ENWAVE CORPORATION (The Company ) MANAGEMENT DISSCUSSION AND ANALYSIS ( MD&A) FOR THE YEAR ENDED SEPTEMBER 30, 2012

Transcription

1 ENWAVE CORPORATION (The Company ) MANAGEMENT DISSCUSSION AND ANALYSIS ( MD&A) FOR THE YEAR ENDED SEPTEMBER 30, Date of this report: January 7, This report covers financial information related to the year ended September 30, 2012 ("the Year"), and other relevant information available up to the date of this report and it should be read in conjunction with the Company s audited financial statements for the year ended September 30, 2012 and the related notes (the Financial Statements ). Some of the statements set forth in this MD&A are forward-looking statements relating to the Company s future results of operations. The actual results may vary from the results anticipated by these statements. Please see Forward-Looking Statements, below. Financial results are now prepared and reported in accordance with International Financial Reporting Standards ( IFRS ). As a result, accounting policies, presentation, financial statement captions and terminology used in this discussion and analysis may differ from those used in previous financial reporting. Further details on the transition to IFRS are included in Notes 2 and 18 to the Financial Statements. Unless otherwise explicitly indicated, all monetary amounts are expressed in Canadian dollars. 2. Overall performance Description of business was formed under the Canada Business s Act on July 14, 1999 with the amalgamation of DRI Dehydration Research Inc. and Commonwealth Assisted Living Inc. The Company is a reporting issuer in the provinces of British Columbia, Alberta and Ontario; and its shares trade on both the TSX Venture Exchange (trading symbol: ENW) and the Frankfurt Stock Exchange (trading symbol: E4U). ( or the Company ) is a Vancouver-based industrial technology company offering commercial-scale dehydration technology for applications in the food and pharmaceutical spaces. Developed in conjunction with the University of British Columbia ( UBC ), 's proprietary Radiant Energy Vacuum ("REV ") platforms apply microwave energy under vacuum to offer flexible, efficient processing suitable for sensitive food products and biomaterials. 's mission is to establish its REV technology as the new global dehydration standard: faster and cheaper than freeze drying, with better quality than air drying or spray drying. The Company currently has two commercial technologies, nutrarev & MIVAP, and four technologies in the pilot-scale stage: powderrev, quantarev freezerev and biorev. During the past two years the Company acquired the North American intellectual property, secured a license in Germany and global marketing rights to MIVAP, a commercial-scale vacuum microwave technology developed by INAP GmbH ( INAP ), a private German company controlled by the management of Hans Binder Maschinenbau GmbH ( Binder ). Binder is an established German dehydration machine builder with extensive vacuum-microwave ( VM ) and conventional drying technology expertise, which the Company recently acquired in October An approximate 86.5% controlling interest in Binder was acquired by the Company in exchange for a 2,000,000 Euro investment directly into the capital structure of Binder. Under the terms of the acquisition, the controlling interest increased to approximately 86.5% from the 75.1% interest originally agreed upon in the Letter of Intent ( LOI ) signed in June 2012, due to a valuation adjustment since that date. Page 1 of 25

2 Since announcing their initial strategic partnership together in May of 2009, and Binder have developed joint commercial projects and a strong marketing and technical partnership with common interests in the global dehydration industry. With Binder s successful MIVAP plant delivery earlier this year for an established berry customer in the U.S. market and a growing interest in VM technology from potential multi-national Tier 1 customers, the parties agreed it was an opportune time to join forces with the intention of becoming a leading global innovator and industrial supplier of VM technology. The strategic acquisition of Binder strengthens the Company s royalty and licensing model, bringing together s innovation, global marketing expertise, Tier 1 collaboration pipeline and growing patent position, with Binder's economies of scale, experience and ability to design and deliver industrial scale turn-key VM plants customized for specific applications. These combined strengths should offer customers exceptional machine quality and overall service with stronger protection of general know-how and intellectual property on a global basis. Designed for the dehydration of discrete food pieces, s nutrarev technology can provide similar nutritional content with improved appearance and flavour over freeze drying, which is the industry standard for dehydration in many food applications. The first commercial-scale nutrarev machine was sold in February 2009 to a British Columbia-based blueberry producer. In 2010, signed a Research & Development agreement with a subsidiary of Nestlé SA, the world s largest food and beverages producer, and a Research & Development Agreement with Grupo Bimbo SA, to evaluate the Company s nutrarev technology. During the fiscal year 2011, the Company signed a Research & Development Agreement with Kellogg Company, a Technology Evaluation & Licence Option Agreement with Ocean Spray Cranberries Inc. and a Collaboration Agreement with Hormel Foods ; all focusing on the use of the Company s nutrarev technology. In May 2011, signed a commercial license agreement with Milne Fruit Products Inc., a leading American fruit processor, to supply REV technology for the dehydration of a variety of specified fruit products. The Agreement includes a provision for royalty payments on nutradried fruit products produced using s technology. A MIVAP dehydrator has been purchased for its new plant. In October 2011, the Company signed two new collaboration agreements with Milne Food Products Inc. to expand the product development in a new fruit category and exclusive licensing options for two other territories within the United States where Milne Fruits is interested in potentially expanding its REV capacity. As of April 2012, Milne began the full-scale production of commercially saleable products using s technology at their production plant in Nampa, Idaho. Subsequently on August 2, 2012, the Company signed a market development agreement with Milne Fruit Products Inc. to collaborate on the commercial advancement of three additional products including dried cherries, strawberries and carrot using the Company s REV technology. has developed a pilot-scale REV technology platform called powderrev which is being designed as a replacement for the expensive and time consuming process of tray freeze drying. powderrev is a novel method for the continuous production of dried food and biological materials, including frozen or liquid food cultures, bacterial suspensions such as probiotics, viruses, proteins, enzymes, and other temperature-sensitive materials. Laboratory tests have shown that the potential benefits of powderrev over freeze drying, also known as lyophilization, could include higher capacity and less capital cost due to faster dehydration times, smaller plant footprints, and lower energy and labour costs. During the fiscal year 2011, the Company announced the development of quantarev, a new highspeed, high-volume, continuous REV platform designed for the dehydration of food pastes, gels, liquids, or particulates such as fruit concentrates, pomace, encapsulated ingredients and biochemicals. This low temperature technology is designed to provide a higher-quality end product than what is currently produced through spray drying or air drying. In December 2010, signed a Collaboration Agreement with Grimmway Farms; and a Research & Development Agreement with an option to license with Bonduelle Canada Inc., a subsidiary of Bonduelle SAS for production in Canada and the eastern United States. Both agreements specifically focus on testing the quantarev technology. The Company successfully started up its pilot-scale quantarev dehydration technology, completed specific product testing and has begun customer testing associated with the said agreements. In January of 2012, announced the successful scale-up of quantarev to a 5 foot wide engine and the planned design and production of a second generation quantarev machine capable of producing between 200kg and 500kg of dried product per hour. That machine is expected to start up in Page 2 of 25

