| 5. | TMC will pay Valkor the sum of $25,000 on lease commencement, and thereafter $15,000 per month until expiration of the lease agreement. In addition, the termination clause was amended to read as follows: | (i) | Termination will be automatic if TMC fails to obtain (a) by December 31, 2019, a written financial commitment to fund a second processing facility (or a facility expansion) that will increase the Company’s processing capacity by an additional 1,000 barrels per day (achieving an aggregate capacity of 2,000 barrels per day), and (b) by December 31, 2021, a written financial commitment to fund a third processing facility (or facility expansion) that will increase the Company’s processing capacity by an additional 1,000 barrels per day (achieving an aggregate capacity of 3,000 barrels per day). The Company expects that the cost of constructing each of the two additional processing facilities (or any expansion) will range between $10 million and $12 million, which the Company intends to fund from revenue derived from operations or from third party funding sources. |
| (ii)6. | Cessation of operations or inadequateTMC will pay a production due to increased operating costs or decreased marketability and if production is not restored to 80% of capacity within three months of any such cessation will cause a termination.royalty as follows: |
| (iii)a. | CessationFor “Bitumen Product” produced from Tar Sands mined or otherwise extracted from the Property shall be eight percent (8%) of operations for longer than 180 days duringthe gross sales revenue received by Sublessee from the sale of such Bitumen Product at the Property. As used herein, the term “Bitumen Product” means naturally occurring oil in the Tar Sands that is sold in whatever form, including run-of-mine, screened, processed, or after the addition of any lease year additives and/or 600 days in any three consecutive years will cause a termination.upgrading of the Bitumen Product |
| (iv)b. | FromThe Production Royalty on all other Minerals produced from Bitumen Product mined or otherwise extracted from the Property and after Julysold shall be eight percent (8%) of the gross sales revenue received by Sublessee. Subject to the provisions of Paragraph 1, 2023,wherein sales of products and byproducts are wholly accounted for, should sales occur to a failurethird party purchaser that is engaged in marketing a variety of PQE’s processing facilityproducts or by-products made from such materials, payments to produce a minimumSublessor may vary. If Sublessee’s receipts are measurably greater than comparable sales by others of 80%similar products or byproducts which may be due to the nature of high end by-products such as frac sands produced and sold by the third party, the Production Royalty to Sublessor shall be the greater of a rated capacity5% royalty on the gross value of 3,000 barrels per day during a period of at least 180 calendar days during any lease year, the Lease may be terminatedproduct and by-products sold by the lessor.third party or 50% of the gross revenue received by Sublessee from the sale of such products or byproducts, as the case may be. |
| (v)c. | TMC may surrenderThe Production Royalty on oil and gas, and associated hydrocarbons produced by Sublessee using standard oil and gas drilling recovery techniques above 3000 feet MSL and sold shall be 1/6 of the lease with 30 days written notice.gross market value. |
| (vi)d. | InAny sales of Minerals to third parties shall be of such a nature that the eventsales price adequately represents the market value of a breach of the material terms of the lease, the lessor will inform TMC in writing and TMC will have 30 days to cure any monetary breach and 150 days to cure any non-monetary breach. |
Terms to advance royalties required were amended to read as follows:
| (i) | From July 1, 2018 to June 30, 2020, minimum payments of $100,000 per quarter.all potential products or by-products. |
| (ii)e. | From July 1, 2020, minimum payments of $150,000 per quarter.Minerals shall be deemed sold at the time they leave the Property or at the time the Minerals are transferred by Sublessee to an Affiliate. As used herein, “Affiliate” means any business entity which, directly or indirectly, is owned or controlled by Sublessee or owns or controls Sublessee, or any entity or firm acquiring Minerals from Sublessee otherwise than at arm’s-length. |
| (iii)7. | Minimum paymentsPrior to commencing on July 1, 2020any Operations, Sublessee shall have obtained final approval of all necessary mining and reclamation plans from the Utah Division of Oil, Gas and Mining, or its successor agency (the “Division”) authorizing Sublessee’s Operations and shall have posted with and obtained approval from the Division of a surety bond or other financial guarantee (“Reclamation Surety”) in the amount and form acceptable to the Division and sufficient to guarantee Sublessee’s performance of reclamation in accordance with Utah laws and regulations. The amount of the surety bond or financial guarantee shall be periodically reviewed in accordance with Division’s regulations and, if the Division directs, increased or otherwise modified as directed by the Division. Sublessee shall keep Sublessor fully informed as to reclamation costs and bonding requirements and Sublessor’s approval of the bond amount shall be required. Sublessor will be adjusted for CPI inflation.not unreasonably withhold such approval. |
| 8. | Under the terms of the Lease, Asphalt Ridge , Inc. has reserved the right at any time during the term of the Lease to convey all or part of the Property or the Water Rights, or rights therein, subject to the Lease and shall give Sublessor Notice of any such conveyance. This Sublease shall be subject to the right reserved by the Lessor as described herein. Upon Sublessor’s receipt of any sale or conveyance of the Property by Lessor, Sublessor shall promptly notify Sublessee in writing of any such conveyance. |
Production royalties payable are amended to 8% of
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the gross sales revenue, subject to certain adjustments up until Junethree months ended November 30, 2020. After that date, royalties will be calculated on a sliding scale based on crude oil prices ranging from 8% to 16% of gross sales revenues, subject to certain adjustments.2020 and 2019 Expressed in US dollars | 5. | MINERAL LEASES (continued) |
| (b) | PetroteqSITLA Mineral Lease (Petroteq Oil Recovery, LLC mineral lease (the “SITLA Mineral Lease”)lease) |
On June 1, 2018, the Company acquired mineral rights under two mineral leases entered into between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and Petroteq Oil Sands Recovery, LLC (“POSR”),POSR, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease (collectively, the “SITLA Mineral Leases”). The SITLA Mineral Leases are valid until May 30, 2028 and have a primary term of ten (10) years, and willrights for extensions based on reasonable production. The leases remain in effect thereafter for asbeyond the original lease term so long as (a) bituminousmining and sale of the tar sands are produced in paying quantities, or (b) POSR is otherwise engaged in diligent operations, exploration or development activitycontinued and certain other conditions are satisfied. Generally, the termsufficient to cover operating costs of the SITLA Leases may not be extended beyond the twentieth year of their effective dates except by production in paying quantities. An annual minimumCompany. Advanced royalty of $10 per acre mustare due annually each year the lease remains in effect and can be paid duringapplied against actual production royalties. The advanced royalty is subject to price adjustment by the lessor after the tenth year of the lease and then at the end of each period of five years thereafter. Production royalties payable are 8% of the market price of marketable product or products produced from the tar sands and sold under arm’s length contract of sale. Production royalties have a minimum of $3 per barrel of produced substance and may be increased by the lessor after the first ten years of production at a maximum rate of 1% per year and up to 12.5%. On January 18, 2019, the SITLA Leases; from and afterCompany paid $10,800,000 for the 11th yearacquisition of 50% of the operating rights under U.S. federal oil and gas leases, the annual minimum royalty may be adjustedadministered by the lessor based on certain “readjustment” provisions inU.S. Department of Interior’s Bureau of Land Management (“BLM”) covering approximately 5,960 gross acres (2,980 net acres) within the SITLA Leases. Annual minimum royalties paid in any lease year may be credited against production royalties accruing inState of Utah. The total consideration of $10,800,000 was settled by a cash payment of $1,800,000 and by the same year.issuance of 15,000,000 shares at an issue price of $0.60 per share, amounting to $9,000,000. On July 22, 2019, the Company acquired the remaining 50% of the operating rights under U.S. federal oil and gas leases, administered by the BLM covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah, for a total consideration of $13,000,000 settled by the issuance of 30,000,000 shares at an issue price of $0.40 per share, amounting to $12,000,000 and cash of $1,000,000, of which $100,000 has not been paid to date. | 6. | PROPERTY, PLANT AND EQUIPMENT |
| | Oil Extraction Plant | | | Other Property and Equipment | | | Total | | Cost | | | | | | | | | | | | | August 31, 2019 | | $ | 35,555,827 | | | $ | 438,168 | | | $ | 35,993,995 | | Additions | | | 2,072,058 | | | | 692 | | | | 2,072,750 | | August 31, 2020 | | | 37,627,885 | | | | 438,860 | | | | 38,066,745 | | Additions | | | 4,173,448 | | | | - | | | | 4,173,448 | | November 30, 2020 | | $ | 41,801,333 | | | $ | 438,860 | | | $ | 42,240,193 | | | | | | | | | | | | | | | Accumulated Amortization | | | | | | | | | | | | | August 31, 2019 | | $ | 2,148,214 | | | $ | 232,131 | | | $ | 2,380,345 | | Additions | | | - | | | | 103,888 | | | | 103,888 | | August 31, 2020 | | | 2,148,214 | | | | 336,019 | | | | 2,484,233 | | Additions | | | - | | | | 11,523 | | | | 11,523 | | November 30, 2020 | | $ | 2,148,214 | | | $ | 347,542 | | | $ | 2,495,756 | | | | | | | | | | | | | | | Carrying Amount | | | | | | | | | | | | | August 31, 2019 | | $ | 33,407,613 | | | $ | 206,037 | | | $ | 33,613,650 | | August 31, 2020 | | $ | 35,479,671 | | | $ | 102,841 | | | $ | 35,582,512 | | November 30, 2020 | | $ | 39,653,119 | | | $ | 91,318 | | | $ | 39,744,437 | |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 8. | MINERAL LEASES (continued) |
| (b) | Petroteq Oil Recovery, LLC mineral lease (the “SITLA Mineral Lease”) (continued) |
The SITLA Leases provide that POSR must pay: (i) an annual rent equal to the greater of $1 per acre or a fixed sum of $500 (without regard to acreage); and (ii) a production royalty of 8% of the market price received for products produced from the leases at the point of first sale, less reasonable actual costs of transportation to the point of first sale. After the tenth year of the leases, the lessor may increase the royalty rate by as much as one percent (1%) per year up to a maximum of 12.5%, subject to a proviso that production royalties under the leases shall never be less than $3.00/bbl during the term of the leases). As the sole lessee under the SITLA Leases, POSR owns 100% of the working interests under the leases, subject to payment of annual rentals, advance annual minimum royalties, and production royalties.
In April 2019, TMC acquired an undivided 50% of the operating rights and interests relating to oil sands under certain U.S. federal oil and gas leases encompassing approximately 8,480 gross acres (4,240 net acres, less royalty) located in P.R. Springs and the Tar Sands Triangle regions in the State of Utah (the “BLM Leases”), consisting of the right to explore for and produce oil from oil sands formations and deposits from the surface down to a subsurface depth of 1,000 feet, for gross proceeds of $10,800,000 of which $1,800,000 was paid in cash and the remaining $9,000,000 was settled by the issue of 15,000,000 common shares at $0.40 per share. The operating rights assigned and transferred to TMC under certain of the BLM Leases also grant to TMC the right, subject to similar depth limitation, to explore for and produce oil and gas from conventional sources. Each of the BLM Leases includes lands that are located within a “Special Tar Sands Area” or “STSA”, a geographic area that has been designated by the (U.S.) Department of Interior as containing substantial deposits of oil sands. Under the BLM Leases, production royalties are governed by BLM regulations and are payable to the U.S. Department of Interior at the rate of 12.5% of the amount or value of the production removed and sold. The interests acquired by TMC under the BLM Leases are also subject to a 6.25% overriding royalty reserved by predecessors-in-title.
The BLM Leases were originally issued by the U.S. Bureau of Land Management (“BLM”) under the Mineral Leasing Act of 1920 (the “MLA”). However, because the definition of “oil” in the MLA prior to 1981 did not include oil produced from oil sands, the BLM Leases (and all other federal onshore mineral leases issued prior to 1981) did not authorize the development and recovery of oil from oil sands, tar sands and bitumen-impregnated rocks and sediments. The Combined Hydrocarbon Leasing Act of 1981 (“CHL Act”) expanded the definition of “oil” to include oil produced from oil sands and bitumen deposits and authorized the issuance of new “combined hydrocarbon leases” or “CHLs” that permit exploration and production of oil and gas from both conventional sources and from oil sands deposits.
For federal onshore mineral leases that were in effect on November 16, 1981 (the CHL Act’s enactment date) and included lands located within an STSA, the CHL Act granted to lessees the right to convert such leases to new CHLs. Upon issuance by BLM, each CHL will constitute a new lease that will remain in effect for a primary term of ten (10) years and thereafter for as long as oil or gas is produced in paying quantities.
Each of the BLM Leases has been included in an application to BLM requesting their conversion to new CHLs. During the pendency of such applications, the term (and any operations) of the BLM Leases are in “suspension status” under BLM regulations until the new CHLs are issued.
On July 22, 2019, the Company closed its acquisition of its previously announced agreement for the acquisition of the remaining 50% of the operating rights and interests relating to the BLM Leases.
The total consideration payable for the acquisition will be $13 million, with $1 million payable in cash and $12 million payable in shares, namely 30 million common shares of the Company, at a deemed value of $0.40 per share.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 9.6. | PROPERTY, PLANT AND EQUIPMENTEQUIPMENT(continued) |
| | Oil Extraction Plant | | | Other Plant and Equipment | | | Total | | Cost | | | | | | | | | | August 31, 2017 | | $ | 16,846,500 | | | $ | 315,967 | | | $ | 17,162,467 | | Additions | | | 6,254,535 | | | | 78,588 | | | | 6,333,123 | | August 31, 2018 | | | 23,101,035 | | | | 394,555 | | | | 23,495,590 | | Additions | | | 7,807,440 | | | | 43,613 | | | | 7,851,053 | | May 31, 2019 | | $ | 30,908,475 | | | $ | 438,168 | | | $ | 31,346,643 | | | | | | | | | | | | | | | Accumulated Amortization | | | | | | | | | | | | | August 31, 2017 | | $ | 2,148,214 | | | $ | 107,300 | | | $ | 2,255,514 | | Additions | | | - | | | | 51,181 | | | | 51,181 | | August 31, 2018 | | | 2,148,214 | | | | 158,481 | | | | 2,306,695 | | Additions | | | - | | | | 54,316 | | | | 54,316 | | May 31, 2019 | | $ | 2,148,214 | | | $ | 212,797 | | | $ | 2,361,011 | | | | | | | | | | | | | | | Carrying Amount | | | | | | | | | | | | | August 31, 2017 | | $ | 14,698,286 | | | $ | 208,667 | | | $ | 14,906,953 | | August 31, 2018 | | $ | 20,952,821 | | | $ | 236,074 | | | $ | 21,188,895 | | May 31, 2019 | | $ | 28,760,261 | | | $ | 225,371 | | | $ | 28,985,632 | |
In June 2011, the Company commenced the development of an oil extraction facility on its mineral lease in Maeser, Utah and entered into construction and equipment fabrication contracts for this purpose. On September 1, 2015, the first phase of the plant was completed and was ready for production of hydrocarbon products for resale to third parties. During the year ended August 31, 2017 the Company began the dismantling and relocating the oil extraction facility to its TMC Mineral Lease facility to improve production and logistical efficiencies whilstwhile continuing its project to increase production capacity to a minimum capacity of 1,000400-500 barrels per day. The plant has been substantially relocated to the TMC mining site and expansion of the plant to production of 1,000400-500 barrels per day has been substantially completed. The costAs a result of construction includes capitalized borrowing costs for the nine months ended May 31, 2019relocation of $nil (yearthe plant and the expansion that has taken place to date, the Company reassessed the reclamation and restoration provision and raised an additional liability of $2,375,159 during the fiscal year ended August 31, 2018: $18,666)2019 which is capitalized to the cost of the plant and total capitalized borrowing costs as at May 31, 2019 of $2,230,746 (August 31, 2018 - $2,230,746).will be depreciated according to our depreciation policy.
As a result of the relocation of the plant and the planned expansion of the plant’s production capacity to 1,000400-500 barrels per day, and subsequently to an additional 3,000 barrels per day, the Company reevaluatedre-evaluated the depreciation policy of the oil extraction plant and the oil extraction technologies (see Note 10(a))(Note 11) and determined that depreciation should be recorded on the basis of the expected production of the completed plant at various capacities. No amortization has been recorded during the three2020 and nine months ended May 31, 2019 and the 2018 fiscal yearyears as there has only been test production during that period.these years. The Company entered into a real property lease for office space located at 15315 Magnolia Blvd., Sherman Oaks, California. The lease commenced on September 1, 2019 and expires on August 31, 2024, monthly rental expense is $4,941 per month with annual 3% escalations during the term of the lease. The initial value of the right-of-use asset was $245,482 and the operating lease liability was $245,482. The Company monitors for events or changes in circumstances that require a reassessment of our lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right-of-use asset unless doing so would reduce the carrying amount of the right-of-use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right-of-use asset balance is recorded as a loss in the statement of operations and comprehensive loss. During April 2015, the Company entered into two equipment loan agreements in the aggregate amount of $282,384, with financial institutions to acquire equipment for the oil extraction facility. The loans had a term of 60 months and bore interest at rates between 4.3% and 4.9% per annum. Principal and interest were paid in monthly installments. These loans were secured by the acquired assets. On May 7, 2018, the Company entered into a negotiable promissory note and security agreement with Commercial Credit Group to acquire a crusher from Power Equipment Company for $660,959. An implied interest rate was calculated as 12.36% based on the timing of the initial repayment of $132,200 and subsequent 42 monthly instalments of $15,571. The terms of the note were renegotiated during June 2020, and the instalments were amended to $16,140 per month due to payments not being made during the pandemic. The promissory note is secured by the crusher. Discount Rate To determine the present value of minimum future lease payments for operating leases at September 1, 2019, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the 5 year ARM interest rate at the time of entering into the agreement and compared that rate to the Company’s weighted average cost of funding at the time of entering into the operating lease. The Company determined that 10.00% was an appropriate incremental borrowing rate to apply to its real-estate operating lease. PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars
Right of use assets Right of use assets included in the consolidated Balance Sheet are as follows: | | November 30, 2020 | | | August 31, 2020 | | Non-current assets | | | | | | | | | Right of use assets – operating leases, net of amortization | | $ | 198,977 | | | $ | 209,101 | | Right of use assets – finance leases, net of depreciation – included in property, plant and equipment | | | 708,109 | | | | 718,193 | |
Lease costs consist of the following: | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Finance lease cost: | | $ | 17,483 | | | $ | 21,650 | | Depreciation of right of use assets | | | 10,085 | | | | 10,085 | | Interest expense on lease liabilities | | | 7,398 | | | | 11,565 | | | | | | | | | | | Operating lease expense | | | 15,268 | | | | 14,823 | | | | | | | | | | | Total lease cost | | $ | 32,751 | | | $ | 36,473 | |
Other lease information: | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | Operating cash flows from finance leases | | $ | (7,398 | ) | | $ | (11,565 | ) | Operating cash flows from operating leases | | | (15,268 | ) | | | (14,823 | ) | Financing cash flows from finance leases | | $ | (41,022 | ) | | $ | (51,018 | ) | | | | | | | | | | Right-of -use assets obtained in exchange for new operating leases | | $ | - | | | | 245,482 | | Weighted average remaining lease term – finance leases | | | 1.11 years | | | | 2.50 years | | Weighted average remaining lease term – operating leases | | | 2.75 years | | | | 3.75 years | | Weighted average discount rate – finance leases | | | 13.52 | % | | | 12.86 | % | Weighted average discount rate – operating leases | | | 10.00 | % | | | 10.00 | % |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars Maturity of Leases The amount of future minimum lease payments under finance leases is as follows: | | November 30, 2020 | | | August 31, 2020 | | Undiscounted minimum future lease payments | | | | | | | | | Total instalments due: | | | | | | | | | Within 1 year | | $ | 193,680 | | | $ | 193,680 | | 1 to 2 years | | | 32,280 | | | | 80,700 | | 2 to 3 years | | | - | | | | - | | | | | 225,960 | | | | 274,380 | | Imputed interest | | | (19,550 | ) | | | (26,948 | ) | Total finance lease liability | | $ | 206,410 | | | $ | 247,432 | | | | | | | | | | | Disclosed as: | | | | | | | | | Current portion | | $ | 178,200 | | | $ | 172,374 | | Non-current portion | | | 28,210 | | | | 75,058 | | | | $ | 206,410 | | | $ | 247,432 | |
The amount of future minimum lease payments under operating leases is as follows: | | November 30, 2020 | | | August 31, 2019 | | Undiscounted minimum future lease payments | | | | | | | | | Total instalments due: | | | | | | | | | Within 1 year | | $ | 61,528 | | | $ | 61,070 | | 1 to 2 years | | | 63,375 | | | | 62,903 | | 2 to 3 years | | | 65,276 | | | | 64,790 | | 3 to 4 years | | | 50,050 | | | | 66,734 | | | | | 240,229 | | | | 255,497 | | Imputed interest | | | (41,252 | ) | | | (46,396 | ) | Total operating lease liability | | $ | 198,977 | | | $ | 209,101 | | | | | | | | | | | Disclosed as: | | | | | | | | | Current portion | | $ | 43,575 | | | $ | 42,053 | | Non-current portion | | | 155,402 | | | | 167,048 | | | | $ | 198,977 | | | $ | 209,101 | |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | | Oil Extraction Technology | | Cost | | | | August 31, 2017 | | $ | 809,869 | | Additions | | | - | | August 31, 2018 | | | 809,869 | | Additions | | | - | | May 31, 2019 | | $ | 809,869 | | | | | | | Accumulated Amortization | | | | | August 31, 2017 | | $ | 102,198 | | Additions | | | - | | August 31, 2018 | | | 102,198 | | Additions | | | - | | May 31, 2019 | | $ | 102,198 | | | | | | | Carrying Amounts | | | | | August 31, 2017 | | $ | 707,671 | | August 31, 2018 | | $ | 707,671 | | May 31, 2019 | | $ | 707,671 | |
| | Oil Extraction | | | | Technologies | | | | | | Cost | | | | | August 31, 2019 | | $ | 809,869 | | Additions | | | - | | August 31, 2020 | | | 809,869 | | Additions | | | - | | November 30, 2020 | | $ | 809,869 | | | | | | | Accumulated Amortization | | | | | August 31, 2019 | | $ | 102,198 | | Additions | | | - | | August 31, 2020 | | | 102,198 | | Additions | | | - | | November 30, 2020 | | $ | 102,198 | | | | | | | Carrying Amounts | | | | | August 31, 2019 | | $ | 707,671 | | August 31, 2020 | | $ | 707,671 | | November 30, 2020 | | $ | 707,671 | |
| (a) | Oil extraction technologies |
Oil Extraction Technologies During the year ended August 31, 2012, the Company acquired a closed-loop solvent based oil extraction technology which facilitates the extraction of oil from a wide range of bituminous sands and other hydrocarbon sediments. The Company has filed patents for this technology in the USA Russia and Canada and has employed it in its oil extraction plant. The Company commenced partial production from its oil extraction plant on September 1, 2015 and was amortizing the cost of the technology over fifteen years, the expected life of the oil extraction plant. Since the Companycompany has substantially completedincreased the increase in capacity of the plant to 1,000400 to 500 barrels daily during fiscal 2018, and expects to further expand the capacity to an additional 3,000 barrels daily, it determined that a more appropriate basis for the amortization of the technology is the units of production at the plant after commercial production resumes. begins again. No amortization of the technology was recorded during the three2021 and nine months ended May 31, 2019 and for the 20182020 fiscal year. | 11. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable as at May 31, 2019 and August 31, 2018 consist primarily of amounts outstanding for construction and expansion of the oil extraction plant and other operating expenses that are due on demand.years.
