UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended August 31, 2020
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 000-55991
PETROTEQ ENERGY INC.
(Exact name of registrant as specified in its charter)
| Ontario | None | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
15315 W. Magnolia Blvd, Suite 120 Sherman Oaks, California |
91403 | |
| (Address of principal executive offices) | (Zip code) |
(866) 571-9613
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the act: None
| Title of each class: | Trading Symbol(s): | Name of each exchange on which registered: | ||
| N/A | N/A | N/A |
Securities registered pursuant to section 12(g) of the Act:
| Common Shares, without par value |
| (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the TSX Venture Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter (CAD$0.0950 converted to US$0.0707 on February 28, 2020) was approximately: $13,793,616
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Number of shares of common stock outstanding as of December 14, 2020 was 385,609,435.
Documents incorporated by reference: None.
PETROTEQ ENERGY INC.
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2020, as filed with the Securities and Exchange Commission on December 23, 2020, is being filed for the following purposes: (a) to provide on the face page of this Amendment No. 1 (i) the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the TSX Venture Exchange as of the last business day of our Company’s most recently completed second fiscal quarter, and (ii) the number of shares of common stock outstanding as of December 14, 2020, as such information was inadvertently omitted from the original Form 10-K; (b) to replace all references to “Petroteq Oil Sands Recovery, LLC” with “Petroteq Oil Recovery, LLC” (being the correct name of that entity); (c) to furnish the List of Subsidiaries as Exhibit 21.1, which was inadvertently omitted from the original Form 10-K; (d) to amend the exhibit table to include references to the Extensible Business Reporting Language (XBRL) exhibits included in the original Form 10-K filing and this Amendment No.1; (e) to replace the Certification of Chief Executive Officer filed pursuant to Rule 13a-14(a) of the Exchange Act as Exhibit 31.1 to the original Form 10-K; and (f) to replace the Certification of Chief Executive Officer furnished pursuant to Rule 13a-14(b) as Exhibit 32.1 to the original Form 10-K. Due to an administrative error, the EDGAR versions of Exhibits 31.1 and 32.1 incorrectly identified David Sealock, our Company’s former Chief Executive Officer, as the certifying officer. New Certifications of Chief Executive Officer are filed and furnished herewith as Exhibits 31.1 and 32.1 hereto.
No other changes have been made to the Form 10-K. This Amendment No. 1 to the Form 10-K/A speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-K.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Annual Report on Form 10-K/A, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part I, Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K/A. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
NOTE REGARDING COMPANY REFERENCES
Throughout this Annual Report on Form 10-K/A, “Petroteq,” the “Company,” “we,” “us” and “our” refer to Petroteq Energy Inc.
PETROTEQ ENERGY INC.
FORM 10-K/A
TABLE OF CONTENTS
i
BUSINESS OVERVIEW
We are a holding company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and gas industry. Our primary focus is on the development and implementation of our proprietary oil sands mining and processing technology to recover oil from surface mined bitumen deposits. Our wholly-owned subsidiary, Petroteq Energy CA, Inc., a California corporation (“PCA”), conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company (“POSR”), and TMC Capital, LLC, a Utah limited liability company (“TMC”). Another subsidiary, Petrobloq LLC, a California limited liability company (“Petrobloq”), also wholly owned by Petroteq, is currently dormant.
OIL SANDS MINING & PROCESSING
Through our wholly-owned subsidiary PCA, and its two subsidiaries POSR and TMC, we are in the business of oil sands mining operations on the TMC Mineral Lease (as defined and described below) in Uintah County, Utah, where we process mined oil sands ores using our proprietary extraction technology (the “Extraction Technology”) to produce crude oil and hydrocarbon products. Our primary extraction and processing operations are conducted at our Asphalt Ridge processing facility, which is owned by POSR.
Petroteq owns the intellectual property rights to the Extraction Technology which is used at our Asphalt ridge processing facility to extract and produce crude oil from oil sands utilizing a closed-loop solvent based extraction system.
The processing facility, which initially commenced operations as a pilot plant in 2015, was relocated from its original site near Maeser, Utah, to the lands then covered by a Mining and Mineral Lease Agreement dated as of July 1, 2013, between Asphalt Ridge, Inc., as lessor, and TMC, as lessee, (the “Original TMC Mineral Lease”), near our Asphalt Ridge Mine, in 2017 to improve logistical and processing efficiencies in the oil sands recovery process. The relocation of our processing facility occurred during a temporary suspension of our oil sands mining and processing operations that we had initiated in 2016 in the face of a sharp decline in world oil prices. We restarted operations at the end of May 2018, and completed expansion work on the processing facility to increase production to 400-500 barrels of oil per day during the last quarter of fiscal 2019 (the quarter ended August 31, 2019). We continued testing the expanded plant in the first quarter of fiscal 2020 (the quarter ended November 30, 2019) and determined that a number of equipment upgrades were required to support continuous operation of the plant. As discussed below, such upgrades were completed by Greenfield Energy LLC (“Greenfield”) in December 2020.
We had expected to generate revenue from the sale of hydrocarbon products commencing 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 quarter ended February 29, 2020, and ultimately suspended production of hydrocarbon products during the quarter ended May 31, 2020.
1
On July 2, 2020, TomCo Energy PLC (“TomCo”) announced that, following the establishment by TomCo of 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 late December 2020.
The Company expects that Greenfield will also be in a position to restart mining and ore handling operations in late December 2020. 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 December 2020.
Even once we resume production, we anticipate that our revenue will be limited until we are at full production. We expect that we will require additional capital to continue our operations and planned growth.
As announced by TomCo on September 16, 2020, the board of TomCo believes that the Pre-FEED (Front-End Engineering and Design) Report prepared by Crosstrails Engineering LLC, a subsidiary of Valkor, provides a high level of confidence that the processes being utilized at the Asphalt Ridge processing facility can be scaled up to 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 the associated trials to demonstrate the commerciality of the processes used in Petroteq’s Extraction Technology process and the identification and securing of a suitable site for a commercial scale plant.
Once the Asphalt Ridge processing facility has been restarted, Petroteq intends to undertake a series of 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 addition, Greenfield has announced that, following the restart of the Asphalt Ridge processing facility, it intends to start working with Quadrise Fuels International plc, regarding a trial 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 United 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 low 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 specialist 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 comparison to HFOs.
As announced by the Company on November 17, 2020, Greenfield has executed a non-exclusive, multi-site license with Petroteq (the “Greenfield License”). The Greenfield License has been granted in consideration for the funding that Greenfield has provided to date in respect of the upgrades to the Asphalt Ridge processing facility, in the aggregate amount of $2,000,000. The Greenfield License will allow Greenfield to use the Extraction Technology in any future oil sands plants built by Greenfield in the United States. The Greenfield License also clarifies the ownership of any intellectual property developed as a result of the Asphalt Ridge processing facility upgrade and associated trials or otherwise developed by Greenfield in the future. Any such intellectual property will be the property of Petroteq and pursuant to the Greenfield License, Petroteq will grant Greenfield the ability to utilize such intellectual property, together with any additional intellectual property developed by Petroteq, in accordance with the terms of the Greenfield License.
For any future oil sands plants built by Greenfield utilizing the Greenfield License, Greenfield will pay Petroteq a 5% royalty of net revenues received from oil products produced from oil sand resources.
2
Oil Sands Exploration and Processing Plant
In June 2011, Petroteq commenced the development of an oil sands extraction facility near Maeser, Utah and entered into construction and equipment fabrication contracts for the purpose of evaluating the Extraction Technology in producing crude oil from the extraction and processing of oil sands mined from the TMC Mineral Lease and from other deposits located in the Asphalt Ridge area. By January 2014 our initial processing facility, designed as a pilot plant having processing capacity of 250 barrels per day, was fully permitted and construction was completed by October 1, 2014. Operations conducted at this initial pilot plant during 2015 allowed us to test and evaluate the Extraction Technology at or near the plant’s capacity. During 2015, the plant produced approximately 10,000 (gross) barrels of oil from the local oil sands ores, including oil sands deposits located within our TMC Mineral Lease. From this production, 7,777.33 barrels of finished crude oil were sold to an oil and gas distributor for resale to its refinery customers, with the balance of the produced oil used internally to power generators for the plant. The initial processing plant was flexible in that it had the ability to produce both high quality heavy crude oil as well as lighter oil if needed.