3 s single-vial prototype biorev technology is designed to dehydrate liquid biological materials in vials such as viruses and antibodies, at temperatures above the freezing level. The Company also has a multiple-vial version of a dehydration method called freezerev, which is designed for high-speed dehydration of live bacterial cultures and other biological materials, but starts with the matter in a frozen state. Both technologies have the potential to significantly reduce processing times and increase production speeds over conventional freeze drying. In December 2011, signed a Research Evaluation Agreement with Merck to conduct a field test to determine the feasibility of REV Technology using 's new multi-vial pilot-scale equipment. In addition, granted Merck an exclusive research license to use the Company s technology and licensed patents for the duration of the evaluation and an option to obtain an exclusive commercial worldwide license to 's portfolio. In addition to Merck, the Company entered into a second collaboration with a pharmaceutical company. This second company will test REV technology as a potential method for the drying of biologic material used for the production of protein-based therapeutics via the Collaborator s proprietary process. In June of 2012, announced it had signed a commercial royalty-bearing license with a Tier 1 partner following a successful initial R&D phase to enable the production, evaluation and sale of specific products dehydrated with its Radiant Energy Vacuum technology, for the purpose of conducting a larger scale market evaluation. Under the terms of the agreement, the Licensee has agreed to rental and royalty terms allowing them to immediately install a pilot-scale REV machine at their own facilities. The evaluation of the equipment and the production of small scale commercial quantities for customer testing and pricing assessments have begun. If the market evaluation phase is successful and the parties can agree on final machine delivery and licensing terms, commercial scale equipment is expected to be ordered in the first half of 2013 to support a full-scale commercial launch later in the year. In addition to the aforementioned market evaluation, two other Tier 1 collaborators transitioned from the R&D phase to a market evaluation phase. In October 2012, the 2nd Tier 1 collaborator successfully completed their Research & Development phase and has received internal authorization to conduct a market evaluation. As part of the market evaluation phase, the company requested approval from to initiate the market testing of a new product developed using REV technology. The Company has approved the new product and if the market evaluation is successful, expects to sign a commercial license and secure a plant order by the first half of In November 2012, the 3rd Tier 1 collaborator completed their initial Research & Development phase and will be conducting a comprehensive market evaluation in The Collaborator plans to dry finished product over a number of process trials in the first half of 2013 using REV technology. has extended this Collaborator s exclusive option to license until June 30th, 2013 and expects to receive royalty revenue from the production of the Tier 1 test products. In June 2012, signed a Collaboration Agreement with Cherry Central Cooperative Inc., an industry leader in the production and processing of red tart cherries, amongst other fruits and vegetables, in the United States of America. Cherry Central successfully completed an initial evaluation and has expanded its testing of s REV technology. The goal of the Collaboration is to facilitate a broader product development and market assessment for a premium dehydrated cherry snack product with superior flavor, color and nutritional value than currently available in the market. In August 2012, signed an R&D agreement with an option to license with Sun-Maid Growers of California. The two companies will work together to determine the feasibility of using REV technology to dry a variety of fruit products. If the product development is successful, Sun-Maid has the exclusive option to license the REV technology for specific fruit products outlined in the Agreement. Page 3 of 25

4 Recent highlights & milestones to the date of this MD&A During the year ended September 30, 2012 and to the date of this report, has: received a TSX Venture Pick of the Street award for the third consecutive year; received a TSX Venture Top 50 designation for the third consecutive year; received the LifeSciences British Columbia Award for Innovation & Achievement in February 2012; received the Investment Agriculture Foundation Award of Excellence for Innovation in January 2012; announced the successful scale up of quantarev to a 5 foot wide engine and the planned design and production of a second generation quantarev machine capable of producing between 200kg and 500kg of dried product per hour. That machine is expected to be available for commercial testing in 2014; signed two new Collaboration Agreements with Milne Fruit Products Inc., to expand product development in a new fruit category and grant 18 month exclusive licensing options for two other territories within the United States; announced that Milne Fruit Products began commercial production on their MIVAP processing line; signed a Technology Evaluation and Licence Option Agreement with Ocean Spray Cranberries Inc; signed a Collaboration Agreement with Hormel Foods to test s nutrarev food dehydration technology; signed a Research Evaluation Agreement with Merck, through a subsidiary, to conduct a field test to determine the feasibility of the REV Technology using the new multi-vial pilot-scale freezerev /powderrev equipment; signed commercial royalty-bearing license with a Tier 1 Partner to initiate a broader market evaluation; signed a collaboration agreement with Cherry Central Cooperative Inc., an industry leader in the production and processing of red tart cherries, amongst other fruits and vegetables, in the United States of America; completed a private placement of 3,676,000 common shares for total proceeds of $5,514,000; signed a market development agreement with Milne Fruit Products Inc. to collaborate on the commercial advancement of three additional products including dried cherries, strawberries and carrot; signed a research and development agreement with an exclusive option to license with Sun- Maid Growers of California; signed a research and development agreement with an exclusive option to license with a second pharmaceutical company; announced that a 2 nd Tier 1 collaborator entered into a market evaluation phase; announced that a 3 rd Tier 1 collaborator entered into a market evaluation phase; and acquired an 86.5% controlling interest in Hans Binder Maschinenbau GmbH. Page 4 of 25