Accrued expenses as at May 31, 2019 and August 31, 2018 consist primarily of other operating expenses and interest accruals on long-term debt (see Note 12) and convertible debentures (see Note 13).
Information about the Company’s exposure to liquidity risk is included in Note 24.
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | | | | | | | Principal due | | Principal due | | | | | | | | Principal due | | Principal due | | Lender | | Maturity Date | | Interest Rate | | | May 31, 2019 | | | August 31, 2018 | | | Maturity Date | | Interest Rate | | | November 30, 2020 | | | August 31, 2020 | | | | | | | | | | | | | | | | | | | | | Private lenders | | December 2, 2018 | | | 10.00 | % | | $ | 200,000 | | | $ | 200,000 | | | On demand | | | 10.00 | % | | | 105,000 | | | | 115,000 | | Private lenders | | May 1, 2019 | | | 5.00 | % | | | 557,501 | | | | 632,512 | | | August 31, 2020 | | | 5.00 | % | | | 471,329 | | | | 468,547 | | Private lenders | | September 17, 2019 | | | 10.00 | % | | | 100,000 | | | | - | | | On demand | | | 10.00 | % | | | - | | | | 100,000 | | Private lenders | | July 28, 2020 | | | 10.00 | % | | | - | | | | 120,900 | | | Private lenders | | August 31, 2020 | | | 5.00 | % | | | - | | | | 70,900 | | | Equipment loans | | April 20, 2020 – November 7, 2021 | | | 4.30 - 12.36 | % | | | 455,032 | | | | 602,239 | | | Total loans | | | | | | | | $ | 1,312,533 | | | $ | 1,626,551 | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 576,329 | | | $ | 683,547 | |
The maturity date of the long-term debt is as follows: | | May 31, 2019 | | | August 31, 2018 | | | November 30, 2020 | | | August 31, 2020 | | | | | | | | | | | | | Principal classified as repayable within one year | | $ | 1,060,124 | | | $ | 1,027,569 | | | $ | 576,329 | | | $ | 683,547 | | Principal classified as repayable later than one year | | | 252,409 | | | | 598,982 | | | | - | | | | - | | | | $ | 1,312,533 | | | $ | 1,626,551 | | | | | | | | | | | | | $ | 576,329 | | | $ | 683,547 | |
| (i) | On July 3, 2018, the Company received a $200,000 advance from a private lender bearing interest at 10% per annum and repayable on September 2, 2018. The loan is guaranteed by the Chairman of the Board. The loan wasDuring the year ended August 31, 2020 the company repaid on September 4, 2018. On October 30, 2018 the Company received a further advance of $350,000 from the same lender, bearing interest at 0% per annum and repayable on demand. On January 31, 2019, the Company repaid $150,000$35,000 of the principal outstanding.outstanding and a further $10,000 during the three months ended November 30, 2020. On July 6, 2020 in accordance with the terms of a debt settlement agreement entered into, the lender converted $50,000 into 1,250,000 shares at a conversion price of $0.04 per share. |
| (ii) | On October 10, 2014, the Company issued two secured debentures for an aggregate principal amount of CAD $1,100,000 to two private lenders. The debentures bearinitially bore interest at a rate of 12% per annum, maturingwere originally scheduled to mature on October 15, 2017 and are secured by all of the assets of the Company. In addition, the Company issued common share purchase warrants to acquire an aggregate of 16,667 common shares of the Company. On September 22, 2016, the two secured debentures were amended to extend the maturity date to January 31, 2017. The terms of these debentures were renegotiated with the debenture holders to allow for the conversion of the secured debentures into common shares of the Company at a rate of CAD $4.50 per common share and to increase the interest rate, starting June 1, 2016, to 15% per annum. On January 31, 2017, the two secured debentures were amended to extend the maturity date to July 31, 2017. Additional transaction costs and penalties incurred for the loan modifications amounted to $223,510. On February 9, 2018, the two secured debentures were renegotiated with the debenture holders to extend the loan to May 1, 2019. A portion of the debenture amounting to CAD $628,585 was amended to be convertible into common shares of the Company, of which, CAD $365,000 have beenwere converted on May 1, 2018. The remaining convertible portion is interest free and was to be converted from August 1, 2018 to January 1, 2019. The remaining non-convertible portion of the debenture was to be paid off in 12 equal monthly instalments beginning May 1, 2018.2018, bearing interest at 5% per annum. On September 11, 2018, the remaining convertible portion of the debenture was converted into common shares of the Company and a portion of the non-convertible portion of the debenture was settled through the issue of 316,223 common shares of the Company. On December 13, 2019, the maturity date of the non-convertible portion of the debenture was extended to January 31, 2020 and the interest rate was increased to 10% per annum. Effective January 31, 2020, the terms of the debenture were renegotiated and the maturity date was extended to August 31, 2020. The maturity date of the debentures are currently being renegotiated. |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| (a) | Private lenders (continued) |
| (iii) | On October 4, 2018, the Company received an advance of $100,000 from Bay Private Equity in terms ofentered into a debenture line of credit of $9,500,000 made available to the Company.from Bay Private Equity and received an advance of $100,000. The debenture maturesmatured on September 17, 2019 and bears interest at 10% per annum. As compensation forOn September 23, 2020, the principal amount of the debenture line of credit the Company issued 950,000 commitment$100,000 plus accrued interest of $18,904 was converted into 2,161,892 shares to Bay Private Equity andat a further 300,000 shares as a finder’s fee to a third party.conversion price of $0.055 per share. |
| (iv) | The Company received advances from a private lender during the years ended August 31, 2018 and 2017 in the form of unsecured promissory notes. The promissory note matures on July 28, 2020, and bears interest at 10% per annum. The Company repaid the remaining private lender and advanced the lender a further $1,195,123 (see note 6). |
| (v) | The Company received advances from a private lender during the year ended August 31, 2018 and 2017 in the form of unsecured promissory notes. This promissory note matures on August 31, 2020 and bear interest at 5% per annum. On May 31, 2019, in terms of a debt settlement agreement entered into, the Company issued 363,073 shares of common stock at an issue price of $0.30 per share to settle the outstanding liability of $70,900 including interest thereon of $27,130. |
The Company entered into two equipment loan agreements with financial institutions to acquire equipment for the oil extraction facility. The loans had a term of 60 months and bore interest at rates between 4.3% and 4.9% per annum. Principal and interest were paid in monthly installments. These loans were secured by the acquired assets.
On May 7, 2018, the Company entered into a negotiable promissory note and security agreement with Commercial Credit Group to acquire a crusher from Power Equipment Company for $660,959. An implied interest rate was calculated as 12.36% based timing on the initial repayment of $132,200 and subsequent 42 monthly instalments of $15,571. The promissory note was secured by the equipment financed.
| 13. | CONVERTIBLE DEBENTURES |
| | | | | | | Principal due | | | Principal due | | Lender | | Maturity Date | | Interest Rate | | | May 31, 2019 | | | August 31, 2018 | | | | | | | | | | | | | | Alpha Capital Anstalt | | October 31, 2018 | | | 5.00 | % | | $ | - | | | $ | 56,500 | | Private lenders | | January 1, 2019 | | | 0.00 | % | | | - | | | | 201,904 | | GS Capital Partners | | May 1, 2019 | | | 12.00 | % | | | 143,750 | | | | - | | Calvary Fund I LP | | September 4, 2019 | | | 10.00 | % | | | 250,000 | | | | 250,000 | | Calvary Fund I LP | | September 4, 2019 | | | 10.00 | % | | | 250,000 | | | | - | | SBI Investments LLC | | September 4, 2019 | | | 10.00 | % | | | 250,000 | | | | - | | Bay Private Equity, Inc. | | September 17, 2019 | | | 5.00 | % | | | 2,900,000 | | | | - | | Bay Private Equity, Inc | | October 15, 2019 | | | 5.00 | % | | | 2,400,000 | | | | - | | | | | | | | | | | 6,193,750 | | | | 508,404 | | Unamortized debt discount | | | | | | | | | (936,190 | ) | | | - | | Total loans | | | | | | | | $ | 5,257,560 | | | $ | 508,404 | |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 13.10. | CONVERTIBLE DEBENTURES (continued) |
| | | | | | | Principal due | | | Principal due | | Lender | | Maturity Date | | Interest Rate | | | November 30, 2020 | | | August 31, 2020 | | | | | | | | | | | | | | Calvary Fund I LP | | July 31, 2021 | | | 12.00 | % | | | 250,000 | | | | 250,000 | | | | July 31, 2021 | | | 12.00 | % | | | 480,000 | | | | 480,000 | | | | August 7, 2021 | | | 0 | % | | | 150,000 | | | | 150,000 | | SBI Investments LLC | | December 15, 2020 | | | 10.00 | % | | | 250,000 | | | | 250,000 | | | | January 16, 2021 | | | 10.00 | % | | | 55,000 | | | | 55,000 | | Bay Private Equity, Inc. | | March 31, 2021 | | | 5.00 | % | | | - | | | | 3,661,874 | | | | February 20, 2021 | | | 5.00 | % | | | 2,400,000 | | | | 2,400,000 | | Cantone Asset Management LLC | | October 19, 2020 | | | 7.00 | % | | | 250,000 | | | | 300,000 | | | | December 17, 2020 | | | 7.00 | % | | | 240,000 | | | | 240,000 | | | | January 14, 2021 | | | 7.00 | % | | | 240,000 | | | | 240,000 | | | | December 30, 2021 | | | 7.00 | % | | | 300,000 | | | | - | | Private lender | | October 29, 2020 | | | 10.00 | % | | | 200,000 | | | | 200,000 | | Petroleum Capital Funding LP. | | November 26, 2023 | | | 10.00 | % | | | 318,000 | | | | 318,000 | | | | December 4, 2023 | | | 10.00 | % | | | 432,000 | | | | 432,000 | | | | March 30, 2024 | | | 10.00 | % | | | 471,000 | | | | 471,000 | | Power Up Lending Group LTD | | May 7, 2021 | | | 12.00 | % | | | - | | | | 64,300 | | | | June 4, 2021 | | | 12.00 | % | | | 69,900 | | | | 69,900 | | | | June 19, 2021 | | | 12.00 | % | | | 82,500 | | | | 82,500 | | | | November 11, 2021 | | | 12.00 | % | | | 140,800 | | | | - | | EMA Financial, LLC | | April 22, 2021 | | | 8.00 | % | | | 150,000 | | | | 150,000 | | Morison Management S.A | | July 31, 2021 | | | 10.00 | % | | | - | | | | 192,862 | | Bellridge Capital LP. | | March 31, 2021 | | | 15.00 | % | | | 2,900,000 | | | | - | | Stirling Bridge Resources | | October 29, 2021 | | | 10.00 | % | | | 15,000 | | | | - | | Alpha Capital Anstalt | | August 6, 2021 | | | 21.00 | % | | | 500,000 | | | | - | | Rijtec Enterprises Limited Pension Scheme | | November 11, 2021 | | | 10.00 | % | | | 32,000 | | | | - | | Private lender | | November 30, 2021 | | | 10.00 | % | | | 150,000 | | | | - | | | | | | | | | | | 10,076,200 | | | | 10,007,436 | | Unamortized debt discount | | | | | | | | | (1,481,237 | ) | | | (1,173,112 | ) | Total loans | | | | | | | | $ | 8,594,963 | | | $ | 8,834,324 | |
The maturity date of the convertible debentures are as follows: | | May 31, 2019 | | | August 31, 2018 | | | November 30, 2020 | | | August 31, 2020 | | | | | | | | | | | | | Principal classified as repayable within one year | | $ | 5,257,560 | | | $ | 258,404 | | | $ | 7,847,760 | | | $ | 8,227,257 | | Principal classified as repayable later than one year | | | - | | | | 250,000 | | | | 747,203 | | | | 607,067 | | | | $ | 5,257,560 | | | $ | 508,404 | | | | | | | | | | | | | $ | 8,594,963 | | | $ | 8,834,324 | |
On August 31, 2017, the Company issued a convertible secured note for $565,000 to Alpha Capital Anstalt. The convertible secured note bears interest at a rate of 5% per annum and matures on October 31, 2018. The convertible secured note is convertible into units, consisting of one common share of the Company and one common share purchase warrant of the Company, at a conversion price of $0.29 per unit until August 31, 2022. Each warrant would entitle the holder to acquire one additional common share at an exercise price of $0.315 per share until August 31, 2022. The convertible secured note is secured by all of the assets of the Company.
From December 19, 2017 to May 22, 2018, a total of $508,500 of the principal of the convertible secured notes was converted into 1,753,447 units. From March 16, 2018 to July 11, 2018, Alpha Capital Anstalt exercised a total of 1,753,447 warrants to purchase 1,753,447 common shares of the Company. On December 3, 2018, the remaining $56,500 and accrued interest thereon of $13,479 was settled by the issue of 145,788 common shares.
According to the terms of an amendment made with two debenture holders and the Company on February 9, 2018, a portion of their debentures was convertible into common shares (see Note 12(a)(iii)). On September 11, 2018, the remaining convertible portion of the debenture was converted into common shares of the Company through the issue of 316,223 common shares of the Company
During December 2018, the Company issued a convertible debenture of $143,750 including an original issue discount of $18,750, together with warrants exercisable for 260,416 shares of common stock at an exercise price of $0.48 per share with a maturity date of April 29, 2019. The debenture has a term of four months and one day and bears interest at a rate of 10% per annum payable at maturity and at the option of the holder the purchase amount of the debenture (excluding the original issue discount of 15%) is convertible into 260,416 common shares of the Company at $0.48 per share in accordance with the terms and conditions set out in the debenture.
On September 4, 2018, the Company issued units to Calvary Fund I LP for $250,000, which was originally advanced on August 9, 2018. The units consist of 250 units of $1,000 convertible debenture and 1,149,424 commons share purchase warrants. The convertible debenture bears interest at 10%, matures on September 4, 2019 and is convertible one common share of the Company at a price of $0.87 per common share. The common share purchase warrants entitle the holder to acquire additional common shares of the Company at a price of $0.87 per share and expires on September 4, 2019.
