Upload
lamnhu
View
216
Download
1
Embed Size (px)
Citation preview
MANAGEMENT DISCUSSION AND
ANALYSIS
For the first quarter ending March 31, 2014
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 2
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
INTRODUCTION
The following Management’s Discussion and Analysis (“MD&A”) is prepared as of March 31,
2014 and should be read together with the HTC Purenergy Inc. (“HTC” or the “Corporation”)
unaudited condensed consolidated interim financial statements for the period ending March 31,
2014 (the “Quarter” or “Period”) (“Consolidated Financial Statements”) and related notes
attached thereto, which are prepared in accordance with International Financial Reporting
Standards (“IFRS”). All amounts are stated in Canadian dollars unless otherwise indicated. The
Corporation has adopted National Instrument 51-102F1 as the guideline in representing the
MD&A. Terms used but not defined in this MD&A shall bear the meaning as set out in Part 1 of
National Instruments (“NI”) 51-102 and NI 14-101 Definitions and accounting terms that are not
defined herein shall bear the meaning as described or used in IFRS applicable to publicly
accountable enterprises.
This MD&A is dated May 29, 2014.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Statements in this MD&A that are not historical facts are forward-looking statements involving
known and unknown risks and uncertainties that may cause the Corporation's actual results or
outcomes to be materially different from those anticipated and discussed herein. In assessing
forward-looking statements contained herein, readers are urged to read carefully all cautionary
statements contained in this MD&A and accompanying Consolidated Financial Statements, and
in those other filings with the Corporation’s Canadian regulatory authorities as found at
‘www.SEDAR.com’ and to not put undue reliance on such forward-looking statements. Although
Management believes that the expectations reflected in the forward-looking statements are
reasonable, Management cannot guarantee future results, levels of activity, performance or
achievements, or other future events. Management is under no duty to update any of its forward-
looking statements after the date of this MD&A, other than as required and governed by law.
Additional information related to the Corporation is available for view on SEDAR at
www.sedar.com.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 3
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
CORPORATION OVERVIEW
HTC operates in three commercial market sectors under the following brands, each with
strong potential for immediate revenue growth and profitability, namely:
I. Energy Technologies & CO2
Systems
II. Oil & Gas
Equipment Supply
and Service
III. Fertilizer &
Grain Handling
Solutions
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 4
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
I. Energy Technologies & CO2 Systems Market Sectors
Companies doing business in the energy industry
are looking for cost-effective methods and new
energy technologies to produce their products,
while at the same time being environmentally
sustainable and profitable. The Energy
Technologies and CO2 Systems Market Sector’s
mandate is to develop and commercialize the
technologies that satisfy these requirements and
to commercialize this product offer world-wide.
HTC has developed cost-effective energy
technologies and CO2 capture solutions for the
power generation, oil and gas and industrial food
grade CO2 markets that are easier to build,
operate and maintain. HTC participates in this
sector through its commercial entity - HTC CO2
Systems Corp., under brands LCDesign™,
PDOengine™ and SRS Solvent Reclaimer
System™.
HTC has developed a new CO2 capture system
that has been designed to significantly reduce the
cost of CO2 capture. Brand named the HTC
Low-Cost Design CO2 Capture System or
LCDesign™, this system has been engineered to
reduce capital and operating costs while at the
same time delivering superior performance by reducing energy usage, lowering emissions, and
improving the quality of CO2 product captured.
HTC’s engineering design group has developed a simplified design that will significantly reduce
the cost of CO2 capture systems. The industrial grade and energy CO2 markets require capture
systems that are cost effective and can deliver a quality product.
HTC CO2 Systems continues to focus its efforts on the sale of modular CO2 capture systems
using the LCDesign™. HTC is primarily focusing on markets such as OTSG (Once Through
Steam Generators) boilers used in SAGD (Steam Assisted Gravity Drainage), CSS (Cyclic Steam
Stimulation), natural gas turbines, oil sand projects, enhanced oil recovery, and for small
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 5
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
industrial purposes. The development of these industry specific purpose built systems should
provide a potential market that will be more readily accessible, more immediate than larger scale
projects, subject to less impact by worldwide economic issues and delays in climate change
legislation. HTC continues to evaluate other industry specific areas where the existing
technology can be adapted, such as the use of CO2 in oil and gas development for hydraulic
fracturing purposes.
During the third quarter of 2013, HTC announced that its new LCDesign™ CO2 capture
technology was selected to be incorporated in a new CO2 capture unit, which is scheduled to be
built at Husky Energy Pikes Peak South heavy oil facility, located in west-central Saskatchewan,
Canada. HTC has also been appointed the general contractor with regard to construction of this
CO2 capture unit. The project is now in the construction phase, and is on schedule to start
commissioning in the fall of 2014.
In addition, HTC’s LCDesign™ capture technologies are now being incorporated into
commercial food grade CO2 capture systems supplied by Messer ASCO of Switzerland and New
Zealand. Messer ASCO will be commercially supplying HTC designed products and solvent
blends to global food grade CO2 markets such as breweries and beverage manufacturers 3 under a
royalty bearing license agreement. The first commercial plants utilizing HTC technology are
being completed and commissioned for CO2 production throughout 2014.
HTC has recently completed development of its advanced PDOengine™ that will assist the
HTC engineering team in the design, modelling, and simulation of efficient CO2 capture, solvent
reclaimer, and gas processing systems. The PDOengine™ is the cornerstone of producing high
quality, cost effective FEED and project engineering engagements. The PDOengine™ has been
utilized in the engineering and design of HTC’s Husky project during the past quarter.
The PDOengine™ is a design and optimization approach based on accumulative experience,
newly developed algorithms, and rigorous proprietary models developed to perform the following
activities:
Process design;
Optimum allocation of scarce resources;
Equipment and unit operations sizing;
Sensitivity analysis;
Process troubleshooting, debottlenecking, optimization; and
Optimizing solvent reclaimer systems.
The rigorous models used by HTC’s team are based on in-house developed models, extensively
field tested and proven commercial programs engineered to perform the above applications.
Depending on the application, the PDOengine™ is able to combine the coupling between mass
transfer, energy transfer, momentum transfer, chemical equilibrium and/or chemical kinetics.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 6
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
These techniques are more efficient and allow the design of CO2 capture, gas processing and
solvent reclaimer systems that are more energy efficient, while simultaneously reducing capital
costs, operating costs and streamlining the commissioning and optimization process.
Efficient and cost-effective is what the market is now looking for. The PDOengine™ is the
process design engine of our LCDesign™ system; HTC’s process design advantage gives the
Corporation the competitive lead in the CO2 capture, solvent reclaimer, and gas processing design
market today.
HTC has had two technical publications nominated to be published in a prestigious energy
journal. The first article featured the HTC LCDesign™ system and the second article featured
the PDOengine™.
A combination of the recent article publication and the announcement of the Husky project have
substantially increased the Corporation’s profile and business activities. HTC is scheduled to
present its SRS pilot plant test data at the prestigious Green House Gas Technologies 12 (GHGT-
12) world conference in Austin Texas in the fourth quarter of 2014.
SRS Solvent Reclaimer
System™ in operation in
California
During the first quarter of 2013,
HTC reached an agreement with
the operator of the world’s
largest coal-fired emissions CO2
capture plant in Trona, California
to commercially test its recently
completed SRS Solvent
Reclaimer System™.
The CO2 plant captures
approximately 800 – 1000 tons
of CO2 per day from the exhaust
emissions of a coal fired power
plant. The CO2 is then used in the
production of commercial soda
ash, which is utilized for many
industrial processes.
A reclaimer unit is like a kidney
in the human body in that it
removes the impurities that build up in the liquid solvent used in most CO2 capture systems. The
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 7
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
HTC proprietary SRS Solvent Reclaimer System™ is unique in that it has been designed to
remove the impurities from mixed and formulated solvents, resulting in a smaller environmental
footprint and lower energy costs in operation. The actual industrial operating conditions within
the chemical complex of extreme heat and wind-generated dusty conditions, at the Death Valley
facilities, has been an excellent commercial test for HTC’s reclaimer system.
During the third quarter of 2013, Phase I of the single solvent test program was completed, and
Phase II of the testing program was started. The second phase being completed during the second
quarter, is focused on reclaiming mixed amines or blended solvents. Blended solvents are used in
today’s more effective CO2 capture systems, because the solvent can capture more CO2 at a lower
energy penalty.
The results from testing has exceeded all
expectations. The process has demonstrated
that it can remove all types of heavy
degradation products, impurities and
contamination from the solvent and recover
about 98% of the solvent.
Cleaned solvent left, original dirty feed stock right
HTC has recently filed a patent on this process which has the added advantages over standard
reclaimers of:
Being able to reclaim single, mixed and formulated solvents;
Low cost modular design;
Produces minimum waste for disposal; and
Ease of operation and maintenance.
Dr. Ahmed Aboudheir – HTC Chief Technology Officer at the Death Valley CO2 capture plant
The SRS solvent reclaimer system is scheduled to be incorporated into the Husky CO2 capture
project once it has completed its testing at the Death Valley CO2 capture plant which is scheduled
to be completed by the end of June 2014
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 8
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
II. Oil & Gas Equipment Supply and Services Market Sector
The Oil & Gas Equipment Supply and Service Market Sector have been, and continue to be, a
strong growth market in Western Canada and the United States. The sector is focused on
providing a complete product line of manufactured oil field equipment. The sector is focused on
providing services for oil and gas producers and drilling service contractors in Western Canada
and the North Central and North Eastern United States. The commercial operating entities
servicing this sector are: Pinnacle Industrial Services, MaxxEnergy and SteelBlast Coatings
and Painting Inc. (all operating under the banner of the “Maxx Group of Companies Corp.”).
Oilfield equipment manufactured at locations in Regina Sask., Carseland Ab., and Davenport
Iowa
In an effort to expand into the growing Saskatchewan market for overhead cranes, Pinnacle has opened its
Saskatoon office during the quarter, which will specialize in crane installation and repairs.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 9
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
MaxxEnergy completed insulated frack water tank
“Oil Field Equipment that Meets the Cost Management, Size, Automation, Safety
and Environmental Needs of today’s oil and gas industry”
This commercial brand introduces equipment with higher degrees of automation, performance
and technical complexity utilizing the outsourced resources of 100 plus HTC employees that
bring key technologies, manufacturing capacity, procurement capability, process design, and in-
field service know-how to the Oil & Gas Supply Market Sector. A new United States dedicated
manufacturing operation was opened last year in Davenport, Iowa and will provide an additional
34,000 sq. ft. of manufacturing space. The new USA dedicated manufacturing operation will take
advantage of more cost effective infrastructure and cost effective highly skilled labour. The new
manufacturing facility is strategically located between the two largest northern U.S. markets: the
northeastern Utica/Marcellus oil and gas plays and the North Dakota Bakken oil play.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 10
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
GUARDIAN PIPE HANDLING SYSTEM
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 11
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Fully automated Guardian™ Maxx pipe handling system
MaxxEnergy Specializes in:
Drilling Mud Control systems;
Centrifuges including Parts, Service and Repairs;
Guardian Pipe Handling System; and
Frac Water Handling Systems.
MaxxEnergy’s Drillworks division is currently completing the design and engineering of a
service rig and drilling rig product offer, and has assembled a team that has many years of
experience in rig manufacturing and building product that will be able to deal with the unique
deep well challenges of the Saskatchewan, Manitoba and North Dakota markets.
A new dedicated manufacturing location has been established to manufacture equipment for the
North American oil and natural gas industries and equipment for the agricultural sector.
The spacious 34,000 sq. ft. manufacturing floor area is serviced by large overhead cranes which
are ideal for Maxx Energy’s large-scale North American manufacturing needs.
Advantages of the Davenport, Iowa branch are the central location, the access to cost effective
and highly skilled personnel, low capital cost of land and buildings, and the proximity and ease of
access to the Interstate highway system. Davenport, Iowa is located in the heart of the United
States corn and soybean belt, giving proximity and market access for the GrainMaxx Telescopic
Swing Auger products.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 12
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Maxx Dedicated Manufacturing facilities – 34,000 sq. ft.
III. Fertilizer & Grain Handling Solutions Market Sector
Today’s high-yield fertilizers used in the increasingly larger corporate farming operations in
Western Canada demand sophisticated fertilizer blending systems that can provide the required
fertilizer blend in a timely and cost effective manner. The Fertilizer & Grain Handling Solutions
Market Sector is riding the wave of increased demand for high throughput, high capacity,
fertilizer blending and grain handling in rural Western Canada.
The NuVision Fertilizer Handling Solutions brand supplies fertilizer handling equipment and
constructs high capacity fertilizer blending equipment.
The GrainMaxx Telescopic Swing Augers brand supplies and distributes grain transfer augers in
Canada and the United States.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 13
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
NuVision Fertilizer Handling Plant
NuVision Fertilizer Handling Solutions offers a superior line of fertilizer handling and
blending facilities for the Western Canadian market. It operates out of two facilities: Carseland,
Alberta and Regina, Saskatchewan. Both of these locations can design, build, retrofit, and service
new and existing fertilizer plants. With over 20 years’ experience and a significant number of
successfully installed Fertilizer Handling Systems, NuVision Fertilizer Handling Solutions is
considered to be one of the leaders in building and servicing fertilizer plants in Western Canada.
NuVision FHS continues to have excellent growth potential as there has been an increased
demand for more automated and larger fertilizer plants in Western Canada. NuVision FHS was
recently awarded a significant contract to build one of Western Canada’s largest fertilizer plants.
