ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Results of Operations
For the three months ended January 31, 2006 and since the date of inception, we have generated no revenues.
We incurred operating expenses of $557,484 for the three months ended January 31, 2007, as compared to $388,702 for the three months ended January 31, 2006. The largest increase was attributed to management fees payable to a related party in the amount of $25,000, as compared to $Nil for the three months ended January 31, 2006. In addition, professional fees increased by approximately $30,000 for the period ended January 31, 2007. The balance of the expenses consisted of general operating expenses, including research and development expenses, and accounting fees incurred in connection with the day-to-day operation of our business and the preparation and filing of our periodic reports.
Our total comprehensive loss for the three month period ended January 31, 2007 was $557,491, or ($0.02) per share, as compared to a total comprehensive loss of $386,483, or ($0.01) per share, for the three month period ended January 31, 2006. We have incurred a total comprehensive loss of $4,001,067 from the date of incorporation on September 2, 2003 to January 31, 2007.
There was no cash provided by investing activities for the six month period ended January 31, 2007.
During the nine month period ended January 31, 2007, we issued 33,333 shares of common stock for legal services, valued at $5,000; 57,820 shares of common stock, valued at $5,782; 69,000 shares of common stock, valued at $6,210; 24,513 shares of common stock at a price of $0.19 per share for consulting services; 150,000 shares of common stock at a price of $0.19 per share for marketing services; 75,000 shares of common stock at a price of $0.10 per share for consulting services; 800,000 shares of common stock at a price of $0.12 per share for public relations services; 192,363 shares of common stock, valued at $15,389; 135,850 shares of common stock, valued at $10,868; and 114,286 restricted shares of common stock at a price of $0.21 per share.
During the nine month period ended January 31, 2007, we issued a total of 2,500,000 share purchase warrants to our officers and directors, valued at $219,824. Each purchase warrant entitles the holder to purchase an additional share of common stock at a price of $0.15 until December 7, 2011.
At January 31, 2007, there were a total of 11,502,160 share purchase warrants issued and exercisable at $0.50 per share; a total of 2,960,000 share purchase warrants issued and exercisable at $0.25 per share; and a total of 2,500,000 share purchase warrants issued and exercisable at $0.1 per share.
The weighted average grant date fair value of warrants issued during the nine-month period ended January 31, 2006, amounted to $0.09 per warrant, as compared to January 31, 2007 of $0.23 per warrant. The fair value of each warrant granted was determined using the Black-Scholes option pricing model and the following weighted average assumptions:
As at 31 As at 31
January January
2007 2006
Risk free interest rate 4.04 - 4.82 % 4.04 - 4.42%
Expected life 2.0 - 5.0 years 2.0-5.0 years
Annualized volatility 117 - 141% 134 - 141%
Expected dividends - -
During the nine month period ended January 31, 2007, our officers and directors made contributions to capital for management fees in the amount of $75,000, as compared to $Nil for the nine month period ended January 31, 2006.
Subsequent to January 31, 2007, we entered into a Public relations agreement with an unrelated third party for a period of three months whereby we agreed to issue 93,750 restricted shares of our common stock, valued at $7,500.
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Liquidity and Capital Resources
We expect our current cash in the bank of $1,496, plus monies we expect to receive from exercise of warrants during the ensuing year to satisfy our cash requirements until we complete our engine technology and are able to generate revenues. We expect to be able to satisfy our cash requirements for at least the next twelve months without having to raise additional funds or seek bank loans; however, there we cannot guarantee that the funds will be sufficient. We may have to raise additional monies through sales of our equity securities or through loans from banks or third parties to continue our business plans; however, no such plans have yet been implemented.
Our total stockholders' equity at January 31, 2007, was $216,914.
We do not intend to purchase any significant property or equipment, nor incur any significant changes in employees during the next nine months.
Plan of Operation
We are a development stage company formed to develop and market a new type of patented oscillating piston engine. The oscillating piston engine (OPE) weighs only a fraction of a conventional engine and requires no valves or valve train, nor a cumbersome water cooling system. However, despite its lighter weight, to date we have not yet perfected the technology or proven that the oscillating piston engine can function as well as a conventional engine.