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 13.10. | CONVERTIBLE DEBENTURES (continued) |
| (e)(a) | CalvaryCavalry Fund I LP |
| | (i) | On October 12, 2018, the Company entered into an agreement with Calvary Fund I LP whereby the Company issued 250 one year units to Cavalry for gross proceeds of $250,000, each unit consisting of a $1,000 principal convertible unsecured debenture, bearing interest at 10% per annum and convertible into common shares at $0.86 per share, and a warrant exercisable for 1,162 common shares at $0.86 per share, and a common share purchase warrant exercisable for 290,500 shares at an exercise price of $0.86 per share, which warrant expired on October 12, 2019. During December 2019, the maturity date of the convertible debenture was amended to October 12, 2020 and the conversion price was amended to $0.18 per share. In terms of the ARA entered into on August 7, 2020, the maturity date of the convertible debenture was amended to July 31, 2021, the interest rate was amended to 12% per annum and the conversion price was amended to $0.0412 per share. |
| | (ii) | On August 19, 2019, the Company issued a convertible debenture to Calvary for an aggregate principal amount of $480,000, including an original issue discount of $80,000, for net proceeds of $374,980 after certain legal expenses, and a warrant exercisable for 2,666,666 common shares at an exercise price of $0.15 per share. The convertible debenture bore interest at 3.3% per annum and matured on August 29, 2020. The convertible debenture may be converted into common shares of the Company at a conversion price of $0.17 per share. In terms of the ARA entered into on August 7, 2020, the maturity date of the convertible debenture was amended to July 31, 2021 and the conversion price was amended to $0.0412 per share and the exercise price of the warrant was amended to $0.0412 per share and the maturity date was amended to July 31, 2021. |
| | (iii) | On August 7, 2020, the Company issued a convertible debenture to Calvary for an aggregate principal amount of $150,000, including an original issue discount of $25,000, for net proceeds of $125,000, and a warrant exercisable for 3,033,980 common shares at an exercise price of $0.0412 per share. The convertible debenture bore interest at 0.0% per annum and matured on August 7, 2021. The convertible debenture may be converted into common shares of the Company at a conversion price of $0.0412 per share. |
| (f)(b) | SBI Investments, LLC |
| | (i) | On October 15, 2018, the Company entered into an agreement with SBI Investments, LLC (“SBI”) whereby the Company issued 250 one year units for proceeds of $250,000, each debenture consisting of a $1,000 principal convertible unsecured debenture, bearing interest at 10% per annum and convertible into common shares at $0.86 per share, and a warrant exercisable for 1,162 shares of common stock at an exercise price of $0.86 per share. The warrants expired on October 15, 2019 unexercised. During December 2019, the maturity date of the convertible loan was extended to October 12, 2020 and the conversion price of the note was reset to $0.18 per share. The Company repaid $50,000, and the maturity date of the loan has been extended to December 15, 2020. | | | (ii) | On January 16, 2020, the Company entered into an agreement with SBI whereby the Company issued a convertible promissory note for $55,000 for gross proceeds of $50,000, bearing interest at 10% per annum and convertible into common shares at $0.14 per share. The convertible note matures on January 16, 2021. In conjunction with the convertible promissory note, the Company issued a warrant exercisable for 357,142 shares of common stock at an exercise price of $0.14 per share, expiring on January 16, 2021. |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | (g)10. | CONVERTIBLE DEBENTURES (continued) |
| (c) | Bay Private Equity, Inc. |
On September 17, 2018, the Company issued 3 one year convertible units of $1,100,000 each to Bay Private Equity, Inc. (“Bay”) for net proceeds of $2,979,980 related to this agreement. These units bear interest at 5% per annum and mature
| | (i) | On September 17, 2018, the Company issued 3 one year convertible units of $1,100,000 each to Bay Private Equity, Inc. (“Bay”), including an OID of $100,000 per unit, for net proceeds of $2,979,980. These units bear interest at 5% per annum and matured one year from the date of issue. Each unit consists of one senior secured convertible debenture of $1,100,000 and 250,000 common share purchase warrants. Each convertible debenture may be converted to common shares of the Company at a conversion price of $1.00 per share. Each common share purchase warrant entitles the holder to purchase an additional common share of the Company at a price of $1.10 per share for one year after the issue date. On January 23, 2019, $400,000 of the principal outstanding was repaid out of the proceeds raised on the January 16, 2019 Bay convertible debenture, see (ii) below. On September 17, 2019, the warrants expired, unexercised. During December 2019, the maturity date was extended to January 15, 2020. The maturity date was not extended further during the year and the note was in default as at August 31, 2020. On September 1, 2020, the convertible debenture was assigned to Bellridge Capital, LP (“Bellridge”). Bellridge enforced the penalty provisions of the original agreement, resulting in an increase in the capital due under the debenture by $610,312 , and an increase of 10% to the interest rate, from the date of original default which was September 19, 2019. On September 23, 2020, in accordance with the terms of the amended agreement entered into with Bellridge, the maturity date was extended to March 31, 2021 and the conversion price was amended to $0.055 per share. | | | (ii) | On January 16, 2019, the Company issued a convertible debenture of $2,400,000, including an OID of $400,000, for net proceeds of $2,000,000. The convertible debenture bears interest at 5% per annum and matured on October 15, 2019. The convertible debenture may be converted to 5,000,000 common shares of the Company at a conversion price of $0.40 per share. $400,000 of the proceeds raised was used to repay a portion of the $3,300,000 convertible debenture issued to Bay Private Equity on September 17, 2018 (Note 14(d)(i)). On August 20, 2020, in accordance with the terms of an amendment entered into with Bay, the maturity date was extended to February 20, 2021. |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 10. | CONVERTIBLE DEBENTURES (continued) |
| (d) | Cantone Asset Management, LLC |
| | (i) | On July 19, 2019, the Company issued a convertible debenture to Cantone Asset Management, LLC (“Cantone”) in the aggregate principal amount of $300,000, including an OID of $50,000 for net proceeds of $234,000 after certain issue expenses. The convertible debenture bears interest at 7% per annum and the gross proceeds, less the OID, of $250,000 is convertible into common shares at a conversion price of $0.19 per share, and matured on October 19, 2020. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,315,789 common shares at an exercise price of $0.24 per share, expiring on October 19, 2020. On July 7, 2020, the Company entered into an Amending Agreement (“the Amendment”) whereby the conversion price of the convertible debenture was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share. On September 23, 2020, $50,000 of the principal was repaid out of the proceeds of the $300,000 convertible note issued to Cantone Asset Management. | | | (ii) | On September 19, 2019, the Company issued a convertible debenture to Cantone in the aggregate principal amount of $240,000, including an original issue discount of $40,000, for net proceeds of $200,000. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $200,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on December 17, 2020. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 952,380 common shares at an exercise price of $0.26 per share, expiring on December 17, 2020. In accordance with the terms of the Amendment entered into on July 7, 2020, the conversion price was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share. | | | (iii) | On October 14, 2019, the Company issued a convertible debenture to Cantone in the aggregate principal amount of $240,000, including an original issue discount of $40,000, for net proceeds of $200,000. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $200,000 is convertible into common shares at a conversion price of $0.17 per share, and matures on January 14, 2021. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,176,470 common shares at an exercise price of $0.17 per share, expiring on January 16, 2021. In accordance with the terms of the Amendment entered into on July 7, 2020, the conversion price of the convertible debenture was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share. | | | | | | | (iv) | On September 23, 2020, the Company issued a convertible debenture to Cantone Asset Management in the aggregate principal amount of $300,000, including an original issue discount of $50,000, for net proceeds of $247,500. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $250,000 is convertible into common shares at a conversion price of $0.055 per share until September 23, 2021 and thereafter at $0.08 per share. The convertible debenture matures on December 23, 2021. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 4,545,454 common shares at an exercise price of $0.055 per share, expiring on December 23, 2021. |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 10. | CONVERTIBLE DEBENTURES (continued) |
On October 29, 2019, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $200,000. The convertible debenture bears interest at 10.0% per annum and matured on October 29, 2020. The convertible debenture may be converted into common shares of the Company at a conversion price of $1.00$0.18 per share. Each common share purchase warrant entitlesThe Company is currently renegotiating the holder to purchase an additional common shareterms of the convertible debenture with the lender. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 555,555 common shares at aan exercise price of $1.10$0.18 per share, for one year after the issue date. On January 23, 2019, $400,000which warrant expired on October 29, 2020. | (f) | Petroleum Capital Funding LP. |
All of the principal outstanding was repaid outconvertible notes issued to Petroleum Capital Funding LP. (“PCF”) are secured by a first priority lien on all bitumen reserves at the Asphalt Ridge property consisting of 8,000 acres. The Company may force the conversion of all of the proceeds raisedconvertible debentures if the trading price of the Company’s common shares on the Bay Private Equity convertible debenture (see Note 13(h)).TSXV Venture Exchange is above $0.40 for 20 consecutive trading days, with an average daily volume of greater than 1 million common shares, and has agreed to certain restrictions on paying dividends, registration rights and rights of first refusal on further debt and equity offerings. | | (i) | On November 26, 2019, further to a term sheet entered into with PCF, the Company issued a convertible debenture in the aggregate principal amount of $318,000, including an OID of $53,000 for net proceeds of $226,025 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $265,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on November 26, 2023. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,558,730 common shares and a brokers warrant exercisable for 124,500 common shares, at an exercise price of $0.17 per share, expiring on November 26, 2023. On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 1,558,730 shares was amended to $0.055 per share. | | | (ii) | On December 4, 2019, the Company concluded its second closing as contemplated by the term sheet entered into with PCF per (i) above and issued a convertible debenture in the aggregate principal amount of $432,000, including an OID of $72,000 for net proceeds of $318,600 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $360,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on December 4, 2023. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 2,117,520 common shares and a brokers warrant exercisable for 169,200 common shares, at an exercise price of $0.17 per share, expiring on December 4, 2023. On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 2,117,520 shares was amended to $0.055 per share. |
| | (iii) | On March 30, 2020, the Company concluded its third closing as contemplated by the term sheet entered into with PCF per (i) above and issued a convertible debenture in the aggregate principal amount of $471,000, including an OID of $78,500 for net proceeds of $347,363 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $392,500 is convertible into common shares at a conversion price of $0.21 per share, and matures on March 30, 2024. In conjunction with the convertible debenture, the Company issued a warrant exercisable for 4,906,250 common shares and a brokers warrant exercisable for 392,500 common shares, at an exercise price of $0.17 per share, expiring on March 30, 2024. On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 4,906,250 shares was amended to $0.055 per share. |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | (h)10. | Bay Private Equity, Inc.CONVERTIBLE DEBENTURES (continued) |
| (g) | Power Up Lending Group LTD. |
| | (i) | On May 7, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $64,300, including an original issue discount of $6,300, for net proceeds of $55,000 after certain expenses. The note bears interest at 12% per annum and matures on May 7, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days. Between November 11, 2020 and November 13, 2020, Power Up converted the aggregate principal sum of $64,300, including interest thereon of $3,480 into 2,256,939 common shares at an average conversion price of $0.03 per share, thereby extinguishing the note. | | | (ii) | On June 4, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $69,900, including an original issue discount of $6,900, for net proceeds of $60,000 after certain expenses. The note bears interest at 12% per annum and matures on June 4, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days. | | | | | | | (iii) | On June 19, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $82,500, including an original issue discount of $7,500, for net proceeds of $72,000 after certain expenses. The note bears interest at 12% per annum and matures on June 19, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days. | | | (iv) | On November 6, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $140,800, including an original issue discount of $12,800, for net proceeds of $125,000 after certain expenses. The note bears interest at 12% per annum and matures on November 6, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days. |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 10. | CONVERTIBLE DEBENTURES (continued) |
| | (i) | On July 22, 2020, the Company issued a convertible promissory note to EMA for the aggregate principal sum of $150,000, including an original issue discount of $15,000, for net proceeds of $130,500 after certain expenses. The note bears interest at 8% per annum and matures on April 22, 2021. The note may be prepaid subject to a prepayment penalty of 130%. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to the lower of; (i) the lowest trading price of the Company’s common stock during the 15 trading days including and immediately preceding the issue date; and (ii) 70% of the two lowest average trading prices during the fifteen prior trading days including and immediately preceding the conversion date. |
| (i) | Morison Management S.A. |
On January 16, 2019,August 26, 2020, the convertible debenture originally issued to GS Capital Partners in the aggregate principal sum of $143,750 together with accrued interest and penalty interest thereon of $49,112 was purchased and assigned to Morison Management S.A. (“Morison”). The Company cancelled the convertible debenture issued to GS and issued a replacement convertible debenture to Morison in the aggregate principal sum of $192,862 with a maturity date of August 26, 2021 and bearing interest at 10% per annum. The note is convertible into common shares at a conversion price equal to 50% of the lowest trading price on the preceding 20 days prior to the notice of conversion. On October 1, 2020, in terms of a debt conversion agreement entered into the $192,862 convertible debenture was converted into 10,285,991 shares of common stock at a conversion price of $0.019 per share.
On September 1, 2020, in terms of an assignment agreement entered into between Bay Private Equity, Inc (“Bay”) and Bellridge Capital LP (“Bellridge”), Bay assigned a convertible debenture dated September 17, 2018, with a principal balance outstanding of $3,661,874 and interest accrued thereon of $525,203 to Bellridge. On September 23, 2020, the company entered into an amending agreement with Bellridge, whereby the maturity date of the loan was extended to March 31, 2021 and the conversion price was amended to $0.055 per share, simultaneously Bellridge entered into a debt conversion agreement with the Company converting $1,321,689 of the convertible debt into 24,030,713 shares of common stock at a conversion price of $0.055 per share. | (k) | Stirling Bridge Resources |
On November 24, 2020, the Company issued a convertible debenture to Stirling Bridge Resources in the aggregate principal amount of $2,400,000, including an original issue discount of $400,000, to Bay$15,000, for net proceeds of $2,000,000 related to this agreement.$15,000. The convertible debenture bears interest at 5%10% per annum and matures on October 19, 2019. Theis convertible debenture may be converted to 5,000,000into common shares of the Companyunits at a conversion price of $0.40$0.0562 per unit. Each unit consisting of a common share and a two year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. $400,000 of the proceeds raised was used to repay a portion of the $3,300,000The convertible debenture matures on November 24, 2021.
On November 6, 2020, the Company issued a convertible debenture to Bay Private EquityAlpha Capital Anstalt in the aggregate principal amount of $500,000, for net proceeds of $500,000. The convertible debenture bears interest at 21% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a five year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on September 17, 2018 (see Note 13(g)).August 6, 2021. | (l) | Rijtec Enterprises Limited Pension Scheme |
On November 11, 2020, the Company issued a convertible debenture to Rijtec Enterprises limited Pension Scheme in the aggregate principal amount of $500,000, for net proceeds of $500,000. The convertible debenture bears interest at 10% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a two year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on November 11, 2021.
On November 30, 2020, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $150,000, for net proceeds of $150,000. The convertible debenture bears interest at 10% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a two year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on November 30, 2021. PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 14.11. | FEDERAL RELIEF LOANS |
Small Business Administration Disaster Relief loan On June 16, 2020, Petroteq Oil Recovery, LLC, received a Small Business Economic Injury Disaster loan amounting to $150,000, bearing interest at 3.75% per annum and repayable in monthly installments of $731 commencing twelve months after inception with the balance of interest and principal repayable on June 16, 2050. The loan is secured by all tangible and intangible assets of the Company. The proceeds are to be used for working capital purposes to alleviate economic injury caused by the COVID-19 pandemic. On May 1, 2020 and July 27, 2020, Petroteq CA, Inc, received a Small Business Economic Injury Disaster loan amounting to $10,000 and $150,000, respectively, bearing interest at 3.75% per annum and repayable in monthly installments of $731 commencing twelve months after inception with the balance of interest and principal repayable on July 27, 2050. The loan is secured by all tangible and intangible assets of the Company. The proceeds are to be used for working capital purposes to alleviate economic injury caused by the COVID-19 pandemic. Payroll Protection Plan loans (“PPP Loans”) On April 11, 2020, Petroteq Oil Recovery, LLC, received a PPP Loan amounting to $133,600, bearing interest at 1.00% per annum and repayable in a single payment after 2 years. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for. On April 23, 2020, Petroteq CA, Inc, received a PPP Loan amounting to $133,890, bearing interest at 0.98% per annum and repayable in monthly installments commencing on October 23, 2020. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for. Convertible notes issued to several lenders, disclosed in note 14(h), (i) and (j), above have conversion rights that are linked to the Company’s stock price, at a factor ranging from 50% to 75% of an average stock price over a period ranging from 15 to 20 days prior to the date of conversion. These conversion rights may also include a fixed maximum conversion price. The number of shares issuable upon conversion of these convertible notes is therefore not determinable until conversion takes place. The Company has determined that these conversion features meet the requirements for classification as derivative liabilities and has measured their fair value using a Black Scholes valuation model which takes into account the following factors: | ● | Historical share price volatility; |
| ● | Maturity dates of the underlying securities being valued; |
| ● | Risk free interest rates; and |
| ● | Expected dividend policies of the Company. |
The fair value of the derivative liabilities was initially recognized as a debt discount and was re-assessed at November 30, 2020, with a total change in fair value of $156,998 charged to the consolidated statement of loss and comprehensive loss. The value of the derivative liability will be re-assessed at each financial reporting date, with any movement thereon recorded in the statement of loss and comprehensive loss in the period in which it is incurred. The following assumptions were used in the Black-Scholes valuation model: | | Three months ended November 30, 2020 | | Conversion price | | | CAD$0.0375 to CAD$0.06 | | Risk free interest rate | | | 0.16 to 0.21 | % | Expected life of derivative liability | | | 6 to 12 months | | Expected volatility of underlying stock | | | 158.85 to 171.20 | % | Expected dividend rate | | | 0 | % |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 12. | DERIVATIVE LIABILITY (continued) |
The movement in derivative liability is as follows: | | November 30, 2020 | | | August 31, 2020 | | | | | | | | | Opening balance | | $ | 841,385 | | | $ | - | | Derivative financial liability arising from convertible notes | | | 120,535 | | | | 653,984 | | Fair value adjustment to derivative liability | | | (156,998 | ) | | | 187,401 | | | | | 804,922 | | | $ | 841,385 | |
| 13. | RECLAMATION AND RESTORATION PROVISIONS |
| | Oil Extraction Facility | | | Site Restoration | | | Total | | | | | | | | | | | | Balance at August 31, 2017 | | $ | 364,140 | | | $ | 208,080 | | | $ | 572,220 | | Accretion expense | | | 7,283 | | | | 4,161 | | | | 11,444 | | Balance at August 31, 2018 | | | 371,423 | | | | 212,241 | | | | 583,664 | | Accretion expense | | | 5,571 | | | | 3,184 | | | | 8,755 | | Balance at May 31, 2019 | | $ | 376,994 | | | $ | 215,425 | | | $ | 592,419 | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 14. | RECLAMATION AND RESTORATION PROVISIONS (continued) |
| | Oil | | | | | | | | | | Extraction | | | Site | | | | | | | Facility | | | Restoration | | | Total | | Balance at August 31, 2019 | | $ | 498,484 | | | | 2,472,013 | | | | 2,970,497 | | Accretion expense | | | - | | | | - | | | | - | | Balance at August 31, 2020 | | | 498,484 | | | | 2,472,013 | | | | 2,970,497 | | Accretion expense | | | - | | | | - | | | | - | | Balance at November 30, 2020 | | $ | 498,484 | | | $ | 2,472,013 | | | $ | 2,970,497 | |
In accordance with the terms of the leasesub-lease agreement disclosed in note 8 above, the Company is required to dismantle its oil extraction plant at the end of the lease term, which is expected to be in 25 years.term. During the year ended August 31, 2015, the Company recorded a provision of $350,000 for dismantling the facility. During the year ended August 31, 2019, in accordance with the requirements to provide a surety bond to the Utah Division of Oil Gas and Mining in terms of the amendment to the Notice of Intent to Commence Large Mining Operations at an estimated production of 4,000 barrels per day, the Company estimated that the cost of dismantling the oil extraction plant and related equipment would increase to $498,484. The discount rate used in the calculation is estimated to be 2.32% on operations that are expected to commence in September 2021. Because of the long-term nature of the liability, the greatest uncertainties in estimating this provision are the costs that will be incurred and the timing of the dismantling of the oil extraction facility. In particular, the Company has assumed that the oil extraction facility will be dismantled using technology and equipment currently available and that the plant will continue to be economically viable until the end of the lease term. The discount rate used in the calculation of the provision as at May 31, 2019 and August 31, 2018 is 2.0%.
In accordance with environmental laws in the United States, the Company’s environmental permits and the lease agreements, the Company is required to restore contaminated and disturbed land to its original condition before the end of the lease term, which is expected to be in 25 years. During the year ended August 31, 2015, the Company provided $200,000 for this purpose. The site restoration provision represents rehabilitation and restoration costs related to oil extraction sites. This provision has been created based on the Company’s internal estimates. Significant assumptions in estimating the provision include the technology and equipment currently available, future environmental laws and restoration requirements, and future market prices for the necessary restoration works required. During the year ended August 31, 2019, in accordance with the requirements to provide a surety bond to the Utah Division of Oil Gas and Mining in terms of the amendment to the Notice of Intent to Commence Large Mining Operations at an estimated production of 4,000 barrels per day, the Company estimated that the cost of restoring the site would increase to $2,472,013. The discount rate used in the calculation ofis estimated to be 2.32% on operations that are expected to commence in September 2021. PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the provision as at May 31,three months ended November 30, 2020 and 2019 and August 31, 2018 is 2.0%. Expressed in US dollars | 15.14. | SHARE CAPITALCOMMON SHARES
|
| Authorized:Authorized | unlimited common shares without par value | | Issued and Outstanding:Outstanding | 131,797,097382,894,504 common shares as at May 31, 2019.November 30, 2020. |
| (a) | Settlement of liabilities |
Between September 4, 201821, 2020 and May 31, 2019,November 23, 2020, the Company issued 5,216,03460,023,777 common shares of common stock to several investors in settlement of $2,368,562certain lenders to settle $2,769,000 of trade debt. Between September 1, 2018 and April 1, 2019, the Company issued 1,375,000 shares valued at $1,354,861 as compensation for professional services rendered to the Company,debt, including 1,250,000 shares of common stock issued as fees for the Bay Private Equity convertible debt raise (see Note 13(g)).
On September 6, 2018, the Company issued 1,234,567 units to an investor for net proceeds of $1,000,000. Each unit consists of one share of common stock and three quarters of a share purchase warrant for a total warrant exercisable over 925,925 shares of common stock.
On September 28, 2018, the Company issued 316,223 shares to two private investors in settlement of the remaining portion of their convertible debt of $255,078 (see Note 13(b)).
On October 11, 2018, the Company issued 81,229 shares of common stock to investors for net proceeds of $79,605. In addition, a further 752,040 units were issued to investors for net proceeds of $737,000. Each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at exercise prices ranging from $1.35 to $1.50.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 15. | SHARE CAPITAL (continued) |
On November 7, 2018, the Company issued 320,408 units to investors for net proceeds of $169,000. Each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price ranging from $0.61 to $0.66 per share.
On December 3, 2018, the Company issued 145,788 shares of common stock to a private investors in settlement of the remaining portion of their convertible debt of $56,500 including interestloss realized thereon of $13,479 (see Note 13(a)).
On December 7, 2018, the Company issued a total of 3,868,970 shares of common stock to investors for net proceeds of $2,190,200. Certain of the subscription agreements were unit agreements, whereby warrants exercisable over 3,373,920 shares of common stock were issued to investors at exercise prices ranging from $0.67 to $1.50 per share.
On December 7, 2018, the Company issued 1,190,476 units to an investor for net proceeds of $500,000, each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.525 per share.
On January 10, 2019, the company issued a total of 1,522,080 shares of common stock to investors for net proceeds of $645,100. Certain of the subscription agreements were unit agreements, whereby warrants exercisable over 1,437,557 shares of common stock were issued to investors at an exercise price of $1.50 per share.
On January 11, 2019, the Company issued 307,692 units to an investor for net proceeds of $200,000, each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price of $1.50 per share.
On January 25, 2019, the Company issued 147,058 units to an investor for net proceeds of $50,000, each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.37 per share.
On February 27, 2019, the Company issued a total of 7,242,424 shares of common stock to investors for net proceeds of $2,390,000.
On February 27, 2019, the Company issued 135,135 units to an investor for net proceeds of $50,000, each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.37 per share.
On February 27, 2019, the CEO of the Company subscribed for 62,500 shares of common stock for net proceeds of $25,000.
On March 11, 2019, the Chairman of the Board subscribed for 2,222,222 shares of common stock for net proceeds of $1,000,000.
On March 29, 2019 the Company cancelled 18,518 shares previously issued to an investor and returned the subscription proceeds of $10,000.
On March 29, 2019, the Company issued 1,481,481 units to an investor for net proceeds of $400,000, each unit consisting of one share of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.465 per share. In addition, the Company issued 248,782 shares of common stock to investors for gross proceeds of $82,000.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 15. | SHARE CAPITAL (continued) |
On April 1, 2019, the Company issued 15,000,000 shares valued at $9,000,000 in settlement of the remaining purchase consideration in terms of the acquisition of the BLM leases disclosed under note 8 above.
On May 22, 2019, the Company issued 3,431,828 units to investors for gross proceeds of $886,950, each unit consisting of one share of common stock and one warrant exercisable for a share of common stock at exercise prices ranging from $0.28 to $1.50 per share, in addition, the Company issued a further 35,714 shares to a private investor for gross proceeds of $25,000.
On May 22, 2019, the Company issued 308,333 shares of common stock to the Chairman of the Board for gross proceeds of $74,000.
| 16. | SHARE PURCHASE OPTIONS |
The Company has a stock option plan which allows the Board of Directors of the Company to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of the TSX Venture Exchange. The stock option plan is a 20% fixed number plan with a maximum of 17,969,849 common shares reserved for issuance.
During the three and nine months ended May 31, 2019, no share options were granted. During the year ended August 31, 2018 the Company granted 9,775,000 share options to directors, officers and consultants of the Company. The weighted average fair value of the options granted was estimated at $0.87 per share at the grant date using the Black-Scholes option pricing model.
