and was initially funded from current cash resources. The plan was to replenish the Company s operating cash with a separate financing so as not to diminish its liquidity, which it did with the completion of the bought deal financing (See Subsequent Events Financing ). Financing On May 25, 2007, the Company completed a bought deal financing with Paradigm Capital Inc. whereby the Company sold to Paradigm, common shares at $3.20 per share. The initial agreement was for 1,250,000 shares and gross proceeds of $4,000,000. In response to market demand, the Company and Paradigm agreed to increase the number of shares to 1,562,500 shares and gross proceeds of $5,000,000. Paradigm s compensation for the transaction was a combination of cash commission and compensation warrants. The cash component was $300,000 or 6% of the gross proceeds. In addition, 62,500 compensation warrants were issued whereby each warrant entitled the holder to purchase one common share of the Company at a price of $3.20 prior to the close of business on November 24, 2008, 18 months following the closing date. Other expenses relating to the offering amounted to $231,000 including $76,810 for the value of the compensation warrants. Net proceeds of this financing were $4,469,000 The Company expended $2,858,000 from its existing working capital to fund the initial investment in EEStor and applied an equivalent amount of the net proceeds from the financing to replenish its working capital. The balance of approximately $1,611,000 will be used to fund working capital and for general corporate purposes, including, inventory purchases, and planning and engineering for additional product offerings. 10

11 The Company has a capital commitment with respect to its investment in the EEStor technology rights contingent on EEStor achieving specific milestones. As at, there are two remaining milestone payments due to EEStor totaling US$1,200,000. A milestone payment of US$700,000 is due upon third party verification of permittivity and a final payment of US$500,000 is due upon delivery by EEStor of a production quality Electrical Energy Storage Unit (EESU). The timing of these payments is dependent on EEStor s presenting deliverables in accordance with the EEStor Technology Agreement and accordingly are not in the control of the Company. Off Balance Sheet Arrangements The Company does not have any off balance sheet arrangements in place. Related Party Transactions (see Subsequent Events ) Changes in Accounting Policies Comprehensive Income and Financial Instruments Effective October 1, 2006, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) under CICA Handbook Section 1530, Comprehensive Income, Section 3251, Equity, Section 3855, Financial Instruments Recognition and Measurement, Section 3861 Financial Instruments Disclosure and Presentation and Section 3865, Hedges. These new Handbook Sections, which apply to fiscal years beginning on or after October 1, 2006, provide requirements for the recognition and measurement of financial instruments and on the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income which are excluded from net income calculated in accordance with generally accepted accounting principles. Under Section 3855, all financial instruments are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments and derivatives are measured in the balance sheet either at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is reclassified or impaired. All derivative instruments, including embedded derivatives, are recorded in the balance sheet at fair value unless they qualify for the normal sale normal purchase exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. 11

12 As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents as held-for-trading. Receivables are classified as loans and receivables. Accounts payable, accrued liabilities and capital leases are classified as other liabilities, all of which are measured at amortized cost. The Company has elected to measure all derivatives and embedded derivatives at fair value and the Company has maintained its policy not to use hedge accounting. The adoption of these new standards had no impact on the Company s financial position as at. Carrying value and fair value of financial assets and liabilities at are summarized as follows: Classification Carrying value Fair value Held-for-trading $ 7,253,000 $ 7,253,000 Available for sale 2,858,000 2,858,000 Loans and receivables 208, ,000 Held-to-maturity nil nil Other liabilities 933, ,000 Inventory As previously described in the Highlights and Summary section of this MD&A, the Company has elected to adopt the provision of the Canadian Institute of Chartered Accountants Accounting Standards Section 3031 on Inventories. The Section provides guidance on accounting for inventories, including determination of costs and the subsequent recognition as expense, including write-downs to net realizable values. The implementation of this accounting guideline has had no material effect on the way the Company accounts for inventory. Subsequent Events Related Party Transaction In July 2007 the Company entered into a consulting services agreement with a company controlled by one of its directors. The consulting services are being provided on commercial terms and conditions similar to the Company s engagement with other consultants. Up to August 21, 2007, the Company has paid the consulting company the amount of $7,526. Risks and Uncertainties An investment in the Company should be considered highly speculative due to the nature of the Company s activities and its present stage of development. These risk factors could materially affect the Company s future operating results and could cause actual events to differ materially from those described in forward-looking statements contained herein relating to the Company. This section should be read in conjunction with and is qualified by the Risks and Uncertainties section of the Company s Annual Information Form ("AIF") dated January 23, 2007 available on SEDAR at Some of the risks are highlighted below. 12