5 nutrarev Food Dehydration Technology Interest in s nutrarev technology continues to build amongst the major players across the global food industry. The Company has signed a number of new Mutual Non-Disclosure Agreements with both global and regional food processors, and has undertaken new testing projects to determine the potential benefits of nutrarev technology for each group. The Company s pilot plant, located in Delta, B.C., has served as a focal point for interested parties to watch lab-scale and pilot-scale machines at work, and participate in trials with s scientists to produce larger scale quantities of product for introduction to test markets. The Company s market introduction strategy focuses on the development of sales with both Tier 1 leaders in a variety of identified consumer product areas, and Tier 2 entrepreneurial companies that operate in geographically segmented markets. s management is also working to expand a number of the existing collaboration agreements with our current partners where there is the opportunity for broader intra-company adoption. s engineering team has continually improved the original nutrarev design in order to increase the platform s overall efficiencies. The 150kW nutrarev modular design allows the Company to deliver easily customizable turn-key processing lines to different potential customers. Seven of s current collaborators are focused on product development using nutrarev technology. MIVAP Continuous Tray-Based Food & Ingredient Dehydration In December 2010, the Company purchased the U.S. patents, know-how and exclusive North American marketing rights for MIVAP vacuum microwave dehydration technology from INAP. The Company also signed a long term Global Marketing and Strategic Supply Agreement with Binder, a German engineering firm which controls the marketing rights for MIVAP technology outside North America. As indicated earlier in this document, acquired an 86.5% controlling stake of Binder in October 2012 and received rights to the MIVAP patent in Germany as well as global marketing rights for MIVAP from INAP. The first large scale MIVAP plant is in operation in France, and produces dried chicken stock for a major Japanese food processing company. intends to continue to market this technology to major manufacturers of dried meat purees, fragile fruit and fruit pieces, fruit and vegetable pomace and encapsulated ingredients. In May 2011, signed its first commercial royalty-bearing license agreement for MIVAP with U.S.-based Milne Fruit Products Inc. The agreement also provides for the introduction of s trademark, nutradried as a co-brand on any products marketed by Milne that are produced by s REV technologies. negotiated the license agreement with Milne and received a commission for arranging the sale. Future royalties generated as a percentage of wholesale revenue from the ongoing use of the MIVAP technology by Milne in North America will be shared 75% by and 25% by INAP. In October 2011, signed two new Collaboration Agreements with Milne Fruit Products Inc. under which agreed to expand the product development in a new product category and granted 18 month exclusive licensing options for two other territories within the United States. Milne Fruits has agreed to a US$100,000 non-refundable commitment to secure the license option rights if a second REV machine is acquired within the licensing option period this payment would be credited towards the purchase price. In April 2012, Milne began commercial production of dehydrated blueberry products and in August 2012 Milne entered into a market development agreement with to develop strawberry, cherries and carrot using the MIVAP platform. Page 5 of 25

6 quantarev High-Volume Continuous Food & Ingredient Dehydration The newest member of s dehydration technology suite, quantarev TM, is being designed to meet the requirements of large food and chemical production companies for high-volume continuous, low-temperature dehydration of solids, liquids, granular or encapsulated products. quantarev TM will use a continuous belt design in a controlled vacuum-microwave environment with an eventual target of dehydrating up to several tonnes of material per hour. The Company has successfully started up a continuous quantarev TM pilot-scale machine at the Company s pilot plant facility in Delta, B.C. and has now initiated larger scale product testing with current and potential partners. In January of 2012, announced the successful scale-up of quantarev to a 5 foot wide engine and the planned design and production of a second generation quantarev machine capable of producing between 200kg and 500kg of dried products per hour. That machine is expected to be available for commercial testing in delayed the design phase for quantarev until after the acquisition of Binder to secure Binder s input on the final design. quantarev TM technology could potentially provide a more economical and higher-quality alternative to hot air drying and spray drying for food and other materials such as beverage ingredients, proteins from soy, canola, milk, eggs, vegetable gums, encapsulated oils and industrial enzymes. powderrev Bulk Powder Dehydration The Company has made good progress in developing and testing its powderrev bulk powder dehydration platform. With powderrev is seeking an alternative to the industry standards of freeze drying, which is time consuming and expensive, and spray drying, which is a high heat environment that damages sensitive organisms. If successful, continuous, commercial-scale REV dehydration of frozen pellets or liquids containing live or active organisms into bulk powder or dried pellets would serve to reduce manufacturing and distribution costs while potentially improving retention and shelf-life of live material in the end product. powderrev technology could potentially dehydrate a wide variety of materials including enzymes, probiotics and food cultures; pharmaceuticals such as vaccines, antibodies, and antibiotics; other nonregulated biologicals such as nucleic acids, peptides, cell cultures and antibodies; and certain dry food products such as including instant coffee. During November 2011, mutually discontinued an on-going testing agreement with Danisco AS, to develop a customized powderrev dehydration platform for their specific product areas. The parties began testing a larger scale powderrev prototype in early 2010 to better evaluate potential product and economic advantages. In February 2011, the Company completed building and began testing a continuous pilot machine version of this prototype. The agreement was mutually discontinued due to the pilot machine having not yet achieved all project targets and would require some equipment modifications and further testing resulting in a longer development path. s near-term goal is to identify a collaboration partner and develop powderrev into a commercially viable method for dehydrating frozen pellets or liquid streams of food and bioactive ingredients into dried pellets or bulk powder. freezerev In-vial High Speed Dehydration for Biopharmaceuticals s prototype freezerev technology provides high-speed dehydration for live and active organisms in vials with the potential for significantly lower operating costs than freeze drying. freezerev is intended for products which must have a minimum moisture content in order to maximize their shelf-life. Vaccines dried to very low moisture levels should be capable of withstanding longer storage at higher room temperatures without losing a significant amount of bioactivity, and therefore effectiveness. Page 6 of 25

