management’s discussion and analysis · management’s discussion and analysis march 31, 2017 3...

Management’s Discussion and Analysis

For the Three Months Ended March 31, 2017

Contact Information :

dynaCERT Inc.

501 Alliance Avenue, Suite 101

Toronto, ON M6N 2J1

Contact Person: Mr. Terrence MacDonald, CFO

Email: [email protected]

DYNACERT INC. Management’s Discussion and Analysis

March 31, 2017

2

MANAGEMENT’S DISCUSSION AND ANLYSIS

QUARTER ENDED MARCH 31, 2017

The following Management Discussion and Analysis (“MD&A”) of the financial condition and results of

operations of dynaCERT Inc. (“dynaCERT” or the “Company”) was prepared by management as at May

24, 2017 and was reviewed and approved by the Audit Committee. The following discussion of

performance, financial condition and future prospects should be read in conjunction with the unaudited

interim consolidated financial statements of dynaCERT Inc. and notes thereto for the three months ended

March 31, 2017. The information provided herein supplements but does not form part of the financial

statements. All amounts are stated in Canadian dollars unless otherwise indicated. Additional

information related to the Company is available for view on SEDAR at www.sedar.com.

CAUTION REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this document constitute forward-looking statements. When used in this

document, the words “may”, “would”, “could”, “will”, “intend”, “plan”, “propose”, “anticipate”, and

“believe”, used by any of the Company’s management, are intended to identify forward-looking statements.

Such statements reflect the Company’s forecasts, estimates and expectations, as they relate to the

Company’s views with respect to future events and are subject to certain risks, uncertainties, and

assumptions. Many factors could cause the Company’s performance or achievements to be materially

different from any future results, performance or achievements that may be expressed or implied by such

forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue

reliance on such forward-looking statements. The Company does not intend and does not assume any

obligation, to update any such factors or to publicly announce the result of any revisions to any of the

forward-looking statements contained herein to reflect future results, events, or developments.

http://www.sedar.com/


March 31, 2017

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Nature of Business:

dynaCERT Inc. is domiciled in Canada with its registered head office at 501 Alliance Avenue, Suite 101,

Toronto Ontario, M6N 2J1. The Company is listed on the TSX Venture Exchange (TSX.V – DYA). The Company is engaged in the design, engineering, manufacturing, testing, distributing and installation

of a transportable hydrogen generator aftermarket product, originally targeted for use in the heavy Class

6-8 tractor trailer industry and now expanding this development into the smaller Class 2-5 trucks,

stationary power generation and off-road construction machinery, with potential for application in the

ocean shipping and trans-continental rail industries. The system is a patent pending retrofit product that

provides performance enhancements by injecting hydrogen and oxygen into the air intake manifold

resulting in greater fuel efficiency and reduced fuel emissions. In 2014 the company acquired the

intellectual property (including all patents and patents pending) of the HydraGEN™ technology.

Foreseeing scaling up production for assembly of the HydraGEN™, in September 2016 the Company

strategically secured production space of 7,032 square feet adjacent to its current facility. dynaCERT has

now fully occupied this expansion facility. Subsequent to March 31, 2017 the Company has signed an

agreement to acquire an additional 5,118 square feet of manufacturing space to support anticipated future

sales.

Over the past year, the Company has initiated ongoing programs within Canada to further test and validate

the HydraGEN™ technology. As required by the Ontario Government’s requirement for a validation

process to ensure qualification under any of the Provincial or Federal Government’s funding programs,

an extensive schedule of third party testing was undertaken to validate and determine proper flow rates

of its flagship HydraGEN™ HG1 product for Class 6-8 trucks. These tests were completed at the

University of Ontario Institute of Technology (UOIT), a facility deemed an “Automotive Centre of

Excellence” for both fuel savings and Carbon Emission Reductions.

Using the older version electronic control unit (ECU) in the HG1 unit, UOIT verified in the testing that

trucks using the HG1 will experience up to 19.2% fuel consumption reductions. As well the HydraGEN™

technology reduced greenhouse gas emissions by up to 40% for the tested Class 8 diesel truck engines.