In 2015, with the sharp decline in world oil prices, Petroteq determined that the transportation costs of hauling mined ore from our mine site to the processing facility, a distance of approximately 17 miles, were adversely affecting the economics of our processing operations. For that reason, we temporarily suspended operations in 2016, and, in 2017, the plant was disassembled and moved from its original location to the site of our Temple Mountain mining site (referred to as the Asphalt Ridge Mine #1) located within the TMC Mineral Lease. During the reassembly of the facility, additional equipment was installed to increase the plant’s capacity from 250 barrels per day to 400-500 barrels per day. In May 2018, mining operations at the Asphalt Ridge Mine #1 recommenced, and the new processing plant commenced a test production phase of heavy crude oil from oil sands deposits at this site. Work to increase the plant’s capacity to 400-500 barrels per day was completed during the last quarter of fiscal 2019 (the quarter ended August 31, 2019). Testing, which continued into the first quarter of fiscal 2020 (the quarter ended November 30, 2019), determined that a number of equipment upgrades were required to support continuous operation of the plant.
Greenfield, a joint venture company established by TomCo and Valkor, assumed responsibility for the management and operations of our Asphalt Ridge processing facility in July 2020. As discussed above, Greenfield has made certain upgrades to the plant to improve its capacity and reliability, and is undertaking tests to assess its potential commerciality.
Resources and Mining Operations
Through its acquisition of TMC in June 2015, Petroteq indirectly acquired certain mineral rights under the TMC Mineral Lease, consisting of the Original TMC Mineral Lease covering approximately 1,229.82 acres of land in the Asphalt Ridge area of Uintah County, Utah. In June 2018, Petroteq, acting through POSR, acquired additional mineral rights under two mineral leases entitled “Utah State Mineral Lease for Bituminous-Asphaltic Sands”, each dated June 1, 2018, between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and POSR, as lessee, covering lands that largely adjoin the lands covered by the TMC Mineral Lease ( “SITLA Leases”). More recently, in April 2019 and in July 2019, in two separate transactions, TMC acquired an initial 50% and then the remaining 50% of the operating rights under five (5) federal (U.S.) oil and gas leases, administered by the (U.S.) Department of Interior’s Bureau of Land Management (“BLM”), covering lands located in eastern and south-eastern Utah (“BLM Leases”).
As described in more detail below, the Original TMC Mineral Lease was terminated effective August 10, 2020, and a new Short-Term Mining Lease agreement dated as of that date was entered into between Asphalt Ridge, Inc., as lessor, and Valkor as lessee. Valkor and TMC have entered into a Short-Term Mining and Mineral Sub-Lease dated August 20, 2020 (the “TMC Mineral Sub-Lease”) whereby all of the rights and obligations of Valkor, as lessee, have been sub-let to TMC. At this time, Petroteq (through its subsidiaries) holds mineral leases (or the operating rights under leases) covering approximately 8,501.76 net acres within the State of Utah, consisting of 1,229.82 acres held under the TMC Mineral Lease, 1,311.94 acres held under the SITLA Leases and 5.960 acres under the BLM Leases.
The SEC permits oil and gas companies that are subject to domestic issuer reporting requirements under U.S. federal securities law, in their filings with the SEC, to disclose only estimated proved, probable and possible reserves that meet the SEC’s definitions of such terms. The Company has not yet established any reserves.
Between March 14, 2019 and May 31, 2020, we made cash deposits of $1,907,000, included in prepaid expenses and other current assets on the consolidated balance sheets for the acquisition of 100% of the operating rights under U.S. federal oil and gas leases, administered by the BLM in Garfield and Wayne Counties covering approximately 8,480 gross acres in P.R. Springs and the Tar Sands Triangle within the State of Utah. The total consideration of $3,000,000 has been partially settled by the $1,907,000 cash deposit, with the balance of $1,093,000 still outstanding.
3
The following table sets forth the gross/net developed and undeveloped acreage held under the TMC Mineral Sub-Lease.
TMC Mineral Lease Developed/Undeveloped Acreage (Gross/Net) | |
| Total Acreage | |
| Gross Acres | 1,229.82 acres |
| Net Acres | 1,229.82 acres |
| Developed Acreage | |
| Asphalt Ridge Mine #1/Permit Boundaries | |
| Gross Acres | 174.00 acres |
| Net Acres | 174.00 acres |
| Undeveloped Acreage | |
| Acreage Outside Asphalt Ridge Mine #1/Permit Boundaries | |
| Gross Acres | 1,055.82 acres |
| Net Acres | 1,055.82 acres |
The TMC Mineral Lease covers 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. Most of the oil-impregnated reservoirs or deposits in the Asphalt Ridge area are found in the Rimrock Sandstone (Mesaverde Group Formations) and in the (Tertiary) Duchense River Formation. Substantial bitumen deposits in the Rimrock and Duchense River Formations extend from the northwest in a south-easterly direction through a substantial part of the lands included in the TMC Mineral Lease, particularly the acreage located in T5S-R21E (Section 25) and T5S-R22E (Section 31) where our Asphalt Ridge Mine #1 is located. Bitumen-saturated pay thicknesses in lands covered by the TMC Mineral Lease generally range from 50-200 feet, with some deposits approaching 300 feet in pay thickness. Petroteq believes that oil sands deposits in this area may be mined economically at depths up to 250-300 feet below the surface.
As announced by the Company on October 29, 2020, a recent survey of Petroteq’s lease properties has identified three key areas where the oil sands ore appears to have higher oil saturations than what was previously mined. Samples were taken from each location and lab assays of the samples showed that the ore was a higher quality to that mined previously. These areas are currently anticipated to be the focus of Petroteq’s mining efforts during the initial operation of the Asphalt Ridge processing facility following its restart. In addition, six corehole locations were staked and, subject to rig availability, will be drilled during January. This work is expected to allow Petroteq’s mining consultant to develop a detailed mining plan which would direct future mining operations for extended plant operation. No additional exploratory work has been performed in the preceding three years.
The following tables set forth the gross/net undeveloped acreage held under the SITLA Leases and BLM Leases, respectively.
| SITLA Leases | |
| Developed/Undeveloped Acreage (Gross/Net) | |
| SITLA Lease #53806 | |
| Gross Acres | 833.03 acres |
| Net Acres | 833.03 acres |
| SITLA Lease #53807 | |
| Gross Acres | 478.91 acres |
| Net Acres | 478.91 acres |
| All Acreage is Currently Undeveloped | |
4
BLM Leases Developed/Undeveloped Acreage (Gross/Net) | |
| BLM Lease #U-38071 | |
| Gross Acres | 1,920.00 acres |
| Net Acres | 1,920.00 acres |
| BLM Lease #U-08291G | |
| Gross Acres | 160.00 acres |
| Net Acres | 160.00 acres |
| BLM Lease #U-17781 | |
| Gross Acres | 1,880.00 acres |
| Net Acres | 1,880.00 acres |
| BLM Lease #U-17979 | |
| Gross Acres | 720.00 acres |
| Net Acres | 720.00 acres |
| BLM Lease #U-20860 | |
| Gross Acres | 1,280.00 acres |
| Net Acres | 1,280.00 acres |
| All Acreage is Currently Undeveloped | |
The BLM Leases include lands located either in the P.R. Springs or Tar Sands Triangle areas of Utah, geographic areas that have been designated as a “Special Tar Sands Area” by the (U.S.) Department of Interior.