7 In December 2010, s testing partner, the Saskatchewan Research Council, completed a set of viability and shelf-life tests using freezerev to dry samples of a live Escherichia coli ( E.coli ) animal vaccine. Overall, the tests demonstrated positive results over the standard industry method for preserving pharmaceuticals in-vials, freeze drying. The Company and Saskatchewan Research Council signed a Testing Agreement to evaluate a 250 multi-vial prototype of the technology. The Company planned to deliver a 250 multi-vial version of the technology to the SRC in 2012 to conduct a new set of viability and shelf-life tests on their E.coli vaccine but has terminated this agreement to focus on commercial opportunities with industry partners. In August 2011, received positive test results from a 12 month study comparing freezerev against the standard industrial drying method, freeze drying ( lyophilization ), in the dehydration of pure samples of FITC-conjugated and unconjugated animal-derived monoclonal antibody. The results show that the drying methods were equivalent in terms of the structural changes incurred by the protein both immediately post-dehydration, and over the course of the 12 month shelf-life period, but that the samples dried using s single-vial freezerev prototype were produced in 20 minutes versus the typical 48 hours required for freeze drying. In December 2011, signed a Research Evaluation Agreement with Merck to conduct a field test to determine the feasibility of REV Technology using 's new multi-vial pilot-scale equipment. In addition, granted Merck an exclusive research license to use the Company s technology and licensed patents for the duration of the evaluation and an option to obtain an exclusive commercial worldwide license to 's portfolio for certain pharmaceutical applications. In September 2012, signed a collaboration agreement with a second pharmaceutical company to test freezerev as a potential method for the drying of biological material used for the production of protein-based therapeutics via the collaborator s proprietary process. biorev In-vial Dehydration for Live and Active Organisms s single-vial biorev prototype is undergoing testing at s laboratory in order to determine its potential for producing room temperature stable biomaterials with the goal of eliminating the need for a continuous cold chain from manufacturer to patient. Shelf-stable biomaterials such vaccines and antibodies could be used to increase their availability and reduce delivery costs of these products to the developing world, and to provide increased population protection against pandemics and bioterrorism attacks. Unlike freezerev TM, which is essentially an accelerated freeze drying process, biorev is a more gentle drying process that is intended to remove moisture from highly sensitive biomaterials that cannot withstand freezing temperatures. The timeline for commercialization of this technology is still to be determined, and will depend on the developments made in conjunction with a partner in the pharmaceutical industry. Targets for 2013 The Company will work towards the achievement of the following five key targets over the course of the calendar year 2013: 1. receive 3 to 5 REV plant orders with Tier 1 and Tier 2 partners; 2. validate new REV platforms through commercial project execution; 3. sign 3 new collaboration agreements; 4. integrate and Binder management, marketing and engineering/design teams to optimize efficiencies between the two companies; and 5. generate consolidated revenues in excess of CAD$10 million. Page 7 of 25

8 Patents and trademarks Management Discussion and Analysis In December, 2010, the Company acquired the U.S. patents, know-how and exclusive North American marketing rights for the MIVAP vacuum microwave dehydration technology for approximately $1.45 million ($550,000 cash and 550,000 common shares) from INAP, owner of the Intellectual Property. When acquired an 86.5% controlling interest in Binder, INAP also granted non-exclusive rights to the German patents. In March 2011, the Company acquired all of the patents and know-how that it had previously licensed from The University of British Columbia for REV dehydration technology. The acquisition considerably expanded 's intellectual property portfolio, and no longer has any royalty obligations to UBC for use of the technology (Financial Statements, Note 8). A summary of the Company s trademarks and patent position is presented below: Registered and applied-for trademarks: Trademark nutrarev biorev powderrev freezerev nutradried nutradried logo quantarev Status Registered in Canada and USA Registered in Canada and USA Registered in Canada and USA Applied for in Canada and USA Registered in Canada, European Union and USA Registered in Canada and applied for in USA Registered in Canada and applied for in USA nutrarev -related patents: Topic Ownership Inventors Status of patent Low fat snack foods Potato pieces Dehydrated krill Dried fruit Medicinal plants Dehydrated berries Dr. Tim Durance & Dr. Frank Liu Dr. Tim Durance, Dr. Rich Meyer & Dragan Macura Dr. Tim Durance & Dr. Frank Liu Dr. Tim Durance, Dr. Rich Meyer & J. H. Wang Dr. Tim Durance et al. Dr. Tim Durance et al. Granted in the U.S. Granted in the U.S. Granted in the U.S. Granted in U.S. Granted in the U.S. Granted in the U.S. and Canada. Page 8 of 25

9 nutrarev equipment and methods of use for dehydration of organic materials Modular nutrarev for microwave vacuumdrying of organic materials Dr. Tim Durance, Dr. Parastoo Yaghmaee, and Mr. Leon Fu Dr. Tim Durance, Mr. Leon Fu & Mr. Levi Cao Patent granted in Canada and New Zealand; application filed in U.S., E.U. and eight other jurisdictions around the world. Patent application filed to begin PCT process Other REV-related patents: Title Ownership Inventors Status of patent MIVAP Equipment for drying and heat-treating food products Michael Wefers Granted in US., Licensed in Germany Production of dry sponges and foams from hydrocolloids Dr. Tim Durance & other UBC researchers Patent granted in Canada, China, Australia and Hong Kong. National filing initiated in EU, India, and the U.S. Method of drying biological material including vaccines, antibiotics, enzymes and microorganisms Dr. Tim Durance & other UBC researchers Patent granted in Canada and China. National filings initiated in U.S., India, Hong Kong, EU, and Brazil. Protection of Company s proprietary biorev equipment and methods for dehydration of vaccines and similar pharmaceutical materials Dr. Tim Durance, Dr. Parastoo Yaghmaee, Mr. Leon Fu, Dr. Vu Truong, Mr. Binh Pham and Dr. Robert Pike Patent application filed, PCT reviewed and published.; National filings initiated in Canada, Europe and the U.S. Protection of Company s proprietary equipment and methods for freezerev dehydration of pharmaceuticals and similar products Dr. Tim Durance, Dr. Parastoo Yaghmaee, Mr. Leon Fu and Dr. Robert Pike Patent application filed, PCT reviewed and published. National filings initiated in Brazil,, Canada, China, EU, Hong Kong, India and U.S. Protection of Company s 1 st equipment and processes for powderrev dehydration Dr. Tim Durance, Mr. Leon Fu Patent application filed as PCT. National filings initiated in Canada, EU, and U.S. Protection of Company s 2 nd equipment and processes for large scale powderrev /quantarev dehydration Dr. Tim Durance, Mr. Leon Fu, Dr. Parastoo Yaghmaee Patent application filed as PCT. National filings initiated in Australia, Brazil, Canada, Chile, China, EU, Hong Kong, India, Japan, Mexico, New Zealand and U.S. Page 9 of 25