GrainMaxx™ – Telescopic Swing
Augers
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 14
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
As larger corporate farms look to increase their commercial efficiencies, GrainMaxx™ has
taken the grain handling market to a new level with its new GrainMaxx™ brand of telescopic
swing augers. The GrainMaxx™ auger provides one operator with the capability to fully
manage the grain loading and unloading process, using a newly developed fully integrated
telescopic swing auger technology. In addition, the unique GrainMaxx™ telescopic swing
auger system allows one operator to position the auger under the grain truck using an advanced
“reach and retract” hydraulic motor drive system. Most other auger systems would require a
minimum of two operators to position the auger on the grain bin and truck for correct loading and
unloading. GrainMaxx™ markets its full line of grain augers through an extensive dealer
network.
GrainMaxx™ is featuring its new Telescopic Swing Auger at Canadian Farm Shows and will
continue to demonstrate this innovative product at other key agricultural events during the rest of
the year. Maxx Manufacturing USA is now manufacturing the GrainMaxx™ product for the
U.S. market, and has attracted interest from a number of new USA dealers and distributors. Some
of the first units are now coming off the line in time for the fall harvest season.
Additional Information on HTC’s Commercial Brands
Information on Energy Technologies & CO2 Systems division can be viewed at:
www.htcco2systems.com
Information on Oil & Gas Equipment Supply and Service division can be viewed at:
www.maxxenergy.ca and www.pinnacleindustrial.com
Information on the Fertilizer & Grain Handling Solutions division can be viewed at:
www.nuvisionfhs.com and www.grainmaxx.com .
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 15
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
SELECTED ANNUAL INFORMATION
In Canadian Dollars Year ending
Dec 31, 2013
Year ending
Dec 31, 2012
Year ending
Dec 31, 2011
Total Revenue 27,641,097 29,679,041 2,163,799
Income (Loss) from Operations 617,939 (284,692) (2,370,643)
Net Income (Loss) 4,665,103 (1,424,934) (8,978,287)
Income (Loss), on a per-share
basis*
0.17 (.07) (.49)
Income (Loss), on a per-share
basis diluted**
.13 - -
Comprehensive Net Income
(Loss)
5,094,376 (1,290,269) (9,326,420)
Total Assets 30,340,732 25,245,567 13,801,406
Total Long-Term Financial
Liabilities
626,866 744,851 NIL
Operating Lease payments base
rent
77,314 61,229 119,171
Cash Dividends Declared per-
share
NIL NIL NIL
* Loss per common share has been calculated using the weighted average number of
common shares outstanding.
** Diluted net loss per common share is not presented for the balance of the schedule, as the
effect of common share options would be anti-dilutive.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 16
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
DISCUSSIONS OF HTC’s
2014 FIRST QUARTER END FINANCIAL
RESULTS
SUMMARY OF QUARTERLY RESULTS
In Canadian Dollars
(other than share
amounts)
3 months
ending
March 31,
2014
Unaudited
3 months
ending
March 31,
2013
Unaudited
3 months
ending Dec.
31, 2013
Audited
3 months
ending
Dec. 31, 2012
Audited
3 months
ending
Sept. 30,
2013
Unaudited
3 months
ending Sept.
30, 2012
Unaudited
3 months
ending
June 30,
2013
Unaudited
3 month
sending
June 30,
2012
Unaudited
Total Revenues 5,279,685 6,145,137 7,985,402 8,787,390 6,397,754 6,400,583 7,112,804 7,980,739
Net Income (Loss) (142,716) 4,903,273 (53,015) (2,224,576) 35,581 247,472 1,440,422 623,130
Total Assets 28,614,970 31,001,343 30,340,732 25,245,567 32,303,584 26,720,717 31,045,458 26,950,154
Long Term
Liabilities
626,866 746,021 626,866 744,851 748,677 1,647,331 747,637 1,642,292
Shareholder Equity 22,715,995 23,508,512 19,406,959 17,527,003 26,278,372 19,982,694 25,799,003 19,285,505
Cash flow from
Operations
(1,812,403) 1,229,338 212,670 (463,569) 4,177,779 1,210,838 (1,914,078) (546,979)
Increase (decrease) in
Cash
(2,041,586) 1,300,183 210,611 1,371,887 4,102,876 977,501 (1,633,122) 571,173
Net Income (Loss), in
total, on a per-share
basis1 (See discussion
below)
(.005) .20 (0.001) (.09) 0.001 .01 .05 .03
Net Income (Loss),
in total, on a per-
share fully diluted
basis2 (See discussion
below)
- .17 - - 0.0009 .01 .04 .03
Weighted Average
common shares
28,309,195 24,387,962 28,309,195 23,692,347 28,309,195 22,527,767 25,896,181 21,915,239
1Net Income (Loss) per common share for the Years has been calculated using the weighted average number of
common shares outstanding during the respective Years. 2 Net Income per common share on a fully diluted basis. (Loss) per common share is not presented, on a fully
diluted basis as the effect of common share options would be anti-dilutive.
PER SHARE AMOUNTS:
Basic net earnings (loss) per common share have been calculated using the weighted average
number of common shares outstanding during the Period of 28,309,195 (Mar. 31, 2013 –
24,387,962). The fully diluted shares during the Period is 36,159,195 (Mar. - 31, 2013 –
29,587,962).
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 17
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
For the Quarter Ended
March 31, 2014
(Unaudited)
For the Quarter Ended
March 31, 2013
(Unaudited)
Net Income (loss) per common share
(See commentary below)
(.005) $0.20
Net Income (loss) per common share
fully diluted (See commentary
below)
_ $0.17
Earnings per share for the period ending March 31, 2013 (shown above), is not believed to be
representative of ongoing operations as it was impacted by a $4,815,204 one-time gain. If the
effects of this gain were eliminated, revised basic and fully diluted earnings per share would be
$(0.004).
REVENUES
For the Period the Corporation had operating revenue of $5,279,685 (Mar. 31, 2013 –
$6,145,137) of which $4,964,179 (March 31, 2013 - $6,069,592) came from Maxx operations
and $806,006 (March 31, 2013 - $75,445) came from engineering and process design. The
decrease in revenue is attributed to of the timing and size of projects in respect to the current year
as well as the temporary transfer of time and resources from sales to develop and expand new or
improved product offerings for future growth opportunities. Increase in engineering and
processing design relates to commencement of work on the Husky/Lashburn Project CO2 capture
facility.
OPERATING EXPENSES
Costs of sales reflect manufacturing and sales costs associated with Maxx Group of Companies
Corp. (“Maxx”) and its subsidiaries. The reduction reflects the corresponding reduction in sales.
Engineering and process design services include costs associated with the provision of
engineering services. These amounts will vary with activity and project progress. Services for the
Period are $673,923 as compared to $70,491 at March 2013 reflecting increased project and
product development costs.
Commercialization, product development and administrative expenses for the Period were
$1,393,524 as compared to $1,222,684 for the same period in the prior year. The increase in
2014 is primarily due to expansion of operations of one of its subsidiaries in anticipation of
expanding operations and expansion of crane services, as well as rising compliance costs.
A significant portion of $134,151 amortization expenses, in the amount of $41,675 (March 31,
2013 - $146,338) is related to amortization of product development costs, patents and intangibles
associated with the acquisitions of subsidiaries. The remaining amortization is attributable to
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 18
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
tangible assets. The reduction in amortization reflects the December 31, 2013 decision to write
down intangibles that were previously subject to amortization.
Finance expense realized during the Period was $12,152 (2013 -$11,610).
INTEREST & OTHER INCOME (EXPENSE)
The Corporation recorded interest earned on short and long term investments and other income
for the Period of $2,334 as compared to $28,252 for the March 31, 2013.
STOCK BASED COMPENSATION EXPENSE
There is no stock based compensation expenses arising through the issuance of options and
warrants for the Period. For the period ending March 31, 2013 stock compensation was
$165,000. The amount represents a fair value estimate established by applying Black Scholes
modeling to predict the value associated with options and warrants on the basis that they may be
exercised before expiration. There is no cash consideration or outflow associated with the
granting of these options. At the time options were awarded the exercise price was for a higher
amount than the stock trading value. The offset to this amount is reflected as an increase in
contributed capital. Accordingly the net impact on equity, when considered as a whole, is nil due
to the fact that the amount reflected as an expense and impacting retained earnings is offset by the
corresponding amount in contributed capital.
OPERATING INCOME
For the Period, the Corporation had operating loss of $(142,716) as compared to income of
$317,608 from operations for the prior year. Decrease in operating income is primarily related to
timing and weather conditions affecting the timing of purchase orders in the resource sector and
delays in commissioning fertilizer plants.
NET INCOME AND COMPREHENSIVE INCOME
Net income (loss) for the Period was $(142,716) compared to income of $4,903,273 in the prior
year. The 2013 income amounts included the results of one-time gains on the disposition of
various assets as part of an overall corporate reorganization of $4,815,204 which is non-
reoccurring. When the effect of this gain is reversed, the revised 2013 income for comparative
purposes is $88,069. The decrease in income is primarily attributable to timing issues and related
weather conditions affecting the timing of purchase orders in the resource sector, delays in
commissioning fertilizer plants and increases in operational costs as described above.
Comprehensive income includes the unrealized loss on investments classified as available for
sale of $816,192 (March 31, 2013 - gain of $702,210) and represents the net change in the
carrying value of the investments in EESTech Inc., Kingsland Energy Corp. (“KLE”) and USA
Synthetic Fuel Corporation to the quoted value. These adjustments do not involve cash.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 19
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Comprehensive net loss for the Period is ($958,908) after considering the effects of the
unrealized gains on financial assets available for sale and intangibles above, as compared to a
comprehensive net income of $5,610,483 in the prior period.
TOTAL ASSETS
Total assets for the Period were $28,614,970 compared to $31,001,343 as at March 31, 2013.
The primary reasons for the decrease was a reduction in the fair value of investments available of
for sale of $816,192 (which does not involve cash) amortization (which does not involve cash)
and reduction of current liabilities.
Capitalized Development
The Corporation has capitalized development expense relating to the CCS Purenergy® 1000 C02
Capture System of $428,329, net of amortization of $119,200, its HTC SRS® mixed Amine
Solvent Reclaimer of $525,965, and its CCS FEED engine® of $186,092 net of amortization of
$46,523.
There were no expensed research and development costs and commercialization costs during the
Period included in the Consolidated Financial Statements. Development work associated with
the SRS® mixed Amine Solvent Reclaimer is capitalized (see above). Total accumulated costs
expensed from December 31, 2004 to March 31, 2014 are $3,203,862. Research and
development costs incurred by subsidiaries prior to their acquisition are not included in this
amount, nor are costs incurred by HTC’s collaborative technology development research
institutions.
CURRENT LIABILITIES
Current liabilities were $5,272,109 for the Period as compared to $6,038,962 as at March 31,
2013. The reduction is due to timing and activity levels.
LONG TERM DEBT
Long term debt (including current portion) decreased from $733,681 (Dec. 31, 2013) to $707,067
(Mar. 31, 2014). The decrease was the result of normal principal payments on equipment loans
financed by Maxx.
SHAREHOLDERS’ EQUITY
As at the end of the Period the Shareholders’ Equity was $22,715,995 as compared to
shareholders’ equity of $23,674,904 at Dec. 31, 2013. The decrease in equity is primarily
attributed to the effects of the adjustment to fair value of investments available for sales (see
above) of $816,192 which does not involve cash.
Non-controlling interest represents amounts arising from the minority positions of Maxx that are
not held by HTC.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 20
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
CASH FLOW
Cash flows from operating activities were ($1,812,403) for the Period, compared to $1,229,338
for March 31, 2013. Reduction is attributable to reduced operations relative to the prior quarter
and a combination of increases in other current assets combined with use of funds to reduce
current liabilities.
CHANGE IN CASH POSITION
The change in cash position was ($2,041,586) as at March 31, 2014 and $1,300,183 for March
31, 2013. The change in cash flow from December 31, 2013 of $2,041,586 is largely attributable
to cash flow from operations (described above) and additions to property plant and equipment.
LIQUIDITY
The Corporation possesses adequate capital to meet its obligations. The Corporation will
continue to raise capital to forward its plans of intellectual property protection, continued
research and development, demonstration plants, acquisition of complementary technologies and
commercialization of these developed and aggregated technologies. HTC intends to retain funds
in operations for expansion.
The timing of cash outflows relating to the financial liabilities are outlined in the table below:
March 31, 2014 < 1 year 1-2 years -5 years Total
Accounts payable and accrued liabilities
$ 5,184,295 $ - $ - $ 5,184,295
Long term debt 80,111 101,916 252,288 434,405
Balance $ 5,264,496 $101,916 $ 252,288 $ 5,618,700
December 31 , 2013 < 1 year 1-2 years 2-5 years Total
Accounts payable and accrued liabilities
$ 5,924,534 $ - $ - $ 5,924,534
Long term debt 106,815 101,916 252,288 461,019
Balance $ 6,031,349 $ 101,916 $ 252,288 $ 6,385,553
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 21
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
COMMITMENTS
The Corporation rents office space on a month to month basis under a lease agreement with a
related party of the Corporation (see Note 19 of the Consolidated Financial Statements), with
minimum monthly rental payments of $5,485. The lease agreement expires December 31, 2014.
The minimum rent payments to expiration are $49,365.
