METHES ENERGIES INTERNATIONAL LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Some of the statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See "Cautionary Statement Regarding Forward-Looking Information" following the Table of Contents of this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.

Business Overview We are a renewable energy company that offers an array of products and services to a network of biodiesel fuel producers. We also market and sell in the U.S.

and Canada biodiesel fuel produced at our small-scale production and demonstration facility in Mississauga, Ontario, Canada, and have recently commissioned and are scaling-up biodiesel production at our new facility in Sombra, Ontario, Canada.

Among other services, we sell feedstock to our network of biodiesel producers, sell their output in the U.S. and Canada, provide them with proprietary software used to operate and control their processors, remotely monitor the quality and characteristics of their output, upgrade and repair their processors, and advise them on adjusting their processes to use varying feedstock and improve their output. Through the accumulation of production data from our network, we are equipped to provide consulting services to network members and other producers for operating their facilities, maintaining optimum production and solving production problems. For our network services and the license of our operating and communications software, we receive a royalty from network members based on the gallons of biodiesel produced.

Our revenue sources include the sale of biodiesel produced at our own facility, the sale of biodiesel that we purchase from network members and other third-party producers, the sale of biodiesel equipment, the sale of feedstock to network members and other third-party biodiesel producers, Canadian government incentive payments, royalties from our network members, and revenue from other services we provide related to the production of biodiesel.

As of August 31, 2012, due in large part to the funds we spent to develop and build our Sombra facility, we had a working capital deficiency of $3,377,377. In addition, during the nine months ended August 31, 2012, we incurred a loss of $2,728,604 and had negative cash flow from operations of $1,128,745. Our Sombra facility has recently been approved by the U.S. Environmental Protection Agency ("EPA") as a Foreign Renewable Fuel Producer and as a result the biodiesel produced at this facility became eligible for export to the United States.

Obtaining this approval from the EPA enables us to sell our biodiesel into the U.S., and provides our U.S. importers the ability to generate Renewable Identification Numbers ("RINS"). RINS are used in the U.S. by obligated parties to comply with certain obligations under the Renewable Fuel Standard 2 ("RFS2").

We expect to begin commercial operation of the Sombra plant in November 2012.

On October 12, 2012, our registration statement on Form S-1 (File No. 333-182302) for our initial public offering ("IPO") was declared effective by the U.S. Securities and Exchange Commission ("SEC"). On October 30, 2012, we consummated our IPO pursuant to which we sold 560,000 units (each a "Unit") at a price $5.00 per Unit and raised net proceeds of approximately $2.3 million. Each Unit consists of (i) one share of common stock, $.001 par value ("Common Stock"), (ii) one Class A warrant, to purchase one share of Common Stock at an exercise price of $7.50 (each a "Class A Warrant"), and (iii) one Class B warrant, to purchase one share of Common Stock at an exercise price of $10.00 (each a "Class B Warrant", and together with the Class A Warrants, the "Warrants").

Effective on June 11, 2012, we implemented a reverse stock split of our Common Stock pursuant to which one new share of Common Stock will be issued in exchange for each 3.835 outstanding shares of Common Stock. The reverse stock split proportionately reduced all issued and outstanding shares of Common Stock, as well as Common Stock underlying stock options and warrants outstanding immediately prior to the effective time of the reverse stock split.

The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries Methes Energies Canada Inc. ("Methes Canada") and Methes Energies USA Ltd. ("Methes USA"). All significant inter-company transactions and balances have been eliminated.

(15) --------------------------------------------------------------------------------Factors Influencing Our Results of Operations The principal factors affecting our results of operations are as follows: Biodiesel and feedstock price fluctuations Biodiesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biodiesel prices have historically been correlated to petroleum-based diesel fuel prices. Accordingly, biodiesel prices have generally been affected by the same factors that affect petroleum prices, such as worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters. Recently enacted government requirements and incentive programs, such as RFS2 and the blenders' tax credit, which expired on December 31, 2011, have reduced this correlation, although it remains a significant factor in the market price of our product.