10 Protection of Company s 3 rd equipment and processes for large scale powderrev and recycling system Mr. Leon Fu, Dr. Parastoo Yaghmaee, Dr. Tim Durance US Patent application filed. 3. Selected annual information Years ended September 30 (audited) (Expressed in Canadian dollars) Prepared under IFRS Prepared under Canadian GAAP 2012 $ 2011 $ 2010 $ Revenues 486, , ,048 Operating Loss (6,429,762) (4,971,472) (3,256,955) Loss for the year (6,769,847) (4,839,436) (3,227,873) Loss per share, basic & diluted (0.09) (0.07) (0.06) Total assets 20,627,414 20,463,015 6,420,067 Long term liabilities Nil Nil Nil Cash dividends declared Nil Nil Nil 4. Financings and working capital a) Financings During the fiscal year ended September 30, 2012, the Company completed a private placement of 3,676,000 common shares at $1.50 per share raising a total of gross proceeds of $5,514,000. An amount of $95,248 was incurred in share issue costs in connection with this placement. Also, during the year ended September 30, 2012, the Company raised a total of $373,218 from the exercise of 850,000 stock options and 57,186 agents warrants. During the fiscal year ended September 30, 2011, the Company raised a total of $15,503,470 through completion of $12,070,800 private placement from issuance of 6,706,000 units, and from exercise of 2,338,500 stock options and 2,238,210 warrants. The proceeds will be used to acquire Binder (see Subsequent Events), and the Company s research and development plans. Page 10 of 25

11 b) Working capital As at September 30, 2012, the Company had a working capital of $13,286,521 (September 30, 2011: $12,323,600, October 1, 2010: $5,472,467), integrated as follows: Cash and cash equivalents as at September 30, 2012 amounted to $10,167,240 (September 30, 2011: $11,640,701; October 1, 2010: $5,206,300). Restricted cash as at September 30, 2012 amounted to $28,749 (September 30, 2011: $28,749; October 1, 2010: $28,749). Short term investment as at September 30, 2012 amounted to $3,261,160 (September 30, 2011: $Nil; October 1, 2010: $Nil). As at September 30, 2012 the Company had trade receivables of $181,124 (September 30, 2011: $59,134; October 1, 2010: $38,733); and prepaids and other receivables of $452,470 (September 30, 2011: $384,997; October 1, 2010: $194,845). As at the beginning of the fourth quarter of fiscal 2012, the Company determined that inventory of prototype and testing equipment of $971,290 was impaired, as they were no longer available for sale. Therefore, this was expensed and recorded to cost of sales (Financial Statements Note 16). Prepaid and other receivables consist of advances to customers of $252,260 (September 30, 2011: $Nil: October 1, 2010: $Nil), prepaid expenses of $95,086 (September 30, 2011: $63,890; October 1, 2010: $35,248) for advances to manufacturers, security deposits and certain retainers in the normal course of business, HST receivables of $30,250 (September 30, 2011: $227,402; October 1, 2010: $121,074), bank interest receivable of $51,127 (September 30, 2011: $69,273; October 1, 2010: $1,776), grants from the National Sciences and Engineering Research Council ( NSERC ) of $12,500 (September 30, 2011: $12,500; October 1, 2010: $23,974 from National Research Council( NRC )), long-term deposits of $10,872 (September 30, 2011: $10,872; October 1, 2010: $10,872), and receivables from employees in payment of benefits of $375 (September 30, 2011: $1,060; October 1, 2010: $1,901). Trade and other payables of $555,972 (September 30, 2011: $399,930; October 1, 2010: $347,797) (see Note 9 to the Financial Statements) consists of trade payables of $118,663 (September 30, 2011: $161,940; October 1, 2010: $116,501), payables to related parties of $170,149 (September 30, 2011: $136,875; October 1, 2010: $137,181) which includes current payables and accrued liabilities due to parties related to the Company including annual compensation bonuses (see Note 12 to the Financial Statements), and accrued expenses and provisions of $267,160 (September 30, 2011: $101,115; October 1, 2010: $94,115). Deferred revenue of $4,500 (September 30, 2011: $26,861; October 1, 2010: $29,861) includes amounts received as deposits for work in progress. Other financial liability of $243,750 (September 30, 2011: $150,000; October 1, 2010: $Nil), is the estimated liability the Company accrued pursuant to the license agreement for the sublicensing rights to the MIVAP technology (see Note 2 to the Financial Statements). Page 11 of 25

12 5. Results of operations Year ended September 30, 2012 and year ended September 30, 2011 The breakdown of the operating revenues and expenses is stated in the following table: Years ended September 30, 2012 % of 2011 % of % $ Expense $ Expense Change Revenues 486, , % Cost of sales, excluding amortization and depreciation (971,290) - n/a Expenses: Administrative ( 916,137) 15% (1,035,637) 20% -12% Sales and marketing (424,641) 7% (279,907) 6% 52% Research and development (2,542,496) 43% (2,444,157) 48% 4% Amortization of intangible assets (1,147,256) 19% (629,922) 12% 82% Stock-based compensation (914,845) 16% (739,185) 14% 24% Acquisition costs (483,723) - n/a Foreign exchange loss (15,303) (1,363) 1023% Interest income 158, ,399 19% Net loss and comprehensive loss for the year (6,769,847) (4,839,436) 40% Loss per share (basic and diluted) (0.09) (0.07) Revenues line is comprised of commissions on sales of equipment, royalties and equipment testing fees. The increase in revenues in the year ended September 30, 2012 reflect the Company s success in signing more collaboration contracts (see Overall Performance ) which entail the payment of fees to for equipment testing, as well as commissions from strategic partners on equipment sales, and the first royalty revenues. As at the beginning of the fourth quarter of fiscal 2012, the Company determined that inventory of prototype and testing equipment of $971,290 was impaired, as they were no longer available for sale. Therefore, this was expensed and recorded to cost of sales in the year ended September 30, Administrative expenses: During the year ended September 30, 2012 there was a decrease in administrative expenses of 12% compared to the year ended September 30, These expenses include shareholder communication fees, legal fees administration, accounting and audit fees, non-cash amortization expense, management s salaries, office rent including insurance, filing and transfer agent fees and travel expenses. Sales and marketing expenses: There was a 52% increase in sales and marketing costs in the year ended September 30, 2012 as compared to the year ended September 30, 2011 which reflects an increase in sales and marketing activities resulting in an increase in the total remuneration of management and consultants as well as their travelling expenses to potential customers. Sales and marketing includes salaries for staff, travel expenses, consulting fees, office expenses including insurance, legal fees related to sales and non-cash amortization expense. Research and development expenses: There was a 4% increase in the R&D expenses, which include the salaries of engineers, technicians and management related to the R&D, the materials and other labour used in the construction of prototypes including testing of equipment, patent search, costs associated with the Company s, laboratory and pilot plant facilities including insurance, office expenses at the plants and the R&D staff travel expenses. The R&D expenses were offset by the development contributions derived from potential customers for product tests and the recovery received from National Sciences and Engineering Research Council and Research (Financial Statements Note 16). Page 12 of 25