Particulate matter was reduced by up to 65%, which will significantly reduce any black smoke being

emitted into the environment by trucks using the HydraGEN™ units. The testing at UOIT resulted in

550-plus pages of results, which have provided the design team with valuable data, enabling us to further

program our new Smart ECU to maximize performance for all types of applications.

Additional independent testing with HG1 units now having the DYA Smart ECU has been planned at PIT

Group in Montreal. This testing, using the DYA Smart ECU, is expected to further verify the unit for fuel

efficiency and emission reduction in accordance with SAE Type 2 protocols using two vehicles side-by-

side, one with the HG1 and one as a benchmark. The further verification is to begin in June 2017 for 60

days.

During the last several months the dynaCERT team has worked closely with NeuronicsWorks along with

technical consultants to finalize the electronic interface, design and manufacturing of the “DYA Smart

ECU”. The corresponding patents have been filed or are being processed for filing.


March 31, 2017

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The “Smart ECU” has shown significant advantages and improvements over the older version of the ECU

in several key areas: reading; collecting and storing of data pertaining to fuel efficacy and emissions

reduction; communicating with the engine’s onboard computer; learning and altering the flow of gases

produced; providing General Packet Radio Service (GPRS) capability for remote access and allowing for

future tracking and monitoring of Carbon Credits. This will provide users with accurate data for which to

promote and use the carbon credits to a competitive financial advantage.

Focused marketing and sales effort of the HydraGEN™ HG1 unit has resulted in orders received from

several large fleet owners and from dedicated end-users. The company is now delivering the HG1 with

the first finished products shipped and installed in Q1 2017. The company has obtained CE certification

of the HG1, HG2 and HG3 units for sale in Europe.

Sales

During the first quarter of 2017, the Company received initial purchase orders for over 700 HydraGEN

units with a gross sales value of over $4.5 million dollars, and 215 of these units with a gross sales value

of $1.38 million were delivered by March 31, 2017.

The Company is now engaged in offering the HydraGEN unit to the market place with the new Vice

President, Global Sales taking an active role. Additional inside sales staff will be hired as required to

maintain close contact with our distributors. A new distribution agreement has been developed to better

align the company’s interest with the current North American distributor’s activities. Initial discussions

have been held with potential distributors in Europe and China.


March 31, 2017

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PERFORMANCE SUMMARY

The following is a summary of the significant events and transactions that occurred during the three

months ended March 31, 2017 and for the subsequent period to the report date:

Recent

On May 11, 2017 the Company announced a collaboration with the Northwest Territory Power Corp.

(‘NTPC’) and that it had sold and delivered four HG1 units in a fuel savings and emission reduction

project located in Deline, NT. Deline is serviced only by aircraft and winter ice roads. NTPC operates

3,500 diesel power generation units in remote villages and communities across the Territory.

On May 2, 2017 the Company announced a debt settlement whereby it will issue 723,959 common

shares from treasury in settlement of a $500,000 promissory note and accrued interest of $223,959.

On May 2, 2017 the Company announced that Robert Maier, MBA, P.Eng. was appointed as Chief

Operating Officer and Chief Engineer of dynaCERT. Mr. Maier has been a Director of the Company

since February 2015 and will now oversee the development of the new production facility to ramp up

deliveries.

On April 19, 2017 the Company announced that it has received CE certification for its HydraGEN

technology. Specifically, the models HG1 (Class 6 – 8 trucks), HG2 (Class 2 – 5 trucks, refrigerated

trailers and shipping containers) and HG3 (diesel-powered ocean ships, locomotives and stationary

generators) will all now carry the CE mark for shipments to clients within Europe.

On March 28, 2017 the Company announced that it had received new purchase orders for over 430

HydraGEN units with a gross sales value of over $2.7 million.

On March 10, 2017 the Company announced that certain major shareholders including the Directors

of dynaCERT have extended the formal strategic voluntary lock-up agreement and increased the total

from 55 million shares in September 2016 to over 72 million shares. The voluntary lock-up stipulates

that these shareholders shall not assign, deal in, pledge, sell, trade or transfer in any manner

whatsoever, or agree to do so in the future, any of the shares or any beneficial interest in them, on or

before July 31, 2017.