Our operating results also generally reflect the relationship between the price of biodiesel and the price of the feedstock used to produce biodiesel. Spot market prices for virgin vegetable oil or used vegetable oil or rendered animal fat may increase, which would adversely affect our gross margins. The price of vegetable oil, as with most other products made from crops, is affected by weather, disease, changes in government incentives, demand and other factors. A significant reduction in the supply of vegetable oil because of weather or disease, or increases in the demand for vegetable oil, could result in higher feedstock prices. The price of vegetable oil and other feedstock has fluctuated significantly in the past and may fluctuate significantly in the future.

Government programs related to biodiesel production and use Biodiesel has been more expensive to produce than petroleum-based diesel fuel and as a result the industry depends on Canadian and U.S. federal and, to a lesser extent, provincial and state usage requirements and tax incentives.

On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel that must be utilized in the United States each year. Under RFS2, obligated parties, including petroleum refiners and fuel importers, must show compliance with these standards. The RFS2 program required the domestic use of 800 million gallons of biodiesel in 2011 and one billion gallons in 2012. The EPA recently mandated a requirement for domestic use of biodiesel by obligated parties of 1.28 billion gallons in 2013.

Seasonal fluctuations Our operating results are influenced by seasonal fluctuations in the price of biodiesel. Our sales tend to decrease during the winter season due to perceptions that biodiesel will not perform adequately in colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean, canola or inedible corn oil. Reduced demand in the winter for our higher cloud point biodiesel may result in excess supply of such higher cloud point biodiesel or lower prices for such higher cloud point biodiesel. In addition, our production facilities are located in Canada and our costs of shipping biodiesel to warmer climates generally increase in cold weather months.

Dependence on significant customers A large part of our revenue is generated from a few large customers. The sales to these customers are made at spot market prices, and we have no binding purchase agreements for our biodiesel, which could affect the consistency of our revenues. Potential customers for biodiesel regularly bid for biodiesel in the spot market at prices that are quoted on a daily basis. As a matter of convenience, we prefer to deal with customers with whom we have had a past relationship, although the specific customers to whom we sell have varied over time. The loss of one or more customers who have been among our largest customers historically would not have a material adverse effect on our business because we believe that a customer or customers could be replaced by one or more new customers regularly bidding for biodiesel, and we believe this will continue to be the case. For example, in the nine months ended August 31, 2012, one new major customer accounted for 23% of our total revenue and our largest customer in the year ended November 30, 2011 declined to 44% of total revenue in the nine-month period ended August 31, 2012 from 79% of total revenue in same period in fiscal 2011.

Lengthy sales cycle The sale of one of our Denami processors in a particular financial period has a significant effect on our quarter-to-quarter and year-to-year results. The purchase of our Denami processors involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our Denami processors is typically lengthy, varying from 6 to 18 months. The lengthy sales cycles of our equipment sales, as well as the size and timing of orders, make it difficult to forecast our future results of operations.

(16) --------------------------------------------------------------------------------Results of Operations Three and nine months ended August 31, 2011 and 2012 Set forth below is a summary of certain financial information for the periods indicated: Nine Months Three Months Ended Nine Months Three Months Ended Ended August 31, Ended August August 31, 2011 August 31, 2012 2011 31, 2012 Revenue Biodiesel sales Resales $ 1,695,443 $ 449,379 $ 3,369,471 $ 2,978,177 Internal production 1,416,909 403,281 2,590,268 2,189,472 Feedstock sales 165,080 70,450 539,917 354,411 Glycerin sales 41,581 127 95,221 49,894 Government incentive 149,207 8,257 322,899 252,713 Equipment sales 4,346 (257,842 ) 261,842 (241,342 ) Royalties 28,359 13,743 73,934 58,022 Other 7,482 54,280 36,736 164,728 3,508,407 741,675 7,290,288 5,806,075 Cost of goods sold 3,050,448 746,305 6,032,550 5,184,357 Gross profit (loss) 457,959 (4,630 ) 1,257,738 621,718 Operating expenses Selling, general and administrative expenses 521,503 1,415,376 1,675,336 3,222,811 Loss before interest and taxes (63,544 ) (1,420,006 ) (417,598 ) (2,601,093 ) Other income (expenses) Interest expense (11,890 ) (98,387 ) (30,802 ) (130,480 ) Interest income 18 2,324 51 2,969 Loss before income taxes (75,416 ) (1,516,069 ) (448,350 ) (2,728,604 ) Income taxes - - - - Net loss for the period $ (75,416 ) $ (1,516,069 ) $ (448,350 ) $ (2,728,604 ) (17)--------------------------------------------------------------------------------Three months ended August 31, 2011 compared to three months ended August 31, 2012 Revenue. Our total revenues for the three months ended August 31, 2011 and 2012 were $3.51 million and $742,000, respectively, representing a decrease of $2.77 million, or 79%. The reasons for this decrease are outlined below.