On December 31, 2018, options to acquire 50,000 shares of common stock, at an exercise price of CAD$4.80 expired, unexercised.$134,490.
| (b) | Share purchase optionsCommon share subscriptions |
Share purchaseOn November 13, 2020, the Company issued 7,416,666 common shares to various investors for net proceeds of $410,000.
| (c) | Convertible debt conversions |
Between October 1, 2020 and November 13, 2020, in terms of conversion notices received, the Company issued 38,735,555 common shares for convertible debt in the aggregate sum of $1,701,256, realizing a loss thereon of $80,661. On September 17, 2020, warrants were exercised for 2,268,169 shares at an exercise price of $0.03 per share for gross proceeds of $68,045. During the three months ended November 30, 2020 the share-based compensation expense of $199,632 (2019 - $18,157) relates to the vesting of options granted during the current and prior fiscal year. Stock option transactions under the stock option plan were: | | Three months ended November 30, 2020 | | | Year ended August 31, 2020 | | | | Number of Options | | | Weighted average exercise price | | | Number of options | | | Weighted average exercise price | | Balance, beginning of period | | | 9,470,000 | | | CAD$ | 0.63 | | | | 9,808,333 | | | CAD$ | 1.20 | | Options granted | | | - | | | | | | | | 5,220,000 | | | | 0.10 | | Options forfeited | | | - | | | | | | | | (5,558,333 | ) | | CAD$ | 1.14 | | Balance, end of period | | | 9,470,000 | | | CAD$ | 0.63 | | | | 9,470,000 | | | CAD$ | 0.63 | |
Share purchase
Stock options outstanding and exercisable as at May 31, 2019November 30, 2020 are: Expiry Date | | Exercise Price | | Options Outstanding | | | Options Exercisable | | | | | | | | | | | February 1, 2026 | | CAD $5.85 | | | 33,333 | | | | 33,333 | | November 30, 2027 | | CAD $2.27 | | | 1,425,000 | | | | 1,425,000 | | June 5, 2028 | | CAD $1.00 | | | 8,350,000 | | | | 3,400,000 | | | | | | | 9,808,333 | | | | 4,858,333 | | Weighted average remaining contractual life | | | | | 8.9 years | | | | 8.9 years | | Weighted average exercise price | | | | | CAD $1.20 | | | | CAD $1.41 | |
Expiry Date | | Exercise Price | | | Options Outstanding | | | Options Exercisable | | February 20, 2021 | | CAD$ | 0.110 | | | | 2,220,000 | | | | 2,220,000 | | August 7, 2025 | | CAD$ | 0.085 | | | | 3,000,000 | | | | - | | November 30, 2027 | | CAD$ | 2.270 | | | | 950,000 | | | | 950,000 | | June 5, 2028 | | CAD$ | 1.000 | | | | 3,300,000 | | | | 2,475,000 | | | | | | | | | 9,470,000 | | | | 5,645,000 | | Weighted average remaining contractual life | | | | | | | 4.9 years | | | | 4.8 years | |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 17.16. | SHARE PURCHASE WARRANTS |
Share purchase warrants outstanding as at May 31, 2019November 30, 2020 are: Expiry Date | | Exercise Price | | Warrants Outstanding | | August 19, 2019 | | USD $7.50 | | | 66,665 | | September 4, 2019 | | USD $0.87 | | | 287,356 | | September 17, 2019 | | USD $1.10 | | | 750,000 | | October 12, 2019 | | USD $0.86 | | | 290,500 | | October 15, 2019 | | USD $ 0.86 | | | 290,500 | | November 5, 2019 | | CAD $28.35 | | | 25,327 | | January 25, 2020 | | USD $0.37 | | | 147,058 | | February 27, 2020 | | USD $0.37 | | | 135,135 | | March 9, 2020 | | USD $1.50 | | | 114,678 | | May 22, 2020 | | USD $0.28 | | | 678,571 | | May 22, 2020 | | USD $0.30 | | | 1,554,165 | | June 7, 2020 | | USD $0.525 | | | 1,190,476 | | June 14, 2020 | | USD $1.50 | | | 329,080 | | July 26, 2020 | | USD $1.50 | | | 1,637,160 | | August 28, 2020 | | USD $0.94 | | | 1,311,242 | | August 28, 2020 | | USD $1.00 | | | 246,913 | | August 28, 2020 | | USD $1.50 | | | 35,714 | | September 6, 2020 | | USD $1.01 | | | 925,925 | | October 11, 2020 | | USD $ 1.35 | | | 510,204 | | October 11, 2020 | | USD $1.50 | | | 10,204 | | November 7, 2020 | | USD $0.61 | | | 20,408 | | November 7, 2020 | | USD $0.66 | | | 300,000 | | November 8, 2020 | | USD $1.01 | | | 918,355 | | December 7, 2020 | | USD $0.67 | | | 185,185 | | December 7, 2020 | | USD $1.50 | | | 3,188,735 | | January 10, 2021 | | USD $1.50 | | | 1,437,557 | | January 11, 2021 | | USD $1.50 | | | 307,692 | | Mar 29, 2021 | | USD $0.465 | | | 1,481,481 | | April 8, 2021 | | CAD $4.73 | | | 57,756 | | May 22, 2021 | | USD $0.91 | | | 6,000,000 | | May 22, 2021 | | USD $0.30 | | | 1,133,333 | | May 22, 2021 | | USD $1.50 | | | 65,759 | | | | | | | 25,633,134 | | Weighted average remaining contractual life | | | | | 1.45 years | | Weighted average exercise price | | USD $0.99 | | | | |
Expiry Date | | Exercise Price | | | Warrants Outstanding | | December 7, 2020 | | US$ | 0.67 | | | | 185,185 | | December 7, 2020 | | US$ | 1.50 | | | | 3,188,735 | | December 17, 2020 | | US$ | 0.26 | | | | 952,380 | | January 10, 2021 | | US$ | 1.50 | | | | 1,437,557 | | January 11, 2021 | | US$ | 1.50 | | | | 307,692 | | January 14, 2021 | | US$ | 0.20 | | | | 1,176,470 | | January 16, 2021 | | US$ | 0.14 | | | | 357,142 | | Mar 29, 2021 | | US$ | 0.465 | | | | 1,481,481 | | April 8, 2021 | | CAD$ | 4.73 | | | | 57,756 | | May 22, 2021 | | US$ | 0.91 | | | | 6,000,000 | | May 22, 2021 | | US$ | 0.30 | | | | 1,133,333 | | May 22, 2021 | | US$ | 1.50 | | | | 65,759 | | July 5, 2021 | | US$ | 0.25 | | | | 52,631 | | July 5, 2021 | | US$ | 0.28 | | | | 131,578 | | July 5, 2021 | | US$ | 0.35 | | | | 3,917,771 | | July 21, 2021 | | US$ | 0.0412 | | | | 2,666,666 | | August 7, 2021 | | US$ | 0.0412 | | | | 3,033,980 | | August 16, 2021 | | CAD$ | 0.29 | | | | 120,000 | | August 16, 2021 | | US$ | 0.18 | | | | 4,210,785 | | September 20, 2021 | | US$ | 0.23 | | | | 1,111,111 | | September 30, 2021 | | US$ | 0.23 | | | | 2,777,777 | | December 30, 2021 | | US$ | 0.055 | | | | 4,545,454 | | November 26, 2023 | | US$ | 0.17 | | | | 1,683,230 | | December 4, 2023 | | US$ | 0.17 | | | | 2,286,720 | | March 30, 2024 | | US$ | 0.08 | | | | 392,500 | | March 30, 2024 | | US$ | 0.15 | | | | 4,906,250 | | January 25, 2025 | | US$ | 0.14 | | | | 151,785 | | | | | | | | | 47,379,348 | | Weighted average remaining contractual life | | | | | | | 1.10 years | | Weighted average exercise price | | USD$ | 0.38 | | | | | |
FromWarrants exercisable over 3,240,651 common shares at exercise prices ranging from $0.18 and $1.50 per share expired during the three months ended November 30, 2020.
On September 6, 2018 to December 28, 2019,17, 2020, warrants for 2,268,169 shares were exercised at an exercise price of $0.03 per share for gross proceeds of $68,045. On September 30, 2020, the Company issued 1,878,772 warrantswarrant exercisable for 4,545,454 shares to a convertible debt note holders in terms of subscription unit agreements entered into with the convertible note holders (see Note 13(c) to 13 (h)).holder. The fair value of the warrants granted was estimated using the relative fair value method at between $0.07 to $0.39 per warrant. From September 6, 2018 to May 22, 2019, the Company issued 13,271,888 warrants in terms of common share subscription agreements entered into with various investors. The fair value of the warrants granted was estimated using the relative fair value method at between $0.09 and $0.36 per warrant.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 17. | SHARE PURCHASE WARRANTS (continued) |
On November 8, 2018, the Company issued 918,355 warrants to certain debt holders in settlement of certain debt. The fair value of the warrants granted was estimated using a black Scholes valuation method at $0.42 per warrant.
The warrants issued in terms of the convertible debt subscription agreements during the nine months ended May 31, 2019, were valued at $557,407$101,475 using the relative fair value method. In addition, warrants valued on debt extinguishment agreements entered into with certain convertible note holders, whereby the exercise price and in certain cases, the expiry date of the warrant were amended, amounted to $149,354.
The fair value of share purchase warrants was estimated using the Black-Scholes valuation model. The warrants issued in terms of share subscription agreements entered into duringmodel utilizing the nine months ended May 31, 2019, were valued at $2,097,215 using the relative fair value method. The fair value of warrants was estimated using the Black-Scholes valuation model.
The following assumptions were used in the Black Scholes valuation model:weighted average assumptions:
| | NineThree months ended November 30, 2020
May 31, 2019
| | Share price | | CAD $0.40 to CAD $1.55CAD$ | 0.075 | | Exercise price | | CAD $0.38 to CAD $2.01US$ | 0.055 | | Expected share price volatility | | 88% to 137% | 147.2 | % | Risk-free interest rate | | 1.55% to 2.34% | 0.21 | % | Expected term | | 1 to 2 years | 1.27 | |
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 Expressed in US dollars | 18.17. | DILUTED LOSS PER SHARE |
The Company’s potentially dilutive instruments are convertible debentures and share purchasestock options and share purchase warrants. Conversion of these instruments would have been anti-dilutive for the periods presented and consequently, no adjustment was made to basic loss per share to determine diluted loss per share. These instruments could potentially dilute earnings per share in future periods. For the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, the following share purchasestock options, share purchase warrants and convertible securities were excluded from the computation of diluted loss per share as the resultsresult of the computation was anti-dilutive: | | Nine months ended May 31, 2019 | | | Nine months ended May 31, 2018 | | | | | | | | | Share purchase options | | | 9,808,333 | | | | 1,508,333 | | Share purchase warrants | | | 25,633,134 | | | | 7,034,531 | | Convertible securities | | | 11,084,020 | | | | 235,344 | | | | | 46,525,487 | | | | 8,778,208 | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Share purchase options | | | 9,470,000 | | | | 9,808,333 | | Share purchase warrants | | | 47,379,348 | | | | 45,347,469 | | Convertible securities | | | 97,608,979 | | | | 16,909,330 | | | | | 154,458,327 | | | | 72,065,132 | |
| 19.18. | RELATED PARTY TRANSACTIONS |
Related party transactions not otherwise separately disclosed in these unaudited condensed consolidated financial statements are: | (a) | Key management personnel and director compensation |
The remuneration of the Company’s directors and other members of key management, who have the authority and responsibility for planning, directing, and controlling the activities of the Company, consist of the following amounts:
| | Three months ended | | | | May 31, 2019 | | | May 31, 2018 | | | | | | | | | Salaries, fees and other benefits | | $ | 162,114 | | | $ | 195,300 | | Share-based compensation | | | 305,413 | | | | - | | | | $ | 467,527 | | | $ | 195,300 | |
| | Nine months ended | | | | May 31, 2019 | | | May 31, 2018 | | | | | | | | | Salaries, fees and other benefits | | $ | 523,620 | | | $ | 484,800 | | Share-based compensation | | | 916,239 | | | | 2,505,647 | | | | $ | 1,439,859 | | | $ | 2,990,447 | |
At May 31, 2019, $326,957 (August 31, 2018: $1,065,392)November 30, 2020, $785,087 was due to members of key management and directors for unpaid salaries, expenses and directors’ fees.fees (August 31, 2020 – $547,660). | (b) | Transactions with directors and officers |
During the three and nine months ended May 31, 2019 and 2018,November 30, 2020, no common shares were granted as compensation to key management and directors of the Company. | (b) | Transactions with directors and officers |
On November 8, 2018October 31, 2019 and March 11, 2020, a director advanced the Company entered into$50,000 and $25,000, respectively as a debt settlement agreement with Robert Dennewald, a directorshort-term loan. The loan is interest free and is expected to be repaid within three months. The total loan outstanding as of the Company, whereby the company issued 28,880 shares of common stock in settlement of $23,393 of travel related payables. On February 25, 2019, the Company entered into debt settlement agreements whereby directors’ fees owing to the directors were settled by the issue of shares of common stock as follows:
Name | | Description | | Amount | | | Shares issued | | | | | | | | | | | Aleksandr Blyumkin | | Directors fees | | $ | 61,989 | | | | 154,972 | | Gerald Bailey | | Directors fees | | | 61,989 | | | | 154,972 | | Travis Schneider | | Directors fees | | | 18,841 | | | | 47,102 | | Robert Dennewald | | Directors fees | | | 61,989 | | | | 154,972 | | David Sealock | | Directors fees | | | 3,107 | | | | 7,767 | | | | | | $ | 207,915 | | | | 519,785 | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollarsNovember 30, 2020 was $125,000.
| 19. | RELATED PARTY TRANSACTIONS (continued) |
| (b) | Transactions with directors and officers (continued) |
On February 27, 2019, the CEO of the Company subscribed for 62,500 shares of common stock for gross proceeds of $25,000.
On March 5, 2019, the Chairman of the Board, subscribed for 2,222,222 shares of common stock for gross proceeds of $1,000,000.
On March 29, 2019, Nefco Petroleum, a Company controlled by the Chairman of the Board, subscribed for 197,058 shares of common stock for gross proceeds of $67,000.
On May 22, 2019, the Chairman of the Board, subscribed for 308,333 shares of common stock for gross proceeds of $74,000.
On May 31, 2019, Palmira Associates, a Company controlled by the Chairman of the Board, entered into a debt settlement agreement whereby debt of $98,030 was settled by the issue of 363,073 shares of common stock.
As of May 31, 2019,November 30, 2020 and August 31, 2018,2020, the Company owed the chairman of the Board and the various private companies controlled by him $527,336 and $395,647 respectively, in funds advanced to the ChairmanCompany for working capital purposes, in addition, the Company owes the chairman of the Board the aggregate sum of $nilboard $220,000, and $nil, respectively.$160,000 respectively, in unpaid salaries. As atof November 30, 2020 and August 31, 2017,2020, the Company had received loansowed a director $125,000 and $125,000, respectively in working capital advances to the Company. The advance is interest free with no fixed terms of $419,322 from the Chairmanrepayment. | 19. | SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
Selling, general and administrative expenses consists of the Board. These loans were interest free and were repaid prior to August 31, 2018.following: | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Investor relations and public relations | | $ | 87,936 | | | $ | 23,946 | | Professional fees | | | 399,129 | | | | 1,026,765 | | Salaries and wages | | | 87,936 | | | | 200,474 | | Share-based compensation | | | 199,632 | | | | 178,157 | | Travel and promotional expenses | | | 83,464 | | | | 571,492 | | Other | | | 186,760 | | | | 381,248 | | | | $ | 1,044,857 | | | $ | 2,382,082 | |
On September 4, 2018, the Company entered into a Debt Settlement Agreement whereby it agreed to convert $249,285 of advances made to the Company by the Chairman of the Board into 336,871 common shares at a conversion price of $0.74 per share.
As at May 31,PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended November 30, 2020 and 2019 the Chairman of the Board owed the Company $272,820. Expressed in US dollars | 20. | INVESTMENT IN JOINT VENTUREFINANCING COSTS, NET |
On November 11, 2016,Financing costs, net, consists of the Company and three other parties entered into a joint venture for the operation of a website for careers in the oil and gas industry. The Company has a 25% interest in this joint venture and has made advances of $68,331 to the joint venture as of August 31, 2017. The joint venture has not commenced operations as of May 31, 2019.following:
In November 2017, the Company entered into an agreement with First Bitcoin Capital Corp. (“FBCC”), a global developer of blockchain-based applications, to design and develop a blockchain-powered supply chain management platform for the oil and gas industry to be marketed to oil and gas producers and operators. On January 8, 2018, the Company paid the first instalment of $100,000 to FBCC and is currently renegotiating the terms of the agreement. The initial $100,000 has been applied to operating costs incurred by Petrobloq, LLC related to an office lease beginning March 1, 2018 and research costs related to payments to the development team consisting of four employees. A further $106,500 was advanced to First Bitcoin Capital during the nine months ended May 31, 2019. These funds were used to fund certain operating costs and payments to the development team.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Interest expense on borrowings | | $ | 287,639 | | | $ | 143,308 | | Amortization of debt discount | | | 333,748 | | | | 353,095 | | | | | - | | | | 12,891 | | | | $ | 621,387 | | | $ | 509,294 | |
| 21. | OTHER EXPENSE (INCOME), NET |
Other expense (income), net, consists of the following: | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Loss (gain) on settlement of liabilities | | $ | 134,490 | | | $ | (394,409 | ) | Loss on conversion of convertible debt | | | 80,661 | | | | - | | Loss on debt extinguishment | | | 330,256 | | | | - | | Interest income | | | (948 | ) | | | (22,271 | ) | | | $ | 544,459 | | | $ | (416,680 | ) |
The Company operated in two reportable segments within the USA during the three and nine months ended May 31,November 30, 2020 and 2019, and 2018: oil extraction and processing operations and mining operations. Once the expansion of the plant has reached a stage of completion where it is viable to commence production and the requisite licenses have been obtained, the Company’s oil extraction segment will be able to commence commercial production and will generate revenue from the sale of hydrocarbon products to third parties.
The presentation of the condensed consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There were minimallimited operations in the mining operations segment during the three and nine months ended May 31, 2019November 30, 2020 and 2018.2019. Other information about reportable segments are: | | | November 30, 2020 | | | | May 31, 2019 | | | Oil | | Mining | | | | | (in ’000s of dollars) | | Oil Extraction | | Mining operations | | Consolidated | | | Extraction | | | Operations | | | Consolidated | | Additions to non-current assets | | $ | 7,851 | | | $ | 10,800 | | | $ | 18,651 | | | $ | 4,173 | | | $ | - | | | $ | 4,173 | | Reportable segment assets | | | 37,291 | | | | 19,655 | | | | 56,946 | | | | 44,897 | | | | 33,240 | | | | 78,137 | | Reportable segment liabilities | | $ | 10,584 | | | $ | 169 | | | $ | 10,753 | | | $ | 18,171 | | | $ | 100 | | | $ | 18,271 | |
| | | November 30, 2019 | | | | May 31, 2018 | | | Oil | | Mining | | | | | (in ’000s of dollars) | | Oil Extraction | | | Mining operations | | | Consolidated | | | Extraction | | | Operations | | | Consolidated | | Additions to non-current assets | | $ | 3,025 | | | $ | - | | | $ | 3,025 | | | $ | 1,893 | | | $ | - | | | $ | 1,893 | | Reportable segment assets | | | 22,959 | | | | 9,047 | | | | 32,006 | | | | 40,918 | | | | 34,794 | | | | 75,712 | | Reportable segment liabilities | | $ | 7,821 | | | $ | 169 | | | $ | 7,990 | | | $ | 13,113 | | | $ | 3,970 | | | $ | 17,083 | |
PETROTEQPETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 21.22. | SEGMENT INFORMATION (continued) |
Segment operating results are as follows:
| | November 30, 2020 | | (in ’000s of dollars) | | Oil Extraction | | | Mining operations | | | Consolidated | | Revenue from license fees | | $ | 2,000 | | | $ | - | | | $ | 2,000 | | Revenues from hydrocarbon sales | | | - | | | | - | | | | - | | Other production and maintenance costs | | | (345 | ) | | | - | | | | (345 | ) | Gross Profit | | | 1,655 | | | | - | | | | 1,655 | | Operating Expenses | | | | | | | | | | | | | Depreciation, depletion and amortization | | | 12 | | | | - | | | | 12 | | Selling, general and administrative expenses | | | 1,045 | | | | - | | | | 1,045 | | Investor relations | | | 88 | | | | - | | | | 88 | | Professional fees | | | 399 | | | | - | | | | 399 | | Salaries and wages | | | 88 | | | | - | | | | 88 | | Share-based compensation | | | 200 | | | | - | | | | 200 | | Travel and promotional expenses | | | 83 | | | | - | | | | 83 | | Other | | | 187 | | | | - | | | | 187 | | | | | | | | | | | | | | | Financing costs | | | 621 | | | | - | | | | 621 | | Other expense (income) | | | 544 | | | | - | | | | 544 | | Gain on settlement of liabilities | | | 134 | | | | - | | | | 134 | | Loss on conversion of convertible debt | | | 80 | | | | - | | | | 80 | | Loss on debt extinguishment | | | 330 | | | | - | | | | 330 | | Derivative liability movements | | | (157 | ) | | | - | | | | (157 | ) | | | | | | | | | | | | | | Net loss | | $ | 410 | | | $ | - | | | $ | 410 | |
| | May 31, 2019 | | (in ’000s of dollars) | | Oil Extraction | | | Mining operations | | | Consolidated | | | | | | | | | | | | External Revenues | | $ | 59 | | | $ | - | | | $ | 59 | | Cost of Goods Sold | | | 729 | | | | 199 | | | | 928 | | Gross Loss | | | (670 | ) | | | (199 | ) | | | (869 | ) | Operating Expenses | | | | | | | | | | | | | General and administrative | | | 593 | | | | 13 | | | | 606 | | Travel and promotion | | | 1,959 | | | | - | | | | 1,959 | | Professional fees | | | 3,363 | | | | - | | | | 3,363 | | Legal fees | | | 1,343 | | | | - | | | | 1,343 | | Research and development | | | 113 | | | | - | | | | 113 | | Salaries and wages | | | 1,043 | | | | - | | | | 1,043 | | Share-based compensation | | | 916 | | | | - | | | | 916 | | Loss on settlement of liabilities | | | 98 | | | | - | | | | 98 | | Loss on convertible debt | | | 100 | | | | - | | | | 100 | | Interest expense | | | 2,534 | | | | - | | | | 2,534 | | Equity loss | | | 150 | | | | - | | | | 150 | | Other income | | | (95 | ) | | | - | | | | (95 | ) | Depreciation and amortization | | | 54 | | | | - | | | | 54 | | Net loss | | $ | 12,841 | | | $ | 212 | | | $ | 13,053 | |
| | November 30, 2019 | | (in ’000s of dollars) | | Oil Extraction | | | Mining operations | | | Consolidated | | | | | | | | | | | | Revenues from hydrocarbon sales | | $ | 101 | | | $ | - | | | $ | 101 | | Other production and maintenance costs | | | 678 | | | | - | | | | 678 | | Advance royalty payments | | | - | | | | 92 | | | | 92 | | Gross Loss | | | (577 | ) | | | (92 | ) | | | (669 | ) | Expenses | | | | | | | | | | | | | Depreciation, depletion and amortization | | | 74 | | | | - | | | | 74 | | Selling, general and administrative expenses | | | 2,379 | | | | 3 | | | | 2,382 | | Investor relations | | | 24 | | | | - | | | | 24 | | Professional fees | | | 1,026 | | | | 1 | | | | 1,027 | | Salaries and wages | | | 200 | | | | - | | | | 200 | | Share-based compensation | | | 178 | | | | - | | | | 178 | | Travel and promotional expenses | | | 571 | | | | - | | | | 571 | | Other | | | 380 | | | | 2 | | | | 382 | | | | | | | | | | | | | | | Financing costs, net | | | 509 | | | | - | | | | 509 | | Other income | | | (416 | ) | | | - | | | | (416 | ) | Gain on settlement of liabilities | | | (394 | ) | | | - | | | | (394 | ) | Interest income | | | (22 | ) | | | - | | | | (22 | ) | Derivative liability movements | | | (35 | ) | | | - | | | | (35 | ) | Net loss | | $ | 3,088 | | | $ | 95 | | | $ | 3,183 | |
PETROTEQ
PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 21. | SEGMENT INFORMATION (continued) |
Segment operating results are as follows:
| | May 31, 2018 | | (in ’000s of dollars) | | Oil Extraction | | | Mining operations | | | Consolidated | | | | | | | | | | | | External Revenues | | $ | - | | | $ | - | | | $ | - | | Cost of Goods Sold | | | 29 | | | | 205 | | | | 234 | | Gross Loss | | | (29 | ) | | | (205 | ) | | | (234 | ) | Operating Expenses | | | | | | | | | | | | | General and administrative | | | 401 | | | | 11 | | | | 412 | | Travel and promotion | | | 2,087 | | | | - | | | | 2,087 | | Professional fees | | | 1,576 | | | | - | | | | 1,576 | | Legal fees | | | 140 | | | | - | | | | 140 | | Salaries and wages | | | 639 | | | | - | | | | 639 | | Share-based compensation | | | 2,523 | | | | - | | | | 2,523 | | Gain on settlement of liabilities | | | (216 | ) | | | - | | | | (216 | ) | Interest expense | | | 323 | | | | - | | | | 323 | | Other income | | | (51 | ) | | | - | | | | (51 | ) | Equity income from investment in Accord Energy | | | - | | | | - | | | | - | | Depreciation and amortization | | | 890 | | | | - | | | | 890 | | Net loss | | $ | 8,341 | | | $ | 216 | | | $ | 8,557 | |
The Companycompany has commitments under equipment financing arrangements entered into two office lease arrangement which, including the Company’s share of operating expenses and property taxes, will require estimated minimum annual payments of:in prior periods, see Note 7, above. 2019 | | $ | 33,615 | | 2020 | | | 124,440 | | 2021 | | | 101,220 | | 2022 | | | 78,000 | | 2023 | | $ | 65,000 | |
For the nine months ended May 2019, the Company made $51,883 (2018 - $nil) in office lease payments.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern and to maintain a flexible capital structure which optimizes the costsMaturity of capital at an acceptable level. The Company considers its capital for this purpose to be its shareholders’ equity and long-term liabilities.Leases
The Company manages its capital structure and makes adjustments to it in lightamount of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may seek additional financing or dispose of assets.future minimum lease payments under finance leases is as follows: | | November 30, 2020 | | | August 31, 2020 | | Undiscounted minimum future lease payments | | | | | | | | | Total instalments due: | | | | | | | | | Within 1 year | | $ | 193,680 | | | $ | 193,680 | | 1 to 2 years | | | 32,280 | | | | 80,700 | | 2 to 3 years | | | - | | | | - | | | | | 225,960 | | | | 274,380 | |
In order to facilitate the management
The amount of its capital requirements, the Company monitors its cash flows and credit policies and prepares expenditure budgets that are updatedfuture minimum lease payments under operating leases is as necessary depending on various factors, including successful capital deployment and general industry conditions. The budgets are approved by the Board of Directors. There are no external restrictions on the Company’s capital.follows: | | November 30, 2020 | | | August 31, 2020 | | Undiscounted minimum future lease payments | | | | | | | | | Total instalments due: | | | | | | | | | Within 1 year | | $ | 61,528 | | | $ | 61,070 | | 1 to 2 years | | | 63,375 | | | | 62,903 | | 2 to 3 years | | | 65,276 | | | | 64,790 | | 3 to 4 years | | | 50,050 | | | | 66,734 | | | | | 240,229 | | | | 255,497 | |
| 24. | MANAGEMENT OF FINANCIAL RISKS |
The risks to which the Company’s financial instruments are exposed to are:
Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations. The Company is exposed to credit risk through its cash held at financial institutions, trade receivables from customers and notes receivable.