On March 10, 2017 the Company announced that Terrence MacDonald, CPA, CA was appointed as

Chief Financial Officer and Corporate Secretary, replacing Yumey Fernandez who resigned on March

3, 2017.

On February 23, 2017 the Company was recognized as a 2017 TSX Venture 50 Company and was the

top performing company in the Clean Technology and Life Sciences sector, and the top overall

performer on the TSX Venture Exchange.

On February 6, 2017 the Company announced that it had received its first purchase orders for the

HydraGEN product, for 276 units with a gross sales value of over $1.8 million.


March 31, 2017

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RESULTS FOR THE QUARTER ENDED MARCH 31, 2017

Revenue and Cost of Sales

The Company commenced commercial production of the HG1 unit during the first quarter and recorded

revenue of $1,380,350 during the three months ended March 31, 2017. This represents the delivery of

215 HG1 units at an average price of $6,420. Cost of sales totaled $726,848 resulting in a gross profit of

$653,502, representing a gross margin of 47%. Included in cost of sales are the product costs of

approximately $473,000 or $2,200 per unit. The balance of $253,848 consists of production overhead of

approximately $124,000 and accrual for warranty costs of approximately $27,000. Also included in the

cost of sales were startup costs of approximately $87,000 that included training for installation, and

amortization of intangibles in the amount of $15,100.

Operating Expenses

Operating expenses have increased due to the commencement of commercial production. The Company

has taken on addition management staff and additional production space, which accounts for much of the

increase in operating expenses. Total operating expenses before stock-based compensation were $454,494

for the three months ended March 31, 2017 (2016 – 425,802). As the company is now deferring research

and development expenses, there were no expenses for research and development in 2017 (2016 -

$227,462).

Stock-based compensation expense for the first quarter was $302,715 (2016 - $4,475).

Legal and audit expenses will vary from quarter to quarter subject to legal and financial activities the

Company may be engaging its advisors to perform.

During 2014 the Company recorded an impairment on its intellectual property in the amount of $585,702.

The Company reversed this impairment charge during the first quarter as the commencement of production

and sales provide evidence that the previously recognized indicators of impairment are no longer present.

SUMMARY OF QUARTERLY RESULTS

March 31,

2017

December 31,

2016

September 30,

2016

June 30,

2016

Total assets $3,468,675 $3,468,675 $909,183 $1,247,075

Working capital (deficit) 2,049,773 2,049,773 250,408 642,360

Shareholders’ equity (deficiency) 2,317,142 2,317,142 (6,496) 378,890

Total revenue 1,380,350 - - -

Gross profit 653,502 - - -

Operating expenses, excluding share-

based compensation

454,314

918,338

385,385

456,546

Share-based compensation 302,715 2,536,642 145,157 4,475

Net income (loss) 482,715 (3,454,980) (530,542) (461,021)

Basic income (loss) per share 0.00 (0.02) (0.00) (0.00)

Diluted income (loss) per share 0.00 (0.02) (0.00) (0.00)


March 31, 2017

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March 31,

2016

December 31,

2015

September 30,

2015

June 30,

2015

Total assets $1,800,600 $1,216,249 $339,039 $212,111

Working capital (deficit) 1,094,228 116,870 ( 801,065) ( 847,565)

Shareholders’ equity (deficiency) 853,435 ( 156,026) (1,038,602) (1,075,603)

Total revenue - - - -

Operating expenses, excluding share-

based compensation

425,327

318,522

239,723

212,279

Share-based compensation 4,475 225,815 - 34,795

Net loss (429,802) (544,337) (239,723) (247,074)

Basic and diluted loss per share (0.00) (0.00) (0.00) (0.00)

Quarterly results will vary in accordance with the Company’s research and development, financing and

non-cash expenses such as share-based compensation. The Company’s professional fees will vary in each

quarter depending on financing. Research and development expenses will vary depending on amount of

work being done on product development and testing.