Biodiesel. Biodiesel sales for the three months ended August 31, 2011, excluding government incentives, were $3.11 million and decreased by $2.257 million, or 73%, to $853,000 in the three months ended August 31, 2012. For the three months ended August 31, 2011 and 2012, our resales of biodiesel purchased from third party producers were $1.70 million and $449,000, respectively, a decrease of approximately $1.25 million, or 74%. This decrease in revenue was due to lower demand and overall decrease in sale price of biodiesel. Revenue from our internal production, excluding government incentives, for the three months ended August 31, 2011 and 2012 was $1.42 million and $403,000, respectively, a decrease of approximately $1.017 million, or 72%. This decrease was due to a decrease in our production at Mississauga plant as management, in view of the Sombra plant construction and start-up, decided to conduct more research and development activities on the Denami 600 at Mississauga plant to purify glycerin stream. This research and development, if successful, would result in cost savings when the glycerin purification system is installed at our Sombra plant. For the three months ended August 31, 2011 and 2012, our average sales price per gallon for 100 percent biodiesel ("B100") was $5.81 and $5.05, respectively, a decrease of $0.76 per gallon, or 13%. Gallons sold for the three months ended August 31, 2011 and 2012 were 540,000 and 170,000 gallons, respectively, a decrease of 370,000 gallons, or 69%. The uncertainty about the integrity of some RINS in the United States caused the demand for B100 to be lower than expected in the first half of fiscal 2012. It was reported by the EPA in late 2011 that two U.S. producers had sold invalid RINS. The increased due diligence by buyers of RINS has created a decrease in the demand for RINS which in turn has affected the demand for biodiesel.

Feedstock. For the three months ended August 31, 2011 and 2012, feedstock sales were $165,000 and $70,000, respectively, a decrease of $95,000, or 58%. In the more recent period, with some variations in quantities, we were able to source additional feedstock as well as other products related to the production of biodiesel on the spot market that we resold immediately to our customers in Canada at a profit. We intend to continue with this strategy as opportunities arise to generate additional profit.

Glycerin. For the three months ended August 31, 2011 and 2012, Glycerin sales were $41,600 and $127, respectively, a decrease of $41,473 or 99.7%. This decrease was as a result of the lower production of glycerin, which is a byproduct of our biodiesel production.

Government incentives. For the three months ended August 31, 2011 and 2012 we received $149,200 and $8,260, respectively, as incentive payments from the Canadian Government. This decrease of $140,940 or 94% was due to the decrease in production of biodiesel and also, due to ecoENERGY audit adjustments for fiscal years 2010 and 2011 concluded in the quarter ended August 31, 2012.

Equipment sales. We generated $4,300 from equipment sales for the three months ended August 31, 2011, which consisted primarily of the sale of an equipment kit. For the three months ended August 31, 2012 we had negative revenues of ($258,000) as an oil processing research and development related equipment sold in fiscal year 2011 was returned under the warranty.

Royalties. We received royalties of $28,000 during the three-months ended August 31, 2011 from two network members that purchased our Denami 600 processors late in fiscal 2010. Royalties for the three months ended August 31, 2012 were $13,700, a decrease of $14,300 which is immaterial. Our customers own the Denami 600 processors, but license the software and monitoring system from us in exchange for an ongoing royalty payment of $0.11 per gallon of biodiesel produced by their Denami 600 processors.