On March 11, 2014, a subsidiary of Maxx, dba Pinnacle Industrial Services, entered into a lease
agreement for its new overhead crane division in Saskatoon, Saskatchewan. Monthly base lease
costs are $2,961 from May 1, 2014 to April 30, 2015 and $3,172 from May 1, 2015 to April 30,
2017 with additional occupancy costs currently estimated at approximately $899 per month.
The Corporation intends to acquire an additional 13 % of the outstanding shares of Maxx.
HTC is engaged in a license dispute with one of its CO2 capture technology providers. The
commercial effect and outcome of this license technology dispute cannot be determined at this
time.
SUBSEQUENT EVENT
On May 26, 2014, the Corporation announced that subject to TSX Venture Exchange Inc.
approval, it will issue 2,000,000 common shares for gross proceeds of $500,000 and 1,000,000
warrants exercisable at $0.40 per common share, expiring 2 years from the date of issuance.
CAPITAL RESOURCES
Share capital:
Authorized:
An unlimited number of common shares
An unlimited number of preferred shares
As at Mar. 31, 2014 As at Dec. 31, 2013
Common Shares Number Amount Number Amount
Balance, beginning of year 28,309,195 $38,508,214 24,059,195 $38,003,214
Shares issued - - 4,250,000 505,000
Balance, end of year 28,309,195 $38,508,214 28,309,195 $38,508,214
The Corporation has no issued or outstanding preferred shares. The Corporation is authorized to
issue one or more series of non-voting, participating in preference to common shares, eligible,
preferred shares.
Stock options and warrants:
The Corporation has a stock option plan for directors, officers, employees and consultants
providing for the issuance of options to acquire up to ten percent of the issued and outstanding
common shares of the Corporation. The following table reflects the stock option and warrants
activity from January 1, 2011 through March 31, 2013 and the weighted average exercise price:
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 22
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
As at Mar 31, 2014 As at December 31, 2012
Options Avg.
Price
Options Avg. Price
Outstanding, and exercisable,
beginning of Year
7,800,000 $0.15 3,750,000 $ 0.42
Expired and cancelled (i)
- - (1,000,000) 1.18
Stock options granted (ii) - - 850,000 0.13
Stock warrants granted (iii) - - 4,250,000 0.16
Outstanding and exercisable, end of
Year 7,850,000 $0.15 7,850,000 $0.15
i. On March 27, 2013, 300,000 options with a price of $0.50 granted on August 9, 2011 were
cancelled.
On April 4, 2013, 300,000 options with a price of $0.50 granted on August 9, 2011 were
cancelled.
On May 3, 2013, 150,000 options with price of $5.00 granted on November 24, 2008 were
cancelled.
On July 10, 2013, 250,000 options with price of $0.50 granted on August 9, 2011 were cancelled.
ii. On March 27, 2013 the Corporation granted 250,000 stock options to consultant of the
Corporation at exercisable price of $0.135. The options will expire on March 26, 2018.
On April 4, 2013 the Corporation granted 350,000 stock options to director of the Corporation at
exercisable price of $0.135. The options will expire on April 3, 2018.
On May 3, 2013 the Corporation granted 250,000 stock options to a director of the Corporation at
exercisable price of $0.135. The options will expire on May 2, 2018.
iii. On October 25, 2012, the Corporation issued 1,350,000 common voting shares at a price of
$0.13 and 1,350,000 warrants with and exercise price of $0.17 pursuant to private placement.
The warrants will expire on October 24, 2017.
The Black Scholes Option Pricing Model is used to estimate the fair value of stock options for
calculating stock based compensation expense. The Corporation recognizes stock based
compensation expense and an increase to contributed surplus based on the vesting schedule of the
option, and assumptions based on information available at the time.
Option pricing models require the input of highly subjective assumptions including the expected
price volatility. Expected volatility considers the historical volatility of the Corporation’s shares
and any other features of the option grant that may impact the measurement of fair value such as
market conditions. Change in the subjective input assumptions can materially affect the fair
value estimate, and therefore the existing models do not necessarily provide a reliable single
measure of the fair value of the Corporation’s stock options.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 23
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
There was no stock based compensation for the Period. The total fair value of stock based
compensation expense on stock options and warrants granted to directors, employees and
consultants of the Corporation as at December 31, 2013 was $910,556.
OFF-BALANCE SHEET ARRANGEMENTS
The Corporation has no off balance sheet arrangements.
RELATED PARTY TRANSACTIONS
Related party transactions include management fees received from the Corporation’s equity
accounted investee, and transactions with corporate investors who have representation on the
Corporation’s board of directors (“Board”). The revenue and costs recognized with such parties
reflect the prices and terms of sales and purchase of transactions with related parties in
accordance with normal trade practices.
During the Period, the Corporation paid $457 (2013-$5,279) for legal services from a law firm
that a director was a partner of. As of March 31, 2014 there is no outstanding amount owing to
the partnership (2013 - $0).
On August 1, 2013 KLE entered into a lease agreement for its exiting premises with the new
landlord KF Kambeitz Land Corp (“LC”) under the same terms and conditions as its existing
agreement. The lease is a month to month lease, which expires December 31, 2014. LC is
considered a related party through one of KLE’s directors. Total rent paid to LC for the Period
was $18,885. As of March 31, 2014 there is no outstanding amount owing to LC.
CRITICAL ACCOUNTING ESTIMATES
GOODWILL AND INTANGIBLE ASSETS
Goodwill impairment is tested at the CGU level and is determined based on the recoverable
amount exceeding the CGU’s carrying amount. The recoverable amount is the higher of fair
value less cost to sell (“FVLCS”) and value in use (“VIU”). VIU is generally determined using
the discounted cash flow method. If the impairment loss exceeds the carrying amount of
goodwill, the goodwill is written off completely. Any impairment loss left over is allocated to the
remaining assets of the CGU. The values assigned to the key assumptions represent
management’s assessment of future trends in the energy services industry and are based on the
external and internal sources, including historical data. The calculation of the VIU was based on
the following key assumptions:
Cash flows were projected based on experience, actual operating results and the operational plan
for the immediate year. Cash flows were projected using a growth rate of 2%.
Each CGU’s pre-tax discount rate of 20% reflects its individual size, risk profile and
circumstance and is based on experience and the industry’s average weighted-average cost of
capital.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 24
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
During 2013, HTC reorganized some of its acquired companies, resulting in companies relating
to the arbitrage of carbon credit trading and techniques for measurement and evaluation of carbon
credits being reorganized into their own CGU. As legislation and conditions necessary for cap
and trade of carbon credits appears to be delayed of the foreseeable future, the related intangibles
of $616,917 associated with this group of companies have been written down.
Goodwill
Intangible assets
subject to
amortization
Total
Cost
Balance at Jan. 1 2013 $ 8,664,201 $ 5,049,499 $ 13,713,700
Write down (619,917) (619,917)
Balance at Dec. 31, 2013 8,664,201 4,429,582 13,093,783
2014 adjustments - - -
Balance at Mar. 31, 2014 $ 8,664,201 $ 4,429,582 $ 13,093,783
Accumulated amortization
Balance at January 1, 2013 $ - $ 3,776,349 $ 3,776,349
Amortization for the year 152,373 152,373
Balance at Dec. 31, 2013 $ - $ 3,928,722 $ 3,928,722
Amortization for the Period - 23,677 23,677
Balance at March 31, 2014 $ - $ 3,952,399 $ 3,952,399
Carrying amounts (by
CGU)
HTC CO2 Systems $ - $358,060 $ 358,060
Maxx 8,664,201 142,800 8,807,001
At Dec 31, 2013 $ 8,664,201 $500,860 $ 9,165,061
HTC CO2 Systems $ - $349,733 $ 349,733
Maxx 8,664,201 127,450 8,791,651
At March 31, 2014 $ 8,664,201 $477,183 $ 9,141,384
Amortization in the amount of $23,667 ($152,373- December 31, 2013) has been included in the
Consolidated Financial Statements, Consolidated Statement of Comprehensive Income under the
caption Amortization.
Management performed an analysis of the carrying value of its goodwill and intangible assets as
at December 31, 2013, according to its policy as set out in Note 4 of the Consolidated Financial
Statements. In respect to the 2013 year, management evaluated goodwill and intangibles under
the same criteria but adjusting for operational, legislative and business conditions that changed
during the year.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 25
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Goodwill and intangible assets were recorded on acquisition of the subsidiaries. IFRS requires
identifiable intangible assets that meet recognition criteria be identified, valued and disclosed
separately from goodwill. Items giving rise to intangibles and related goodwill include, but are
not limited to: intellectual property (i.e. rights to provisional patents, technology rights software
rights), contractual rights with advantageous conditions, human resources (i.e. research teams,
project management, patent resources), and branding and name recognition related items
(literature, data base, videos, domain names, etc.) as well as various other items. Goodwill
comprises the difference between the purchase price of the respective subsidiary and identifiable
net tangible and intangible assets.
OPERATING SEGMENTS:
As a result of the incremental ownership of Maxx, the Corporation now has two reportable
operating segments: HTC CO2 Systems and Maxx.
These operating segments are differentiated by the product and services that each produces. HTC
CO2 Systems provides products and services related to Energy Technologies and CO2 Systems.
Maxx provides manufacturing sales and distribution services relating to oil and gas equipment
supply and service as well as fertilizer and grain handling solutions. Both segments utilize
various brands and trading names in their operations.
March 31, 2014 HTC CO2
Systems
Maxx Combined
Sales $ - $4,473,679 $4,473,679
Engineering, process design and
consulting 806,006 - 806,006
Cost of Sales - 3,210,985 3,210,985
Engineering and Process design
services 673,923 - 673,923
Commercialization, product
development and administration 302,812 1,090,712 1,393,524
Amortization
Finance Cost
44,931
89,220
12,152
134,151
12,152
Income (loss) from commercial
operations ($215,660) $ 70,610 $ (145,050)
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 26
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
March 31, 2013 HTC CO2
Systems
Maxx Combined
Sales $ - $6,069,692 $6,069,692
Engineering, process design and
consulting
75,445
-
75,445
Cost of Sales
-
4,239,658
4,239,658
Engineering and Process design
services
70,491
-
70,491
Commercialization, product
development and administration
235,030
999,264
1,234,294
Amortization 57,131 89,207 146,338
Finance cost - 11,610 11,610
Income (loss) from commercial
operations
$(287,207)
$ 741,563
$ 454,356
March 31, 2014 HTC CO2
Systems
Maxx Combined
Cash $2,956,481 $1,499,691 $4,456,72
Property and Equipment 138,873 1,626,897 1766,770
Goodwill and intangible 349,733 8,791,651 9,141,384
March 31, 2013 HTC CO2
Systems
Maxx Combined
Cash $2,821,134 $3,676,917 $6,498,051
Property and Equipment 153,700 1,509,274 1,662,974
Goodwill and intangible 358,060 8,807,001 9,165,061
DIRECTOR AND OFFICER COMPENSATION
The key management personnel of the Corporation consist of the executive officers, vice-
presidents, other senior managers and members of the Board. Key management personnel also
include those persons that have the authority and responsibility for planning, directing and
controlling the activities of the Corporation, directly or indirectly. Compensation for the Period
was $51,492 ($57,076 - Mar. 31, 2013). During the Period the Corporation did not pay directors’
compensation ($0 as at March 31, 2013). In addition to their salaries, senior management and
directors also participate in the Corporation’s share-based compensation plans.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 27
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
The Corporation has employment agreements with its Chairman and CEO, and with its Sr. Vice-
President and CFO. Compensation is paid in accordance with the remuneration package agreed
upon by the Corporation’s Compensation Committee and the individuals respectively, and then
approved by the Board. This remuneration package is subject to Periodic review and adjustment
by the Compensation Committee, based on performance.
The terms of the agreement for the Chairman and CEO state that he shall receive upon
termination of employment or in the event of a change of control, the equivalent of thirty six
months, plus one month for every year of service to a maximum of forty eight months, in total
compensation. The terms of the agreement for the Sr. Vice-President and CFO state that he shall
receive upon termination of employment or in the event of a change of control, the equivalent of
twenty four, plus one month for every year of service to a maximum of thirty six months, in total
compensation. The total compensation is calculated using the average for the twelve months prior
to termination or change of control, alternatively the average since January 1, 2008, whichever
amount is greater. This total compensation includes all benefits.
ADDITIONAL INFORMATION ON HTC
HTC invites you to review current and historical press releases and News Express releases. This
material can be viewed on the Corporation’s web site at www.htcenergy.com/news.html.
RISKS AND UNCERTAINTIES
Risks and uncertainty relate to dependence of CO2 emitters being legislated or provided incentive,
to adapt CO2 capture technology and the price of oil for adoption of CO2 EOR.
The preparation of Consolidated Financial Statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements, and the reported amounts of revenues and expenses during the
Period.
Significant items subject to judgement, estimates and assumptions include: the carrying amounts
of goodwill and intangible assets, product development, underlying estimations of useful lives of
depreciable assets, capitalization of interest, and the carrying amounts of accounts receivable,
investments, fair value of financial instruments, and environmental remediation and contingent
liabilities, if any (see also Note 2c of the Consolidated Financial Statements).
The Consolidated Financial Statements are based on Management’s best estimates using
information available. Uncertainty regarding the timing of anticipated large scale market demand
for carbon capture technology, related legislative incentives, and uncertainty in financial markets
has complicated the estimation process. Accordingly, the inherent uncertainty involved in making
estimates and assumptions may impact the actual results reported in future Periods by a material
amount.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 28
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
CHANGE IN ACCOUNTING PRINCIPLES
The Corporation has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2014.
Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities and IFRS 7,
Disclosures In December 2011, the IASB issued amendments to IAS 32 and IFRS 7 as part of its offsetting
project. The amendments clarify certain items regarding offsetting financial assets and financial
liabilities and also address common disclosure requirements. The amendments have been applied
retrospectively
IAS 36, Recoverable Amount Disclosures for Non-Financial Assets
Amendments were issued that clarify disclosure requirements for the recoverable amount of an
asset or cash-generating unit. The amendments has been applied retrospectively.
The amendments did not have a material impact on the Corporation.
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
Changing IFRS standard
IFRS has various developmental projects and is in the process of modifying existing standards
and introducing new standards, these standards will be adopted as they are issued. The following
new standards and amendments or interpretations to existing standards have been published.
IFRS 9, Financial Instruments
In November 2009, the IASB issued guidance on the classification and measurement of financial
assets. Under IFRS 9, financial assets will generally be measured initially at fair value plus
particular transaction costs, and subsequently at either amortized cost or fair value. In October
2010, the IASB issued additions to IFRS 9 relating to accounting for financial liabilities. Under
the new requirements, an entity choosing to measure a financial liability at fair value will present
the portion of any change in its fair value due to changes in the entity’s own credit risk in other
comprehensive income (“OCI”), rather than within net income. In December 2011, the IASB
issued amendments which modify the requirements for transition from IAS 39 to IFRS 9. The
modifications introduce new disclosure requirements and eliminate the requirement to restate
prior periods to reflect the new presentation. The standard is to be applied prospectively and will
be effective for periods commencing on or after January 1, 2018, with earlier application
permitted. The Corporation does not expect the amendments to have a material impact on the
Consolidated Financial Statements. The Corporation has not yet adopted these standards.
Capital Disclosures
The Corporation defines its capital as its shareholders’ equity. Except as otherwise disclosed in
these Consolidated Financial Statements, there are no restrictions on the Corporation’s capital.
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 29
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
The Corporation’s capital is summarized as follows:
Mar. 31, 2014 Dec. 31,2013
Shareholders’ equity
Current portion of long term debt
Long term debt
$18,423,787
80,201
626,866
$19,406,959
106,815
626,866
Balance $19,130,854 $20,140,640
The Corporation’s objectives when managing capital are to:
maintain financial flexibility in order to preserve its ability to meet financial obligations;
deploy capital to provide an appropriate investment return to its shareholders in the future;
and
maintain a capital structure that allows multiple financing options to the Corporation,
should a financing need arise.
The Corporation’s financial strategy is designed and formulated to maintain a flexible capital
structure consistent with the objectives stated above and to respond to changes in economic
conditions and the risk characteristics of underlying assets. In order to maintain or adjust its
capital structure, the Corporation may issue new shares, raise debt (secured, unsecured,
convertible and/or other types of available debt instruments) or refinance existing debt with
different characteristics.
FINANCIAL INSTRUMENTS
Management’s risk management policies are typically performed as a part of the overall
management of the Corporation’s operations. Management is aware of risks related to these
objectives through direct personal involvement with employees and outside parties. In the normal
course of its business, the Corporation is exposed to a number of risks that can affect its operating
performance. Management’s close involvement in operations helps identify risks and variations
from expectations. The Corporation has not designated transactions as hedging transactions to
manage risk. As a part of the overall operation of the Corporation, Management considers the
avoidance of undue concentrations of risk. These risks and the actions taken to manage them
include the following:
Liquidity risk is the risk that the Corporation cannot meet its financial obligations associated with
financial liabilities in full. The Corporation's main sources of liquidity are its operations and
equity financing. The funds are primarily used to finance working capital and capital expenditure
requirements and are adequate to meet the Corporation’s financial obligations associated with
financial liabilities. Risk associated with debt financing is mitigated by having negotiating terms
over several years and renegotiating terms before they are due. The timing of cash outflows
relating to the financial liabilities are outlined in the table below:
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 30
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Mar. 31, 2014 < 1 year 1-2 years -5 years Total
Accounts payable and accrued liabilities
$5,184,295 $ - $ - $ 5,184,295
Long term debt 80,201 101,916 252,288 434,405
Balance $ 5,264,496 $101,916 $ 252,288 $ 5,618,700
Dec. 31, 2013 < 1 year 1-2 years 2-5 years Total
Accounts payable and accrued liabilities
$ 5,924,534 $ - $ - -
$ 5,924,534
Long term debt 106,815 101,916 252,288 461,019
Balance $ 6,031,349 $101,916 $ 252,288 $ 6,385,553
Currency risk is the risk that changes in foreign exchange rates may have an effect on future cash
flows associated with financial instruments. The Corporation has no significant transactions
denominated in foreign currency and is not exposed to any material foreign currency risk aside
from broad unquantifiable macro-economic factors arising from fluctuations in foreign exchange
which could result in Canadian products becoming more expensive to international purchasers.
Foreign exchange risk is primarily associated with contracts for services and contracts of supplies
and services. Substantially all of the Corporation’s revenues and expenses are denominated in
Canadian dollars, and therefore isolated from foreign exchange risk. HTC has limited exposure
to US \Canadian dollar fluctuations through its interest in Maxx Chenglin.
Interest rate risk primarily is associated with interest fluctuations earned on the Corporation’s
cash and term deposits and long term debt. The Corporation mitigates exposure by attempting to
match rates and terms to expected cash requirements, and through having the majority of its
revenues and expenses denominated in Canadian dollars. Interest risk associated with long term
loans is mitigated by arranging terms that extend for multiple years (see Note 10 of the
Consolidated Financial Statements). A 1% change in the prime interest rate would have a
negligible impact on the Corporation’s income.
Credit risk is the risk of financial loss if counterparty to a financial transaction fails to meet its
obligations. The Corporation attempts to reduce such exposure to its cash, and short term
deposits by mostly investing in low risk investments with Canadian Chartered Banks and taking
advantage of government guarantees. The Corporation attempts to reduce its loss on amounts
receivable by assessing the ability of the counterparties to fulfill their obligation under contract
prior to entering into the contracts and by the nature of customers the Corporation deals with. At
March 31, 2014 the Corporation had an allowance for doubtful accounts of $28,600 (2013 -
$84,623) and had recorded no bad debt for the periods March 31, 2014 (2013-$0).
Due to project nature of operations of the Corporation, Management considers accounts
receivable outstanding less than 90 days to be current amounts. Over 90 days are also considered
current if extended terms and security are provided or amounts are subject to contract restrictions
and performance markers. The aging of the Corporation’s accounts receivable at March 31, 2014
and December 31, 2013 is as follows:
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 31
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
Current Over 90 Days Total
Aging of accounts receivable at Mar. 31, 2014 $2,489,067 $ 402,236 $ 2,891,303
Aging of accounts receivable at Dec. 31, 2013 $2,620,136 $ 204,144 $ 2,824,280
Signed “Lionel Kambeitz” Signed “Jeffrey Allison”
LIONEL KAMBEITZ JEFFREY ALLISON
CHAIRMAN & CEO SR. VICE- PRESIDENT & CFO
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 32
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
HTC PURENERGY INC. ‘Doing business as’
HTC PURENERGY
To the Shareholders of HTC Purenergy Inc.
Management’s Accountability for Management’s Discussion and Analysis and Consolidated
Financial Statements
The consolidated financial statements for the period ended March 31, 2014 (“Period”) (“Consolidated
Financial Statements”) have been prepared by management in accordance with International Financial
Reporting Standards (“IFRS”) in Canada. Management is responsible for ensuring that these statements,
which include amounts based upon estimates and judgment, are consistent with other information and
operating data contained in management’s discussion and analysis for the Period (“MD&A”) and reflect
the Corporation's business transactions and financial position.
Management is also responsible for the information disclosed in the MD&A including responsibility for
the existence of appropriate information systems, procedures and controls to ensure that the information
used internally by management and disclosed externally is complete and reliable in all material respects.
In addition, management is responsible for establishing and maintaining an adequate system of internal
control over financial reporting. Such systems are designed to provide reasonable assurance that the
financial information is relevant, reliable and accurate and that the Corporation’s assets are appropriately
accounted for and adequately safeguarded. Management has concluded that the Corporation’s system of
internal control over financial reporting was effective as at March 31, 2014.
The board of directors (“Board”) annually appoints an audit committee which includes directors who are
not employees of the Corporation. This committee meets regularly with management and the shareholders'
auditors to review significant accounting, reporting and internal control matters. The shareholders'
auditors have unrestricted access to the audit committee. The audit committee reviews the interim and
annual financial statements, the report of the shareholders' auditors, and the interim and annual
management’s discussion and analysis and has delegated authority to approve the interim filings, and
makes recommendations to the Board regarding annual filings.
Management has reviewed the filing of the Corporation’s MD&A, Consolidated Financial Statements, and
attachments thereto. Based on our knowledge, having exercised reasonable diligence, the annual filings
do not contain any untrue statement of material fact or omit to state a material fact required to be stated or
that is necessary to make a statement not misleading in light of the circumstances under which it is made,
with respect to the Period covered by the interim filings. Based on our knowledge, having exercised
reasonable diligence, the Consolidated Financial Statements together with the other financial information
included in the interim filings fairly present in all material respects the financial condition, financial
performance and cash flows of the Corporation, as of the date of and for the periods presented in the
interim filings.
Signed “Lionel Kambeitz” Signed “Jeffrey Allison”
LIONEL KAMBEITZ JEFFREY ALLISON
CHAIRMAN & CEO SR. VICE-PRESIDENT & CFO
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 33
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
BOARD OF DIRECTORS & SENIOR OFFICERS Of the Corporation as at March 31, 2014
Directors: Lionel Kambeitz,
Regina, Saskatchewan,
Jeffrey Allison,
Regina, Saskatchewan,
Wayne Bernakevitch,
Regina, Saskatchewan,
Garth Fredrickson
Regina, Saskatchewan.
Senior Officers: Lionel Kambeitz, Chairman and CEO
Jeffrey Allison, Sr. Vice-President & CFO
Thor McDonald, Vice-President
Committees of the Board of Directors: Audit Committee
Compensation Committee
Nominating Committee
Members of Audit Committee: Lionel Kambeitz, Jeffrey Allison and Wayne
Bernakevitch
Members of Compensation Committee: Jeffrey Allison and Wayne Bernakevitch
Members of Nominating Committee: Jeffrey Allison and Wayne Bernakevitch
HTC Purenergy Inc.| First Quarter End 2014- Management’s Discussion and Analysis 34
HTC Purenergy Inc. – Management’s Discussion & Analysis 2014
SHAREHOLDER INFORMATION Stock exchange: TSX Venture Exchange Inc.
Stock symbol: HTC
Common Shares outstanding as of March 31, 2014: 28,309,195
Head office and Investor relations address:
HTC PURENERGY #002 – 2305 Victoria Avenue
Regina, Saskatchewan S4P 0S7
Telephone: (306) 352-6132
Fax: (306) 545-3262
E-mail: [email protected]
Sales and Marketing Offices
Asia Pacific:
Sydney, Australia
Telephone: +61 4 10229 393
United States Address:
Bettendorf, Iowa
Telephone: (563) 505-2510
Registrar and Transfer Agent:
Computershare Trust Company of Canada
600, 530 - 8th Avenue S. W.
Calgary, Alberta T2P 3S8
Banks: HSBC; Conexus Credit Union; Canadian Western Bank
Auditors: CALVISTA Professional Accountants LLP , Calgary, Alberta
Legal Counsel: McDougall Gauley, Barristers and Solicitors, Regina Saskatchewan
Borden Ladner Gervais LLP, Barristers and Solicitors, Calgary Alberta
McKercher LLP Barristers & Solicitors, Regina Saskatchewan
Dividend policy: No dividends have been paid on any common shares of the Corporation since the date of inception, and it
is not contemplated that any dividends will be paid in the immediate or foreseeable future.
Duplicate Communications:
Some shareholders may receive more than one copy of the annual report and proxy-related material. This
is generally due to ownership of registered shares in addition to non-registered shares; holding shares in
more than one account; or purchasing shares from more than one stock brokerage firm. Every effort is
made to avoid such duplication. Shareholders who receive duplicate mailings should notify the investor
relations department at the above address.
Consolidated Financial Statements
For the Quarter ending March 31, 2014
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 2
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
TSX -V: HTC
HTC Purenergy operates in three market sectors under
the following commercial brands:
Energy Technologies & CO2
Systems
Oil & Gas Equipment
Supply and Service
Fertilizer & Grain
Handling Solutions
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 3
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
To the Shareholders of HTC Purenergy Inc. Management’s Accountability for Management’s Discussion and Analysis and Financial Statements
The unaudited condensed consolidated interim financial statements for the period ending March 31, 2014 (“Consolidated Financial Statements”) have been prepared by management in accordance with International Financial Reporting Standards in Canada. Management is responsible for ensuring that these statements, which include amounts based upon estimates and judgment, are consistent with other information and operating data contained in management’s discussion and analysis for the period ending March 31, 2014 (“MD&A”) and reflect HTC Purenergy Inc. (“HTC” or the “Corporation”) business transactions and financial position. Management is also responsible for the information disclosed in the MD&A including responsibility for the existence of appropriate information systems, procedures and controls to ensure that the information used internally by management and disclosed externally is complete and reliable in all material respects. In addition, management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Corporation’s assets are appropriately accounted for and adequately safeguarded. Management has concluded that the Corporation’s system of internal control over financial reporting was effective as at March 31, 2014. The board of directors (“Board”) annually appoints an audit committee which includes directors who are not employees of the Corporation. This committee meets regularly with management and the shareholders' auditors to review significant accounting, reporting and internal control matters. The shareholders' auditors have unrestricted access to the audit committee. The audit committee reviews the interim and annual financial statements, the report of the shareholders' auditors, and the interim and annual management’s discussion and analysis and has delegated authority to approve the interim filings, and makes recommendations to the Board regarding annual filings. Management has reviewed the filing of the Corporation’s MD&A, Consolidated Financial Statements, and attachments thereto. Based on our knowledge, having exercised reasonable diligence, this filing does not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, with respect to the period covered by the interim filings. Based on our knowledge, having exercised reasonable diligence, the Consolidated Financial Statements together with the other financial information included in this interim filings fairly present in all material respects the financial condition, the financial performance and cash flows of the Corporation, as of the date of and for the periods presented in the interim filings.