SELECTED ANNUAL INFORMATION

Comparative information for annual periods from December 31, 2016, 2015 and 2014 has been presented

in accordance with IFRS.

December 31,

2016

December 31,

2015

December 31,

2014

Revenues $ - $ - $ -

Operating expense 4,876,345 1,719,965 1,025,655

Net income (loss) (4,876,345) (1,710,825) (1,626,522)

Basic and diluted loss per share (0.02) (0.01) (0.01)

Total assets 3,468,675 1,216,249 161,752

Results of Operations

The following discussion addresses the operating results and financial condition of the Company for the

year ended December 31, 2016 compared with the year ended December 31, 2015. The MD&A should

be read in conjunction with the Company’s audited consolidated financial statements and the

accompanying notes for the year ended December 31, 2016.

Results of operations for the year ended December 31, 2016 as compared to the year ended

December 31, 2015

The Company reported a net loss from operations for the year ended December 31, 2016 of $4,876,345

as compared to a loss for the year ended December 31, 2015 of $1,710,825. The most significant items

accounting for the increased loss are share based compensation, which was $2,690,749 in 2016 (2015 -

$783,138), and increased expenditures on research and development, which totaled $1,265,846 in 2016

(2015 - $285,837).


March 31, 2017

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Expenses related to business development and promotion also increased significantly in 2016 to $442,609

(2015 – 93,688) as the Company progressed toward commercial production of the HydraGEN units.

General and administrative expenses also increased from $284,431 in 2015 to $493,675 in 2016 as the

company brought in additional management to assist with the ongoing development of the technology and

the business development opportunities.

LIQUIDITY AND CAPITAL

As at March 31, 2017, cash on hand was $1,093,944 as compared to $2,875,638 at December 31, 2016.

This decrease in cash was largely due to the commencement of production of the HG1 units, and the

related use of funds for the production of units sold and inventory. The Company also has accounts

receivable in the amount of $1,133,465 at March 31, 2017 as compared to $59,235 at year end. The

Company requires a 25% deposit at the time the order is placed.

At March 31, 2017 the Company had accounts payable and accrued liabilities of $1,060,085 as compared

to $751,590 at December 31, 2016.

Subsequent to March 31, 2017 the Company announced that it had agreed to settle the outstanding

promissory note and accrued interest related to the 2014 acquisition of technology through the issuance

of common shares from treasury.

After taking this debt settlement into consideration, the Company had current assets of $3,636,370 and

current liabilities of $836,126 at March 31, 2017, for a working capital amount of $2,800,244.

The Company raises capital, as necessary, to meet its needs and to take advantage of perceived

opportunities.

The ability of the Company to obtain adequate financing and to reach profitable levels of operations is

dependent on the acceptance by the market of the current generation of the HydraGEN™ product and

establishing a market demand for it.

OFF BALANCE SHEET ARRANGEMENTS

The Company is not a party to any off-balance sheet arrangements or transactions.

PROPOSED TRANSACTIONS

The Company does not currently have any proposed asset or business acquisitions or dispositions.


March 31, 2017

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TRANSACTIONS WITH RELATED PARTIES

The Company paid or accrued the following costs incurred on transactions with the directors and officers

and companies controlled by them:

Three Months Ended March 31

2017 2016

Rent $ 32,247 $ 12,921

Key management compensation

Key management includes directors and other key personnel, including the CEO, President and CFO, who

have authority and responsibility for planning, directing, and controlling the activities of the Company.

The compensation paid to these key management personnel for the three months ended March 31, 2017

and 2016 is outlined below:

Three Months Ended March 31

2017 2016

Short-term compensation $ 94,350 $ 98,100

Share-based compensation 141,930 -

$ 236,280 $ 98,100

COMMITMENTS

The Company has commitments for leasing of its office space at 501 Alliance Avenue, Toronto, Ontario

at rent of $4,303 per month. The lease expires on December 31, 2017. The Company also has

commitments for leasing manufacturing space at the same location at rent of $6,446 per month. This lease

expires on September 30, 2018. Subsequent to March 31, 2017 the Company signed an agreement for an

additional 5,118 square feet of space at its production facility in Toronto for $4,691 per month. The lease

commences on August 1, 2017 for an initial period of 14 months.