(18) -------------------------------------------------------------------------------- Other. Other revenue includes sales of consulting services, delivery charges, lab and shop supplies, storage and rental income. Other revenue for the three months ended August 31, 2011 and 2012 was $7,000 and $54,000, respectively, an increase of $47,000, or 671%, primarily due to an increase in storage charges and rental income from the sub-lease of space adjacent to our Mississauga facility.

Cost of goods sold. Our cost of goods sold for the three months ended August 31, 2011 and 2012 were $3. 05 million and $746,000, respectively, a decrease of $2.30 million, or 76%. This decrease was primarily due to decrease in costs associated with the decreased quantity of biodiesel sold in the three months ended August 31, 2012.

Biodiesel cost of goods sold decreased 74% from the three months ended August 31, 2011 compared to the same period in fiscal 2012, or from $2.89 million for the three months ended August 31, 2011 to $744,000 for the three months ended August 31, 2012. If the average feedstock price and the price paid for biodiesel purchased from other biodiesel producers in Canada remained constant from the three months ended August 31, 2011 to the end of the same period in 2012, the decrease in gallons of biodiesel sold would have resulted in a $1.98 million decrease in the related biodiesel cost of goods sold. The decrease in average feedstock prices from the three months ended August 31, 2011 to the end of the same period in 2012 resulted in $7,000 of the decrease in biodiesel cost of goods sold and the lower price paid for biodiesel purchased from others resulted in $163,000 of this decrease.

All other costs of goods sold, excluding biodiesel cost of goods sold, for the three months ended August 31, 2011 and August 31, 2012 were $156,000 and $2,000, respectively. The decrease was mainly due to the cost of return of an equipment kit sold in fiscal year 2011 and no significant equipment sold in the three months ended August 31, 2012.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended August 31, 2011 and 2012 were $522,000 and $1.42 million, respectively, an increase of $898,000, or 172%. The increase in the more recent period was mainly related to an increase in salaries, wages and stock option expense of $227,000 and a one-time non-cash charge for penalty shares of $399,998 in the three months ended August 31, 2012. Salary increases supported the higher level of operations, including expansion at our Sombra facility. The one-time charge related to a transfer of 52,151 shares of the Common Stock of the Company by Softdiffusion SA, a third party shareholder, to a new shareholder of shares owned by Softdiffusion SA pursuant to an agreement by the Company with the new shareholder. We recorded the estimated fair value of $399,998 for these shares as part of the general and administrative expenses with a corresponding credit to additional paid-in capital.

Other income (expenses). Other expenses were $12,000 and $96,000 for the three months ended August 31, 2011 and 2012, respectively. These amounts relate to accruals for interest expense associated with loans extended to us from two stockholders, one director and TCE Capital. The increase was due to increases in the principal balances of the loans.

Income taxes. No income tax expense or benefit was recorded during the three months ended August 31, 2011 and August 31, 2012 due to ongoing taxable losses and the uncertainty of their ultimate realization. As of August 31, 2012, we were not subject to any uncertain tax exposures.

Net loss. Our net loss for the three months ended August 31, 2011 was $75,000 and increased $1.44 million to $1.52 million for the three months ended August 31, 2012 due primarily to the $2.77 million decrease in revenues and resultant $463,000 decrease in gross profit, and the $898,000 increase in selling, general and administrative expenses to support our higher level of operations, which included development of our Sombra facility and a one-time non-cash charge for the penalty shares of $399,998.

(19) --------------------------------------------------------------------------------Nine months ended August 31, 2011 compared to nine months ended August 31, 2012 Revenue. Our total revenues for the nine months ended August 31, 2011 and 2012 were $7.29 million and $5.81 million, respectively, a decrease of $1.48 million, or 20%. The reasons for this decrease are outlined below.