Signed “Lionel Kambeitz” Signed “Jeffrey Allison” LIONEL KAMBEITZ JEFFREY ALLISON CHAIRMAN & CEO SR. VICE-PRESIDENT & CFO
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 4
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
NOTICE TO READER OF THE
CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
The condensed consolidated interim financial statements for the period ending March 31,
2014 have been prepared by management in accordance with the International Financial
Reporting Standards and have not been reviewed by HTC Purenergy Inc.’s Auditor.
Signed “Lionel Kambeitz”
Lionel Kambeitz
Chairman, CEO and Director
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 5
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Condensed Consolidated Statement of Financial Position Unaudited (In Canadian dollars)
Note March 31, 2014 Dec. 31, 2013
ASSETS
Current Assets:
Cash $ 4,456,172 $ 6,498,051
Accounts receivable 16 2,891,303 2,824,280
Inventory 4 3,003,735 2,182,485
Prepaid expenses and other assets
334,684
159,358
10,685,894 11,664,174
Property, plant and equipment 5 1,766,770 1,662,974
Product development 6 974,663 983,562
Investments 7 5,945,050 6,761,242
Patents 8 101,209 103,719
Goodwill and intangible assets 9 9,141,384 9,165,061
$ 28,614,970 $ 30,340,732
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities Corporate tax payable Current portion of long term debt
10
$ 5,184,295 7,613
80,201
$ 5,924,534 7,613
106,815
5,272,109 6,038,962
Long Term Debt 10 626,866 626,866
Shareholders’ Equity:
Share capital 11 38,508,214 38,508,214
Contributed Surplus 910,556 910,556
Retained deficit (20,202,065) (20,035,086)
Accumulated other comprehensive gain (loss) (792,918) 23,275
Total equity attributable to shareholders of the Corporation 18,423,787 19,406,959
Total equity (deficit) attributable to non-controlling interest 4,292,208 4,267,945
Total equity 22,715,995 23,674,904
Total liabilities and equity $ 28,614,970 $ 30,340,732
See accompanying notes to the Consolidated Financial Statements
APPROVED BY THE BOARD: Signed “Lionel Kambeitz” Signed “Jeffrey Allison” LIONEL KAMBEITZ JEFFREY ALLISON DIRECTOR DIRECTOR
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 6
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Condensed Consolidated Interim Statement of Comprehensive Income Unaudited (In Canadian dollars except per share amounts)
For the three month period ended March 31,
Note
2014
2013
Revenue: Sales
$ 4,473,679
$ 6,069,692 Engineering, process design & consulting 806,006 75,445
5,279,685 6,145,137
Expenses:
Cost of Sales 3,210,985 4,239,658
Engineering and process design services 673,923 70,491
Commercialization, product development and administration 1,393,524 1,222,684
Amortization 134,151 146,338
Finance costs 12,152 11,610
5,424,735 5,690,781
Income (Loss) from commercial operations (145,050) 454,356
Other income (expense):
Interest and other income 2,334 28,252
Stock based compensation expense 12 - 165,000
Income (Loss) from operation (142,716) 317,608
Gain on disposal of assets - 4,815,204
Income (Loss) for the year before the followings (142,716) 5,132,812
Tax Provision 13 - 229,539
Net Income (loss) for the period $ (142,716) 4,903,273
Income for the year attributable to:
Shareholders of the Corporation $ (166,979) $ 3,604,309
Non-controlling interest 24,263 1,298,964
Net Income (Loss) for the period $ 4,434 $ 4,903,273
Income per share – basic and diluted (0.005) 0.20
Income per share – fully diluted - 0.17
Weighted Average shares outstanding
Basic 28,309,195 24,387,962
Diluted 36,159,195 29,587,962
See accompanying notes to the Consolidated Financial Statements
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 7
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Condensed Consolidated Statements of Other Comprehensive Income Unaudited (In Canadian dollars)
For the 3 month period ended March 31 2014 2013
Net Income $ (142,716) $ 4,903,273
Unrealized gain on available for sale financial assets (816,192) 707,210
Comprehensive net income $ (958,908) $ 5,610,483
Condensed Consolidated Interim Statements of Accumulated Other Comprehensive Deficit Unaudited (In Canadian dollars)
For the 3 month period ended March 31 2014 2013
Balance, beginning of period $ 23,275 $ (405,998)
Other comprehensive income (loss) (816,193) 707,210
Balance, end of period $ (792,918) $ 301,212
See accompanying notes to the Consolidated Financial Statements
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 8
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Condensed Consolidated Statement of Changes in Equity
Unaudited (In Canadian dollars, except number of shares)
Equity attributable to the shareholders
Number of Shares
Share Capital Contributed
Surplus Deficit
Other Comprehensive
income
Non Controlling Interests
Total Equity
Balance at Dec 31, 2013 28,309,195 $38,508,214
$910,556 $(20,035,086) $23,275 $4,267,945 $23,674,904
Share issued - - - Option Cancelled - - - Fair value of Options and warrants issued
- - -
Total Income (Loss) (166,979) 24,263 (142,716) Non-Controlling Interest Adjustment - EHR Unrealized gain on sale of assets (816,193) (816,193)
Balance Mar. 31, 2014 28,309,195 $38,508,214 $910,556 $(20,202,065) $(792,918) $4,292,208 $22,715,995
Equity attributable to the shareholders
Number of Shares
Share Capital Contributed
Surplus Deficit
Other Comprehensive
income
Non Controlling Interests
Total Equity
Balance at Dec. 31, 2012 24,059,195 $38,003,214 $520,236 $(24,212,699) $(405,998) $3,622,250 $17,527,003
Shares issued 1,500,000 165,000 - - - 165,000 Non-controlling interest in Maxx - - - - - - Option Cancelled (117,180) 117,180 Fair Value of Options and warrants 165,000 165,000 Total income (loss) for the year - - - 3,604,309 - 1,298,964 4,093,273 Non-Controlling interest adjustment -EHR 41,026 41,026 Unrealized gain on available for sale financial assets - - - - 707,210 - 707,210
Balance Mar. 31, 2013 25,559,195 $38,168,214 $568,056 $(20,491,210) $301,212 $4,962,240 $23,508,512
See accompanying notes to Consolidated Financial Statements
HTC Purenergy Inc. –Consolidated Financial Statements Q1 2014
Condensed Consolidated Interim Statement of Cash Flows Unaudited (In Canadian dollars)
For the three month period ended March 31 Note 2014 2013
Cash Flows from Operating Activities: Net income $ (142,716) $ 4,903,273
Items not affecting cash:
Amortization 134,151 146,338
Stock based compensation - 165,000
Gain or loss on sale of assets - (3,215,204)
Change in working capital and other 16 (1,803,838) 829,931
(1,812,403) 1,229,338
Cash flows from investing activities:
Cash change in investments and loans receivable - (23,397)
Purchase of assets (net) (196,449 (29,255)
Capitalized development costs Patent
(6,413))
(5,382) (11,538)
(202,862) (2,655,018)
Cash flows from financing activities:
Increase (Decrease) in loans payable (26,61) (24,583)
Shares issued - 165,000
(26,61) 140,417
Increase (decrease) in cash during the period (2,041,879) 1,300,183
Cash (bank overdraft) – beginning of year 6,498,051 2,517,503
Bank – end of period
$ 4,456,172
$ 3,817,686
Included in operating activities
Cash interest received $ 9,983 $ 4,855
Cash interest paid Corporate tax paid
12,152
- 11,247
-
See accompanying notes to the Consolidated Financial Statements
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 10
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Notes to the Consolidated Financial Statements
Unaudited for the three months ended March 31, 2014 and 2013
1. Operations: HTC Purenergy Inc. (“HTC” or “Corporation”) is incorporated under the Business Corporations Act (Alberta) and is located at #002-2305 Victoria Avenue, Regina, Saskatchewan, Canada. These unaudited condensed consolidated interim financial statements for the period ending March 31, 2014 (“Consolidated Financial Statements”) include the accounts of the Corporation and its wholly owned subsidiary companies. All inter company profits and losses are eliminated on consolidation. With the exception of HTC’s subsidiary, Maxx Group of Companies Corp. (“Maxx”), HTC and its subsidiaries are development stage companies whose commercial business is the development, aggregation and commercialization of proprietary technologies relating to CO2 capture and CO2 solvent recovery.
Maxx and its subsidiaries provide energy products and services for oil field drilling, completion and production and operate custom fabrication, CNC and conventional machine shop as well as overhead, mobile crane division, fertilizer/material handling and paint shop.
2. Basis of presentation a) Statement of Compliance with International Financial Reporting Standards (“IFRS”):
These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards and International Accounting Standards (“IAS”), as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). These Consolidated Financial Statements include the accounts of HTC and its wholly owned subsidiaries. In management’s opinion, the Consolidated Financial Statements include all adjustments necessary to fairly present such information. These Consolidated Financial Statements were authorized by the audit committee of the Board of Directors for issue on May 30, 2014.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 11
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
b) Functional Currency
The Consolidated Financial Statements are presented in Canadian dollars, which is the Corporation’s functional currency. c) Use of Estimates and Judgment
The preparation of the Consolidated Financial Statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected. Judgment is used mainly in determining whether a balance or transaction should be recognized in the Consolidated Financial Statements. Estimates and assumptions are used mainly in determining the measurement of recognized transactions and balances. However, judgment and estimates are often interrelated. Judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected. These Consolidated Financial Statements are based on management’s best estimates using information available. Uncertainty regarding the timing of anticipated large scale market demand for carbon capture technology, related legislative incentives, and uncertainty in financial markets has complicated the estimation process. Accordingly, the inherent uncertainty involved in making estimates and assumptions may impact the actual results reported in future periods by a material amount. Use of estimates and judgment – Information about judgment, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment are as follows:
Significant influence investments: As part of the evaluation and identification of significant influence investments, management must exercise judgment based on current information and in the evaluation and applications of the accounting pronouncements. Determination of whether or not an investment does not have significant influence, has significant influence or has control and should be consolidated (see below) has a material impact on the financial statements.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 12
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Business combinations: Business combinations are accounted for using the acquisition method of accounting. The determination of fair value often requires management to make assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair value of acquired assets liabilities, goodwill and intangibles changes in any of these assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the purchase price allocation. Future net income can be affected as a result of changes in asset impairment. Asset impairment: The carrying amounts of the Corporation’s non-financial assets, other than inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The Corporation’s most significant estimates and assumptions involve values associated with product development costs, patents, goodwill and intangible assets. These estimates and assumptions include those with respect to future cash inflows and outflows, discount rates, asset lives, and the determination of cash generating units. At least annually, the carrying value of product development costs, patents goodwill and intangible assets is reviewed for potential impairment. Among other things, this review considers the fair value of the cash-generating units based on discounted estimated future cash flows. This review involves significant estimation uncertainty, which could affect the Corporation’s future results if the current estimates of future performance and fair values change.
Impairment indicators and discount rate: For purposes of impairment testing, assets are aggregated into cash-generating units (“CGU’s”). The determination of the Corporation’s CGU’s is subject to judgment. The recoverable amounts of CGU’s and individual assets have been determined based on the higher of the value-in-use calculations and fair value less costs to sell. These calculations require the use of estimates and assumptions, including the discount rate. It is reasonably possible that the economic and related technology assumptions may change, which may impact the estimated life of the assets and may require a material adjustment to the carrying value of the related assets. The Corporation monitors internal and external indicators of impairment relating to its assets. Classification of Financial Instruments: The Corporation classifies its financial instruments into one of the following categories: held for-trading; held-to-maturity; loans and receivables; available-for-sale; and other liabilities. Classification requires management to exercise judgment based on available information and in the context of the prescribed accounting policies.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 13
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Provisions: Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of a past obligating event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions also arise in connection with evaluation of the collectability of accounts receivables or in the value of inventory (see below). Identification and evaluation of provisions is subject to judgment and estimates. Inventory provision: In determining the lower of cost and net realizable value of inventory and in establishing the appropriate impairment amount for inventory obsolescence, management estimates the likelihood that inventory carrying values will be affected by changes in market pricing or demand for the products and by changes in technology or design which could make inventory on hand obsolete or recoverable at less than the recorded value. Management performs regular reviews to assess the impact of changes in technology and design, sales trends and other changes on the carrying value of inventory. Where it is determined that such changes have occurred and will have an impact on the value of inventory on hand, appropriate adjustments are made. If there is a subsequent increase in the value of inventory on hand, reversals of previous write-downs to net realizable value are made. Unforeseen changes in these factors could result in additional inventory provisions, or reversals of previous provisions, being required.