CAPITAL MANAGEMENT

The Company’s shareholders’ equity comprises its capital under management. The Company’s objectives

when managing capital are to safeguard the Company’s ability to continue as a going concern in order to

pursue the development of its mineral properties and to maintain a flexible capital structure that optimizes

the costs of capital at an acceptable risk level.

The Company manages the capital structure and makes adjustments to it in light of changes in economic

conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure,

the Company may attempt to issue new shares, issue new debt, acquire or dispose of assets.

In order to facilitate the management of its capital requirements, the Company prepares expenditure

budgets that are updated as necessary depending on various factors, including successful capital

deployment and general industry conditions. The Board of Directors does not establish quantitative return

on capital criteria for management, but rather relies on the expertise of the Company’s management to

sustain future development of the business.

There have been no changes to the Company’s approach to capital management during the three months

ended March 31, 2017. The Company is not subject to externally imposed capital requirements.


March 31, 2017

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FINANCIAL INSTRUMENTS (MANAGEMENT OF FINANCIAL RISKS)

Credit risk

Credit risk is the risk of financial loss to the Company if a counter party to a financial instrument fails to

meet its payment obligations. The Company is exposed to credit risk with respect to its cash and cash

equivalents and receivables.

The Company's credit risk is primarily attributable to cash and cash equivalents, and accounts receivable.

Management believes that the credit risk concentration with respect to cash and cash equivalents is remote,

as it maintains accounts with highly-rated financial institutions.

The Company is exposed to credit risk on its receivables. Credit risk related to accounts receivable is

managed through dealing with reputable, financially strong dealers who we expect to have ongoing

relationships with. The Company requires a 25% deposit when orders are placed, and full payment is due

within 30 days of delivery.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in satisfying financial obligations as

they become due. The Company manages its liquidity risk by forecasting cash flows from operations and

anticipated investing and financing activities. At March 31, 2017 the Company had current liabilities of

$1,475,028 (December 31, 2016: $1,151,535) and cash balances and accounts receivable of $2,227,409

(December 31, 2016 - $2,934,873) available to satisfy the liabilities.

Based on the cash and accounts receivable held, the Company has sufficient funds to discharge its

liabilities as they come due.

Market risk

Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign

exchange rates and commodity prices. The Company is not exposed to any significant interest rate risk

volatility.


March 31, 2017

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OUTSTANDING SHARE DATA as at May 24, 2017:

a) Authorized:

Unlimited number of shares, without par value

b) Issued and outstanding:

231,325,058 common shares

c) Outstanding incentive stock options:

As at March 31, 2017, the following incentive stock options were outstanding:

Number of Options

Expiry Date 2017 2016 Exercise Price

August 16, 2017 800,000 1,025,000 0.19

March 4, 2018 1,300,000 1,450,000 0.12

July 15, 2019 1,976,500 3,051,000 0.10

February 26, 2020 2,975,000 3,075,000 0.15

December 11, 2020 5,740,000 6,040,000 0.10

July 13, 2021 1,200,000 1,200,000 0.10

September 1, 2021 250,000 500,000 0.12

November 30, 2021 500,000 500,000 0.40

December 16, 2021 3,925,000 3,925,000 0.80

March 13, 2022 450,000 - 0.71

March 24, 2022 300,000 - 0.94

19,416,500 20,766,000

The Company has not granted any options subsequent to March 31, 2017.

d) Warrants - the Company has no warrants outstanding at this time.


March 31, 2017

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RISKS AND UNCERTAINTIES

The reader is cautioned to keep these risk factors in mind and refrain from attributing undue certainty to

any forward-looking statements which speak only as of the date of this report.

Demand for and supply of our products and services may be adversely affected by numerous factors,

some of which we cannot predict or control. This could adversely affect our operating results.

Numerous factors may affect the demand for and supply of our products and services, including: customer

and competitor consolidation, declines in general economic conditions; and changes in environmental

regulations that would limit our ability to sell products and services in specific markets;

Increased raw material and energy costs could reduce our income.