13 History of Losses The Company has a history of limited revenues and has generated losses from operations to date. The Company has only recently commenced commercial sales of its initial electric vehicle model, the ZENN, and expects to continue to incur significant expenditures for general administrative activities, including sales and marketing and research and development activities. As a result of these costs, the Company needs to generate and sustain significantly higher revenues and gross margins to achieve and sustain profitability. There can be no assurance that implementation of the Company's strategies will result in the Company becoming profitable. Maintenance of Rights under Microcar Supply Agreement Pursuant to the terms of the July 2005 supply agreement for host vehicles entered into with Microcar, the Company is required to make minimum annual purchases of host vehicles to maintain its rights under the agreement. The current year s requirement to purchase 500 host vehicles on or before September 1, 2007 has been waived by Microcar in exchange for the deferral of certain purchase discounts until September The minimum annual purchase requirement increases significantly in each subsequent year of the agreement. While the Company believes its working relationship with Microcar to be good, any failure by the Company to meet its minimum purchase requirement in any subsequent year, if acted upon by Microcar, could result in the termination of the supply agreement. Any termination of the supply agreement, for any reason, or the interruption or delay in the supply of host vehicles by Microcar to the Company could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. EEStor Technology The Company's rights to the power storage technology being developed by EEStor, Inc. are subject to the Company making additional payments to EEStor on its achievement of certain technical milestones. Any failure of the Company to make the milestone payments or to do so by the deadline dates required could result in the termination of the Company's rights and could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. The EEStor power storage technology is still under development and there can be no assurance that it will be successfully commercialized or that the Company will be able to successfully incorporate this technology into its products. EEStor Equity Investment EEStor, Inc. is a private company. There is no ready market for its shares or to determine the value of its shares and there are restrictions on the transferability of the shares acquired by the Company. The can be no assurance that the EEStor shares will not decrease in value below the amount paid by the Company or that the Company will be able to sell part or all of its investment, should it desire to do so. There can also be no assurance that the Company will exercise part or all of its investment option to purchase up to a further US$5 million of shares of EEStor. Disclosure for Venture Issuers without Significant Revenue The Company has commenced a development project whereby costs will be deferred and written off against production based on the units sold. As at costs relating to the development project totaled $60,720 ($43,920 at March 31, 2007) and have been included in Prepaid expenses and other assets. 13

14 Outstanding Shares The following table outlines the outstanding equity and convertible securities as of August 21, 2007 Designation of Security Expiry Exercise Price Number or Principal Amount Outstanding If Convertible, Exercisable or Exchangeable for Common Shares, the Maximum Number of Common Shares Issuable Common Shares N/A N/A 28,758,568 N/A Options February 5, 2009 to July 15, 2012 $0.45 to 1,932,466 1,932,466 $5.03 (1) Performance Warrants March 31, 2009 $ , ,468 Investors Warrants February 29, 2008 $ , ,955 February 2007 Agent August 14, 2008 $ , ,679 Compensation Warrants (2) May 2007 Agent November 24, 2008 $ ,500 62,500 Compensation Warrants (3) TOTAL (maximum number of common shares, fully-diluted) 32,095,636 (3) Features of the Options and Warrants are described in the Notes to the September 30, 2006 Consolidated Financial Statements and the Annual MD&A dated January 23, (1) The weighted average exercise price is $2.08 (2) The February 2007 Agent Compensation Warrants were issued pursuant to the February 2007 short form prospectus offering. Each warrant entitles the holder to purchase one common share of the Company at $2.65 per share until August 14, (3) The May 2007 Agent Compensation Warrants were issued pursuant to the May 2007 short form prospectus offering described in the Financing section of this MD&A. Each warrant entitles the holder to purchase one common share of the Company at $3.20 per share until November 24, Additional Information Additional information relating to the Company, including the Company s AIF dated January 23, 2007, can be found on SEDAR at 14