13 Other research and development expenses include non-cash amortization expense of R&D equipment, the calculation method of which changed in the Year, resulting in higher than previous amortization expense in the year ended September 30, 2012 for the reasons explained in the following paragraph (Financial Statements Note 3 and Note 7). In the year ended September 30, 2012, the Company reviewed the estimated useful economic life of its property, plant and equipment and intangible assets and pattern of usage. As a result, the Company changed its depreciation and amortization method for its property, plant and equipment and computer software in intangible assets, from the declining balance basis to the straight-line basis. The effect of these changes result in an increase of $75,694 and $6,268, respectively, to the original trend of the annual depreciation and amortization charge. Amortization of intangible assets: Non-cash amortization of intangible assets expense relates to the patents acquired from UBC and INAP (Financial Statements Note 3 and Note 8), and computer software amortization. Amortization of intangible assets is significantly higher in the fiscal year ended 2012 because the Company had purchased more than 80% of the patents in the second half of the fiscal 2011, compared to the full 100% amortization of cost from the beginning of fiscal Stock-based compensation: During the year ended September 30, 2012, the Company granted an aggregate of 1,055,000 (2011: 967,500) incentive stock options to management, directors, employees and consultants. For the options vested during the year ended September 30, 2012 (including vesting of some options granted in prior years), an amount of $914,845 (2011: $739,185) of stock-based compensation expense was charged to contributed surplus. Other items: There was a 19% increase in interest income in the fiscal year ended September 30, 2012 due to higher amount of investments held compared to the fiscal year The acquisition costs consist of due diligence, legal, financial and tax, as well as auditing costs with respect to the Company s acquisition of a controlling interest in Binder (Note 19 to the Financial Statements). There was an increase in the foreign exchange loss due to the more frequent and higher amount of payments in Euro for acquisition of Binder (Note 19 to the Financial Statements) as well as expansion of investor relations activities in Europe and United States for the year ended September 30, 2012, and therefore expenses incurred in Euros, British pounds and U.S. Dollars. Page 13 of 25

14 Three months ended September 30, 2012 and three months ended September 30, 2011 The breakdown of the operating revenues and expenses for the most recent quarter is stated in the following table: Three months ended September 30, 2012 % of 2011 % of % $ Expense $ Expense Change Revenues 85,207 35, % Cost of sales, excluding amortization and depreciation (971,290) - n/a Expenses: Administrative (205,020) 14% (232,925) 20% -12% Sales and marketing (98,173) 6% (61,425) 6% 60% Research and development (768,473) 50% (514,553) 48% 49% Amortization of intangible assets (291,515) 19% (285,719) 12% 2% Stock-based compensation (174,149) 11% (138,238) 14% 26% Acquisition costs (483,723) - n/a Foreign exchange (loss) gain (4,508) 2, % Interest income 46,961 38,593 22% Net loss and comprehensive loss for the quarter (2,864,683) (1,157,158) 40% Loss per share (basic and diluted) (0.04) (0.02) Descriptions of these expenses are consistent with those presented for the Year. Stock-based compensation: During the three months ended September 30, 2012, the Company granted 345,000 (2011: 270,000) incentive stock options to its employees. For the options vested during the three months ended September 30, 2012 (including vesting of some options granted in prior periods), an amount of $174,149 (2011: $ 138,238) of stock-based compensation expense was charged to operations. 6. Summary of quarterly results: Quarter ended ($) IFRS 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec Revenues 85,207 70, ,448 71,355 35,067 98,077 14,192 10,000 Loss before other income and expenses (2,423,412) (1,415,836) (1,349,997) (1,240,517) (1,197,793) (1,208,075) (1,630,066) (950,094) Per share basic & diluted loss (0.03) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) Loss for the quarter (2,864,683) (1,354,112) (1,345,770) (1,205,283) (1,157,158) (1,151,905) (1,594,387) (935,986) Per share, basic and diluted loss (0.04) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) Total assets 20,627,414 22,914,628 18,555,636 19,141,052 20,463,015 21,491,628 21,617,973 19,141,052 Long term liabilities Nil Nil Nil Nil Nil Nil Nil Nil Cash dividends declared Nil Nil Nil Nil Nil Nil Nil Nil Page 14 of 25

15 The higher loss for the quarter ended September 30, 2012 reflects the write-off of inventory. As at the beginning of the fourth quarter of fiscal 2012, the Company determined that inventory of prototype and testing equipment of $971,290 was impaired, as they were not longer available for sale. Therefore, this was expensed and recorded to cost of sales (Financial Statements Note 5). There was also acquisition costs related to the Company s purchase of 86.5% controlling interest in Binder (see subsequent events) which significantly increased the loss for the quarter ended September 30, These expenses had been recorded as deferred expenses for the quarter ended June 30, 2012, and they were non-existent prior to that. Also attributable to the higher loss in the quarter ended September 30, 2012, was the increase of amortization expense as an adjustment for the property plant and equipment and computer software amortization for the year. In the quarter ended September 30, 2012, the Company reviewed the estimated useful economic life of its property, plant and equipment and intangible assets and pattern of usage. As a result, the Company changed its depreciation and amortization method for its property, plant and equipment and computer software in intangible assets, from the declining balance method to the straightline method. The effect of these changes resulted in an increase of $75,694 and $6,268, respectively, as compared to the original trend of the depreciation and amortization charge. The increase in total assets for the June, 2012 quarter was due to the private placement raising gross cash proceeds of $5,514,000, as explained under Financings, above. The increase in revenues for the quarters ended September 30, 2012, June 30, 2012 and December 30, 2011 reflect the increase in the equipment testing fees from the customers. The increase in revenues in the quarters ended March 31, 2012 and June 30, 2011 reflect the commission revenues on equipment sales and royalty revenues. The amounts for quarters of December 31, 2010, March 31, 2011, and June 30, 2011, have been restated as compared to the statements originally reported by the Company. During these interim periods, the Company expensed all of its patents acquired from third parties. However, after careful examination at the end of the fiscal year ended September 30, 2011, the Company determined it was more appropriate to capitalize, rather than expense, patents and other intellectual property acquired from third parties. Therefore, the comparative numbers for the three months ended December 31, 2010 in the Interim Financial Statements and year end numbers in the financial statements for the fiscal year ended September 30, 2011, show the patents acquired from UBC and INAP capitalized and amortized as indicated in Note 8 to the Financial Statements and Note 5 to the financial statements for the year ended September 30, The corresponding interim financial statements for the December 31, 2010, March 31, 2011 and June 30, 2011 have not been re-filed, as the Company is of the opinion that this decision would not have had any adverse material effect on investors decisions. The above table reflects the fact that the UBC and MIVAP patents were capitalized at the date of acquisition, and then depreciated over their useful life.. The increase in assets for the March 31, 2011 quarter reflects the amount of $2,496,938 for the acquisition of the UBC patents through issuance of shares (see Note 8 and Note 10(b)(iii) to the Financial Statements). The loss for the quarter ended March 31, 2011 includes higher than usual engineering expenses for powderrev of $195,534 and R&D materials of $219,973 also for powderrev due to completion and testing of a continuous pilot machine version of a larger scale powderrev prototype. The increase in assets for the December 31, 2010 quarter reflects the $12,070,800 private placement and the $907,500 acquisition of the MIVAP patents through issuance of shares (see Note 8 and Note 10(b)(i) to the Financial Statements). Page 15 of 25