Biodiesel. Biodiesel sales for the nine months ended August 31, 2011, excluding government incentives, were $5.96 million and decreased by $792,000, or 13%, to $5.17 million in the nine months ended August 31, 2012. For the nine months ended August 31, 2011 and 2012, our resales of biodiesel purchased from third party producers were $3.37 million and $2.98 million, respectively, a decrease of $390,000, or 12%. This decrease was due to decreased demand for biodiesel in the United States. Revenue from our internal production, excluding government incentives, for the nine months ended August 31, 2011 and 2012 was $2.59 million and $2.19 million, respectively, a decrease of $400,000, or 15%. This decrease was partly due to the increased downtime for research and development at our Mississauga facility and partly due to the lower demand as a result of depressed United States market. For the nine months ended August 31, 2011 and 2012, our average B100 sales price per gallon was $5.10 and $4.57, respectively, a decrease of $0.53 per gallon, or 10%. Gallons sold for the nine months ended August 31, 2011 and 2012 were 1.17 million and 1.13 million, respectively, a decrease of 40,000 gallons, or 3%. The uncertainty about the integrity of some RINS in the United States caused the demand for B100 to be lower than expected in the first half of fiscal 2012. It was reported by the EPA in late 2011 that two U.S. producers had sold invalid RINS. The increased due diligence by buyers of RINS has created a decrease in the demand for RINS which in turn has affected the demand for biodiesel.

Feedstock. For the nine months ended August 31, 2011 and August 31, 2012, feedstock sales were $540,000 and $354,400, respectively, a decrease of $185,600, or 34%. In the more recent period, with some variations in quantities, we were able to source additional feedstock as well as other products related to the production of biodiesel on the spot market that we resold immediately to our customers in Canada at a profit. We intend to continue with this strategy as opportunities arise to generate additional profit.

Glycerin. For the nine months ended August 31, 2011 and 2012, Glycerin sales were $95,200 and $49,900, respectively, a decrease of $45,300, or 48%. This decrease was as a result of lower production of glycerin, which is a byproduct of our biodiesel production.

Government incentives. For the nine months ended August 31, 2011 and 2012 we received $322,900 and $252,700, respectively, as incentive payments from the Canadian Government. The decrease of $70,200, or 22% in the more recent period was due to decrease in production and also, due to ecoENERGY audit adjustments for fiscal years 2010 and 2011 concluded in the quarter ended August 31, 2012.

Equipment sales. We generated $261,800 from equipment sales for the nine months ended August 31, 2011, which consisted primarily of the sale of an equipment kit. For the nine months ended August 31, 2012 we had negative revenues of ($241,300) due to an oil processing research and development related equipment sold in fiscal year 2011 was returned under our warranty.

Royalties. We received royalties of $73,900 during the nine-month period ended August 31, 2011 from two network members that purchased our Denami 600 processors late in fiscal 2010. Royalties for the nine months ended August 31, 2012 were $58,000, a decrease of $16,000 in the 2012 fiscal period which is immaterial. Our customers own the Denami 600 processors, but license the software and monitoring system from us in exchange for an ongoing royalty payment of $0.11 per gallon of biodiesel produced by their Denami 600 processors.

Other. Other revenue includes sales of consulting services, delivery charges, lab and shop supplies, storage and rental income. Other revenue for the nine months ended August 31, 2011 and 2012 was $36,700 and $164,700, respectively, an increase of $128,000, or 348%, primarily due to an increase in storage charges and rental income from the sub-lease of space adjacent to our Mississauga facility.

(20) -------------------------------------------------------------------------------- Cost of goods sold. Our cost of goods sold for the nine months ended August 31, 2011 and 2012 were $6.03 million and $5.18 million, respectively, a decrease of $850,000, or 14%, from the first nine months of fiscal 2011 to the first nine months of 2012. This decrease was primarily due to costs associated with the decreased sales price and decreased quantity of biodiesel sold in the nine months ended August 31, 2012.

Biodiesel cost of goods sold decreased 9% from the first nine months of fiscal 2011 compared to the same period in fiscal 2012, or from $5.4 million for the nine months ended August 31, 2011 to $4.9 million for the nine months ended August 31, 2012. If the average feedstock price and the price paid for biodiesel purchased from other biodiesel producers in Canada remained constant from the nine months ended August 31, 2011 to the end of the same period in 2012, the decrease in gallons of biodiesel sold would have resulted in a $174,000 decrease in the related biodiesel cost of goods sold. The decrease in average feedstock prices from the nine months ended August 31, 2011 to the end of the same period in 2012 resulted in $102,000 of the decrease in biodiesel cost of goods sold and the higher price paid for biodiesel purchased from others resulted in $209,000 of this decrease.