We have acquired the prototype engine and certain rights to the patents from the inventor and engineering team through an Option Agreement that gives us the rights to further develop the engine to the point where it can successfully be marketed and sold. We do not currently own all of the intellectual property or patents related to the OPE and the underlying technology and the proceeds of our current offering will not provide us with enough capital to buy these intellectual property and patent rights. On September 15, 2003, we entered into an option agreement (the "Option") to purchase certain patents related to the Oscillating Piston Engine (the "OPE Patents"). Under the terms of the Option, we were required to pay $100,000 in cash by 31 May 2004 (paid) plus interest at the rate of 24% per annum calculated from January 31, 2004 until the $100,000 cash was paid (total interest paid - $8,745), and an additional $1,500,000 in cash by June 2, 2007. On October 25, 2006, we negotiated an extension to exercise the Option by thirty seven (37) months. Pursuant to the terms of the amended agreement, we must pay a royalty of $50 per engine on the sale of up to 10,000 oscillating piston engines ("OPE"), and a royalty of $2 per engine on the sale of up to 100,000 OPE.
On July 18, 2006, we entered into an Engine Development and License Agreement ("Agreement") with Obvio! Automotoveiculos S.A. , a Brazilian corporation with headquarters in Rio de Janeiro ("Obvio!"). Obvio! is a developer and manufacturer of high-safety and high performance microsports automobiles. Obvio! is in the process of manufacturing two automobile models, the Obvio!828 and the Obvio!012 for which it is considering using our Oscillating Piston Engine ("OPE") technology. The Agreement provides for a non-exclusive joint venture for the purpose of developing a new generation of OPE suitable for hybrid vehicle applications. Under the Agreement, we granted Obvio! with a non-exclusive license for the OPE technology in consideration of the payment by Obvio! of $5,000,000, payable in $500 installments for each OPE installed or sold. Upon completion of the payment of the full $5,000,000, Obvio! will then pay a royalty to us in the amount of $100 for each Obvio! vehicle sold with incorporates the OPE technology.
On August 28, 2006, we entered into a letter of intent with Autocraft Industries, Inc. ("AIG") for the purpose of developing energy efficient propulsion systems for on and off road vehicles. No significant activities occurred in the joint venture during the period ended October 31, 2006.
On January 27, 2006, the Company entered into a letter of intent with Apollo Energy Systems, Inc. for the purpose of developing hybrid electric car technology. All administrative and legal costs would be shared, and an operational cost sharing pan will be based on partner contribution. No significant activities occurred in the joint venture during the period ended January 31, 2007.
We are in the development stage; have not yet generated any revenues and have sustained net losses of $3,996,814 since inception. Our business plans are to develop the technology and build a prototype engine that can be sublicensed or sold to third party manufacturers for amounts sufficient to generate the funds to purchase the patent rights subject of the option agreement; however, if we are unable to do so prior to the expiration date of the option, we would need to raise additional capital through loans or equity sales, or rely on receipt of the cash we would receive from exercise of any warrants sold in our current offering to exercise the option. In addition, based on our current development plans, we will not generate any revenues or profits over the next 12 months while we are completing and testing the engine and technology. Our auditors have expressed substantial doubt about our ability to continue as a going concern.
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Critical Accounting Policies
The unaudited financial statements as of January 31, 2007 included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. It is suggested that these financial statements be read in conjunction with our April 30, 2006 audited financial statements and notes thereto, which can be found in our Form 10K-SB Annual Report, filed on the SEC website at www.sec.gov under our SEC File No. 333-116324.
We have accounted for patent costs in accordance with Statement of Financial Accounting Standards (SFAS) 142 - "Goodwill and Other Intangible Assets". In accordance with that statement, intangible assets with estimatable lives, such as a patent, are amortized on a straight-line basis over the estimated useful lives and are reviewed for impairment in accordance with SFAS 144 - "Accounting for the Impairment of Long-Lived Assets". The patent costs will be amortized over their estimated useful lives upon exercise of the option.
We have also adopted SFAS No. 52, Foreign Currency Translation, which requires that the translation of the applicable foreign currency into U.S. dollars be performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are included in the consolidated statements of stockholders' equity and comprehensive income.