16 7. Liquidity As at September 30, 2012 the Company had cash and cash equivalents, short term investments, restricted cash and accounts receivable of $13,732,525 (December 31, 2010: $12,038,819: October 1, 2010: $5,425,940). As indicated in Section 4(a), during the fiscal years 2012 and 2011 and to the date of this MD&A, the Company raised approximate gross proceeds of over $21.3 million through the issuance of shares in private placements, and through the exercise of stock options and warrants, enhancing its liquidity. The Company is working towards funding operations by realizing the sales revenue and ongoing royalties from its continuous nutrarev technology, the eventual commercialization of other REV technologies currently in the prototype stage and by actively looking for new research partnerships with financial power to further develop the Company s REV technologies. There is no assurance that these initiatives will be successful. The Company has not yet realized profitable operations and has relied on non-operational sources of financing to fund operations and, as at September 30, 2012, has an accumulated deficit of approximately $26.9 million (September 30, 2011: $20 million; October 1, 2010: $15.2 million). The Company s ability to continue as a going concern will depend on management s ability to successfully execute its business plan, achieving profitable operations and in obtaining additional financing. There is no assurance that these initiatives will be successful. 8. Contingencies and commitments a) The Company has entered into various lease agreements for the rental of office space, plant facilities, and laboratory facilities for lease terms ranging from 3 to 5 years and renewable at the end of the lease at market rates. The Company also pays additional rent to cover its share of operating costs and property taxes. The future aggregate minimum lease payments due under non-cancellable operating leases are as follows: September 30, 2012 $ September 30, 2011 $ October 1, 2010 $ Less than 1 year 159, , ,267 Between 1 and 5 years 124, , ,175 More than 5 years Total 284, , ,442 Refer to the Financial Statements Note 16 for rent payments recognized in the statement of loss and comprehensive loss for the years ended September 30, 2012 and b) As part of a termination agreement with a former officer of the Company dated June 30, 1998, and amended on September 5, 2006, the Company is committed to pay 2% of adjusted annual cash flows (as defined in the termination agreement) in each fiscal year subsequent to the year the Company first achieves $500,000 of adjusted cash flows, until $150,000 has been paid in aggregate. At September 30, 2012, the condition was not met; therefore, it was more likely than not that the present obligation was not probable nor would the liability be estimated reliably. c) In fiscal year 2011, the Company entered into a Marketing agreement with Hans Binder Maschinenbau GmbH ( Hans Binder ) to sell dehydration equipment using the MIVAP Technology (see below). Page 16 of 25

17 d) In fiscal year 2011 the Company entered into an agreement with INAP for the acquisition of certain patents and the sub-licensing rights to their MIVAP technology (the Original INAP Agreement ) for $1,457,500 (see note 8) plus 25% of license or royalty fees paid by the Company s customers who purchase MIVAP technology for use in food applications and 12.5% for non-food applications in North American markets, and 50% of license or royalty fees paid by the Company s customers who purchase MIVAP technology for use in food applications and 25% for non-food applications in the rest of the world. The estimated present value of the future contingent royalties has been calculated to be $243,750 as at September 30, 2012 ( $150,000) which has been added to the acquisition consideration and amortized over the useful life of the patent. e) The Company entered into a contribution agreement with the NRC on March 26, 1999, for a maximum contribution of $480,474. The contribution was repayable to the NRC at the rate of 2.3% of revenues to a maximum of $720,711. The Company was required to continue to make royalty payments until the earlier of the original contribution being fully repaid and January 1, 2012, after which time no further payments were required. As a result, during the year ended September 30, 2012 $nil ( $4,962) was paid or accrued to the National Research Council ( NRC ). 9. Off-balance sheet arrangements There are no off-balance sheet arrangements. 10. Transactions with related parties Transactions were as follows: Years ended September ($) 2011 ($) Management fees paid to a company controlled by Mr. Salvador Miranda 95,756 88,725 Management fees paid to a company controlled by Dr. Tim Durance 126, ,625 Management fees paid to a company controlled by Ms. Jennifer Thompson, a former Officer. - 61,767 Directors fees paid to Dr. Gary Sandberg, Director 1,000 2,000 Directors fees paid to Mr. J. Hugh Wiebe, Director 1,000 2,000 These transactions are in the normal course of operations and are measured at the exchange amount agreed to by the related parties. Page 17 of 25