All other costs of goods sold, excluding biodiesel cost of goods sold, for the nine months ended August 31, 2011 and 2012 were $641,000 and $278,000, respectively. The decrease was mainly due to the cost of return of an equipment kit sold in the first nine months of fiscal 2011 and no significant equipment sold in the first nine months of 2012.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the nine months ended August 31, 2011 and 2012 were $1.68 million and $3.22 million, respectively, an increase of $1.54 million or 92%. The increase in the more recent period was mainly related to an increase in salaries and wages and stock option expense of $608,000, an increase in professional charges of $192,000 and a one-time non-cash charge for penalty shares of $399,998 in the first nine months of fiscal 2012. The increases in salaries and wages and professional charge supported the higher level of operations, including expansion at our Sombra facility. The one-time charge related to a transfer of 52,151 shares of common stock by Softdiffusion SA, an existing shareholder, to a new shareholder reflecting penalty shares owed by us pursuant to an agreement with us and the new shareholder. We recorded the estimated fair value of $399,998 for these shares as part of the general and administrative expenses with a corresponding credit to additional paid-in capital.

Other income (expenses). Other expenses were $30,800 and $130,480 for the nine months ended August 31, 2011 and 2012, respectively. These amounts relate to accruals for interest expense associated with loans extended to us from two stockholders, one director and TCE Capital. The increase was due to increases in the principal balance of the loans.

Income taxes. No income tax expense or benefit was recorded during the nine months ended August 31, 2011 and 2012 due to ongoing taxable losses and the uncertainty of their ultimate realization. As of August 31, 2012, we were not subject to any uncertain tax exposures.

Net loss. Our net loss for the nine months ended August 31, 2011 was $448,349 and increased $2.28 million, or by 509%, to $2.73 million for the nine months ended August 31, 2012 due primarily to the $1.48 million decrease in revenues and resultant $636,000 decrease in gross profit, and the $1.55 million increase in selling, general and administrative expenses to support our higher level of operations, which included the development of our Sombra facility and a one-time charge for penalty shares of $399,998.

Liquidity and Capital Resources Sources of liquidity. Since inception, a significant portion of our operations was financed through the sale of our capital stock. At November 30, 2011 and August 31, 2012, we had cash and cash equivalents of $1.7 million and approximately $200,170, respectively.

During the nine months ended August 31, 2012, we received cash proceeds of $1,985,051 from the private placement of shares of Common Stock. On March 12, 2012 and April 26, 2012, we borrowed a total of $1.0 million from one stockholder. These debts are unsecured, payable on demand and carry interest at 8% per annum.

(21)-------------------------------------------------------------------------------- On June 20, 2012, Methes Canada entered into a term loan facility with a lender that allows Methes Canada to borrow up to $1.5 million. The term loan, which was drawn in late June 2012, is repayable in 12 months and bears interest at 23% per annum. The loan is repayable by Methes Canada after six months upon payment of a penalty equal to one-month's interest. The facility is guaranteed by the Company and collateralized by a general security agreement from Methes Canada and a first collateral mortgage on certain assets located at our Sombra facility. The facility prohibits payment of debt in excess of $550,000 owed by the Company to certain of our stockholders and directors during the life of the facility and contains other customary debt covenants. The facility also provides that, beginning October 1, 2012, any additional operating losses incurred by Methes Canada must be financed by stockholders or new equity funding.

On October 30, 2012, we consummated our IPO pursuant to which we sold 560,000 Units at a price of $5.00 per Unit and raised net proceeds of approximately $2.3 million, after deducting the underwriting discount and estimated offering expenses. We expect to use the net proceeds from our IPO for working capital, to pay development expenses at our Sombra, Ontario facility and to support our marketing and sales efforts.

Cash flow. The following table presents information regarding our cash flows and cash and cash equivalents for the nine months ended August 31, 2011 and 2012:

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