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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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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)
DYNACERT INC. Management’s Discussion and Analysis
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).
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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.
DYNACERT INC. Management’s Discussion and Analysis
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,
DYNACERT INC. Management’s Discussion and Analysis
March 31, 2017
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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.