Revenue recognition: Revenues under certain contracts for product and engineering development services provide for receipt of payment based on achieving defined milestones or on the performance of work under product development programs. Revenues are recognized under these contracts based on management’s estimate of progress achieved against these milestones or on the proportionate performance method of accounting. Changes in management’s estimated costs to complete a contract may result in an adjustment to previously recognized revenues.
Utilization of tax losses: Due to current circumstances, there is no immediate expectation for utilization of losses based on prior year’s results. Contingencies: By their nature, contingencies will only be resolved when one of more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.
Additional insight to the use of judgment estimates and assumptions are provided in
the notes below.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 14
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
d) Basis of measurement
The Consolidated Financial Statements have been prepared on the historical cost basis except that financial instruments are measured at fair value through profit and loss except for certain financial instruments which are measured at fair value through profit and loss as described in Note 3. The methods used to measure fair values are discussed in Note 15.
3. Significant accounting policies:
The Corporation has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2014. These changes were made in accordance with the applicable transitional provisions. Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities and IFRS 7, Disclosures In December 2011, the IASB issued amendments to IAS 32 and IFRS 7 as part of its offsetting project. The amendments clarify certain items regarding offsetting financial assets and financial liabilities and also address common disclosure requirements. The amendments have been applied retrospectively. IAS 36, Recoverable Amount Disclosures for Non-Financial Assets Amendments were issued that clarify disclosure requirements for the recoverable amount of an asset or cash-generating unit. The amendments have been retrospectively applied. The amendments did not have a material impact on the Corporation.
Comparative Amounts Certain comparative amounts have been restated to conform with the present basis of presentation and reflect determinations made as part of the year end audit. Cash Equivalents Cash equivalents are comprised of cash and highly liquid investments with a maturity of three months or less from the date of purchase. The Corporation does not presently have any highly liquid investments that would qualify as a cash equivalent and so has disclosed cash. Basis of Consolidation
a) Subsidiaries Subsidiaries are entities controlled by the Corporation. The financial statements of the subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 15
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
b) Transactions eliminated on consolidation Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions are eliminated in preparing the Consolidated Financial Statements. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Corporation’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
The Consolidated Financial Statements include the accounts of the Corporation and its subsidiaries. Wholly owned subsidiaries include101079353 Saskatchewan Ltd, HTC CO2 Systems Corp. (“HTC CO2 Systems”), which was amalgamated with: HTC Hydrogen Thermochem Corp., HTC International Inc., BTC BioEnergy Technologies Corp., Carbon Rx Inc. (“CRX”), which was amalgamated with: Carbon Rx Inc., Carbon Capital Management Inc. and C-Green Carbon Management Solutions Inc.; and 65% of Maxx which owns the following subsidiaries: 101059035 Saskatchewan Ltd doing business as Pinnacle Industrial Services (“Pinnacle”), Nuvision Industries Inc., Maxx Chenglin Energy Products and Services Corp., and SteelBlast Coatings and Painting Inc. (collectively referred to as the “Maxx Group”). Maxx operations are based in Alberta and Saskatchewan. The Corporation has accounted for the business combinations using the acquisition method of accounting. Significant influence investments HTC accounts for its investment in Maxx Chenglin Energy Products and Services Ltd. (“Maxx Chenglin”), a private company, using the cost method due to contractual restrictions on shares. HTC owns directly and indirectly 46% of Maxx Chenglin. Foreign currency translation The Corporation translates monetary assets and liabilities using the rate of exchange at the Consolidated Financial Statement date and non-monetary assets liabilities using the historical exchange rate at the transaction date. Revenues and expenses are translated using the average exchange rate in effect for the period. Inventory Inventory is comprised of completed product as well as work in progress including materials, services, labor and related overhead associated with projects in progress. Inventory is valued at the lower of cost and net realizable value using the specific identification method.
Property, plant and equipment The CO2 property plant and equipment is recorded at cost and depreciated over its useful life at a rate of 30% on a declining balance basis except for leasehold improvements (3 years straight line). The manufacturing property and equipment are amortized on a straight line basis as follows: Vehicles - 3 to 5 years; leaseholds,
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 16
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
office equipment and buildings - 5 years; and shop equipment - 10 years. The amortization period requires estimation of the useful life of the asset and its salvage and residual value. Long-lived assets are tested for recoverability if events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment of assets
a) Financial assets The Corporation assesses at each statement of financial position date whether there is any objective evidence that a financial asset is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.
b) Non-financial and intangible assets The carrying amounts of the Corporation’s property and equipment and intangible assets having a finite useful life are assessed for impairment indicators on an annual basis to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s or group of assets’ estimated fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable independent cash inflows (a cash generating unit (“CGU”)). Where an impairment loss is subsequently reversed, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 17
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Assets that have an indefinite useful life and goodwill are not subject to depreciation and are tested for impairment on an annual basis or when there is an indication of potential impairment. Provisions Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of a past obligating event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
These provisions are measured at the present value of management’s best estimate of the expenditure required to settle the obligation as at December 31, 2013. The discount rate used to determine the present value reflects current market assessments of the time value of money. The Corporation performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts.
Financial instruments The Corporation classifies its financial instruments into one of the following categories: held-for-trading; held-to-maturity; loans and receivables; available-for-sale; and other financial liabilities. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments, except for held-for-trading instruments, in which case the transaction costs are expensed as incurred. Measurement in subsequent periods is based on the classification of the financial instrument. Financial assets and liabilities classified as held-for-trading are measured at fair value with gains and losses recognized in net income. Financial assets held-to-maturity, loans and receivables and financial liabilities other than those held-for-trading, are measured at amortized cost using the effective interest rate method. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Where the fair value of financial assets that are equity instruments is not determinable because there is no active market for the instrument, the asset is carried at cost and tested annually for impairment. Financial instruments Classification Measurement
Cash Held-for-trading Fair value
Accounts receivable Loans and receivables Amortized cost
Available for sale assets Available for sale Fair value
Investments Available for sale Fair value
Accounts payable and accrued liabilities Other financial liabilities Amortized cost
Available for sale liability Available for sale Fair value
Long term debt Other financial liabilities Amortized cost
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 18
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Patents
Costs associated with registration of patents are accumulated at cost and when registration is complete, amortized on a straight line basis over 15 years. Patents are evaluated for impairment annually and any impairment is charged to earnings as identified. Intangible assets Identifiable intangible assets, acquired through acquisitions that are subject to amortization, are amortized using the straight-line method over their estimated useful lives of 4 to 20 years.
Intangible assets, not subject to amortization, are tested annually for impairment, and any impairment identified is charged to earnings as identified. Research and development Research costs are expensed as they are incurred in accordance with specific criteria set out under IFRS. Product development costs are expensed as incurred except if the costs are related to the development and setup of new products, processes and systems, and satisfy certain conditions for capitalization, including reasonable assurance that they will be recovered. All capitalized development costs are amortized when commercial production begins based on the expected useful life of the completed product. The carrying value of capitalized development costs are examined for recoverability annually.
Costs associated with the development of the CCS Purenergy® 1000, and HTC’s Mixed Amine Solvent Reclaimer, CCS FEEDengine® have been capitalized in accordance with the specific criteria under IFRS.
Goodwill The excess of the purchase price over the fair market value of identifiable assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assessed for impairment at least annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired. The assessment of impairment is based on estimated fair market values derived from certain valuation models, which may consider various factors such as estimated future earnings, terminal values and discount rates. An impairment loss, if any, is recognized to the extent that the carrying amount of goodwill relating to certain acquired assets exceeded its estimated market value. As at December 31, 2013, the date of the last impairment test there has been no further impairment of goodwill. The impairment test of goodwill involves significant estimates and judgement based on the information available to management at the date of the impairment test. Should these assumptions and estimates be incorrect, the carrying value of goodwill may differ from the amount recorded by a material amount.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 19
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Stock-based compensation The Corporation used the fair-value based method of accounting for share-based compensation for all awards of share options granted. The fair value at the grant date of share options is calculated using the Black-Scholes valuation method. Compensation expense is charged to net income over the vesting period with a corresponding increase to contributed surplus. The Corporation issues shares and share options under its share-based compensation plans as described in Note 12. Any consideration paid by directors, consultants and employees on exercise of share options or purchase of shares, together with the amount initially recorded in contributed surplus, is credited to share capital. Revenue recognition Revenues under certain contracts for product and engineering development services provide for receipt of payment based on achieving defined milestones or on the performance of work under product development programs. Revenues are recognized under these contracts based on management’s estimate of progress achieved against these milestones or on the proportionate performance method of accounting. Changes in management’s estimated costs to complete a contract may result in an adjustment to previously recognized revenues. Revenue from product sales are recognized when economic benefits transfers. Interest revenue is recorded when earned, and dividends and management fees from equity accounted investees are recorded when declared and receivable. Government grants and bursaries Government assistance and investment tax credits are recorded as either a reduction of the cost of the applicable assets, or credited against the related expense incurred in the statement of operations, as determined by the terms and conditions of the agreements under which the assistance is provided to the Corporation or the nature of the expenditures which gave rise to the credits unless repayable conditions or terms are attached, in which case they are recorded separately. Government assistance and investment tax credit receivables are recorded when their receipt is reasonably assured. Income taxes The Corporation uses the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis (temporary differences). The resulting changes in the net future tax asset or liability are included in income. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 20
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. Future income tax assets are evaluated and if realization is not considered “probable” a valuation allowance is provided. Changes to accounting policies and future changes to accounting standards
Changing IFRS standard
IFRS has various developmental projects and is in the process of modifying existing standards and introducing new standards. These standards will be adopted as they are issued. The following new standards and amendments or interpretations to existing standards have been published.
IFRS 9, Financial Instruments In November 2009, the IASB issued guidance on the classification and measurement of financial assets. Under IFRS 9, financial assets will generally be measured initially at fair value plus particular transaction costs, and subsequently at either amortized cost or fair value. In October 2010, the IASB issued additions to IFRS 9 relating to accounting for financial liabilities. Under the new requirements, an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity’s own credit risk in OCI, rather than within net income. In December 2011, the IASB issued amendments which modify the requirements for transition from IAS 39 to IFRS 9. The modifications introduce new disclosure requirements and eliminate the requirement to restate prior periods to reflect the new presentation. The standard is to be applied prospectively and will be effective for periods commencing on or after January 1, 2018 (tentative), with earlier application permitted. The Corporation does not expect the amendments to have a material impact on the Consolidated Financial Statements. The Corporation has not yet adopted these standards.
4. Inventory
Mar. 31, 2014 Dec. 31, 2013
Work in progress $ 382,038 $ 215,697
Materials and supplies 2,621,697 1,966,788
$3,003,735 $2,182,485
During the period ending March 31, 2014 (“Period”), changes in work in progress, materials, supplies, and finished goods recognized as cost of sales amounted to $3,554,335(Q1 2013 - $ 4,239,658). There were no adjustments for net realizable
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 21
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
value or obsolescence in the first quarter 2014 or for the year ending December 31, 2013.
5. Property, plant and equipment:
Equipment Leaseholds Vehicles Buildings Total
Carrying amount Dec 31, 2013 $ 1,200,468 $ 257,717 $ 200,588 $ 4,201 $ 1,662,974
Additions 73,595 24,952 97,902 - 196,449 Amortization (55,957) (17,803) (18,593) (300) (92,653)
Carrying amount Mar. 31, 2014 $ 1,218,106 $ 264,866 $ 279,897 $ 3,901 $ 1,766,770
Balance Mar. 31, 2014 is comprised of:
Cost 2,069,116 389,481 437,137 19,331 2,734,794 Accumulated Amortization (851,010) (124,615) (157,240) (15,430) (1,071,820)
Carrying Amount $ 1,218,106 $ 264,866 $ 279,897 $ 3,901 $ 1,766,770
Carrying amount Dec 31, 2012 1,322,840 264,647 298,688 10,733 1,896,908
Additions 115,680 60,542 - - 176,222 Disposals (21,292) - (19,780) - (41,162) Amortization (216,760) (67,472) (78,230) (6,532) (368,994)
Carrying amount Dec 31, 2013 $ 1,200,468 $ 257,717 $ 200,588 $ 4,201 $ 1,662,974
Balance December 31, 2013 is comprised of:
Cost 2,011,698 364,529 339,235 19,331 2,734,793 Accumulated Amortization (811,230) (106,812) (138,647) (15,130) (1,071,819)
Carrying Amount $ 1,200,468 $ 257,717 $ 200,588 $ 4,201 $ 1,662,974
6. Product Development:
Product development costs represent costs incurred to date in connection with the design and construction of the CCS Purenergy® 1000, the HTC Solvent Reclaimer System (“HTC SRS”), and the CCS FEEDengine®. Amortization of these costs commence once the development is substantially complete.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 22
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Mar. 31, 2014 Dec. 31, 2013
HTC SRS® $525,965 $519,553
CCS Purenergy® 1000 428,329 428,152
Amortization (119,200) (108,364)
309,129 319,788
CCS FEED engine® 186,092 186,092
Amortization (46,523) (41,871)
139,569 144,221
Total product development costs $974,663 $ 983,562
7. Investments:
Mar. 31, 2014 Dec. 31, 2013
Portfolio Investments
Share Investments (a) $3,700,000 $3,700,000
Share investments (b) Share Investment (c)
138,250 331,800
186,182 425,560
Share Investment (d) 1,775,000 2,449,500
$5,945,050 $6,761,242
a) The Corporation has 615,000 Class A common shares of the Maxx Chenglin, a
private company for consideration of $100,000 and 400,000 Class E shares. The 400,000 Class E shares are redeemable for $1,600,000.