The Company has cash balances at various financial institutions. The Company has not experienced any loss on these accounts, although balances in the accounts may exceed the insurable limits. The Company considers credit risk from cash to be minimal.
Credit extension, monitoring and collection are performed for each of the Company’s business segments. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of the customer’s credit information.
Accounts receivable, collections and payments from customers are monitored and the Company maintains an allowance for estimated credit losses based upon historical experience with customers, current market and industry conditions and specific customer collection issues.
At May 31, 2019 and August 31, 2018, the Company had minimal trade receivables. The Company considers it maximum exposure to credit risk to be its trade and other receivables and notes receivable.
Interest rate risk is the risk that changes in interest rates will affect the fair value or future cash flows of the Company’s financial instruments. The Company is exposed to interest rate risk as a result of holding fixed rate investments of varying maturities as well as through certain floating rate instruments. The Company considers its exposure to interest rate risk to be minimal.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 24. | MANAGEMENT OF FINANCIAL RISKS (continued) |
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities as they become due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses.
The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted and include estimated interest payments. The Company has included both the interest and principal cash flows in the analysis as it believes this best represents the Company’s liquidity risk.
At May 31, 2019 | | | | | | | | | | | | | | | | | | | | | Contractual cash flows | | (in ’000s of dollars) | | Carrying amount | | | Total | | | 1 year or less | | | 2 - 5 years | | | More than 5 years | | Accounts payable | | $ | 2,058 | | | $ | 2,058 | | | $ | 2,058 | | | $ | - | | | $ | - | | Accrued liabilities | | | 748 | | | | 748 | | | | 748 | | | | - | | | | - | | Convertible debenture | | | 5,258 | | | | 6,516 | | | | 6,516 | | | | - | | | | - | | Long-term debt | | | 1,313 | | | | 1,516 | | | | 1,236 | | | | 280 | | | | - | | | | $ | 9,377 | | | $ | 10,838 | | | $ | 10,558 | | | $ | 280 | | | $ | - | |
At August 31, 2018 | | | | | | | | | | | | | | | | | | | | | Contractual cash flows | | (in ’000s of dollars) | | Carrying amount | | | Total | | | 1 year or less | | | 2 - 5 years | | | More than 5 years | | Accounts payable | | $ | 1,102 | | | $ | 1,102 | | | $ | 1,102 | | | $ | - | | | $ | - | | Accrued liabilities | | | 1,900 | | | | 1,900 | | | | 1,900 | | | | - | | | | - | | Convertible debenture | | | 508 | | | | 533 | | | | 258 | | | | 275 | | | | - | | Long-term debt | | | 1,627 | | | | 1,880 | | | | 1,159 | | | | 721 | | | | - | | | | $ | 5,137 | | | $ | 5,415 | | | $ | 4,419 | | | $ | 996 | | | $ | - | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 25. | RECONCILIATION OF CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES |
Liabilities arising from financing activities include corporate loans and loans payable to officers and related companies. A reconciliation of changes in these liabilities is:
For the nine months ended | | May 31, 2019 | | | May 31, 2018 | | | | | | | | | Balance, beginning of the period | | $ | 2,134,955 | | | $ | 2,804,202 | | | | | | | | | | | Changes from financing cash flows | | | | | | | | | Proceeds from debt | | | 517,000 | | | | 1,328,056 | | Proceeds from convertible debt | | | 5,618,750 | | | | 5,200,171 | | Proceeds from officer loan | | | - | | | | - | | Repayment of long-term loans | | | (497,206 | ) | | | (947,720 | ) | Repayment of convertible loans | | | (400,000 | ) | | | | | Advances from executive officers | | | - | | | | 9,196 | | | | | | | | | | | Effect of changes in foreign exchange rate | | | (21,838 | ) | | | (23,277 | ) | | | | | | | | | | Other changes | | | | | | | | | Debt settled through share issuance | | | (192,395 | ) | | | (4,392,171 | ) | Conversion of convertible debt | | | (257,082 | ) | | | - | | Debt applied to notes receivable | | | (120,900 | ) | | | | | Interest accrual | | | - | | | | 2,160 | | Interest capitalized | | | - | | | | 446,355 | | Value placed on warrants issued | | | (557,407 | ) | | | - | | Value placed on beneficial conversion feature | | | (621,166 | ) | | | - | | Gain on debt deposit | | | - | | | | (50,982 | ) | Accretion of loan balance | | | 967,382 | | | | 56,500 | | Balance, end of the period | | $ | 6,570,093 | | | $ | 4,432,490 | |
| 26. | RECONCILIATION OF IFRS DISCLOSURE TO US GAAP DISCLOSURE |
The Company’s primary listing is on the Toronto Ventures Exchange (“TSXV”). The unaudited condensed consolidated financial statements filed on that exchange are prepared in terms of International Financial Reporting Standards (“IFRS”).
The Company’s unaudited condensed consolidated financial statements on this Form 10-Q is prepared in terms of US GAAP.
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 26. | RECONCILIATION OF IFRS DISCLOSURE TO US GAAP DISCLOSURE (continued) |
The main differences between IFRS and US GAAP are as follows:
For the three months ended | | May 31, 2019 | | | May 31, 2018 | | | | | | | | | Net loss and comprehensive loss in accordance with IFRS | | $ | 4,792,890 | | | $ | 3,178,839 | | | | | | | | | | | Share-based compensation | | | (248,912 | ) | | | - | | Debt issue costs | | | (43,799 | ) | | | - | | | | | | | | | | | Net loss and comprehensive loss in accordance with US GAAP | | $ | 4,500,179 | | | $ | 3,178,839 | |
For the nine months ended | | May 31, 2019 | | | May 31, 2018 | | | | | | | | | Net loss and comprehensive loss in accordance with IFRS | | $ | 13,747,997 | | | $ | 8,557,082 | | | | | | | | | | | Share-based compensation | | | (746,736 | ) | | | - | | Debt issue costs | | | 51,894 | | | | - | | | | | | | | | | | Net loss and comprehensive loss in accordance with US GAAP | | $ | 13,053,155 | | | $ | 8,557,082 | |
| | May 31, 2019 | | | August 31, 2018 | | | | | | | | | Total shareholders’ equity in accordance with IFRS | | $ | 46,193,400 | | | $ | 32,929,400 | | | | | | | | | | | Components of share capital in accordance with IFRS | | | | | | | | | Share capital | | | 100,109,913 | | | | 77,870,606 | | Shares to be issued | | | 1,068,000 | | | | 996,401 | | Share option reserve | | | 14,485,974 | | | | 12,823,000 | | Share warrant reserve | | | 6,246,032 | | | | 3,207,915 | | | | | 121,909,919 | | | | 94,897,922 | | Adjustment for: | | | | | | | | | Share-based compensation | | | (217,862 | ) | | | 528,874 | | Total share capital in accordance with US GAAP | | | 121,692,057 | | | | 95,426,796 | | | | | | | | | | | Accumulated deficit in accordance with IFRS | | | (75,716,519 | ) | | | (61,968,522 | ) | Adjustment for: | | | | | | | | | Share-based compensation | | | 217,862 | | | | - | | Debt issue costs | | | (51,894 | ) | | | (528,874 | ) | Accumulated deficit in accordance with US GAAP | | | (75,550,551 | ) | | | (62,497,396 | ) | | | | | | | | | | Shareholders equity in accordance with US GAAP | | $ | 46,141,506 | | | $ | 32,929,400 | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
| 26. | RECONCILIATION OF IFRS DISCLOSURE TO US GAAP DISCLOSURE (continued) |
Share-based compensation
The Company granted certain directors, officers and consultants of the Company share purchase options with vesting terms attached thereto, 25% vested immediately and a further 25%, per annum will vest on the grant date of the share purchase options. These share purchase options were valued using a Black Scholes valuation model utilizing the assumptions as disclosed in note 16 above.
Under IFRS share-based compensation paid to certain directors, consultants and employees were amortized over the vesting period of the option grant using a weighted average expense over the vesting period, including the immediately vesting share purchase options.
Under US GAAP, the share purchase options issued to consultants were expensed immediately and the share purchase options issued to directors and officers were amortized as follows; (i) the value of the twenty five percent of the options that vested immediately were expensed immediately; (ii) the remaining value of the seventy five percent of the options which vest equally on an annual basis are being expensed over the vesting period on a straight line basis.
The difference in treatment between IFRS and US GAAP gave rise to a reversal of expense of $248,912 and $746,736 for the three months and nine months ended May 31, 2019, respectively. There was no impact on the prior periods as all options issued during that period vested immediately and were accordingly expensed immediately.
Debt issue costs
The Company settled certain commitment fees and finders fees related to the issue of convertible notes by the issue of common shares valued at $1,276,980. Under IFRS, these debt issue costs were originally expensed in the three month period ended November 30, 2018 and subsequently recorded as a prepaid commitment fee in the nine month period ended May 31, 2019. Under IFRS this commitment fee is not directly linked to the convertible debt and is amortized on a straight-line basis over the commitment period.
In terms of US GAAP, the commitment fee and finders fee is regarded as directly related to the debt and is recorded as a debt discount which is amortized over the life of the debt, including any accelerated amortization due to repayment or early settlement of the debt.
The difference in treatment between IFRS and US GAAP gave rise to a reversal of the prepaid commitment fee of $1,276,980 and the subsequent amortization thereof of $894,587 and the raising of additional debt discount of $1,276,980 and the amortization thereof of $946,481. The difference between the amortization of the prepaid commitment fee and the debt discount amortization to the statement of loss and comprehensive loss was a credit of $43,799 and a charge of $51,894 for the three months and nine months ended May 31, 2019, respectively.
Subsequent eventsEvents after the reporting date not otherwise separately disclosed in these unaudited condensed consolidated financial statements are:
On July 3, 2019, the Company cancelled 390,625December 9, 2020, a warrant holder exercised warrants over a total of 1,176,470 shares previously issued to an investor for gross proceeds of $250,000, due to the proceeds never being received.$35,294 at an exercise price of $0.03 per share. On July 5, 2019,December 7, 2020, the Company entered into lability settlement agreements with a vendor, whereby 1,538,461 shares were issued 6,732,402in settlement of liabilities amounting to $60,000. Between December 15, 2020 and January 13, 2021, convertible note holders converted $128,080 of convertible debt into 4,423,123 common shares at an average conversion price of common stock and warrants exercisable to purchase 4,601,980$0.029 per share. On January 7, 2021, Cantone Asset Management converted $200,000 of convertible debt maturing on January 14, 2021 into 5,405,405 shares of common stock at exercise pricesa conversion price of $0.037 per share. On January 12, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $86,350, including an original issue discount of $7,850, for net proceeds of $75,000 after certain expenses. The note bears interest at 12% per annum and matures on January 12, 2022. The note may be prepaid subject to certain prepayment penalties ranging from $0.25 per share110% to $0.40 per share, for gross proceeds130% based on the period of $1,546,149. Included in this issuance was 210,526prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock issuedat a conversion price equal to a company controlled by the Chairman75% of the Board. average of the lowest trading bid price during the previous fifteen prior trading days. PETROTEQ ENERGY INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31,For the three months ended November 30, 2020 and 2019 AND 2018
Expressed in US dollars | 27. | SUBSEQUENT EVENTS (continued) |
On July 22, 2019, the Company issued to an arm’s length lender a $300,000 principal amount (including an original issue discount of 20%) unsecured convertible debenture, and warrants to purchase up to 1,315,789 common shares of the Company at $0.24 per share for 15 months. The debenture has a term of 15 months and bears interest at a rate of 7% per annum payable quarterly, and at the option of the holder the purchase amount of the debenture (excluding the original issue discount of 20%) is convertible into 1,315,789 common shares of the Company at $0.19 per share in accordance with the terms and conditions set out in the debenture.
The Company entered into debt settlement agreements whereby debt of $93,500 was settled by the issue of 410,000 shares of common stock.
The Company entered into a shares for debt transaction, pursuant to which it will issue 838,714 common shares in satisfaction of $176,130 of indebtedness currently owed to an arm’s length service provider.
| 28.25. | SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS |
Supplemental unaudited information regarding the Company’s oil and gas activities is presented in this note. The Company has not commenced commercial operations, therefore the disclosure of the results of operations of hydrocarbon activities is limited to advance royalties paid. All expenditure incurred to date is capitalized as part of the development cost of the Company’scompany’s oil extraction plant. The Company does not have any proven hydrocarbon reserves or historical data to forecast the standardized measure of discounted future net cash flows related to proven hydrocarbon reserve quantities. Upon the commencement of production, the Company will be able to forecast future revenues and expenses of its hydrocarbon activities. Costs incurred
The following table reflects the costs incurred in hydrocarbon property acquisition and development expenses. All costs were incurred in the US. (In US$ 000’s) | | Nine months ended May 31, 2019 | | | Nine months ended May 31, 2018 | | | | | | | | | Advanced royalty payments | | $ | 300 | | | $ | 469 | | Mineral rights acquired | | | 10,800 | | | | - | | Construction of oil extraction plant | | | 7,851 | | | | 3,025 | | | | $ | 18,951 | | | $ | 3,494 | |
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed in US dollars
(In US$ 000’s) | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Advanced royalty payments | | $ | - | | | $ | 60 | | Mineral lease acquisition costs – Unproven properties | | | - | | | | 560 | | Construction of oil extraction plant | | | 4,173 | | | | 1,893 | | | | $ | 4,173 | | | $ | 2,513 | |
| 28. | SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (continued) |
Results of operations
The only operating expenses incurred to date on hydrocarbon activities relate to minimum royalties paid on mineral leases that the Company has entered into and certain operating expenses related to plant maintenance.maintenance and personnel costs incurred. All costs were incurred in the US. (In US$ 000’s) | | Nine months ended May 31, 2019 | | | Nine months ended May 31, 2018 | | | | | | | | | Plant maintenance expenses | | $ | 729 | | | $ | - | | Advanced royalty payments | | | 199 | | | | 234 | | | | $ | 928 | | | $ | 234 | |
(In US$ 000’s) | | Three months ended November 30, 2020 | | | Three months ended November 30, 2019 | | | | | | | | | Advanced royalty payments applied or expired | | $ | - | | | $ | 92 | | Production and maintenance costs | | | 345 | | | | 677 | | | | $ | 345 | | | $ | 769 | |
Proven reserves The Company does not have any proven hydrocarbon reserves as of MayNovember 30, 2020 and August 31, 2019. 2020. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Registration Statement on the Form 10-12G/10-K/A filed with the Securities and Exchange Commission on July 5, 2019.December 28, 2020. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
Overview and financial conditionrecent developments Overview
Since our corporate reorganizationWe are a holding company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and agreement to disposegas industry. Our primary focus is on the development and implementation of our interest in MCW Fuels, Inc., which was effective May 13, 2015proprietary oil sands mining and for which regulatory approval was received on June 19, 2015, we have had one wholly ownedprocessing technology to recover oil from surface mined bitumen deposits (the “Extraction Technology”). Our wholly-owned subsidiary, Petroteq Energy CA, LLC. (“PQE”)Inc., which has three wholly owned active subsidiary companies, POSR, TMC Capital LLC (“TMC”) and Petrobloq LLC (“Petrobloq”). We are now primarily focused on developinga California corporation, conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company (“POSR”), and processing business and related mining interests.TMC Capital, LLC, a Utah limited liability company (“TMC”).