5
The TMC Mineral Lease
The Original TMC Mineral Lease has been terminated and replaced with (a) a new Short-Term Mining Lease agreement dated as of August 20, 2020 between Asphalt Ridge, Inc., as lessor, and Valkor as lessee, and (b) the TMC Mineral Sub-Lease whereby all of the rights and obligations of Valkor, as lessee, have been sub-let to TMC, as sub-lessee. TMC has the exclusive right to explore for, mine and produce oil and other minerals associated with oil sands, subject to certain depth limits. For ease of reference, the term “TMC Mineral Lease” is used to refer to the Original TMC Mineral Lease or the TMC Mineral Sub-Lease, as applicable.
Previously, TMC was the direct lessee under the TMC Mineral Lease with Asphalt Ridge, Inc., as lessor, which was amended on October 1, 2015 and further amended on March 1, 2016, on February 1, 2018, and most recently on November 21, 2018. The primary term of the TMC Mineral Lease, as amended, commenced July 1, 2013 and continued for six years until June 30, 2019, subject to extension.
The TMC Mineral Sub-Lease it is to remain in effect for a term that coincides and is co-extensive with the term of the Short-Term Mining Lease between Asphalt Ridge, Inc. and Valkor, including any extension or renewal to the term thereof; provided, however, that the TMC Mineral Sub-Lease provides for a termination date of June 30, 2021. The initial term of the Short-Term Mining Lease between Asphalt Ridge, Inc. and Valkor will expire on December 31, 2020, provided that Valkor may extend the term for an additional period of up to 6 months subject to certain conditions, but in no event beyond June 30, 2021.
TMC paid Valkor an initial rental fee in the amount of $25,000 on commencement of the TMC Mineral Sub-Lease, and is obligated to pay Valkor a monthly rental fee of $15,000 during the term of the TMC Mineral Sub-Lease. TMC is also obligated to pay production royalties as follows:
| (a) | For “Bitumen Product” produced from oil sands mined or otherwise extracted from the property, a production royalty equal to 8% of the gross sales revenue received by TMC from the sale of such Bitumen Product. “Bitumen Product” is defined to mean naturally occurring oil in the oil sands that is sold in whatever form, including run-of-mine, screened, processed, or after the addition of any additives and/or upgrading of the Bitumen Product; |
| (b) | Subject to the production royalty described in paragraph (a) above on sales of Bitumen Product that are fully accounted for, a production royalty of 8% of the gross sales revenue received by TMC on all other minerals produced from Bitumen Product mined or otherwise extracted from the property and sold; provided that where sales occur to a third party purchaser that is engaged in marketing a variety of products or by-products made from such materials, and payments to TMC therefore vary, and if TMC’s receipts are measurably greater than comparable sales by others of similar products or by-products 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 will be the greater of a 5% royalty on the gross value of the product and by-products sold by the third party or 50% of the gross revenue received by TMC from the sale of such products or by-products, as the case may be; and |
| (c) | On oil and gas, and associated hydrocarbons produced by TMC using standard oil and gas drilling recovery techniques above 3000 feet MSL (mean sea level) and sold, a production royalty of 1/6 of the gross market value. |
6
During the year ended August 31, 2020, we received (gross) proceeds of $290,809 from the sale of upgraded or finished oil produced at our Asphalt Ridge processing facility from oil sands mined under the TMC Mineral Lease. During our fiscal years ending August 31, 2019 we had sales of $59,335 and for the years ended August 31, 2018 and 2017 and 2016, we had no sales of produced oil since, during this period, we temporarily suspended our mining and processing operations during the relocation, reassembly and expansion of our process facility to a new site located within the TMC Mineral Lease.
During the last five (5) months of 2015, we produced approximately 10,000 barrels of oil, with 2,222 barrels consumed as fuel in plant operations and 7,777.33 barrels sold and delivered to an independent purchaser at our processing facility. Our use of produced oil as a fuel source for plant generators in 2015 is no longer necessary since the plant’s power supply is now provided by a local power company.
The costs associated with extraction and processing operations at our Asphalt Ridge processing facility which are used in determining our “Average Production Costs” include the costs of oil sands ore, natural gas liquids, aromatic solvent, operator labor, electricity, propane, nitrogen, water, diesel fuel and rental equipment. The primary costs are the costs of mining oil sands ore, natural gas liquids, aromatic solvents, and labor costs. Other than the aromatic solvents, the condensate used as both a solvent and a feedstock in the processing operations at our Asphalt Ridge facility is produced by processing natural gas liquids through a distillation column, with aromatic solvents then added to the distillate. In addition:
| ● | Our fixed costs generally remain constant without regard to the API gravity of our upgraded crude oil; |
| ● | Our oil sands ore costs, which include our mining costs, the cost of transporting mined ore to our processing facility, and pre-processing costs (crushing etc.) incurred in preparing mined ore for processing, do not vary with the API gravity of the oil produced at our facility, but will decrease over time (subject to economies of scale) as our mining operations expand and oil production increases; and |
| ● | Solvent and condensate costs are based on the market prices that exist for each category of product, which are usually determined by a monthly average of prevailing prices in effect during the month of delivery. Solvent and condensate costs typically increase as the target API gravity for our finished crude oil increases. |
7
During the period of August 2018 through December 2018, our “Average Production Costs” decreased to $27 per barrel of oil produced at our Asphalt Ridge facility. During this period, our fixed costs did not differ materially from our August 2015 to December 2015 fixed costs. We do anticipate that we will experience a decrease in fixed costs per barrel as we increase our capacity and operate at full capacity.
With respect to variable costs, our oil sands ore cost during the 2018 period increased to an average of $6.65 per barrel, due primarily to the quantity and quality of ore processed, but with cost-savings resulting from the relocation of our processing facility to the mine site located within our TMC Mineral Lease. In addition, during the 2018 period, our average cost of aromatic solvent decreased to $0.47 per gallon and the average cost of condensate was substantially lower at $2.75 per barrel, due primarily to our production of heavier oil with an API gravity of between 15 and 25 degrees.
We do not expect our operating costs to materially change as the depth of the Asphalt Ridge #1 Mine increases with additional mining over time. We further anticipate that increased efficiencies in our mining operations and various economies of scale (such as bulk quantity purchases of aromatic solvents at quantity/price discounts), will assist in managing and potentially reducing our average production costs as production at our Asphalt Ridge facility increases over time.
The API gravity for the raw heavy oil or bitumen extracted from oil sands ores initially treated at our Asphalt Ridge processing facility averages approximately 10 degrees. Through the application of the Extraction Technology at our plant, we expect to produce a crude oil having a range of API gravity of between 10 degrees and 12 degrees. Through our solvent formulation and the select distillation capabilities, the plant is able to craft a final crude oil product to meet the specifications of a range of customers.
The finished crude oil produced at our Asphalt Ridge processing facility is currently sold to an independent purchaser under short-term or spot delivery contracts where the purchaser takes delivery of finished crude oil at or near the plant and transports it for resale to a refinery in Nevada. The specifications of the oil produced at the plant are effectively tailored to meet customer (pipeline and refinery) specifications and requirements. From time to time we sell oil produced at our Asphalt Ridge facility pursuant to the terms of product off take agreements However, none of our agreements with our current purchaser and none of the offtake agreements are firm commitments requiring the purchaser to acquire a specified quantity of our produced oil. If we increase our production beyond the needs of our current purchaser, we expect to attempt to find additional purchasers for such additional production. Although we believe that larger production quantities will attract certain purchasers that only purchase larger quantities of product and will require transportation of our products to locations closer to our processing facility, resulting in lower transportation costs, to date we have only had preliminary discussions with such purchasers and have no purchase commitments from such purchasers. If purchasers located closer to our processing facility are not interested in acquiring such additional quantities produced, we may sell our product to purchasers that may require transportation of our products to locations that are further from our processing facility, which would result in higher transportation costs and lower profit margins for us.