The investment has been classified as available-for-sale at cost. Fair value cannot be reliably measured as there is no quoted active market for these securities. As at December 31, 2013, HTC’s direct and indirect interest was 46%. The Corporation accounts for its interest in Maxx Chenglin using the cost method due to contractual restrictions on shares. The investment is classified as available for sales at cost. Fair value cannot be reliably measured as there is no quoted active market for these securities. Based on available information, management has determined that there is no impairment to the carrying value of investment.
b) On January 29, 2010 the Corporation received 100,000 common shares in USA
Synthetic Fuel Corporation, as a share dividend received resulting from the Corporation’s investment in Global Energy, Inc. The shares have been recorded at their trading price at March 31, 2014 (December 31, 2013) based on March 31, 2014 (December 31, 2013) quoted prices obtained from over the counter exchanges.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 23
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
c) On December 4, 2008 HTC acquired 2,500,000 shares in EESTech Inc. Upon expiry of trading restrictions in 2010, the Corporation has classified these shares as available–for-sale at fair value through other comprehensive income. The shares have been recorded at their trading price at March 31, 2014 (December 31, 2013) based on March 31, 2014, (December 31, 2013) quoted prices obtained from over the counter exchanges.
d) On January 29, 2013 the Corporation acquired 6 million common shares in
Kingsland Energy Corp. (“KLE”). On November 27, 2013 the Corporation acquired an additional 1,100,000 KLE common shares. The shares have been recorded at their trading price at March 31, 2014 (December 31, 2013) based on March 31, 2014 (December 31, 2013) quoted prices obtained from the TSX Venture Exchange Inc.
8. Patents: Cost Accumulated
amortization Net book value
Carrying Value Dec. 31, 2013 $150,610 $46,891 $103,719 Amortization - 2,510 2,510
Carrying Value Dec.31, 2013 $150,610 $49,401 $101,209
Cost Accumulated amortization
Net book value
Carrying Value Dec. 31, 2012 $150,610 $36,850 $113,760 Amortization - 10,041 10,041
Carrying Value Dec.31, 2013 $150,610 $46,891 $103,719
9. Goodwill and Intangible Assets:
Goodwill impairment is tested at the CGU level and is determined based on the recoverable amount exceeding the CGU’s carrying amount. The recoverable amount is the higher of fair value less cost to sell (“FVLCS”) and value in use (“VIU”). VIU is generally determined using the discounted cash flow method. If the impairment loss exceeds the carrying amount of goodwill, the goodwill is written off completely. Any impairment loss left over is allocated to the remaining assets of the CGU. The values assigned to the key assumptions represent management’s assessment of future trends in the energy services industry and are based on the external and internal sources, including historical data. The calculation of the VIU was based on the following key assumptions:
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 24
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Cash flows were projected over 5 years based on experience, actual operating
results and the operational plan for the immediate year. Cash flows were
projected using a growth rate of 2%.
Each CGU’s pre-tax discount rate of 20% reflects its individual size, risk profile
and circumstance and is based on experience and the industry’s average
weighted-average cost of capital.
Goodwill
Intangible assets subject to amortization
Total
Cost Balance at Dec. 31 2012 $8,664,201 $5,049,499 $13,713,700 Write down (619,917) (619,917)
Balance at Dec. 31, 2013 $8,664,201 $4,429,582 $13,093,783
2014 adjustments - - -
Balance at Mar. 31, 2014 $8,664,201 $4,429,582 $13,093,783
Accumulated amortization Balance at January 1, 2013 $ - $ 3,776,349 $ 3,776,349 Amortization for the year 152,373 152,373
Balance at Dec. 31, 2013 $ - $ 3,928,722 $ 3,928,722
Amortization for the year - 23,677 23,677
Balance at Mar. 31, 2014 $ - $ 3,952,399 $ 3,952,399
Carrying amounts (by CGU) HTC CO2 Systems $ - $ 358,060 $ 358,060 Maxx 8,664,201 142,800 8,807,001
At Dec. 31, 2013 $ 8,664,201 $ 500,860 $ 9,165,061
HTC CO2 Systems $ - $349,733 $ 349,733 Maxx 8,664,201 127,450 8,791,651
At Mar. 31, 2014 $ 8,664,201 $477,183 $ 9,141,384
Goodwill and intangible assets were recorded on acquisition of the subsidiaries. IFRS requires identifiable intangible assets that meet recognition criteria be identified, valued and disclosed separately from goodwill. Items giving rise to intangibles and related goodwill include, but are not limited to: intellectual property (i.e. rights to provisional patents, technology rights software rights), contractual rights with advantageous conditions, human resources (i.e. research teams, project management, patent resources), and branding and name recognition related items (literature, data base, videos, domain names, etc.) as well as various other items. Goodwill comprises the
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 25
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
difference between the purchase price of the respective subsidiary and identifiable net tangible and intangible assets.
Management performed an analysis of the carrying value of its goodwill and intangible assets as at December 31, 2013, according to its policy as set out in Note 4. In respect to the year ending December 31, 2013 (“Year”), management evaluated goodwill and intangibles under the same criteria, but adjusted for operational, legislative and business conditions that changed during the Year. During the Year, HTC reorganized some of its acquired companies, resulting in companies relating to the arbitrage of carbon credit trading and techniques for measurement and evaluation of carbon credits being reorganized into their own CGU. As legislation and conditions necessary for cap and trade of carbon credits appears to be delayed for the foreseeable future, the related intangibles of $616,916 associated with this group of companies have been written down. Amortization in the amount of $39,385 in March 31, 2014 and $152,373 in 2013 has been included in the Consolidated Statement of Comprehensive Income under the caption Amortization.
10. Long Term Debt
Dec. 31, 2013 Dec. 31, 2012
Vehicle Loans payable $2,007 per month including interest at 4%, maturing September, 2015, secured by specified equipment of the Corporation with a net book value of $23,940.
$ 34,949
$ 40,539
Business Development Bank loan payable $2,811 per month plus interest at a variable rate of approximately 6% maturing August 15, 2021. Secured by a general assignment of a subsidiary’s equipment.
250,179
258,612
Business Development Bank loan payable $1,207 per month plus interest at a variable rate of approximately 6% maturing August 15, 2021. Secured by a general assignment of a subsidiary’s equipment.
107,423
111,044
Business Development Bank loan payable $2,990 per month plus interest at variable rate of approximately 6% maturing August 15, 2023. Secured by a general assignment of a subsidiary’s equipment.
314,516
323,486
707,067 $733,681 Current Portion (80,201) (106,815)
$626,866 $ 626,866
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 26
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
Principal payments over the next five years (based on a 12 months cycle ending December 31) are approximately as follows:
The Corporation has a bank line of credit available through its subsidiaries in the amount of $2,500,000. As of March 31, 2014 the line of credit was not in use.
11. Share capital:
At March 31, 2014 and December 31, 2013, the Corporation has authorized an unlimited number of common shares and an unlimited number of preferred shares without par value.
As at Mar. 31, 2014 As at Dec. 31, 2013
Common Shares Number Amount Number Amount
Balance, beginning of period 28,309,195 $38,508,214 24,059,195 $38,003,214
Shares issued - - 4,250,000 505,000
Balance, end of period 28,309,195 $38,508,214 28,309,195 $38,508,214
On January 10, 2013, the Corporation issued 1.5 million common shares at a price of $0.11 for the gross proceed of $165,000 and 1.5 million warrants with and exercise price of $0.14 pursuant to a private placement. Securities and warrants issued were subject to a hold period until May 11, 2013. On May 1, 2013, the Corporation issued 750,000 common shares at a price of $0.12 for gross proceed of $90,000 and 750,000 warrants with an exercise price of $0.165 pursuant to a private placement. Securities and warrants issued were subject to a hold period until September 2, 2013. On May 22, 2013, the Corporation issued 2 million common shares at a price of $0.125 for gross proceed of $250,000 and 2 million warrants with an exercise price of $0.17, to two directors of the Corporation, pursuant to a private placement. Securities and warrants issued were subject to a hold period until September 23, 2013.
2014 80,111 2015 101,916 2016 84,096 2017 2018
84,096 84,096
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 27
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
12. Stock options and warrants:
The Corporation has a stock option plan for directors, officers, employees and consultants providing for the issuance of options to acquire up to ten percent of the issued and outstanding common shares of the Corporation. The following table reflects the stock option and warrants activity from January 1, 2013 through March 31, 2014 and the weighted average exercise price:
As at Mar. 31, 2014 As at Dec. 31, 2013 Options Avg.
Price Options Avg. Price
Outstanding, and exercisable, beginning of year
7,850,000 $0.15 3,750,000 $ 0.42
Expired and cancelled (i)
- - (1,000,000)
1.18
Stock options granted (ii) 850,000 0.13 Stock warrants granted (iii) - - 4,250,000 0.16
Outstanding and exercisable, end of year 7,850,000 $0.15 7,850,000 $ 0.15
(i) On March 27, 2013, 300,000 options with a price of $0.50 granted on August 9,
2011 were cancelled. On April 4, 2013, 300,000 options with a price of $0.50 granted on August 9, 2011 were cancelled.
On May 3, 2013, 150,000 options with price of $5.00 granted on November 24, 2008 were cancelled.
On July 10, 2013, 250,000 options with price of $0.50 granted on August 9, 2011 were cancelled.
(ii) On March 27, 2013 the Corporation granted 250,000 stock options to consultant and officer of the Corporation at an exercisable price of $0.135. The options will expire on March 26, 2018.
On April 4, 2013 the Corporation granted 350,000 stock options to director of the Corporation at exercisable price of $0.135. The options will expire on April 3, 2018. On May 3, 2013 the Corporation granted 250,000 stock options to a director of the Corporation at exercisable price of $0.135. The options will expire on May 2, 2018.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 28
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
(iii) On January 10, 2013, the Corporation issued 1.5 million common shares at a
price of $0.11 and 1.5 million warrants with and exercise price of $0.14 pursuant
to a private placement. Securities and warrants issued were subject to a hold
period until May 11, 2013.
On May 1, 2013, the Corporation issued 750,000 common shares at a price of $0.12 and 750,000 warrants with an exercise price of $0.165 pursuant to a private placement. Securities and warrants issued were subject to a hold period until September 2, 2013. On May 22, 2013, the Corporation issued 2 million common shares at a price of $0.125 and 2 million warrants with an exercise price of $0.17, to two directors of the Corporation, pursuant to a private placement. Securities and warrants issued were subject to a hold period until September 23, 2013.
The Black Scholes Option Pricing Model is used to estimate the fair value of stock options for calculating stock based compensation expense. The Corporation recognizes stock based compensation expense and an increase to contributed surplus based on the vesting schedule of the option, and assumptions based on information at the time if issuance
Option pricing models require the input of highly subjective assumptions including the expected price volatility. Expected volatility considers the historical volatility of the Corporation’s shares and any other features of the option grant that may impact the measurement of fair value such as market conditions. Change in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Corporation’s stock options. No stock based compensation occurred in the first three month period of 2014. The total fair value of stock based compensation expense on stock options and warrants granted to directors, employees and consultants of the Corporation as at December 31, 2013 was $ 910,556.
13. Provision for income taxes:
The Corporation is in a loss position and does not make adjustments for income tax on an interim basis.
Tax positions showing on the Consolidated Financial Statement are a result of provisions made for MAXX operations and are estimates based on income to March 31, 2014 using a rate of 27% (2013 27%). These amounts will be adjusted quarterly and will be added to the detailed note at year end. Interim amounts may be significantly different than final year end amounts.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 29
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
As at December 31, 2013 the Corporation’s tax position was as follows:
Income tax provision (recovery) differs from the amount that would be computed by applying the Federal and Provincial statutory income tax rate of 27% (2012 – 27%) for the following reasons:
As at December 31 2013 2012
Computed income tax provision (recovery) $ 1,260,632 $(377,115)
Increase (Reduction) attributable to:
Stock based compensation 137,025 38,880
Goodwill and other non-deductible expenses 290,617 73,185
1,680,463 (265,050)
Adjustment of net future tax assets for enacted changes in tax laws and rates and other differences:
Change in valuation allowance (1,684,369) 293,261
$ 3,906 $ 28,211
The Corporation’s current expenditures on SR&ED are potentially eligible for a Federal tax credit of 20% and a Saskatchewan tax credit of 15%. As at December 31, 2013 the Corporation had an anticipated balance of approximately $163,000 of tax credits available to reduce future year taxes (expiring December 31, 2015 to 2031). The amounts of tax credits ultimately received by the Corporation are subject to review by the Canada Revenue Agency and the Saskatchewan Minister of Finance for technical and financial aspects of the tax credit claims. Deferred income taxes reflect temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The components of the deferred income tax assets and liabilities are as follows: 2013 2012
Property plant and equipment $ 29,456 $ 182,881 Investments (49,323) 448,631 Intangible assets 33,204 (149,039) Non-capital losses 1,341,231 2,533,699 Research and development (24,875) (15,156) Share issue costs - 13,099 Valuation allowance (1,329,693) (3,014,062)
$ - $ -
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 30
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
14. Unrealized gain on available for sale assets:
Unrealized loss, in respect to the first three months of 2014, of $816,913 results from share price fluctuations of portfolio investments (2013 - gain $429,273).