Through our wholly owned subsidiary PQE,PCA, and its two subsidiaries POSR and TMC, we are in the business of oil sands mining operations on the TMC Mineral Lease in Uintah County, Utah, where we process mined oil sands ores and sediments using our proprietary Extraction Technology (“the Extraction Technology”) to produce finished crude oil and hydrocarbon products. Our primary extraction and processing operations are conducted at our Asphalt Ridge processing facility, located on the TMC Mineral Lease in Uintah County, Utah, which is owned/operatedowned by POSR. Our Asphalt Ridge processing facility uses Petroteq owns the intellectual property rights to the Extraction Technology in the extraction, productionwhich is used at our Asphalt ridge processing facility to extract and upgrade ofproduce crude oil extracted from oil sands and was recently relocated to the TMC Mineral Lease (near our Asphalt Ridge Mine #1) to improve logistical and processing efficiencies in the oil sands recovery process. After relocating our processing facility from the site of its initial operation in 2015 asutilizing a pilot plant, we restarted our oil sands mining and processing operations at the end of May 2018 and completed our expansion project to increase production to at least 1,000 barrels of oil per day during the last quarter of fiscal 2019. closed-loop solvent based extraction system. We commenced commercial production in the first quarter of fiscal 2020 (the quarter ending November 30, 2019) and expecthad expected to generate revenue from the sale of hydrocarbon products producedcommencing in the third quarter ended May 31, 2020. However, due to the COVID-19 pandemic and volatility in oil prices, we reduced operations to a single shift per day during the first quarter ended February 29, 2020, and ultimately suspended production of fiscalhydrocarbon products during the quarter ended May 31, 2020. However, On July 2, 2020, TomCo Energy PLC (“TomCo”) announced that, following the establishment by TomCo of Greenfield Energy LLC (“Greenfield”) as a joint venture company with Valkor LLC (“Valkor”) on June 17, 2020, Greenfield would take over the management and operations of our Asphalt Ridge processing facility. Valkor remains party to a non-exclusive technology licensing agreement with Petroteq dated July 2, 2019, as amended, in respect of the plant. Since assuming responsibility for the management of the Asphalt Ridge facility in July 2020, Greenfield has made certain upgrades to the plant to improve its capacity and reliability, and is undertaking tests to assess its potential commerciality. All critical equipment has been received and installed at the plant. In addition, buildings have been erected over the nitrogen system and the vapor recovery system, and wind-walls have been erected at the mixing tank area and decanter deck, to better allow for operations during winter months. Pressure testing of piping systems is currently underway as part of plant pre-commissioning activities in preparation for plant start-up, which is expected to occur in the near term. The Company expects that Greenfield will also be in a position to restart mining and ore handling operations in the near term. All site personnel completed mandatory Mine Safety and Health Administration (MSHA) training in late November 2020, and rental equipment needed for ore crushing and handling has arrived on site. Valkor has completed its evaluation of recently received mining quotations and has selected a mining contractor. The mining contract has been executed and the mining contractor has already begun mobilizing equipment to site. After initial work to prepare the site, it is expected that mining of oil sands ore will begin in late January 2021. Even once we resume production, we anticipate that our revenue will be limited until we are at full production, our revenue will be limited. In addition, once our Asphalt Ridge processing facility is operating at or near capacity, we anticipate that we will need to hire additional personnel at various levels.production. We expect that we will require additional capital to continue our operations and planned growth. There can be no assurance that funding will be available if needed or As announced by TomCo on September 16, 2020, the board of TomCo believes that the terms will be acceptable. PQE ownsPre-FEED (Front-End Engineering and Design) Report prepared by Crosstrails Engineering LLC, a subsidiary of Valkor, provides a high level of confidence that the intellectual property rights toprocesses being utilized at the Extraction Technology, which is used at our Asphalt Ridge processing facility can be scaled up to extract,enable commercial production of 10,000 barrels of oil per day from a single site. Proof of commerciality though is subject to the successful completion of the upgrade works to the plant, that are currently being completed prior to its restart, and produce crude oilthe associated trials to demonstrate the commerciality of the processes used in Petroteq’s Extraction Technology process and hydrocarbon products from oil sands utilizingthe identification and securing of a closed-loop solvent based extraction system.suitable site for a commercial scale plant.
On July 4, 2016, PQE acquired a controlling interest of 57.3% in Accord GR Energy, Inc. Accord’s assets include a limited license for two enhanced oil recovery (EOR) technologies for use in the production of heavy oil from mineral properties under lease to Accord in southwest Texas.
Due to additional cash injections and share subscriptions in Accord by the outside shareholders, PQE has relinquished control of Accord and has deconsolidated the results of Accord from the financial statements and now accounts for the investment in Accord on the equity basis of accounting. The effective holding in Accord as of August 31, 2018 is 44.7%.
Our indirect subsidiary, Petrobloq, was formed in November 2017 and is developing a blockchain-powered supply chain management platform for the oil and gas industry. We also own a 25% interest in Recruiter OGG, a recruitment venture that provides a website focused on careers in the oil and gas industry.
Our primary mineral lease, the TMC Mineral Lease, is held by TMC and covers approximately 1,229.82 acres inOnce the Asphalt Ridge areaprocessing facility has been restarted, Petroteq intends to undertake a series of eastern Utah. associated tests and trials, to be verified by an independent third party, to demonstrate both the commerciality of the Extraction Technology process and validate the proposed design for the commercial scale plant, thereby enabling Greenfield to move forward with the final FEED report for a 10,000 barrels of oil per day plant.
In June 2018, we finalizedaddition, Greenfield has announced that, following the acquisition at auctionrestart of a 100% interest in the SITLA Leases, consisting of two oil sands mineral leases issued to POSR by the State of Utah’s School and Institutional Trust Land Administration (SITLA), encompassing a total of 1,311.94 acres that largely adjoin our TMC Mineral Lease in the Asphalt Ridge area. Finally, in June 2019 TMC acquiredprocessing facility, it intends to start working with Quadrise Fuels International plc, regarding a 50% interesttrial of Quadrise’s MSAR® technology at the plant. This will initially comprise the supply of oil samples produced by at the plant to Quadrise to enable them to undertake test work in the operating rights under five federal (U.S.) onshore mineral leases encompassingUnited Kingdom to finalize the required MSAR® formulations, before the planned on-site demonstration trial to produce approximately 600 barrels (100 tonnes) of MSAR®. MSAR® is a totallow viscosity oil-in-water emulsified synthetic heavy fuel oil (“HFO”). It is manufactured using Quadrise’s proprietary technology to mix heavy residual oils with small amounts of 5,960 acres (2,980 net acres) locatedspecialist chemicals and water to a bespoke formulation. According to Quadrise, the resulting emulsion contains approximately 30% water and less than 1% chemicals. The emulsion is a low viscosity liquid at room temperature, which makes it easier to handle and reduces the heating costs for storing, transportation and use in eastern and southeastern Utah.comparison to HFOs. On July 22, 2019, the Company closed its acquisition of its previously announced agreement for the acquisition of the remaining 50% of the operating rights and interests relating to the BLM Leases.
The total consideration payable for the acquisition will be $13 million, with $1 million payable in cash and $12 million payable in shares, namely 30 million common shares of the Company, at a deemed value of $0.40 per share.
Results of Operations for the three months ended May 31, 2019November 30, 2020 and the three months ended May 31, 2018November 30, 2019 Net Revenue, Cost of Sales and Gross Loss During the current period, the Company entered into a Technology License Agreement with Valkor whereby Valkor paid $2,000,000 for a non-exclusive license to the Oil Sands Recovery Technology, the Company has no obligation to delivery any technology or know-how on an ongoing basis to Valkor, therefore the revenue is recognizable immediately. The Company continues to run test production on its 1,000 barrel per day plant and continuing with its expansion project to increase production capacity by an additional 3,000 barrels per day. Revenue generation during the quarter of $38,088 represents the
There has been no sale of hydrocarbon products to refineries to determine the commercial quality of our hydrocarbon products. Prior to August 31, 2018, due to the volatility in oil markets and the limited production capacity at the plant, no production took place during the yearthree months ended August 31, 2018, resulting in no revenue generation. During the year ended August 31, 2018, the Company relocated its production plant to the Asphalt Ridge mineral siteNovember 30, 2020 and has expanded production capacity to approximately 1,000 barrels per day with a further expansion to 3,000 barrels per day underway. We commenced commercial productionminimal sales of $100,532 during the first quarter of fiscal 2020 (the quarter endingthree months ended November 30, 2019) and expect to generate revenue from the sale of the hydrocarbon products produced during the first quarter of 2020. 2019. The cost of sales during the three months ended May 31, 2019 and 2018November 30, 2020 consists of; i) advance royalty payments which expire at the end of the calendar year two years after the payment has been made; and ii) certain production related expenses consistingfees charged to Petroteq by Valkor for plant operations recovery expenses. The cost of labor and maintenance expenditure. During the current period, production related costs have been expensed as the plant nears commercial production, previously these costs were capitalized as the plant was under construction. Operating Expenses
Operating expenses of $3,731,585 and $3,132,127sales for the three months ended May 31, 2019 and 2018, respectively, an increase of $599,458 or 19.1%. The increase in operating expenses is primarily due to:
Depletion, depreciation and amortization
Depletion, depreciation and amortization of $21,799 and $296,758 for the three months ended May 31, 2019 and 2018, respectively, a decrease of $274,959 or 92.7%. The Company has ceased depletion, depreciation and amortization on production related assets and reserves until such time as the plant recommences operations, which is expected to occur during the first quarter of fiscal 2020.
Selling, general and administrative expenses
Selling, general and administrative expenses of $2,771,785 and $3,020,992 for the three months ended May 31, 2019 and 2018, respectively, a decrease of $249,207 or 8.2%. Included in selling, general and administrative expenses are the following major expenses:
| a. | Legal fees of $438,239 and $100,674 for the three months ended May 31, 2019 and 2018, respectively, an increase of $337,565. The increase is primarily related to the expansion of the plant, the recent filing of the Registration Statement on Form 10G/A filed with the SEC in the United States and the various fund-raising initiatives undertaken by the Company during the current fiscal period;
| | | | | b. | Professional fees of $1,021,908 and $789,188 for the three months ended May 31, 2019 and 2018, respectively, an increase of $232,720 or 29.5%. The increase in professional fees is primarily due to professional fees paid to various vendors related to the expansion of the plant and management advisory board services; |
| c. | Salaries and wages of $513,529 and $252,555 for the three months ended May 31, 2019 and 2018, respectively, an increase of $260,974 or 103.3%. The increase in salaries and wages expense is primarily due to the increase in headcount as the Company plans for commercial production of hydrocarbon products and increased headcount on administrative functions. | | | | | d. | Stock based compensation of $305,413 and $17,834 the three months ended May 31, 2019 and 2018, respectively, an increase of $287,579. The increase relates to stock options issued to certain members of management and directors during the prior year, which vest over a four year period. | | | | | e. | Travel and promotion of $256,770 and $1,743,444 for the three months ended May 31, 2019 and 2018, respectively, a decrease of $1,486,674 or 85.3%. The decrease is primarily related to a decrease in marketing related activity, as the Company is now approaching the commencement of commercial production and resources are being channeled into completion of the oil processing facility. |
Financing costs, net
Financing costs, net of $893,636 and $81,656 for the three months ended May 31, 2019 and 2018, respectively, an increase of $811,980. The increase is primarily due to the amortization of debt discount of $773,956 related to convertible notes and an increase in interest expense of $38,024 during the current fiscal period due to the convertible notes advanced to the Company during the current fiscal year;
Other expense (income), net
Oher expense of $44,364 and other income of $267,279 for the three months ended May 31, 2019 and 2018, respectively represents interest income on funds advanced to third parties of $35,973 for the current period and a loss realized on the settlement of liabilities of $80,337 and a profit on the settlement of liabilities of $216,297 for the three months ended May 31, 2019 and 2018, respectively. In the prior period a gain of $50,982 was realized on a non-refundable deposit received from a convertible note holder.
Net loss before income tax and equity loss
Net loss before income tax and equity loss of $4,450,179 and $3,178,839 for the three months ended May 31, 2019 and 2018, respectively, an increase of $1,271,340 or 40.0% was primarily due to the labor and maintenance expenses discussed under cost of sales above and the amortization of the debt discount discussed under financing costs, net above.
Equity loss from investment in Accord GR Energy, net of tax
Equity loss from investment in Accord GR Energy, net of tax of $50,000 and $0 for the three months ended May 31, 2019 and 2018 is an estimate of our share of the losses realized by Accord Energy GR for the three months ended May 31, 2019.
Net loss and comprehensive loss
Net loss and comprehensive loss of $4,500,179 and $3,178,839 for the three months ended May 31, 2019 and 2018, an increase of $1,321,340 or 41.6% is discussed above.
Results of Operations for the nine months ended May 31, 2019 and the nine months ended May 31, 2018
Net Revenue, Cost of Sales and Gross Loss
The Company continues to run test production on its 1,000 barrel per day plant and continuing with its expansion project to increase production capacity by an additional 3,000 barrels per day. Revenue generation during the nine months of $59,335 represents the sale of hydrocarbon products to refineries to determine the commercial quality of our hydrocarbon products. Prior to August 31, 2018, due to the volatility in oil markets and the limited production capacity at the plant, no production took place during the year ended August 31, 2018, resulting in no revenue generation. During the year ended August 31, 2018, the Company relocated its production plant to the Asphalt Ridge mineral site and has expanded production capacity to approximately 1,000 barrels per day with a further expansion to 3,000 barrels per day underway. We commenced commercial production during the first quarter of fiscal 2020 (the quarter ending November 30, 2019) and expect to generate revenue from the sale of the hydrocarbon products produced during the first quarter of 2020.
The cost of sales during the nine months ended May 31, 2019 and 2018 consists of; i) advance royalty payments which expire at the end of the calendar year two years after the payment has been made; and ii) certain production related expenses consisting of labor and maintenance expenditure.
Operating Expenses
Operating expenses of $12,034,064Expenses were $2,065,228 and $8,322,962$2,513,469 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increasea decrease of $3,711,102$448,241 or 44.6%17.8%. The increasedecrease in operating expenses is primarily due to:
Depletion, depreciation and amortization Depletion, depreciation and amortization of $54,316was $11,523 and $890,273$74,320 for the ninethree months ended May 31, 2019November 30, 2020 and 2018,20190, respectively, a decrease of $835,957$62,797 or 93.9%84.5%. The Company has ceased depletion, depreciation anddecrease is primarily due to the accelerated amortization on production related assets and reserves until such time asof leasehold improvements in the plant recommences operations,prior period which is expected to occur duringwere incurred at premises previously occupied by the first quarter of fiscal 2020.Company. Selling, general and administrative expenses Selling, general and administrative expenses of $9,342,642was $1,044,857 and $7,376,714$2,382,082 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increasea decrease of $1,965,928$1,337,225 or 26.7%56.1%. Included in selling, general and administrative expenses are the following major expenses: | a. | LegalProfessional fees of $1,342,572was $399,129 and $140,213$1,026,765 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increasea decrease of $1,202,359.$627,636. The increasedecrease is primarily related to other professional fees incurred on plant set up in the expansionprior year prior to conclusion of the plant,agreement with Valkor. Valkor have expertise in oil field operations which is expected to result in significant expense savings to the recent filingCompany.
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| b. | Travel and promotional fees was $83,464 and $571,492 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $488,028, the Registration Statement on Form 10G/A withdecrease is due to an overall reduction in travel expenditure to the SEC in the United States and the various fund-raising initiatives undertakensite, impacted by the Company duringCOVID-19 pandemic and lower promotion expenditure incurred as Valkor readies the current fiscal period;site for production. | | | | | b.c. | Professional fees of $3,363,180Salaries and $1,575,544wages was $87,936 and $200,474 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increasea decrease of $1,787,635 or 113.5%.$112,538. The increase in professional feesdecrease is primarily due to professional fees paid to various vendors related to the expansion ofValkor assuming operational responsibility for the plant all salaries and management advisory board services;wages are currently administrative in nature. | | | | | c.d. | SalariesGeneral and wages of $1,043,232administrative expenses was $234,696 and $638,645$381,248 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increase of $404,587 or 63.4%. The increase in salaries and wages expense is primarily due to the increase in headcount as the Company plans for commercial production of hydrocarbon products and increased headcount on administrative functions. | | | | | d. | Stock based compensation of $916,239 and $2,523,481 for the nine months ended May 31, 2019 and 2018, respectively, a decrease of $1,607,242.$146,552. The decrease related to stock options with immediate vesting issued to certain directors in the prior period. The current period charge represents the charge for stock options with a four year vesting period. | | | | | e. | Travel and promotion of $1,959,186 and $2,086,914 for the nine months ended May 31, 2019 and 2018, respectively, a decrease of $127,728 or 6.1%. Theoverall decrease is primarily relateddue to a decrease in marketing activity duringValkor assuming operational responsibility of the last fiscal quarter as all resources have been channeled into completing the plant for commercial production.production site. |
Financing costs net Financing costs net of $2,533,979was $621,387 and $323,254$509,294 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increase of $2,210,725. The$112,093. Financing costs includes; (i) interest expense of $287,639 and $143,308 for the three months ended November 30, 2020 and 2019, respectively, an increase of $144,331, is attributable to the increase in debt and convertible debt outstanding over the prior fiscal period; (ii) amortization of debt discount of $333,748 and $353,095 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $19,347, primarily due to the timing of the debt agreements entered into and the subsequent amortization of debtthe discount related to convertible notesover the life of $2,244,362 and a decrease in interest expense of $33,637 during the current fiscal period, primarily due to the conversion to capital of several interest-bearing debt securities in the prior year.debt.
Other expense (income), net OherOther expense of $103,126was $544,459 and other income of $267,279was $(416,680) for the ninethree months ended May 31,November 30, 2020 and 2019, respectively, an increase of $961,139. In the current fiscal period we realized a loss on settlement of labilities and 2018, respectively represents interest income on funds advancedconvertible debt which had conversion terms at a discount to third partiesmarket prices. In Addition we renegotiated the maturity dates of $94,896several convertible notes as well as the conversion price of these instruments, resulting in a loss on debt extinguishment of $330,256
Mark to market of derivative liability
The mark to market of the derivative liability was $(156,998) and $(35,547) for the three months ended November 30, 2020 and 2019, respectively. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The charge during the current period represents the mark-to-market of the derivative liability outstanding as of November 30, 2020, which depends on our current share price, risk free interest rates and a loss realized on the settlementvolatility of liabilities of $98,475 and a profit realized on the settlement of liabilities of $216,297 for the nine months ended May 31, 2019 and 2018, respectively, as well as a loss realized on the conversion of convertible debt of $99,547 during the current period. In the prior period a gain of $50,982 was realized on a non-refundable deposit received from a convertible note holder. Net loss before income tax and equity lossour common share price.
Net loss before income taxtaxes and equityNet loss of $12,903,155 and $8,557,082Comprehensive loss Net loss before income taxes was $410,514 and $3,182,671 for the ninethree months ended May 31,November 30, 2020 and 2019, and 2018, respectively, an increasea decrease of $4,346,073$2,772,157 or 50.8% was87.1%. The decrease is primarily due to the labor$2,000,000 technology license fee and maintenancean overall reduction in operating expenses discussed under cost of sales above and professional fees andas Valkor prepares itself for production at the amortization of the debt discount discussed under financing costs, net above.
Equity loss from investment in Accord GR Energy, net of taxplant.
Equity loss from investment in Accord GR Energy, net of tax of $150,000 and $0 for the nine months ended May 31, 2019 and 2018 is an estimate of our share of the losses realized by Accord Energy GR for the nine months ended May 31, 2019.
Net loss and comprehensive loss
Net loss and comprehensive loss of $13,053,155 and $8,557,082 for the nine months ended May 31, 2019 and 2018, an increase of $4,496,073 or 52.5% is discussed above.
Liquidity and Capital Resources As at May 31, 2019, the CompanyNovember 30 2020, we had liquiditycash of approximately $104,171, which is composed entirely of cash. The Company$98,510. We also had a working capital deficiency of approximately $7,584,498,$11,285,842, due primarily to accounts payable, short term loans anddebt, convertible loansdebentures and accrued interest thereon which remainsremain outstanding as of May 31, 2019.November 30, 2020. During the ninethree months ended May 31, 2019, the CompanyNovember 30, 2020, we raised $10,540,453$1,547,545 in private placements a further net proceeds of $517,000 fromwarrant exercises and convertible debt issuances, to meet operational requirements and $5,618,750 from convertible debt. These funds were primarily used on the expansion of the oil facility, expenditures related thereto such as professional fees, marketing costs and notes receivable advanced to third parties.plant improvement expenditure. Subsequent to May 31, 2019, in terms of various subscription agreements entered into with third parties, the CompanyNovember 30, 2020, we raised an additional $1,546,000 in proceeds from private equity issues and issued 6,732,402 common shares. On July 22, 2019, the Company borrowed a further $300,000 by$75,000 in the issuanceform of a convertible debenture to an investor, maturing 15 months from the issue date, bearing interest at 7% per annumdebt and convertible into 1,315,789 common shares at a conversion price of $0.19 per share.promissory note.
The Company continuesWe have spent, and expect to workcontinue to spend, a substantial amount of funds in connection with implementing our business strategy and do not have sufficient cash on several other financing optionshand to secure additional financing on reasonable terms. However, shouldimplement our business strategy. Our financial statements have been prepared assuming we are a going concern. To date, we have generated minimal revenue from operations and have financed our operations primarily through sales of our securities, and we expect to continue to seek to obtain our required capital in a similar manner. During the Company notquarter ended November 30, 2020, our primary sources of funding were from our sales of convertible notes through which we received gross proceeds of approximately $1,069,500. There can be no assurance that we will be able to secure such funding its liquidity may notgenerate sufficient revenue to cover our operating costs and general and administrative expense or continue to raise funds through the sale of debt. If we raise funds by securities convertible into common shares, the ownership interest of our existing shareholders will be sufficient to fund its operations, debt obligations, obligations under its mineral leases and the capital needed to complete development of its Extraction Technology.diluted.
The Company has not paid any dividends on its common shares. The Company has no present intention of paying dividends on its common shares as it anticipates that all available funds will be reinvested to finance the growth of its business.
Capital Expenditures We expect to complete our 1,000 barrel per day plant by the first quarter of the 2020 fiscal year and expectcontinue to incur capital expenditure of approximately $1,000,000.on the oil extraction plant as we refine our processes and improve on our efficiencies. These expenses are at times unpredictable but we do not anticipate spending more than $2,000,000 on the existing plant. We also intend to construct two new oil extraction facilities and expand the existing facility. Each facility is estimated to cost $10,000,000 and expansion of the existing facility may cost an additional $2,000,000.$10,000,000. Other Commitments OtherThe Company has various commitments including those disclosed under Commitments in note 23 to the financial statements, in addition the Company has commitments to repay convertible notes, promissory notes and debt as fully disclosed in notes 9,10 and 11 to the financial statements.