Generally, the finished oil produced at our Asphalt Ridge processing facility is sold at a price representing a discount off an average of published prices for West Texas Intermediate (WTI) crude oil for a specified period. WTI crude oil is commonly used as a benchmark in pricing oil under oil sales/purchase contracts, particularly in the United States. The discount off the WTI benchmark price is based on a number of factors, including differences that may exist between the specifications of our crude oil and those of WTI crude oil together with the cost of transporting our crude oil to delivery points. Since WTI crude oil generally has an API gravity of between 37-42 degrees, a heavier oil having a lower API gravity in the range of the oil produced at our processing facility will be valued and sold at a price reflecting a discount off the WTI benchmark price.
We anticipate that, as production from our oil sands facility increases, longer term contracts will be secured by POSR utilizing market-based pricing formulas.
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The SITLA Leases
The SITLA Leases have a primary term of ten (10) years and will remain in effect thereafter for as long as (a) bituminous sands are produced in paying quantities, or (b) POSR is otherwise engaged in diligent operations, exploration or development activity and certain other conditions are satisfied. Generally, the term of the SITLA Leases may not be extended beyond the twentieth year of their effective dates except by production in paying quantities. An annual minimum royalty of $10 an acre must be paid during the first ten years of the SITLA Leases; from and after the 11th year of the leases, the annual minimum royalty may be adjusted by the lessor based on certain “readjustment” provisions in the SITLA Leases. Annual minimum royalties paid in any lease year may be credited against production royalties accruing in the same year.
The BLM Leases
In April 2019, TMC acquired an undivided 50% of the operating rights under 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. 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.
The BLM Leases were originally issued by 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.
Summary of Production Royalties Payable
Technology Transfer Agreement
Pursuant to the terms of a technology transfer agreement dated November 7, 2011 that we entered into with Vladimir Podlipskiy, the developer of the Extraction Technology, we are obligated to pay Mr. Podlipskiy a royalty on production from each processing plant that we own or operate that uses the Extraction Technology, starting with the construction and operation of a second plant. The royalty, if and at such time as it becomes payable, will consist of 2% of gross sales if the price of heavy oil is below $60.00 per barrel; 3% of gross sales if the price of heavy oil is between $60.00 and $69.99 per barrel; 3.5% of gross sales if the price of heavy oil is between $70.00 and $79.99 and 4% of gross sales if the price of heavy oil is greater than $80.00 per barrel.
TMC Mineral Lease
Under the TMC Mineral Lease, TMC holds 100% of the working interests (subject to a 1.6 % overriding royalty previously granted to Temple Mountain Energy, Inc.).
In addition, TMC was required to make certain advance royalty payments to the lessor. During the period from July 1, 2018 to June 30, 2020, the minimum payments were $100,000 per quarter. The minimum payments were to increase to $150,000 per quarter with effect from July 1, 2020. The TMC mineral lease was terminated during August 2020, and replaced with a sub-lease entered into with Valkor.
Production royalties payable under the sub-lease with Valkor are 8% of the gross sales revenue, subject to certain adjustments.
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SITLA Leases
The SITLA Leases provide that Petroteq must pay: (i) an annual rent equal to the greater of $1 an 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.
BLM Leases
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.
Permits and Taxes
On September 15, 2008, a large mining permit was granted to TME Asphalt Ridge, LLC by the State of Utah Division of Oil, Gas, and Mining (“UDOGM”) for the mining and development of the Asphalt Ridge Mine #1, an open pit mine located on land included within the TMC Mineral Lease.
On or about July 9, 2015, UDOGM approved an application filed by TMC to transfer the “Notice of Intention to Commence Large Mining Operations” for the Asphalt Ridge Mine #1 (Permit # M/047/0089) from TME Asphalt Ridge LLC to TMC. On October 27, 2017, UDOGM granted final approval to TMC’s “Amended Notice of Intention to Commence Large Mining Operations” and issued final Permit # M/047/0089 authorizing TMC to conduct operations at Asphalt Ridge Mine #1.
Mining operations, including the initial development of the mine at the property and removal of a portion of the overburden soil layer, have already been performed. In addition to the mining permits, all environmental, construction, utility and other local permits necessary for the construction of the plant and the processing of the oil sands have been granted to Petroteq.
Specifically, a Groundwater Discharge Permit was issued by the Utah Department of Environmental Quality (Division of Water Quality, Water Quality Board) (“UDEQ”), on July 26, 2016 (expiration on July 27, 2021), covering disposal of tailings from ore sands produced from the land area encompassed by the Asphalt Ridge Mine #1. This permit was required by Utah law even though our processing facility does not use a water-based process, and authorizes a return of residual sand tailings to the mine for backfill and capping. A Small Source Registration air permit was issued by UDEQ by a letter dated November 2, 2018. The letter confirms that our processing facility at Asphalt Ridge is exempt from any requirement of additional air quality permits since the facility produces less emissions than the level that would require a special air permit. A Conditional Use Permit (“CUP”) was issued by the Uintah County (Utah) Commission to us on January 29, 2018, for the operation of our current processing facility. The CUP is a right/interest in land under Utah law and will continue in effect in perpetuity.
The oil and gas properties (including plants, equipment etc.) included in or under the TMC Mineral Lease are subject to the State of Utah’s property (ad valorem) tax. The actual tax rate is established by each county in the State (and therefore may vary) and is generally assessed against the “fair market value” of the property. Under Utah Code § 59-2-1103, the oil and gas properties included in the SITLA Leases are exempt from the State’s property (ad valorem) tax (although this exemption does not apply to improvements on state lands).
Under Utah Code § 59-5-120, beginning January 1, 2006 and ending June 30, 2026, no severance (production) tax will be imposed on oil and gas produced from oil sands (tar sands). Accordingly, severance tax will not be owed to the State of Utah on the production of oil and hydrocarbon substances from the TMC Mineral Lease or the SITLA Leases until after June 30, 2026.
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Extraction Technology
Petroteq intends to continue to develop its operations by processing native oil sands ore produced through the mining operations of its subsidiary (TMC) and potentially through purchased native oil sands ore, using its patented closed loop, continuous flow, scalable and environmentally safe Extraction Technology. The Extraction Technology process allows the extraction of hydrocarbons from a wide range of oil sands deposits and other hydrocarbon sediment types. Petroteq’s oil extraction process takes place in a completely closed loop system that continuously recirculates and recycles the solvent after it has separated the bitumen and heavy oils from the oil sands. The closed loop system is capable of recovering up to 99% of all hydrocarbons from the oil sands. The only two end products of the process are high quality heavy oil and clean sand, making this technology environmentally benign.
The Extraction Technology, which has been modified since 2015 and unlike the technology utilized in 2015, utilizes no water in the process, is anticipated to produce minimal greenhouse gases, and is expected to extract up to 99% of all hydrocarbon content and recycle up to 95% of the solvents. The proprietary solvent composition is expected to dissolve up to 99% of heavy bitumen/asphalt and other lighter hydrocarbons from the oil sands and prevent their precipitation during the extraction process. Solvents used in this composition form an azeotropic mixture which has a low boiling point of 50 – 65 °C (degrees Celsius) and it is expected to allow recycling of over 95% of the solvent.
In the oil extraction and upgrade process utilized at our Asphalt Ridge processing facility, the bitumen crude oil that we extract from mined oil sands has an average API gravity of 9-12 degrees.
No diluents or blending agents are used to reduce the viscosity of the heavy oil extracted from bitumen saturated ores. Instead, varying amounts of solvent are introduced into an extraction tank containing raw oil sands ore that has been crushed prior to being added to the extraction tank. The solvent is designed to release the crude oil from bitumen-saturated ore during the initial extraction process.
The crude oil containing solvent is then introduced or subjected to a simple flash distillation process where virtually all of the solvent is recovered and recycled for future use.