18 As at September 30, 2012, September 30, 2011 and October 1, 2010 the following amounts were due to related parties: As at: September 30, 2012 ($) September 30, 2011 ($) October 1, 2010 ($) Amounts due to Dr. Tim Durance for reimbursable expenses, and annual bonus accrual. 57,615 59,925 25,690 Amounts due to a company controlled by Mr. Salvador Miranda, for the management fees, for reimbursable expense and for the annual bonus accrual. 23,133 5,850 14,000 Amounts due to a company controlled by Ms. Jennifer Thompson in management fees and annual bonus accrual, or amounts due to her for reimbursable expenses ,438 Amount due to Mr. John McNicol for the reimbursable expenses, and annual bonus accrual. 74,015 64,350 66,092 Amounts due to Mr. Beenu Anand for reimbursable expenses and for the annual bonus accrual. 15,386 6,750 - All amounts above are non-interest bearing. 170, , , Proposed transactions The acquisition of Binder, as described in Section 2, above, which was completed on October 26, 2012 (see below), was the proposed transaction as at September 30, Subsequent events a) On October 17, 2012, the Company entered into final agreements relating to the acquisition of an 86.5% controlling interest in Hans Binder Maschinenbau GmbH. The transaction closed on October 26, In exchange for the controlling interest, the Company invested 2,000,000 Euros into the capital structure of Hans Binder. The acquisition was subject to a number of required conditions, including: (i) successful completion of legal, financial and tax due diligence; and (ii) negotiation and execution of definitive agreements, all of which have now been satisfied. b) On October 26, 2012, the Company entered into a Patent License, Know-How and Cooperation Agreement with INAP ( the New INAP Agreement ), whereby INAP grants a non-exclusive license in Germany and exclusive license in the rest of the world to use the German MIVAP, which will cover all of future MIVAP equipment sales excluding those under the Original INAP Agreement. Under the terms of the New INAP Agreement, the Company will secure exclusive future licensing rights from INAP for all other global regions, by sharing 50% of any royalties from licensing MIVAP technology in all regions outside of North America and agreeing to pay INAP minimum annual royalty payments representing an aggregate commitment of 1,356,000 Euros over the next five years. The minimum payments will be on a sliding scale gradually increasing from a minimum commitment of 150,000 Euros in the first year to 428,000 Euros in the fifth year. The Company s minimum annual royalty payments will be reduced each year by any royalties received by INAP during the year from either North American or global customers. Page 18 of 25

19 c) On December 20, 2012, the Company granted 650,000 stock options to its Directors pursuant to its Share Option Plan. Each option will entitle its holder to purchase one common share of the Company at an exercise price of $1.38 per share for a period of five years from the grant date. The options will vest in accordance to provisions set out in the Plan, or as otherwise required by the TSX Venture Exchange. 13. Critical accounting estimates Financial results are now being prepared and reported in accordance with International Financial Reporting Standards ( IFRS ). As a result, accounting policies, presentation, financial statement captions and terminology used in this discussion and analysis differ from that used in previous financial reporting. The Company lists its significant accounting policies in Note 2 to its financial statements for the Year. The Company believes the following policy discusses the most significant accounting judgments and estimates that the Company has made in the preparation of the financial statements and is the most critical in fully understanding and evaluating the reported financial results: Intangible assets The recoverability of the Company s acquired patents under intangible assets requires the use of management s most significant and complex estimates and judgments primarily with respect to assumptions underlying the recoverability of the carrying value and the estimated useful lives of the patents. The estimated useful lives are reviewed annually. Significant estimates are required in assessing assumptions relating to technological changes, competitive conditions and customer demand and these are also reviewed annually. Other financial liability - Royalties Payable Pursuant to the Original INAP Agreement, the Company will sub-license the technology and share the related royalties from its ultimate use by the licensee. The Company has concluded that this obligation results in a financial liability which should be recognized at its fair value and included in the cost of the asset at the date of purchase. The financial liability is classified as other financial liability at fair value on initial recognition and thereafter at amortized cost. The fair value of the liability on initial recognition was added to the cost of the asset at the date of purchase. Subsequent changes in the value of the liability will be recorded against the asset, other than those arising from the passage of time. The Company has estimated the liability at September 30, 2012 to be $243,750 (2011: $150,000) based upon its best estimate of the possible outcomes of inherently uncertain future events, their probabilities and the time value of money. The potential variability of this estimate is significant given that the estimate will be highly sensitive to a small number of additional licensees and their ultimate use of the technology. Given the length of the term over which the royalty is calculated and the company's lack of control over the licensee's actual and ultimate use of the technology which gives rise to the royalty, the company cannot practicably determine how current estimates may change over the next financial year. Consequently, it is reasonably possible that outcomes within the next financial year that are different from the assumptions made about the number of licensees or their use of the technology could require a material adjustment to the carrying amount of the liability and, consequently, the related intangible asset. Changes in the liability at each period end will be added or deducted from the cost of the asset, which will be amortized over its current expected useful life of eight years. Page 19 of 25

20 14. International Financial Reporting Standards As stated in Note 2 to the Financial Statements, these are the Company s first annual financial statements prepared in accordance with IFRS as issued by the International Accounting Standard Board ( IASB ). The effect of the Company s transition to IFRS, as described in the Financial Statements Note 2, Note 3 and Note 18 is summarized in this note as follows: a) Transitional elections and exemptions; b) Reconciliation of assets, liabilities and equity as previously reported under Canadian GAAP to IFRS; c) Reconciliation of loss and comprehensive loss as previously reported under Canadian GAAP to IFRS; and d) Reconciliation of cash flows. Transitional elections and exemptions IFRS 1 contains certain optional one-time exemptions from the requirement to apply IFRS on a retrospective basis as at the date of transition. The IFRS 1 optional exemptions applied by the Company in the conversion from Canadian GAAP to IFRS are as follows: i) Stock-based compensation transactions IFRS 1 encourages, but does not require, first-time adopters to apply IFRS 2, Share-based Payment, to equity instruments that vested before the date of transition or any unvested equity instruments that were granted prior to November 7, The Company has elected not to apply IFRS 2 to awards that vested prior to the date of transition. ii) Property, plant and equipment IFRS 1 provides a choice between measuring property, plant and equipment at their fair value at the date of transition, and using those amounts as deemed cost, or using historical valuation under Canadian GAAP. The Company has decided to apply the cost model for property, plant and equipment, and has not restated property, plant and equipment to fair value under IFRS. The Company has elected to use the historical cost carrying values as determined under Canadian GAAP for transitional purposes. Reconciliation of assets, liabilities and equity as previously reported under Canadian GAAP to IFRS and reconciliation of loss and comprehensive loss as previously reported under Canadian GAAP to IFRS Please see Financial Statements Note 18 for analysis representing the reconciliation from Canadian GAAP to IFRS, summarized in this note as follows: i) Stock-based compensation Under IFRS, the fair value of options granted is recognized on a graded-vesting basis over the period during which each tranche of options vests. Canadian GAAP permitted recognition of stock-based compensation on this basis or on a straight-line basis. Since the Company previously recognized its stock-based compensation on a straight-line basis under Canadian GAAP, an adjustment of $189,509 against opening deficit was required at the transition date October 1, 2010 for the unvested options. An adjustment of $1,938 was required for the fiscal year ended September 30, Page 20 of 25