In addition to commitments otherwise reported in this MD&A, the Company’s contractual obligations as at May 31, 2019, include:
Contractual Obligations | | Total ($ millions) | | | Up to 1 Year ($ millions) | | | 2 – 5 Years ($ millions) | | | After 5 Years ($ millions) | | Convertible Debt[1] | | | 6.52 | | | | 6,52 | | | | - | | | | - | | Debt[2] | | | 1.52 | | | | 1.24 | | | | 0.28 | | | | - | | Total Contractual Obligations | | | 8.04 | | | | 7.84 | | | | 0.44 | | | | - | |
| [1] | Amount includes estimated interest payments. The recorded amount as at May 31, 2019 was approximately $5.59 million. |
| [2] | Amount includes estimated interest payments. The recorded amount as at May 31, 2019 was approximately $1.31 million. |
Recently Issued Accounting Pronouncements The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements. Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements. Off-balance sheet arrangements We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts requiring fair value accounting treatment. Inflation The effect of inflation on our revenue and operating results was not significant. Climate Change We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. Item 4. Controls and Procedures. Disclosure Controls and Procedures The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing or revenue generated from operations, the Company intends to retain additional individuals to remedy the ineffective controls. Changes in Internal Control There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended May 31, 2019November 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 1A. Risk Factors. The following risks relate specifically to our businessinformation updates, and should be considered carefully. Our business, financial condition and results of operations could be harmed by any ofread in conjunction with, the following risks. As a result, the trading price of our common shares could decline and the holders could lose part or all of their investment.
We have a limited operating history, and may not be successfulinformation disclosed in developing profitable business operations.
Our oil extraction segment has a limited operating history. Our business operations must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the oil extraction business. In May 2018 we recommenced our oil extraction activities, which is expected to be a significant source of our revenue. From 2015 until 2018, we temporarily ceased our oil sands mining and processing operations while we relocated our processing plant. For a limited period, we made sales of hydrocarbon products to customers produced at our initial processing facility following completion of its construction and fabrication on September 1, 2015. Due to the volatility in the oil markets production ceased as we were not able to operate profitably at low volumes of output. The losses from continuing operations over the past four fiscal years are largely due to the relocation, reassembly and expansion or our processing facility on land located within our TMC Mineral Lease located in Uintah County, Utah. As of the date of this registration statement, we have generated limited revenue from our oil sands mining and processing activities and do not anticipate generating any significant revenue from these activities until our new (and expanded) processing facility is fully operational for at least a few months, which is not expected until the first quarter of fiscal 2020. We have an insufficient history at this time on which to base an assumption that our oil sands mining and processing operations will prove to be successful in the long-term. Our future operating results will depend on many factors, including:
| ● | our ability to raise adequate working capital; |
| ● | the success of our development and exploration; |
| ● | the level of our competition; |
| ● | our ability to attract and maintain key management and employees; and |
| ● | our ability to efficiently explore, develop, produce or acquire sufficient quantities of marketable gas or oil in a highly competitive and speculative environment while maintaining quality and controlling costs. |
To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance or increase the efficiency of our mining and processing operations that are being conducted in the Asphalt Ridge area in eastern Utah. Despite our best efforts, we may not be successfulPart I, Item 1A, “Risk Factors,” contained in our exploration or development efforts or obtainAnnual Report Form 10-K/A as filed with the regulatory approvals required to conductSecurities and Exchange Commission (the “SEC”) on December 28, 2020. Except as disclosed below, there have been no material changes from the risk factors disclosed in our operations. Annual Report Form 10-K/A as filed with the SEC on December 28, 2020.
We have suffered operating losses since inception and we may not be able to achieve profitability.
At May 31, 2019,November 30, 2020, August 31, 20182020 and August 31, 2017,2019, we had an accumulated deficit of ($75,550,551), ($62,497,396)$(91,074,863) $(90,664,349) and ($46,856,367)$(81,467,953), respectively and we expect to continue to incur increasing expenses in the foreseeable future as we develop our oil extraction business. We incurred a net loss of ($13,053,155) and ($8,557,082) as of410,514) for the ninethree months ended May 31, 2019November 30, 2020 and May 31, 2018, respectively$(12,379,067) and ($15,641,029) and ($7,923,650),$(15,787,886) as of the years ended August 31, 20182020 and August 31, 2017,2019, respectively. As a result, we are sustaining substantial operating and net losses, and it is possible that we will never be able to sustain or develop the revenue levels necessary to attain profitability. Our ability to be profitable will depend in part upon our ability to manage our operating costs and to generate revenue from our extraction operations. Operating costs could be impacted by inflationary pressures on labor, volatile pricing for natural gas used as an energy source in transportation of fuel and in oil sands processes, and planned and unplanned maintenance.
The failure to comply with the terms of our secured notes could result in a default under the terms of the note and, if uncured, it could potentially result in action against the pledged assets. As of May 31, 2019,November 30, 2020, we had issued and outstanding notes in the principal amount of $1,312,533$576,329 and convertible notes in the principal amount of $5,257,560$10,076,200 to certain private investors which mature between November 30 2020 and January 1, 2019 and August 31, 20207, 2022, and are secured by a pledge of all of our assets. If we fail to comply with the terms of the notes, the note holder could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against our assets would likely have a serious disruptive effect on our operations. We have limited capital and will need to raise additional capital in the future.
We do not currently have sufficient capital to fund both our continuing operations and our planned growth. We will require additional capital to meet the terms of the TMC Mineral Lease and to continue to grow our business via acquisitions and to further expand our exploration and development programs. We may be unable to obtain additional capital when required. Future acquisitions and future exploration, development, processing and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.
We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources may not be sufficient to fund our planned operations and may force us to curtail operations or cancel planned projects.
Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our limited operating history, the location of our oil and gas properties and prices of oil and gas on the commodities markets (which will impact the amount of asset-based financing available to us, if any) and the departure of key employees. Further, if oil or gas prices on the commodities markets decline, our future revenues, if any, will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
Any additional capital raised through the sale of equity may dilute the ownership percentage of our shareholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect.
Any additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
| ● | increase our vulnerability to general adverse economic and industry conditions; | | | | | ● | require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital, growth and other general corporate purposes; and | | | | | ● | limit our flexibility in planning for, or reacting to, changes in our business and our industry. |
The incurrence of additional indebtedness could require acceptance of covenants that, if violated, could further restrict our operations or lead to acceleration of the indebtedness that would necessitate winding up or liquidation of our company. In addition to the foregoing, our ability to obtain additional debt financing may be limited and there can be no assurance that we will be able to obtain any additional financing on terms that are acceptable, or at all.
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.
There is substantial doubt about our ability to continue as a going concern. At May 31, 2019,November 30,2020, we had not yet achieved profitable operations, had accumulated losses of ($75,550,551)91,074,863) since our inception and a working capital deficit of ($7,584,498)11,285,842), and expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a going concern. We have incurred net losses for the past four years. As at August 31, 2018 and August 31, 2017, we had an accumulated deficit of ($62,497,396) and ($46,856,367), respectively and a working capital deficit of ($374,567) and ($4,250,552), respectively. The opinion of our independent registered accounting firm on our audited financial statements for the years ended August 31, 20182020 and 20172019 draws attention to our notes to the financial statements, which describes certain material uncertainties regarding our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management’s plan to address our ability to continue as a going concern includes (1) obtaining debt or equity funding from private placement or institutional sources, (2) obtaining loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow us to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully acquire oil and gas interests, to establish reserves, and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. These realities are subject to change and our inability to maintain close working relationships with industry participants or continue to acquire suitable property may impair our ability to execute our business plan.
To continue to develop our business, we will endeavor to use the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships or, if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
We may not be able to successfully manage our growth, which could lead to our inability to implement our business plan.
Our growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have a small number of executive officers, employees and advisors. Further, as we enter into additional contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties. In addition, once we commence operations at our oil extraction facility, our strain on management will further increase. These requirements will be exacerbated in the event of our further growth or in the event that the number of our drilling and/or extraction operations increases. There can be no assurance that our systems, procedures and/or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.
Our operations are dependent upon us maintaining our mineral lease for the Asphalt Ridge Property.
TMC, one of our wholly owned operating subsidiaries, holds certain mining and mineral production rights under the TMC Mineral Lease, covering lands consisting of approximately 1,229.82 acres located in the Asphalt Ridge area in Uintah County, Utah. We recently moved our processing facility to the TMC Mineral Lease site. The TMC Mineral Lease is subject to termination under various circumstances, including our non-payment of certain advance and production royalties as well as a failure to comply with certain minimum production requirements and receiving funding commitments for expanding or building additional production facilities. We currently intend to fund the expansion/ additional facilities through revenue generated from the processing facility at the TMC Mineral Lease, which to date has been minimal, and/or third party funding sources for which we currently have no commitments. If the TMC Mineral Lease were to be terminated, our operations would be significantly impacted until such time that we were able to relocate our processing facility to a site within the SITLA Lease or to secure other acceptable mineral leases for our operations. Any relocation of our processing facility from the TMC Mineral Lease, or the acquisition of other mineral leases for our operations, would require extensive plant relocation and construction work and new regulatory permits to allow our processing facilities at a new lease or mine site to becoming operational. There can be no assurance that we could economically relocate our processing facility to the SITLA Leases or that we would be able to obtain new or substitute mineral leases, if necessary, upon or under acceptable terms, or that any new or substitute leases would permit us to relocate our processing facility to a site within such leases.
The loss of key personnel would directly affect our efficiency and profitability.
Our future success is dependent, in a large part, on retaining the services of our current management team. Our executive officers possess a unique and comprehensive knowledge of our industry, our technology and related matters that are vital to our success within the industry. The knowledge, leadership and technical expertise of these individuals would be difficult to replace. The loss of one or more of our officers could have a material adverse effect on our operating and financial performance, including our ability to develop and execute our long term business strategy. We do not maintain key-man life insurance with respect to any employees. We do not have employment agreements with any of our executive officers other than our Chief Executive Officer. There can be no assurance that any of our officers will continue to be employed by us.
In the future, we may incur significant increased costs as a result of operating as a U.S reporting company, and our management may be required to devote substantial time to new compliance initiatives.
In the future, we may incur significant legal, accounting and other expenses as a result of operating as a public company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the U.S. Securities and Exchange Commission (the “SEC”), have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.
Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.
All of our production is anticipated to be derived from our properties in the Asphalt Ridge area. As a result of this geographic concentration, we may be disproportionately exposed to the effect of regional supply and demand factors, delays or interruptions of production from ore sands in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, weather events or interruption of the processing or transportation of crude oil or natural gas. Additionally, we may be exposed to additional risks, such as changes in laws and regulations that could cause us to permanently cease mining operations at Asphalt Ridge.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Licenses and permits are required for our company to operate in some jurisdictions, and the loss of or failure to renew any or all of these licenses and permits or failure to comply with applicable laws and regulations could prevent us from either completing current projects or obtaining future projects, and, thus, materially adversely affect our business.
Our operations will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments, among other factors. Our inability to obtain, or our loss of or denial of extension of, any of these licenses or permits could hamper our ability to produce revenues from our operations.
We may be required to make significant capital expenditures to comply with laws and the applicable regulations and standards of governmental authorities and organizations.
We are subject to various national, state, and local laws and regulations in the various countries in which we operate, including those relating to the renewable energy industry in general, and may be required to make significant capital expenditures to comply with laws and the applicable regulations and standards of governmental authorities and organizations. Moreover, the cost of compliance could be higher than anticipated. On the effective date hereof, our operations will become subject to compliance with the U.S. Foreign Corrupt Practices Act in addition to certain international conventions and the laws, regulations and standards of other foreign countries in which we operate.
In addition, many aspects of our operations are subject to laws and regulations that relate, directly or indirectly, to the renewable industry. Existing and proposed new governmental conventions, laws, regulations and standards, including those related to climate and emissions of “greenhouse gases,” may in the future add significantly to our operating costs or limit our activities or the activities and levels of capital spending by our customers. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and even criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that may limit or prohibit our operations. The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations which impose substantial new regulatory requirements on our oil extraction operations could also harm our business, results of operations, financial condition and prospects.
We could be subject to litigation that could have an adverse effect on our business and operating results.
We are, from time to time, involved in litigation. The numerous operating hazards inherent in our business increase our exposure to litigation, which may involve, among other things, contract disputes, personal injury, environmental, employment, warranty and product liability claims, tax and securities litigation, patent infringement and other intellectual property claims and litigation that arises in the ordinary course of business. Our management cannot predict with certainty the outcome or effect of any claim or other litigation matter. Litigation may have an adverse effect on us because of potential negative outcomes such as monetary damages or restrictions on future operations, the costs associated with defending the lawsuits, the diversion of management’s resources and other factors.
Global political, economic and market conditions could negatively impact our business.
Our company’s operations are affected by global political, economic and market conditions. The recent economic downturn has generally reduced the availability of liquidity and credit to fund business operations worldwide and has adversely affected our customers, suppliers and lenders. Our limited capital resources have negatively impacted our activity levels and, in turn, our financial condition and results of operations. A sustained or deeper recession in regions in which we operate could limit overall demand for our renewable energy solutions and could further constrain our ability to generate revenues and margins in those markets and to grow overall.
War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on us, our suppliers, logistics providers and customers. Our business operations are subject to interruption by, among others, natural disasters (including, without limitation, earthquakes), fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our services and products, make it difficult or impossible for us to make and deliver crude oil and hydrocarbon products to our buyers and customers, or to receive necessary supplies from our suppliers, and create delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our customers and suppliers. The majority of our business operations, our corporate headquarters, and other critical business operations, including suppliers and customers, are in locations that could be affected by natural disasters. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
We do not carry business interruption insurance, and any unexpected business interruptions could adversely affect our business.
Our operations are vulnerable to interruption by earthquake, fire, power failure and power shortages, hardware and software failure, floods, computer viruses, and other events beyond our control. In addition, we do not carry business interruption insurance to compensate us for losses that may occur as a result of these kinds of events, and any such losses or damages incurred by us could disrupt our projects and our other operations without reimbursement. Because of our limited financial resources, such an event could threaten our viability to continue as a going concern and lead to dramatic losses in the value of our common shares.
Certain Factors Related to Oil Sands Exploration
The Nature of Oil Sands Exploration and Development involves many risks.
Oil sands exploration and development are very competitive and involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. As with any exploration property, there can be no assurance that commercial deposits of bitumen will be produced from oil sands exploration licenses and our permit lands in Utah.
The Extraction Technology has never been implemented on a large commercial basis as an oil and gas recovery technology before and our assumptions and expectations may not be accurate causing actual results of the implementation of the Extraction Technology to be significantly different form our current expectations. As a result, our operations may not generate any significant revenues from the development of the bitumen resources. In addition, there is no assurance that reserve engineers or lenders will determine that the production resulting from the application of the Extraction Technology can be used to establish reserves.
Furthermore, the marketability of any resource will be affected by numerous factors beyond our control. These factors include, but are not limited to, market fluctuations of prices, proximity and capacity of pipelines and processing equipment, equipment and labor availability and government regulations (including, without limitation, regulations relating to prices, taxes, royalties, land tenure, allowable production, importing and exporting of oil and gas, land use and environmental protection). The extent of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital.
Supply risk is a function of the unavailability of oil sands ores containing heavy oil and bitumen, whether from our mineral leases or from third parties; poor ore grade quality or density, and solvents and condensates that we acquire from third parties. Unplanned mine equipment and extraction plant maintenance, storage costs and in situ reservoir and equipment performance could also impact our production targets. Our oil extraction activities will be dependent upon having an available supply of mined oil sands ores and sandstones containing heavy oil and bitumen.
The viability of our business plan, business operations, and future operating results and financial condition are and will be exposed to fluctuating prices for oil, gas, oil products and chemicals.
Prices of oil, gas, oil products and chemicals are affected by supply and demand, which can fluctuate significantly. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability or conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations can have a material effect on our ability to raise capital and fund our exploration activities, our potential future earnings, and our financial condition. For example, in a low oil and gas price environment oil sands exploration and development may not be economically or financially viable or profitable. Prolonged periods of low oil and gas prices, or rising costs, could result in our mining and processing projects being delayed or cancelled, as well as the impairment of certain assets.
Environmental and regulatory compliance may impose substantial costs on us.
Our operations are or will be subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or to pay damages regardless of fault. Environmental laws also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.
Our mining, production and processing activities are or will be subject to extensive laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, land use, protection and remediation of the environment, protection of endangered and protected species, operational safety, toxic substances and other matters. Generally, oil and gas exploration and production, including our oil sands mining and processing operations, are subject to risks and liabilities associated with pollution of the environment and disposal of waste products. Compliance with these laws and regulations will impose substantial costs on us and will subject us to significant potential liabilities. In addition, should there be changes to existing laws or regulations, our competitive position within the oil sands industry may be adversely affected, as many industry players have greater resources than we do.
We are required to obtain various regulatory permits and approvals in order to explore and develop our properties. There is no assurance that regulatory approvals for exploration and development of our properties will be obtained at all or with terms and conditions acceptable to us.
We may be exposed to third party liability and environmental liability in the operation of our business.
Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damage. We could be liable for environmental damages caused by previous owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, and the payment of such liabilities could have a material adverse effect on our financial condition and results of operations. The release of harmful substances in the environment or other environmental damages caused by our activities could result in us losing our operating and environmental permits or inhibit us from obtaining new permits or renewing existing permits. We currently have a limited amount of insurance and, at such time as we commence additional operations, we expect to be able to obtain and maintain additional insurance coverage for our operations, including limited coverage for sudden environmental damages, but we do not believe that insurance coverage for environmental damage that occurs over time is available at a reasonable cost. Moreover, we do not believe that insurance coverage for the full potential liability that could be caused by environmental damage is available at a reasonable cost. Accordingly, we may be subject to liability or may lose substantial portions of our properties in the event of certain environmental damage. We could incur substantial costs to comply with environmental laws and regulations which could affect our ability to operate as planned.
American climate change legislation could negatively affect markets for crude and synthetic crude oil
Environmental legislation regulating carbon fuel standards in the United States (or elsewhere) could adversely affect companies that produce, refine, transport, process and sell crude oil and refined products, including our oil sands mining and processing operations, and could result in increased costs and/or reduced revenue. For example, both the state of California and the U.S. Government have passed legislation which, in some circumstances, considers the lifecycle greenhouse gas emissions of purchased fuel and which may negatively affect our business or require the purchase of emissions credits, which may not be economically feasible.
Because of the speculative nature of oil exploration, there is risk that we will not find commercially exploitable oil and gas and that our business will fail.
The search for commercial quantities of oil and gas as a business is extremely risky. We cannot provide investors with any assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of oil and gas or heavy oil and bitumen contained in oil sands. The exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas. Problems such as unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing formations and other conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are unable to find commercially exploitable quantities of oil and gas (in particular oil sands containing economically recoverable heavy oil and bitumen), and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail our business plan and, as a result, any investment in us may become worthless.
The price of oil and gas has historically been volatile. If it were to decrease substantially, our projections, budgets and revenues would be adversely affected, potentially forcing us to make changes in our operations.
Our future financial condition, results of operations and the carrying value of any oil and gas interests we acquire will depend primarily upon the prices paid for oil and gas production. Oil and gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and gas are subject to a variety of additional factors that are beyond our control. These factors include:
| ● | the level of consumer demand for oil and gas; |
| ● | the domestic and foreign supply of oil and gas; |
| ● | the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls; |
| ● | the price of oil, both in international and U.S. markets; |
| ● | domestic governmental regulations and taxes; |
| ● | the price and availability of solvent materials and feedstocks; |
| ● | market uncertainty due to political conditions in oil and gas producing regions, including the Middle East; and |
| ● | worldwide economic conditions. |
These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and gas price movements with any certainty. Declines in oil and gas prices affect our revenues and accordingly, such declines could have a material adverse effect on our financial condition, results of operations, our future oil and gas reserves and the carrying values of our oil and gas properties. If the oil and gas industry experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline in value or become worthless.
Because of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The oil and gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. There can be no assurance that any insurance we may have in place will be adequate to cover any losses or liabilities. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us becoming worthless.
The market for oil and gas is intensely competitive, and competitive pressures could force us to abandon or curtail our business plan.
The market for oil, gas and hydrocarbon products is highly competitive, and we only expect competition to intensify in the future. Numerous well-established companies are focusing significant resources on exploration and production and are currently competing with us for oil and gas opportunities, including opportunities involving the production of crude oil, synthetic crude oil and other products from oil sands. Other oil and gas companies may seek to acquire oil and gas leases and properties that we have targeted. Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from investors. Competitors include larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage. Actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas but are manufactured from renewable resources. As a result, there can be no assurance that we will be able to compete successfully or that competitive pressures will not adversely affect our business, results of operations and financial condition. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.
Our estimates of the volume of recoverable resources could have flaws, or such resources could turn out not to be commercially extractable. Further, we may not be able to establish any reserves. As a result, our future revenues and projections could be incorrect.
Estimates of recoverable resources and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. To date we have not established any reserves. Our actual amounts of production, revenue, taxes, development expenditures, operating expenses, and future quantities of recoverable oil and gas reserves may vary substantially from the estimates. There are numerous uncertainties inherent in estimating quantities of bitumen resources and recoverable reserves, including many factors beyond our control and no assurance can be given that the recovery of bitumen will be realized. In general, estimates of resources and reserves are based upon a number of factors and assumptions made as of the date on which the resources and reserve estimates were determined, such as geological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from estimated results. Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment. In addition, any estimates of our future net revenues and the present value thereof are based on assumptions derived in part from historical price and cost information, which may not reflect current and future values, and/or other assumptions made by us that only represent our best estimates. For these reasons, estimates of reserves and resources, the classification of such resources and reserves based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially. Investors are cautioned not to assume that all or any part of a resource is economically or legally extractable. Additionally, if declines in and instability of oil and gas prices occur, then write downs in the capitalized costs associated with any oil and gas assets we obtain may be required. Because of the nature of the estimates of our recoverable resources and future reserves and estimates in general, we can provide no assurance that our estimated bitumen resources or future reserves will be present and/or commercially extractable. If our recoverable bitumen resource estimates are incorrect, the value of our common shares could decrease and we may be forced to write down the capitalized costs of our oil and gas properties.
Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.