The oil extraction process, as it exists in the pilot plant, has a Feed/Bottoms heat exchanger, a Solvent Vaporizer (heat exchanger), a Solvent Scrubber (vessel), air-cooled condensers, an air-cooled product cooler, a Bitumen Product Pump, and an oil heater plus a propane tank as the energy source. The bitumen/solvent slurry is routed via a pump to the Feed/Bottoms Exchanger where it is pre-heated both to cool the exiting product as well as to integrate the heat available from the flash distillation process. This pre-heated slurry is then heated in the Solvent Vaporizer to approximately 405°F to vaporize essentially all of the solvent from the bitumen product. This two-phase stream is then flashed across a control valve and routed to the Solvent Scrubber where the gaseous solvent stream exits the vessel and is routed to air-cooled condensers where it will be liquified and returned to the storage vessel to be re-used. The resultant hot bitumen is pumped through the Feed/Bottoms exchanger via the Bitumen Product Pump and cooled prior to entering an air-cooled exchanger where it is cooled to 180°F, the temperature at which the product is stored. If it is desired that solvent be left in the bitumen for transportation purposes, the temperature of that back end flash distillation process can be controlled.
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Petroteq has received patents in the United States, Canada and Russia that protect the claims and processes embodied in the Extraction Technology. See “Intellectual Property” below.
INTELLECTUAL PROPERTY
On March 27, 2013, Petroteq entered into an intellectual property license agreement in a private arm’s length transaction with a Canadian company, TS Energy Ltd., which has agreed to act as the sole and exclusive licensee of the Extraction Technology within Canada and the Republic of Trinidad and Tobago.
On July 2, 2019, Petroteq entered into an intellectual property license agreement with Valkor LLC, a company based in Katy, Texas, for the non-exclusive, non-transferable use of the Extraction Technology worldwide (subject to any exclusive license agreements in effect) in the engineering, construction and operation of oil sands extraction plants. The agreement requires Valkor to invest (or secure investment of) a minimum of US$20 million towards the construction of an oilsands plant by December 2020, and to have in production a minimum of 1,000 barrels per day. The agreement also requires Valkor to pay a one-time non-refundable license fee of US$2 million per oil sands plant commissioned, with 50% payable upon start of construction and the remainder payable upon first production. The agreement further provides that Valkor will pay a five percent (5%) royalty based on annual gross sales for so long as the licensed technology is covered by a valid claim in the country in which it is used.
We rely upon patents to protect our intellectual property. We have obtained patents in the United States, Canada and Russia that protect the Extraction Technology. The following sets forth details of our issued patents.
| DOCKET | TITLE | COUNTRY | DATE FILED SERIAL NO. |
DATE ISSUED PATENT NO./STATUS | ||||
| 1492.2 | Oil From Oil Sands Extraction Process |
USA | 09/26/12 13/627,518 ----------------------- 10/07/11 61/545,034 |
02/06/18 9,884,997 Expires: 10/07/31 |
Summary: A system for extracting bitumen from oil sands includes an extractor tank which incorporates a plurality of jet injectors. Operationally, the jet injectors provide jet streams of an extractant in the extractor tank that creates a fluidized bed of the extractant. A reaction between crushed oil sands and the fluidized bed then separates bitumen from the oil sands.
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Corresponding Foreign Patent Properties
| DOCKET | TITLE | COUNTRY |
DATE FILED SERIAL NO. |
DATE ISSUED PATENT NO./STATUS | ||||
| 11492.2a | Oil Extraction Process | Canada | 09/30/11 2,754,355 | Received Notice of Allowance; patent payment submitted to Commission of Patents | ||||
| 11492.2d | Oil From Oil Sands Extraction Process | Russia | 04/28/14 2014117162 | 12/20/15 2571827 Expires: 09/27/2032 |
THE OIL SANDS MARKET
As an unconventional hydrocarbon resource, oil sands hold hundreds of billions of barrels of oil on a worldwide basis. Although Canada is the only country that is currently extracting large quantities of oil from its oil sands deposits, the United States also has large oil sands resources that can be developed. In a 2007 Report entitled “A Technical, Economic, and Legal Assessment of North American Oil Shale, Oil Sands, and Heavy Oil Resources In Response to Energy Policy Act of 2005 Section 369(p)” (September 2007), prepared by the Utah Heavy Oil Program, Institute For Clean and Secure Energy and The University of Utah for the U.S. Department of Energy (the “2007 Report”), the authors reported the following estimates, which estimates were based upon source material published in 1979, 1987 and 1993:
| ● | The United States has an estimated 76 billion barrels of oil-in-place (“OIP”) (OIP are not estimates of reserves or recoverable resources) from bitumen and heavy oil contained in oil sands resources; |
| ● | In the United States, Utah is known to have the largest oil sands deposits, with total resource estimates ranging from 23 to 32 billion barrels of OIP from bitumen and heavy oil contained in oil sands formations and deposits; and |
| ● | Within the state of Utah, the region that has experienced the most oil sands development, both in terms of existing oil production and supporting infrastructure, is the Asphalt Ridge area located on the northern edge of the Uintah Basin in eastern Utah. In the 2007 Report, it is estimated that about one (1) billion barrels of OIP exist in the form of bitumen and heavy oil contained in oil sands formations and deposits in the Asphalt Ridge area. |
From our own investigation of the oil sands deposits in the Asphalt Ridge area of Utah, we believe that a substantial part of the oil sands deposits in this area are accessible through outcroppings or in shallow depths with limited or no overburden. In our view, the location and accessibility of oil sands deposits in Asphalt Ridge create an opportunity for commercial development, supported by positive economics, using surface mining techniques and our extraction technology.
The worldwide growing demand for heavy crude oil and the recent decline in heavy crude oil production in countries such as Venezuela makes the high quality, low Sulphur, heavy oil found in oil sands deposits in the United States a valuable resource that has been underdeveloped to date. The development of “tight shale” oil plays in the United States has produced significant quantities of light, sweet crude oil reserves, but heavy oil development in the United States has lagged. To date, oil sands development has been limited by the absence of a viable technology that can extract heavy oil and bitumen from the oil sands deposits in an economical and environmentally responsible manner. To that end, Petroteq has developed and patented an extraction technology that aims to develop oil sands reserves in an economical and environmentally responsible manner. Petroteq is currently expanding its commercial oil sands extraction operations in the Asphalt Ridge area, utilizing a process that is economical, environmentally benign and produces high quality heavy oil.
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We have tested our Extraction Technology both at Asphalt Ridge and with oil sands sourced from different parts of the world and having different hydrocarbon chemical compositions. To date, we have conducted tests with oil sands from Russia, China, Indonesia and the Middle East. Our tests with Russian oil sands, which were the only tests of our Extraction Technology with oil sands from different parts of the world that were conducted by third parties, were conducted in Ufa, Bashkorkostan (Russia) by a third party (KVADRA) retained by us to perform the tests using a multi-ton pilot plant, used the local oil sands ore with oil saturation in a range of 7-10%, and resulted in industrial quantities of heavy oil. From the tests conducted in Ufa, an average of 70 metric tons of raw oil sands material were processed per day resulting in 5,475 kg of heavy asphaltenic oil per day. Other tests, consisting of oil sands samples from China, Indonesia and Jordan, were conducted internally at Petroteq’s laboratory in San Diego using lab bench testing with our own solvent blend that produced approximately one to two pound quantities. By introducing the solvent mixture to crushed and treated ore containing bitumen oil, the oil was separated by recycling the solvent with a laboratory-scale rotor vacuum evaporator. Sand tailings were separated by centrifuge and dried under the vacuum.