The primary raw materials are steel, plastics and electronic parts and components. However, the price of

these materials can fluctuate under market conditions affecting the pricing of raw materials.

Our sales and operating results are sensitive to global economic conditions and cyclicality, and could

be adversely affected during economic downturns.

Demand for our products is affected by general economic conditions and the business conditions of the

industries in which we sell our products and services. Any future downturns in general economic

conditions could adversely affect the demand for our products and services, and our sales and operating

results.

We may expand operations into international markets in which we may have limited experience or rely

on business partners.

We continually look to expand our products and services into international markets. As we expand into

new international markets, we will have only limited experience in marketing and operating products and

services in such markets and may also face regulatory issues in such markets. In other instances, we may

rely on the efforts and abilities of foreign business partners in such markets. Certain international markets

may be slower than domestic markets in adopting our products and services, and our operations in

international markets may not develop at a rate that supports our level of investment.

Our inability to attract, retain and motivate key employees could harm current and future operations.

In order to be successful, we must attract, retain and motivate executives and other key employees,

including those in managerial, professional, administrative, technical, sales, marketing and information

technology support positions. We also must keep employees focused on our strategies and goals. Hiring

and retaining qualified executives, engineers and qualified sales representatives are critical to our future,

and competition for experienced employees in these areas can be intense. The failure to hire or the loss of

key employees could have a significant impact on our operations.

We may not be able to generate sufficient cash flows to fund our operations and make adequate capital

investments.

Our cash flows from operations depend primarily on sales and sales margins. To develop new product and

service technologies, support future growth, achieve operating efficiencies and maintain product quality,


March 31, 2017

13

we must make capital investments in manufacturing technology, facilities and capital equipment, research

and development, and product and service technology. In addition to cash used in operations, we have

from time to time utilized external sources of financing. Depending upon general market conditions or

other factors, we may not be able to generate sufficient cash flows to fund our operations and make

adequate capital investments. In addition, due to the recent economic downturn, there has been a tightening

of the credit markets, which may limit our ability to obtain alternative sources of cash to fund our

operations.

Our ability to maintain effective internal control over financial reporting may be insufficient to allow

us to accurately report our financial results or prevent fraud, and this could cause our financial

statements to become materially misleading and adversely affect the trading price of our common stock.

We require effective internal control over financial reporting in order to provide reasonable assurance with

respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting

may not prevent or detect misstatements because of its inherent limitations, including the possibility of

human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal

controls can provide only reasonable assurance with respect to the preparation and fair presentation of

financial statements. If we cannot provide reasonable assurance with respect to our financial statements

and effectively prevent fraud, our financial statements could become materially misleading which could

adversely affect the trading price of our common stock.

We may have difficulty managing faster than anticipated product expansions.

As products are launched, sales may be more than we expect. During periods of quicker than anticipated

expansion, we may have difficulty expanding the scope of our operations to match increased demand. In

addition, we may be required to place more reliance on our strategic partners and suppliers, some of whom

may not be capable of meeting our production demands in terms of timing, quantity, quality or cost.

Difficulties in effectively managing the budgeting, forecasting and other process control issues presented

by any rapid expansion could harm our business, prospects, results of operations or financial position.

New technologies could be introduced in the future that could render our products less economical or

less competitive.

New developments in technology may negatively affect the development or sale of some or all of our

products or make our products uncompetitive or obsolete. Other companies are currently engaged in the

development of products and technologies that are similar to, or may be competitive with, certain of our

products and technologies.

Our Common Share price may fluctuate.

The stock market in general, and the market prices of securities of technology companies in particular,

can be extremely volatile, and fluctuations in our Common Share price may be unrelated to our operating

performance. Our Common Share price has been and could in the future be subject to significant

fluctuations in response to many factors, including actual or anticipated variations in our results of

operations, the addition or loss of customers, announcements of technological innovations, new products

or services by us or our competitors, additions or departures of key employees, general market conditions,

and other events or factors, many of which are beyond our control.

management’s discussion and analysis · management’s discussion and analysis march 31, 2017 3...

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