15. Financial instruments:
Fair Value The Corporation’s financial instruments consist of cash and cash equivalents, short term investments, accounts receivable, bank line of credit, accounts payable and accrued liabilities, long term debt, and available-for-sale investments carried at fair value. The fair values of cash, short term deposits, accounts receivable, bank line of credit, accounts payable and accrued liabilities approximate carrying value because of the short-term nature of these instruments.
The fair value of available-for-sale investments other than those carried at cost is based on prices quoted on over the counter exchanges. The fair value of available-for-sale investments accounted for according to the cost basis is not practical to determine as the investments are not publicly traded. Available-for-sale investments carried at cost are tested annually for impairment.
Fair value measurements recognized in the balance sheet must be categorized in accordance with the following levels: (i) Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities;
(ii) Level 2: inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e., derived
from prices); and
(iii) Level 3: inputs for the asset or liability that are not based on observable market
data (unobservable inputs).
The Corporation categorized the fair value measurement of its short-term deposits, and available-for-sale investments recorded at fair value and bank in Level 1 as they are primarily derived directly from reference to quoted (unadjusted) prices in over the counter markets. The Corporation has not identified any Level 3 financial instruments reported at fair value. The Corporation’s financial instrument classification is summarized as follows:
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 31
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
2014
Level 1 Level 2 Level 3 Total
Available for sale investments – fair value $ 2,245,050 $3,700,000 $ - $ 5,945,050
Cash 4,456,172 - - 4,456,172
$ 6,701,222 $3,700,000 $ - $10,401,222
2013 Level 1 Level 2 Level 3 Total
Available for sale investments – fair value $ 3,061,242 $3,700,000 $ - $ 6,761,242
Cash 6,498,051 - - 6,498,051
$9,559,293 $3,700,000 $ - $13,259,293
16. Supplemental Cash Flow Information
Change in working capital is comprised of
Mar. 31, 2014 Mar. 31, 2013
Accounts receivable $ (67,023) $ 884,889 Inventory (821,250) (13,072) Prepaid expense (175,326) 146,377
Accounts payable and accrued liabilities (740,239) (417,802)
Corporate Tax payable - 229,539
$ (1,803,838) $ 829,831
17. Per share amounts:
Basic net earnings (loss) per common share have been calculated using the weighted average number of common shares outstanding during the Period. Diluted net loss per common share is considered to equal basic earnings per share, where the effect of common share options would be anti-dilutive.
18. Related party transactions:
Related party transactions include management fees received from the Corporation’s equity accounted investee, and transactions with corporate investors who have representation on the Corporation’s Board. The revenue and costs recognized with such parties reflect the prices and terms of sales and purchase of transactions with related parties in accordance with normal trade practices.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 32
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
During the Period, the Corporation paid $457 (2012-$406) for legal services from a law firm that a director is a partner of. As of March 31, 2014 there is no outstanding amount owing to the law firm (2013 - $0). On August 1, 2013 HTC entered into a lease agreement for its exiting premises with the new landlord KF Kambeitz Land Corp (“LC”) under the same terms and conditions as its existing agreement. The lease expires December 31, 2014. LC is considered a related party through one of HTC’s directors. Total rent paid to LC for the Period is $18,885. As of March 31, 2014, there is no outstanding amount owing to LC.
The transactions were conducted in the normal course of business. Compensation The key management personnel of the Corporation consist of the executive officers, vice-presidents, other senior managers and members of the board of directors. Key management personnel also include those persons that have the authority and responsibility for planning, directing and controlling the activities of the Corporation, directly or indirectly. Compensation for the Period was $51,492 ($57,076 in 2013). During the Period, the Corporation paid no director compensation ($0 March 31, 2013). In addition to their salaries, senior management and directors also participate in the Corporation’s share-based compensation plans. The Corporation has employment agreements with its Chairman and CEO, and with its Sr. Vice-President and CFO. Compensation is paid in accordance with the remuneration package agreed upon by the Corporation’s Compensation Committee and the individuals respectively. This remuneration package is subject to periodic review and adjustment by the Compensation Committee, based on performance.
The terms of the agreement for the Chairman and CEO state that he shall receive upon termination of employment or in the event of a change of control, the equivalent of thirty six months, plus one month for every year of service to a maximum of forty eight months, in total compensation. The terms of the agreement for the Sr. Vice-President and CFO state that he shall receive upon termination of employment or in the event of a change of control, the equivalent of twenty four, plus one month for every year of service to a maximum of thirty six months, in total compensation. The total compensation is calculated using the average for the twelve months prior to termination or change of control, alternatively the average since January 1, 2008, whichever amount is greater. This total compensation includes all benefits.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 33
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
19. Financial risk management:
Management’s risk management policies are typically performed as a part of the overall management of the Corporation’s operations. Management is aware of risks related to these objectives through direct personal involvement with employees and outside parties. In the normal course of its business, the Corporation is exposed to a number of risks that can affect its operating performance. Management’s close involvement in operations helps identify risks and variations from expectations. The Corporation has not designated transactions as hedging transactions to manage risk. As a part of the overall operation of the Corporation, management considers the avoidance of undue concentrations of risk. These risks and the actions taken to manage them include the following:
Liquidity risk is the risk that the Corporation cannot meet its financial obligations associated with financial liabilities in full. The Corporation's main sources of liquidity are its operations and equity financing. The funds are primarily used to finance working capital and capital expenditure requirements and are adequate to meet the Corporation’s financial obligations associated with financial liabilities. Risk associated with debt financing is mitigated by having negotiating terms over several years and renegotiating terms before they are due.
The timing of cash outflows relating to the financial liabilities are outlined in the table below: Mar. 31, 2014 < 1 year 1-2 years -5 years Total
Accounts payable and accrued liabilities
$ 5,184,295 $ - $ - $ 5,184,295
Long term debt 80,201 101,916 252,288 434,405
Balance $ 5,264,496 $ 101,916 $ 252,288 $ 5,618,700
Dec. 31, 2013 < 1 year 1-2 years 2-5 years Total
Accounts payable and accrued liabilities
$ 5,924,534 $ - $ - -
$ 5,924,534
Long term debt 106,815 101,916 252,288 461,019
Balance $ 6,031,349 $ 101,916 $252,288 $ 6,385,553
Currency risk is the risk that changes in foreign exchange rates may have an effect on future cash flows associated with financial instruments. The Corporation has no significant transactions denominated in foreign currency and is not exposed to any
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 34
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
material foreign currency risk aside from broad unquantifiable macro-economic factors arising from fluctuations in foreign exchange which could result in Canadian products becoming more expensive to international purchasers.
Foreign exchange risk is primarily associated with contracts for services and contracts of supplies and services. Substantially all of the Corporation’s revenues and expenses are denominated in Canadian dollars, and therefore isolated from foreign exchange risk. HTC has limited exposure to US\ Canadian dollar fluctuations through its interest in Maxx Chenglin (accounted for using the equity method).
Interest rate risk primarily is associated with interest fluctuations earned on the Corporation’s cash and term deposits and long term debt. The Corporation mitigates exposure by attempting to match rates and terms to expected cash requirements, and through having the majority of its revenues and expenses denominated in Canadian dollars. Interest risk associated with long term loans is mitigated by arranging terms that extend for multiple years (see Note 10). A 1% change in the prime interest rate would have a negligible impact on the Corporation’s income. Credit risk is the risk of financial loss if counterparty to a financial transaction fails to meet its obligations. The Corporation attempts to reduce such exposure to its cash, and short term deposits by only investing in low risk investments with Canadian Chartered Banks and taking advantage of government guarantees. The Corporation attempts to reduce its loss on amounts receivable by assessing the ability of the counterparties to fulfill their obligation under contract prior to entering into the contracts and by the nature of customers the Corporation deals with. At March 31, 2013 the Corporation had an allowance for doubtful accounts of $28,600 (December 31, 2013 -$84,623) and had no recorded bad debts for the period ending March 31, 2014 (March 31 2013 - $0). Due to project nature of operations of the Corporation, management considers accounts receivable outstanding less than 90 days to be current amounts. Over 90 days are also considered current if extended terms exist and security is provided or amounts are subject to contract restrictions and performance markers. The aging of the Corporation’s accounts receivable at March 31, 2014 and December 31, 2013 is as follows: Current Over 90 Days Total
Aging of accounts receivable at Mar. 31, 2014 $2,489,067 $ 402,236 $2,891,303
Aging of accounts receivable at Dec. 31, 2013 $2,620,136 $ 204,144 $2,824,280
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 35
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
20. Capital Disclosures:
The Corporation defines its capital as its shareholders’ equity. Except as otherwise disclosed in these Consolidated Financial Statements, there are no restrictions on the Corporation’s capital. The Corporation’s capital is summarized as follows
Mar. 31, 2014 Dec. 31,2013
Shareholders’ equity Current portion of long term debt Long term debt
$18, 423,787 80,201
626,866
$19,406,959 106,815 626,866
Balance $19,130,854 $20,140,640
The Corporation’s objectives when managing capital are to: - maintain financial flexibility in order to preserve its ability to meet financial
obligations; - deploy capital to provide an appropriate investment return to its shareholders in
the future; and - maintain a capital structure that allows multiple financing options to the
Corporation, should a financing need arise. The Corporation’s financial strategy is designed and formulated to maintain a flexible capital structure consistent with the objectives stated above and to respond to changes in economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital structure, the Corporation may issue new shares, raise debt (secured, unsecured, convertible and/or other types of available debt instruments) or refinance existing debt with different characteristics.
21. Operating Segments:
As a result of the incremental ownership of Maxx, the Corporation now has two reportable operating segments: HTC CO2 Systems and Maxx, of which there is a material non-controlling interest as described in Note 22. These operating segments are differentiated by the product and services that each produces. HTC CO2 Systems provides products and services related to energy technologies and CO2 Systems. Maxx provides manufacturing sales and distribution services, relating to oil and gas equipment supply and service, as well as fertilizer and grain handling solutions. Both segments utilize various brands and trading names in their operations.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 36
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
March 31, 2014 HTC CO2 Systems
Maxx Combined
Sales $ - $4,473,679 $4,473,679 Engineering, process design and consulting 806,006 - 806,006
Cost of Sales - 3,210,985 3,210,985
Engineering and Process design services 673,923 - 673,923
Commercialization, product development and administration 302,812 1,090,712 1,393,524
Amortization
Finance Cost
44,931
-
89,220
12,152
134,151
12,152
Income (loss) from commercial operations (215,660) 70,610 (145,050)
March 31, 2013 HTC CO2 Systems
Maxx Combined
Sales $ - $6,069,692 $6,069,592 Engineering, process design and consulting 75,445 - 75,445
Cost of Sales - 4,239,658 4,239,658
Engineering and Process design services 70,491 - 70,491
Commercialization, product development and administration 235,030 987,654 1,222,684
Amortization 57,131 89,207 146,338
Finance cost - 11,610 11,610 Income (loss) from commercial operations (287,207) 741,563 454,356
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 37
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
March 31, 2014 HTC CO2 Systems
Maxx Combined
Cash $2,956,481 $1,499,691 $4,456,172 Property and Equipment 138,873 1,626,897 1,766,770 Goodwill and intangible 349,733 8,791,651 9,141,384
December 31, 2013 HTC CO2 Systems
Maxx Combined
Cash $2,821,134 $3,676,917 $6,498,501 Property and Equipment 153,700 1,509,274 1,662,974 Goodwill and intangible 358,060 8,807,001 9,165,061
22. Details of non-wholly owned subsidiaries with material non-controlling interest:
The portion of net assets and income attributable to Maxx third party shareholders is reported as non-controlling interests and net income attributable to non-controlling interests on the consolidated statements of financial position and comprehensive income respectively. None-consolidated details of the revenue and expenses associated with Maxx are summarized in Note 21 Additional information is as follows.
March 31, 2014 December 31, 2013
Cash $1,499,691 $3,676,917
Other current assets 5,864,851 4,886,580
Property and Equipment 1,626,897 1,509,274
Other non-current assets (including goodwill and intangibles )
6,486,745 10,599,915
Current liabilities 6,682,629 7,851,689
Long term debt 626,866 626,866
23. Commitments and Contingencies:
The Corporation rents office space on a month to month basis under a lease agreement with a related party of the Corporation (Note 18), with minimum monthly rental payments of $5,485. The lease agreement expires December 31, 2014. The minimum rent payments to expiration are $49,365.
HTC Purenergy Inc. | Condensed Consolidated Interim Financial Statements 38
HTC Purenergy Inc. –Condensed Consolidated Interim Financial Statements Q1 2014
On March 11, 2014, Pinnacle entered into a lease agreement for its new overhead crane division in Saskatoon, Saskatchewan. Monthly base lease costs are $2,961 from May 1, 2014 to April 30, 2015 and $3,172 from May 1, 2015 to April 30, 2017 with additional occupancy costs currently estimated at approximately $899 per month.
The Corporation intends to acquire an additional 13 % of the outstanding shares of Maxx. HTC is engaged in a license dispute with one of its CO2 capture technology providers. The commercial effect and outcome of this license technology dispute cannot be determined at this time.
24. Subsequent Events: On May 26, 2014, announced subject to TSX Venture exchange approval that the Corporation will issue 2,000,000 shares for gross proceeds of $500,000 and 1,000,000 warrants exercisable at $0.40 per share expiring 2 years from the date of issuance.