Through our testing of oil sands sourced from different countries, we found that the efficiency and consistency of Petroteq’s extraction technology are not affected by differences in the chemical composition of the oil/bitumen in the oil sands. Despite relatively significant differences in oil/bitumen chemistry, both the efficiency and consistency of our extraction technology remained intact, resulting in an oil recovery efficiency that in each test exceeded 99%. We believe that this testing demonstrates that the Extraction Process is universal in its application and does not depend on the material source or the hydrocarbon content or fingerprint.
REGULATION
Exploration and production operations are subject to various types of regulation at the federal, state and local levels. This regulation includes requiring permits to drill wells, maintaining bonding requirements to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, and the plugging and abandoning of wells. Full mining permits have been granted to POSR from the State of Utah Division of Oil, Gas, and Mining for the mining and development of the Asphalt Ridge Mine #1 located in the Asphalt Ridge area of Utah. In addition to the mining permits, all environmental, construction, utility and other local permits necessary for the construction of the plant and the processing of the oil sands have been granted to POSR. Our operations are also subject to various conservation laws and regulations.
Typically, oil enhancements such as hydraulic fracturing operations are overseen by state regulators as part of their oil and gas regulatory programs; however, the (U.S.) Environmental Protection Agency (“EPA”) has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and has released draft permitting guidance for hydraulic fracturing activities that use diesel in fracturing fluids in those states where EPA is the permitting authority. As a result, we may be subject to additional permitting requirements for our operations. These permitting requirements and restrictions could result in delays in operations at well sites as well as increased costs to make wells productive. In addition, legislation introduced in Congress provides for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and requires the public disclosure of certain information regarding the chemical makeup of hydraulic fracturing fluids. Moreover, on November 23, 2011, the EPA announced that it was granting in part a petition to initiate a rulemaking under the Toxic Substances Control Act, relating to chemical substances and mixtures used in oil and gas exploration and production. Further, on May 4, 2012, the BLM issued a proposed rule to regulate hydraulic fracturing on public and Indian land.
On August 16, 2012, the EPA published final rules that establish new air emission control requirements for natural gas and NGL production, processing and transportation activities, including New Source Performance Standards to address emissions of sulphur dioxide and volatile organic compounds, and National Emission Standards for Hazardous Air Pollutants (NESHAP) to address hazardous air pollutants frequently associated with gas production and processing activities. Among other things, these final rules require the reduction of volatile organic compound emissions from natural gas wells through the use of reduced emission completions or “green completions” on all hydraulically fractured wells constructed or refractured after January 1, 2015. In addition, gas wells are required to use completion combustion device equipment (e.g., flaring) by October 15, 2012 if emissions cannot be directed to a gathering line. Further, the final rules under NESHAP include maximum achievable control technology (MACT) standards for “small” glycol dehydrators that are located at major sources of hazardous air pollutants and modifications to the leak detection standards for valves. Compliance with these requirements, especially the imposition of these green completion requirements, may require modifications to certain of our operations, including the installation of new equipment to control emissions at the well site that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business.
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In addition to these federal legislative and regulatory proposals, some states such as Pennsylvania, West Virginia, Texas, Kansas, Louisiana and Montana, and certain local governments have adopted, and others are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, including requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of water for use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may be used in hydraulic fracturing operations. For example, the Railroad Commission of Texas adopted rules in December 2011 requiring disclosure of certain information regarding the components used in the hydraulic fracturing process. In addition, Pennsylvania’s Act 13 of 2012 became law on February 14, 2012 and amended the state’s Oil and Gas Act to impose an impact fee for drilling, increase setbacks from certain water sources, require water management plans, increase civil penalties, strengthen the Pennsylvania Department of Environmental Protection’s (PaDEP) authority over the issuance of drilling permits, and require the disclosure of chemical information regarding the components in hydraulic fracturing fluids.
We believe that the technologies we use are cleaner and environmentally friendlier than the known fracking or tar sand technologies. Regulatory and social resistance sometimes prohibits fracking recovery methods in some states.
OSHA and Other Laws and Regulations.
We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA), and comparable state laws. The OSHA hazard communication standard, the EPA community right-to-know regulations under the Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards related to workplace exposure to hazardous substances and employee health and safety.
Oil Pollution Act.
The Federal Oil Pollution Act of 1990 (“OPA”) and resulting regulations impose a variety of obligations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The term “waters of the United States” has been broadly defined to include inland water bodies, including wetlands and intermittent streams. The OPA assigns joint and several strict liability to each responsible party for oil removal costs and a variety of public and private damages. We believe that we are in compliance with the OPA and the federal regulations promulgated thereunder in the conduct of our operations.
Clean Water Act.
The Federal Water Pollution Control Act (Clean Water Act) and resulting regulations, which are primarily implemented through a system of permits, also govern the discharge of certain contaminants into waters of the United States. Sanctions for failure to comply strictly with the Clean Water Act are generally resolved by payment of fines and correction of any identified deficiencies. However, regulatory agencies could require us to cease construction or operation of certain facilities or to cease hauling wastewaters to facilities owned by others that are the source of water discharges. We believe that we substantially comply with the Clean Water Act and related federal and state regulations.
COMPETITION
Competition in the oil industry is intense. We compete with other companies seeking to acquire sub economic oil fields, many with substantial financial and other resources. We will also compete with technologies such as gas injection, polymer flooding, microbial injection and thermal methods. As a new technology, we also compete with many of the other technologies that have been proven to be economically successful in enhancing oil production in the United States. As a result of this competition, we may be unable to attract the necessary funding or qualified personnel. If we are unable to successfully compete for funding or for qualified personnel, our activities may be slowed, suspended or terminated, any of which would have a material adverse effect on our ability to continue operations. However due to the innovative nature of our technology and the ecological benefit it provides, while remaining economically efficient, we believe that competition will not be a significant impediment to our operations or expansion.
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IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) even if we cease to be a smaller reporting company with annual revenues of less than $100 million, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year: (a) following the fifth anniversary of the date of the first sale of our common shares pursuant to an effective registration statement filed under the Securities Act; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which generally means the market value of our common shares that is held by non-affiliates exceeded $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning associated with that term in the JOBS Act.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a company incorporated in Ontario, Canada. Certain of our directors and officers named in this registration statement reside outside the U.S. In addition, some of our assets and the assets of our directors and officers are located outside of the United States. As a result, it may be difficult for investors who reside in the United States to effect service of process upon these persons in the United States. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.
Furthermore, there is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against us or these persons on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court agrees to hear a claim, it may determine that Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Canadian law.
History and Development of the Company
We were incorporated as “AXEA Capital Corp.” on January 4, 2008 pursuant to the Business Corporations Act (British Columbia). On October 15, 2012, MCW Energy Group Limited (“MCW NB”), a corporation incorporated in the Province of New Brunswick, completed a reverse acquisition of AXEA Capital Corp. (the “RTO”) and as a result MCW NB became a wholly owned subsidiary of AXEA Capital Corp. which also changed its name from “AXEA Capital Corp.” to “MCW Enterprises Ltd.” Pursuant to articles of continuance filed on December 7, 2012, MCW NB changed its jurisdiction of governance by continuing from the Province of New Brunswick into the Province of Ontario. Pursuant to articles of continuance filed on December 12, 2012, MCW Enterprises Ltd. changed its jurisdiction of governance by continuing from the Province of British Columbia into the Province of Ontario and changed its name to MCW Enterprises Continuance Ltd. Pursuant to a certificate of amalgamation dated December 12, 2012, MCW Enterprises Continuance Ltd. and MCW NB amalgamated in the Province of Ontario and continued under the name “MCW Energy Group Limited”.
We are governed by the Business Corporations Act (Ontario) and our registered office is located at Suite 6000, 1 First Canadian Place, PO Box 367, 100 King Street West, Toronto, Ontario M5X 1E2, Canada. Our executive office is located at 15315 W. Magnolia Blvd., Suite 120, Sherman Oaks, California 91403. Our telephone number is (866) 571-9613.