In the future, we may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for processing of oil and gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.” We accrue a liability for decommissioning costs associated with our extraction plant and wells but have not established any cash reserve account for these potential costs in respect of any of our properties. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.
We may have difficulty marketing or distributing the oil we produce, which could harm our financial condition.
In order to sell the finished crude oil that we are able to produce, if any, we must be able to make economically viable arrangements for the storage, transportation and distribution of our oil to the market. We will rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities. These factors may affect our and potential partners’ ability to explore and develop properties and to store and transport oil and gas production, increasing our expenses.
Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of oil and/or gas and in turn diminish our financial condition or ability to maintain our operations.
Challenges to our properties may impact our financial condition.
Title to oil and gas interests is often not capable of conclusive determination without incurring substantial expense. While we intend to make appropriate inquiries into the title of properties and other development rights we acquire, title defects may exist. In addition, we may be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all. If title defects do exist, it is possible that we may lose all or a portion of our right, title and interests in and to the properties to which the title defects relate. If our property rights are reduced, our ability to conduct our exploration, development and processing activities may be impaired. To mitigate title problems, common industry practice is to obtain a title opinion from a qualified oil and gas attorney prior to the excavation activities undertaken or the drilling operations of a well.
We rely on technology to conduct our business, and our technology could become ineffective or obsolete.
We rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates and to guide our exploration, development and processing activities. We and our operator partners will be required to continually enhance and update our technology to maintain its efficacy and to avoid obsolescence. Our oil extraction business is dependent upon the Extraction Technology that we have developed but which has not yet been used on a large commercial scale. As such, the project carries with it a greater degree of technological risk than other projects that employ commercially proven technologies and the Extraction Technology may not perform as anticipated. If major process design changes are required, the costs of doing so may be substantial and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired. Further, even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we would were our technology more efficient.
Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position.
We rely on a variety of intellectual property rights that we use in our services and products. We rely upon intellectual property rights and other contractual or proprietary rights, including copyright, trademark, trade secrets, confidentiality provisions, contractual provisions, licenses and patents. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries in which our services and products may be sold do not protect intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position. Without patent and other similar protection, other companies could use substantially identical technology to offer products for sale without incurring the sizable development costs we have incurred. Even if we spend the necessary time and money, a patent may not be issued or it may insufficiently protect the technology it was intended to protect. If our pending patent applications are not approved for any reason, the degree of future protection for our proprietary technology will remain uncertain. If we have to engage in litigation to protect our patents and other intellectual property rights, the litigation could be time consuming and expensive, regardless of whether we are successful. Despite our efforts, our intellectual property rights, particularly existing or future patents, may be invalidated, circumvented, challenged, infringed or required to be licensed to others. We cannot be assured that any steps we may take to protect our intellectual property rights and other rights to such proprietary technologies that are central to our operations will prevent misappropriation or infringement of the right to use or license others to use the Extraction Technology and accordingly may conduct an oil sands extraction operation similar to ours.
Certain Factors Related to Our Common Shares
There presently is a limited market for our common shares, and the price of our common shares may continue to be volatile.
Our common shares are currently quoted on the TSXV, the Frankfurt Exchange and the OTC Pink Sheets. Our common shares, however, are very thinly traded, and we have a very limited trading history. There could continue to be volatility in the volume and market price of our common shares moving forward. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial estimates by securities analysts or our failure to meet our or their projected financial and operating results, litigation involving us, factors relating to the oil and gas industry, actions by governmental agencies, national economic and stock market considerations as well as other events and circumstances beyond our control could have a significant impact on the future market price of our common shares and the relative volatility of such market price.
Offers or availability for sale of a substantial number of shares of our common shares may cause the price of our common shares to decline.
Our shareholders could sell substantial amounts of common shares in the public market, including shares sold upon the filing of a registration statement that registers such shares and/or upon the expiration of any statutory holding period under Rule 144 of the Securities Act of 1933 (the “Securities Act”), if available, or upon trading limitation periods. Such volume could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common shares could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to secure additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
We do not anticipate paying any cash dividends.
We do not anticipate paying cash dividends on our common shares for the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.
The market price and trading volume of our common shares may continue to be volatile and may be affected by variability in our performance from period to period and economic conditions beyond management’s control.
The market price of our common shares may continue to be highly volatile and could be subject to wide fluctuations. This means that our shareholders could experience a decrease in the value of their common shares regardless of our operating performance or prospects. The market prices of securities of companies operating in the oil and gas sector have often experienced fluctuations that have been unrelated or disproportionate to the operating results of these companies. In addition, the trading volume of our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, our shareholders may be unable to resell our common shares at or above their purchase price, if at all. There can be no assurance that the market price of our common shares will not fluctuate or significantly decline in the future.
Some specific factors that could negatively affect the price of our common shares or result in fluctuations in their price and trading volume include:
| ● | actual or expected fluctuations in our operating results; | | | | | ● | actual or expected changes in our growth rates or our competitors’ growth rates; | | | | | ● | our inability to raise additional capital, limiting our ability to continue as a going concern; | | | | | ● | changes in market prices for our product or for our raw materials; | | | | | ● | changes in market valuations of similar companies; | | | | | ● | changes in key personnel for us or our competitors; | | | | | ● | speculation in the press or investment community; | | | | | ● | changes or proposed changes in laws and regulations affecting the renewable energy industry as a whole; | | | | | ● | conditions in the renewable energy industry generally; and | | | | | ● | conditions in the financial markets in general or changes in general economic conditions. |
In the past, following periods of volatility in the market price of the securities of other companies, shareholders have often instituted securities class action litigation against such companies. If we were involved in a class action suit, it could divert the attention of senior management and, if adversely determined, could have a material adverse effect on our results of operations and financial condition.
We may be classified as a foreign investment company for U.S. federal income tax purposes, which could subject U.S. investors in our common shares to significant adverse U.S. income tax consequences.
Depending upon the value of our common shares and the nature of our assets and income over time, we could be classified as a “passive foreign investment company”, or “PFIC”, for U.S. federal income tax purposes. Based upon our current income and assets and projections as to the value of our common shares, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. While we do not expect to become a PFIC, if among other matters, our market capitalization is less than anticipated or subsequently declines, we may be a PFIC for the current or future taxable years. The determination of whether we are or will be a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets. Because PFIC status is a factual determination made annually after the close of each taxable year, including ascertaining the fair market value of our assets on a quarterly basis and the character of each item of income we earn, we can provide no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If we were to be classified as a PFIC in any taxable year, a U.S. holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. holder could derive from investing in a non-U.S. corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. holder holds our common shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our common shares.
We are exposed to credit risk through our cash and cash equivalents held at financial institutions.
Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations. We are exposed to credit risk through our cash and cash equivalents held at financial institutions. We have cash balances at four financial institutions. We have not experienced any loss on these accounts, although balances in the accounts may exceed the insurable limits.
Some of our officers and directors have conflicts of interest and cannot devote a substantial amount of time to our company.
Certain of our current directors and officers are, and may continue to be, involved in other industries through their direct and indirect participation in corporations, partnerships or joint ventures which may be potential competitors of ours. Several of our officers work for us on a part time basis. These officers have discretion as to what time they devote to our activities, which may result in lack of availability when needed due to responsibilities at other jobs. In addition, situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers may conflict with our interests. Directors and officers with conflicts of interest will be subject to and follow the procedures set out in applicable corporate and securities legislation, regulation, rules and policies. Certain of our directors and officers will only devote a portion of their time to our business and affairs and some of them are or will be engaged in other projects or businesses.
Our ability to issue an unlimited number of common shares and preferred shares may have anti-takeover effects that could discourage, delay or prevent a change of control and may result in dilution to our investors.
Our charter documents currently authorize the issuance of an unlimited number of common shares without nominal or par value and an unlimited number of preferred shares without nominal or par value in one or more series without the requirement that we obtain any shareholder approval. The Board could authorize the issuance of additional preferred shares that would grant holders rights to our assets upon liquidation, special voting rights, redemption rights. That could impair the rights of holders of common shares and discourage a takeover attempt. In addition, in an effort to discourage a takeover attempt, our Board could issue an unlimited number of additional common shares. There are currently no preferred shares outstanding. If we issue any additional shares or enter into private placements to raise financing through the sale of equity securities, investors’ interests in our company will be diluted and investors may suffer substantial dilution in their net book value per share depending on market conditions and the price at which such securities are sold. If we issue any such additional shares, such issuances also will cause a reduction in the proportionate ownership and voting power of all other shareholders.
Issuances of common shares upon exercise or conversion of convertible securities, including pursuant to our equity incentive plans and outstanding share purchase warrants and convertible notes could result in additional dilution of the percentage ownership of our stockholdersshareholders and could cause our stockshare price to fall. As of September 30, 2019, weWe currently have share purchase warrants to purchase 42,538,54147,379,348 common shares outstanding at exercise prices ranging from US$0.150.03 to US$21.66 (CDN$28.35)CAD$4.73 and options to purchase 9,808,3339,470,000 common shares with a weighted average exercise price of CDN $1.20$0.63 and notes convertible into 10,068,23097,608,979 common shares based on conversion prices ranging from $0.40$0.03 to $1.00$0.18 per share. The issuance of the common shares underlying the share purchase warrants, options and convertible notes will have a dilutive effect on the percentage ownership held by holders of our common shares.
We have applied to list our common shares on the NASDAQ Capital Market (“NASDAQ”); however, there can be no assurance that our common shares will be approved for listing on NASDAQ or if approved that we will meet the continued listing requirements.
We have applied to list our common shares on NASDAQ; however, we currently do not meet the initial listing requirements of NASDAQ. In particular, we do not meet the stock price requirement and may be required to effect another reverse stock split in order to meet such requirement. Even if we effect a reverse stock split, and meet the NASDAQ stock price requirement, NAASDAQ may choose not to list our common shares.
If after listing we fail to satisfy the continued listing requirements of NASDAQ such as the corporate governance requirements, the stockholder’s equity requirement or the minimum closing bid price requirement, NASDAQ may take steps to de-list our common shares. Such a de-listing or even notification of failure to comply with such requirements would likely have a negative effect on the price of our common shares and would impair your ability to sell or purchase our common shares when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the NASDAQ’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common shares to become listed again, stabilize the market price or improve the liquidity of our common shares, prevent our common shares from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with the NASDAQ’s listing requirements.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our common shares will be listed on NASDAQ, our common shares will be covered securities. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were to be delisted from NASDAQ, our common shares would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.
In order to meet the initial listing requirements of NASDAQ, we may need to effect a reverse stock split.
In order to meet the initial listing requirements of NASDAQ. We will likely need to effect a reverse stock split. There are risks associated with a reverse split, including that a reverse split may not result in a sustained increase in the per share price of our common shares. There is no assurance that:
| ● | the market price per share of our common shares after a reverse split will rise in proportion to the reduction in the number of shares of our common shares outstanding before the reverse split; | | | | | ● | a reverse split will result in a per share price that will attract brokers and investors who do not trade in lower priced stocks; | | | | | ● | a reverse split will result in a per share price that will increase our ability to attract and retain employees and other service providers; and | | | | | ● | the market price per share will either exceed or remain in excess of the minimum bid price as required by NASDAQ Capital Market, or that we will otherwise meet the requirements of NASDAQ Capital Market for initial listing for trading on NASDAQ. |
Even if the market price of our common shares does rise following a reverse split, we cannot assure you that the market price of our common shares immediately after a reverse split will be maintained for any period of time. Even if an increased per-share price can be maintained, a reverse split may not achieve the desired results that have been outlined above. Moreover, because some investors may view a reverse split negatively, we cannot assure you that a reverse split will not adversely impact the market price of our common shares.
The risks associated with penny stock classification could affect the marketability of our common shares and shareholders could find it difficult to sell their shares.
Our common shares are currently subject to “penny stock” rules as promulgated under the Securities and Exchange Act of 1934, as amended. The SEC adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Transaction costs associated with purchases and sales of penny stocks are likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on certain national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the exchange).
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker- dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common shares in the United States and shareholders may find it more difficult to sell their shares.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under the Business Corporations Act (Ontario). The rights of holders of our common shares are governed by the laws of the Province of Ontario, including the Business Corporations Act (Ontario), by the applicable laws of Canada, and by our Articles, as amended (the “Articles”), and our bylaws (the “bylaws”). These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. The principal differences include without limitation the following:
Under the Business Corporations Act (Ontario), we have a lien on any common share registered in the name of a shareholder or the shareholder’s legal representative for any debt owed by the shareholder to us. Under U.S. state law, corporations generally are not entitled to any such statutory liens in respect of debts owed by shareholders. Our bylaws also provide that at least 25% of our Board of Directors must be resident Canadians.
With regard to certain matters, we must obtain approval of our shareholders by way of at least 66 2/3% of the votes cast at a meeting of shareholders duly called for such purpose being cast in favor of the proposed matter. Such matters include without limitation: (a) the sale, lease or exchange of all or substantially all of our assets out of the ordinary course of our business; and (b) any amendments to our Articles including, but not limited to, amendments affecting our capital structure such as the creation of new classes of shares, changing any rights, privileges, restrictions or conditions in respect of our shares, or changing the number of issued or authorized shares, as well as amendments changing the minimum or maximum number of directors set forth in the Articles. Under many U.S. state laws, the sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the outstanding shares, although in some cases approval by a higher percentage of the outstanding shares may be required. In addition, under U.S. state law the vote of a majority of the shares is generally sufficient to amend a company’s certificate of incorporation, including amendments affecting capital structure or the number of directors.
Pursuant to our bylaws, two persons holding 5% of the shares entitled to vote at the meeting present in person or represented by proxy and each entitled to vote thereat shall constitute a quorum for the transaction of business at any meeting of shareholders. Under U.S. state law, a quorum generally requires the presence in person or by proxy of a specified percentage of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled to vote.
Under rules of the Ontario Securities Commission, a meeting of shareholders must be called for consideration and approval of certain transactions between a corporation and any “related party” (as defined in such rules). A “related party” is defined to include, among other parties, directors and senior officers of a corporation, holders of more than 10% of the voting securities of a corporation, persons owning a block of securities that is otherwise sufficient to affect materially the control of the corporation, and other persons that manage or direct, to a substantial degree, the affairs or operations of the corporation. At such shareholders’ meeting, votes cast by any related party who holds common shares and has an interest in the transaction may not be counted for the purposes of determining whether the minimum number of required votes have been cast in favor of the transaction. Under U.S. state law, a transaction between a corporation and one or more of its officers or directors can generally be approved either by the shareholders or a by majority of the directors who do not have an interest in the transaction.
Neither Canadian law nor our Articles or bylaws limit the right of a non-resident to hold or vote our common shares, other than as provided in the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”). The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian (other than a “WTO Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire our direct control, and the value of our assets were CDN$5.0 million or more (provided that immediately prior to the implementation of the investment in our company was not controlled by WTO Investors). An investment in our common shares by a WTO Investor (or by a non- Canadian other than a WTO Investor if, immediately prior to the implementation of the investment our company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire our direct control and the value of our assets equaled or exceeded certain threshold amounts determined on an annual basis.
The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the WTO; (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the Investment Act. A different threshold also applies if the Canadian business carries on a cultural business.
The 2018 threshold for WTO investors that are SOEs will be CDN$398 million based on the book value of the Canadian business’ assets, up from CDN$379 million in 2017.
The 2018 thresholds for review for direct acquisitions of control of Canadian businesses by private sector investor WTO investors (CDN$1 billion) and private sector trade-agreement investors (CDN$1.5 billion) remain the same and are both based on the “enterprise value” of the Canadian business being acquired.
A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of our company for purposes of the Investment Act if he or she acquired a majority of our common shares. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of our company, unless it could be established that we are not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a “national” of a country (other than Canada) that is a member of the WTO (“WTO Member”) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO Investor-controlled entity,” pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions involving our common shares would be exempt from the Investment Act, including:
| ● | an acquisition of our common shares if the acquisition were made in connection with the person’s business as a trader or dealer in securities; | | | | | ● | an acquisition of control of our company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and | | | | | ● | an acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control of our company, through the ownership of voting interests, remains unchanged. Under U.S. law, except in limited circumstances, restrictions generally are not imposed on the ability of non- residents to hold a controlling interest in a U.S. corporation. |
We are required to comply with the Exchange Act’s domestic reporting regime and has caused us to incur significant legal, accounting and other expenses.
We are required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and NASDAQ rules. As a result, we expect that compliance would increase our legal and financial compliance costs and is likely to make some activities highly time consuming and costly. We also expect that our required compliance with the rules and regulations applicable to U.S. domestic issuers, it will make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board of Directors.
We are an emerging growth company within the meaning of the Securities Act and intend to take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” or EGC, as defined in the Jumpstart Our Business Start-ups Act of 2012, or the JOBS Act. For as long as we continue to be an EGC, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As an EGC, we are required to report only two years of financial results and selected financial data compared to three and five years, respectively, for comparable data reported by other public companies. We may take advantage of these exemptions until we are no longer an EGC. We could be an EGC for up to five years, although circumstances could cause us to lose that status earlier, including if the aggregate market value of our common shares held by non- affiliates exceeds $700 million as of any February 28 (the end of our second fiscal quarter) before that time, in which case we would no longer be an EGC as of the following August 31 (our fiscal year-end). We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and the price of our common shares may be more volatile in the event that we decide to make an offering of our common shares following this direct listing.
Claims of U.S. civil liabilities may not be enforceable against us.
We are incorporated under Canadian law. Certain members of our Board of Directors and senior management are non- residents of the United States, and many of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible to serve process on such persons or us in the United States or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce judgments obtained in U.S. courts against them or us, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
The United States and Canada do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in Canada. In addition, uncertainty exists as to whether Canadian courts would entertain original actions brought in the United States against us or our directors or senior management predicated upon the securities laws of the United States or any state in the United States. Any final and conclusive monetary judgment for a definite sum obtained against us in U.S. courts would be treated by the courts of Canada as a cause of action in itself and sued upon as a debt at common law so that no retrial of the issues would be necessary, provided that certain requirements are met. Whether these requirements are met in respect of a judgment based upon the civil liability provisions of the U.S. securities laws, including whether the award of monetary damages under such laws would constitute a penalty, is an issue for the court making such decision. If a Canadian court gives judgment for the sum payable under a U.S. judgment, the Canadian judgment will be enforceable by methods generally available for this purpose. These methods generally permit the Canadian court discretion to prescribe the manner of enforcement.
As a result, U.S. investors may not be able to enforce against us or our senior management, Board of Directors or certain experts named herein who are residents of Canada or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.
Our ability to use our net operating losses and certain other tax attributes may be limited. As of August 31, 2018,2020, we had accumulated net operating losses (NOLs), of approximately CDN $31.0$91 million. Varying jurisdictional tax codes have restrictions on the use of NOLs, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, R&D credits and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership. Based upon an analysis of our equity ownership, we do not believe that we have experienced such ownership changes and therefore our annual utilization of our NOLs is not limited. However, should we experience additional ownership changes, our NOL carry forwards may be limited.
| ● | limit our flexibility in planning for, or reacting to, changes in our business and our industry. |
The incurrence of additional indebtedness could require acceptance of covenants that, if violated, could further restrict our operations or lead to acceleration of the indebtedness that would necessitate winding up or liquidation of our company. In addition to the foregoing, our ability to obtain additional debt financing may be limited and there can be no assurance that we will be able to obtain any additional financing on terms that are acceptable, or at all. We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None that haveOn January 12, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $86,350, including an original issue discount of $7,850, for net proceeds of $75,000 after certain expenses. The note bears interest at 12% per annum and matures on January 12, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest trading bid price during the previous fifteen prior trading days.
All sales to U.S. persons in each of the transactions set forth above were issued relying on Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The recipients of the securities in each of these transactions relying on Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder represented their intentions to acquire the securities for investment only and not been previously reported.with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the share certificates issued in these transactions. All recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to information about us. The sales of these securities were made without any general solicitation or advertising. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable.We will commence open cast mining at our TMC site once our plant is fully operational. In terms of the additional disclosure required, we provide the following information.
1. TMC Mining Operations: The TMC mining operation is conducted at the TMC Mineral Lease on lands situated in or near Utah’s Asphalt Ridge, an area located along the northern edge of the Uintah Basin and containing oil sands deposits located at or near the surface, particularly the acreage located in T5S-R21E (Section 25) and T5S-R22E (Section 31) where our Asphalt Ridge Mine #1 is located. (i) | The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard under section 104 of the Federal Mine Safety and Health Act of 1977 (30 U.S.C. 814) for which the operator received a citation from the Mine Safety and Health Administration. |
None. (ii) | The total number of orders issued under section 104(b) of such Act (30 U.S.C. 814(b)). |
None. (iii) | The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of such Act (30 U.S.C. 814(d)).4. |
None. (iv) | The total number of flagrant violations under section 110(b)(2) of such Act (30 U.S.C. 820(b)(2)). |
None. (v) | The total number of imminent danger orders issued under section 107(a) of such Act (30 U.S.C. 817(a)). |
None. (vi) | The total dollar value of proposed assessments from the Mine Safety and Health Administration under such Act (30 U.S.C. 801 et seq.). |
None. (vii) | The total number of mining-related fatalities. |
None. (viii) | Written notifications received of: |
| a) | A pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under section 104(e) of such Act (30 U.S.C. 814(e)); or |
None | b) | The potential to have such a pattern. |
None, that we are aware of. | c) | Any pending legal action before the Federal Mine Safety and Health Review Commission involving such mine. |
None Item 5. Other Information. None.None
Item 6.Exhibits
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned. Petroteq Energy Inc. /s/ David SealockAleksandr Blyumkin | | David SealockAleksandr Blyumkin | | Chief Executive Officer and President | | (Principal Executive Officer) | | | | /s/ Mark Korb | | Mark Korb | | Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | Date: October 4, 2019 January 19, 2021 | |
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