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Our common shares are publicly traded on the TSX Venture Exchange (the “TSXV”) under the trading symbol “PQE”, the Frankfurt Exchange under the trading symbol PQCF.F and on the OTC Pink under the trading symbol “PQEFF”.
Pursuant to articles of amendment filed on May 5, 2017, we changed our name from “MCW Energy Group Limited” to “Petroteq Energy Inc.” and we changed our TSXV trading symbol from MCW to PQE. On June 2, 2017, our OTCQX trading symbol was changed from MCW to PQEFF. Since March 15, 2018, our stock has traded on the OTC Pink market when it no longer traded on the OTCQX International Market.
On May 5, 2017, we effected a share consolidation (reverse stock split) on a 1-for-30 basis. Unless otherwise included, all shares amounts and per share amounts in this registration statement have been prepared on a pro forma basis to reflect the 1-for-30 reverse stock split of our outstanding common shares. On November 23, 2018, our shareholders approved a resolution authorizing our Board of Directors to consolidate our shares on a basis of up to ten for one. No consolidation has been effected to date.
We determined that the Company ceased to qualify as a foreign private issuer (as defined in Rule 405 under the Securities Act of 1933, as amended, and Rule 3b-4 under the Securities Exchange Act of 1934, as amended) as of February 28, 2019 (being the last business day of the second fiscal quarter of the fiscal year ended August 31, 2019), and therefore ceased to be eligible to rely on the rules and forms available to foreign private issuers on August 31, 2019.
Additional information related to our company may be found on our website at www.petroteq.energy. Information contained in our website does not form part of the registration statement and is intended for informational purposes only.
The following risks relate specifically to our business and should be considered carefully. Our business, financial condition and results of operations could be harmed by any of 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 face business disruption and related risks resulting from the recent outbreak of the novel coronavirus 2019 (“COVID-19”), which could have a material adverse effect on our business and results of operations.
In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States and Canada, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. The pandemic has had a material adverse effect on our operations. We have scaled back to a skeleton crew and we have suspended production of hydrocarbon products, because of the effects of the recent decline in oil pricing, we are no longer operating (in terms of the cost to produce and sell oil, excluding G&A) on a breakeven basis. We do not plan to resume production until oil prices return to sustainable profitable levels.
Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. Government-imposed restrictions on travel and other “social-distancing” measures such restrictions on assembly of groups of persons, have the potential to disrupt supply chains for parts and sales channels for our products, and may result in labor shortages.
It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.
We expect the ultimate significance of the impact of these disruptions, including the extent of their adverse impact on our financial and operational results, will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemic and the impact of governmental regulations that might be imposed in response. Our business could also be impacted should the disruptions from COVID-19 lead to changes in commercial behavior. The COVID-19 impact on the capital markets could impact our cost of borrowing. There are certain limitations on our ability to mitigate the adverse financial impact of these items, including the fixed costs of our operations. COVID-19 also makes it more challenging for management to estimate future performance of our businesses, particularly over the near to medium term.
17
We have a limited operating history, and may not be successful in developing profitable business operations.
Our oil extraction segment has a limited operating history. 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 Asphalt Ridge processing facility is fully operational. Even once we are fully operational, 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.
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 demand for oil; |
| ● | 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 successful in our exploration or development efforts or obtain the regulatory approvals required to conduct our operations.
We have suffered operating losses since inception and we may not be able to achieve profitability.
At August 31, 2020, August 31, 2019 and August 31, 2018, we had an accumulated deficit of ($90,664,349), ($78,285,282) and ($62,497,396), 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 ($12,379,067) and ($15,787,886) for the years ended August 31, 2020 and August 31, 2019, respectively. As a result, we are sustaining substantial operating and net losses, and it is possible that we will never be able to develop or sustain 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.
We expect that our revenues will be limited until our Asphalt Ridge processing facility has become fully operational and we are at full production.
The losses from continuing operations over the past four fiscal years have been largely due to the relocation, reassembly and expansion or our processing facility, and we have faced additional challenges with the onset of the COVID-19 pandemic. As described elsewhere in this Annual Report, the relocation of our Asphalt Ridge processing facility from its original site near Maeser, Utah, to its present site on the TMC Mineral Lease in 2017 occurred during a temporary suspension of our oil sands mining and processing operations that we had initiated in 2016 in the face of a sharp decline in world oil prices, and our resulting inability to operate profitably at low volumes of output. We restarted operations at the end of May 2018, and completed expansion work on the processing facility to increase production during the last quarter of fiscal 2019. We had expected to generate revenue from the sale of hydrocarbon products commencing in the third quarter ended May 31, 2020. However, due to the current COVID-19 pandemic, we have suspended production of hydrocarbon products, and do not plan to resume production until oil prices return to sustainable profitable levels. Even once we resume production, we anticipate that our revenue will be limited until we are at full production. We expect that we will require additional capital to continue our operations and planned growth.
18
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 August 31, 2020, we had issued and outstanding notes in the principal amount of $930,979 and convertible notes in the principal amount of $10,007,436 to certain private investors which mature between October 2020 and March 30 ,2024 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 flows.
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.
19
There is substantial doubt about our ability to continue as a going concern.
At August 31, 2020, we had not yet achieved profitable operations, had accumulated losses of ($90,664,349) since our inception and a working capital deficit of ($12,955,134), 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 five years. As at August 31, 2019 and August 31, 2018, we had an accumulated deficit of ($78,285,282) and ($62,497,396), respectively and a working capital deficit of ($9,268,763) and ($374,567), respectively. The opinion of our independent registered accounting firm on our audited financial statements for the years ended August 31, 2020 and 2019 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.
20
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. 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.
21
We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Sarbanes-Oxley Act. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.
We are required requires, among other things, to maintain effective disclosure controls and procedures, and internal control over financial reporting.
We do not yet have effective disclosure controls and procedures, or internal controls over all aspects of our financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified to date include insufficient number of staff to maintain optimal segregation of duties and levels of oversight. As such, our internal controls over financial reporting were not designed or operating effectively.
We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We have not yet retained sufficient staff or engaged sufficient outside consultants with appropriate experience in GAAP presentation, especially of complex instruments, to devise and implement effective disclosure controls and procedures, or internal controls. We will be required to expend time and resources hiring and engaging additional staff and outside consultants with the appropriate experience to remedy these weaknesses. We cannot assure you that management will be successful in locating and retaining appropriate candidates; that newly engaged staff or outside consultants will be successful in remedying material weaknesses thus far identified or identifying material weaknesses in the future; or that appropriate candidates will be located and retained prior to these deficiencies resulting in material and adverse effects on our business.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.
Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the market price of our common stock.
22
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 Exchange Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. Further, 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 energy 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.
23
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.
24
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.
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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; |
| ● | weather conditions; |
| ● | 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.
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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.
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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.
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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 markets. 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.
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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.
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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 stockholders and could cause our stock price to fall.
As of December 14, 2020, we have share purchase warrants to purchase 48,352,714 common shares outstanding at exercise prices ranging from US$0.03 to US$1.50 and options to purchase 9,470,000 common shares with a weighted average exercise price of CDN $0.86 and notes convertible into 93,941,474 common shares based on conversion prices ranging from $0.02 to $0.40 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.
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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 by a majority of the directors who do not have an interest in the transaction.
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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 in a Canadian business, as defined in the Investment Act, 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 directly acquire control of our company, 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, it 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 directly acquire control and the value of our assets or our enterprise value was equal to 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 2020 threshold for WTO investors that are state-owned enterprises (“SOEs”), as defined in the Investment Act, will be CDN$428 million based on the book value of the Canadian business’ assets.
The 2020 thresholds for review for direct acquisitions of control of a publicly-traded Canadian entity by private sector investor WTO investors (CDN$1.075 billion) and private sector trade agreement investors (CDN$1.613 billion) are both based on the “enterprise value” of the Canadian business being acquired, where the enterprise value is the target’s market capitalization, plus total liabilities (less operating liabilities), minus cash and cash equivalents.
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 (i) 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; (ii) 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 (iii) 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.
The Canadian government may review and prohibit any level of investment by a non-Canadian in a Canadian business if it determines that the investment may be “injurious to national security”.
We are required to comply with the Exchange Act’s domestic reporting regime and cause 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 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 as we are now required to comply with the securities rules and regulations applicable to U.S. domestic issuers, it would 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.
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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,” as defined in section 2(a)(19) of the Securities Act. For as long as we continue to be an emerging growth company, 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 even if we cease to be a smaller reporting company with annual revenues of less than $100 million, 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 emerging growth company, 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 emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year: (a) following the fifth anniversary of the date of the first sale of our common shares pursuant to an effective registration statement filed under the Securities Act; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which generally means the market value of our common shares that is held by non-affiliates exceeded $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. 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, we had accumulated net operating losses (NOLs), of approximately CDN $31.0 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.
We may be subject to liability for failure to comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934.
Through inadvertence, we did not comply with the requirements of Regulation 14A under the Exchange Act in connection with the annual and special meeting of our shareholders held on December 13, 2019 (the Meeting”). In particular: (a) the proxy statement prepared by our management complied with applicable Canadian proxy rules but failed to meet the form and disclosure requirements for proxy statements prescribed by Schedule 14A under the Exchange Act; (b) since item 4 of the agenda for the Meeting (approval of our Company’s advance notice by-law) and agenda item 5 (approval of a proposed consolidation (reverse split) of our outstanding common shares) are not among the routine matters excepted from Exchange Act Rule 14a-6, we were required but failed to file a preliminary copy of the proxy statement with the United States Securities and Exchange Commission at least 10 calendar days prior to the date on which the definitive proxy statement was sent to our Company’s shareholders, and thereby failed to give Staff at the SEC an opportunity to review and comment on the proxy statement; and (c) we proceeded under the Canadian “notice-and-access” rules for electronic posting of proxy materials rather than in compliance with Rule 14a-16 under the Exchange Act. In addition, we failed to timely comply with its obligation to file a current report on Form 8-K reporting on the results of the Meeting no later than December 19, 2019 (being the fourth business day following the date of the Meeting).
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As a result of our failure to comply with Regulation 14A, the SEC may bring an enforcement action or commence litigation against us. If any claims or actions were to be brought against us relating to our lack of compliance with Regulation 14A, we could be subject to penalties, required to pay fines, make damages payments or settlement payments. In addition, any claims or actions could force us to expend significant financial resources to defend ourselves, could divert the attention of our management from our core business and could harm our reputation. However, we believe that the potential for any claims or actions is not probable.
Item 1B. Unresolved Staff Comments
Not applicable.
Our registered office address in Canada is Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario M5X 1E2, Canada. Our principal executive offices are located at 15315 W. Magnolia Blvd, #120, Sherman Oaks, California 91403. The monthly base rent is $4,941 for the approximately 2,196 square foot premises and the lease term is five years.
TMC and POSR hold the exclusive right to mine, extract and produce oil and associated hydrocarbons and minerals from oil sands containing heavy oil and bitumen under mineral leases covering approximately 2,541.76 acres in the Asphalt Ridge area of Utah (Uintah County), including 1,229.82 acres held under the TMC Mineral Lease and an additional 833.03 and 478.91 acres, respectively, held under the SITLA Leases. In addition, TMC recently acquired the operating rights under five BLM Leases covering lands consisting of approximately 5,960 acres situated in Uintah, Wayne and Garfield Counties, Utah. We have recently completed the construction and initial expansion of our Asphalt Ridge processing facility, which currently covers an area of approximately 20,000 square feet and is located on three acres of land within our TMC Mineral Lease in Uintah County, Utah.
A map of the TMC Mineral Lease property is set forth below:
Figure 1. The Index map showing the location of the POSR’s Asphalt Ridge Mine #1 located within the TMC Mineral Lease on lands situated in Uintah County, Utah.
Source: JT Boyd, 2015.
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From time to time, we are the subject of litigation arising out of our normal course of operations. While we assess the merits of each lawsuit and defends itself accordingly, we may be required to incur significant expenses or devote significant resources to defend ourselves against such litigation. Accruals are made in instances where it is probable that liabilities may be incurred and where such liabilities can be reasonably estimated. Except as disclosed in this paragraph, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which we are aware), which may have, or have had during the 12 months prior to the date of this registration statement, a significant effect on our and/or our financial position or profitability. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, management has no reason to believe that the ultimate outcome of these matters would have a significant impact on our consolidated financial position.
Item 4. Mine Safety Disclosures
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
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Item 5. Market Price Of, And Dividends On The Registrant’s Common Equity And Related Stockholder Matters.
Our common shares are listed on the TSX Venture Exchange (the “TSXV”) under the symbol “PQE.V”.
At December 10, 2020, there were approximately 228 holders of record of our common shares.
Since inception, no dividends have been paid on the common shares. We intend to retain any earnings for use in its business activities, so it is not expected that any dividends on the common shares will be declared and paid in the foreseeable future.
As at August 31, 2020, there were 274,450,337 common shares issued and outstanding, which are listed for trading on the TSXV, share purchase warrants to purchase 48,342,314 common shares were outstanding and share purchase options to purchase 9,470,000 common shares were outstanding under the 2018 Option Plan (or its predecessors plans). See Item 6.B “Compensation – Stock Plan” for additional information regarding the 2018 Option Plan (or its predecessors plans).
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company of Canada.
Equity Compensation Plan Information
See Item 11—Executive Compensation for equity compensation plan information.
Recent Sales of Unregistered Securities
Sales of unregistered securities have been disclosed previously in the Company’s Current Reports on Form 8-K, as filed with the SEC.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities during the fiscal year ended August 31, 2020.
Performance Graph and Purchases of Equity Securities
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 6. Selected Financial Data
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the years ended August 31, 2020 and August 31, 2019
Net Revenue, Cost of Sales and Gross Loss
The Company entered into a Management and Operations Services Agreement with Valkor LLC on November 20, 2020, effective May 1, 2020. Valkor is an energy services company with expertise in oil and gas processing providing engineering, design optimization and construction as well as other services. Valkor has affected several process improvements to our plant and has optimized workflows and intends commencing production within the next fiscal quarter.
Revenue generation during the year ended August 31, 2020 and 2019 was $290,809 and $59,335, respectively. Revenue represents the sale of hydrocarbon products for use as asphalt and 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.
The cost of sales during the years ended August 31, 2020 and 2019 consists of; i) advance royalty payments which could be applied against production royalties for two years after the year in which the payment was made, the remaining balance of the advanced royalties were expensed during the current year due to the termination of the TMC Mineral Lease; and ii) certain production related expenses consisting of labor and maintenance expenditure.
Expenses
Expenses was $9,968,209 and $14,208,398 were incurred during the years ended August 31, 2020 and 2019, respectively, a decrease of $4,240,189 or 29.8%. The decrease in operating expenses is primarily due to:
Depletion, depreciation and amortization
Depletion, depreciation and amortization was $103,888 and $73,650 for the years ended August 31, 2020 and 2019, respectively, an increase of $30,238 or 41.1%. 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 as soon as the plant becomes operational under the Valkor Management and operations Services Agreement. The increase in depreciation expense is primarily related to office leasehold improvements during the current fiscal year.
Selling, general and administrative expenses
Selling, general and administrative expenses of $6,183,745 and $11,543,432 for the years ended August 31, 2020 and 2019, respectively, a decrease of $5,359,687 or 46.4%. Included in selling, general and administrative expenses are the following major expenses:
| a. | Investor relations and public relations fees were $(92,179) and $1,484,845 for the years ended August 31, 2020 and 2019, a decrease of $1,577,024 or 106.2%. The decrease is primarily due to unfulfilled commitments by our investor relations and public relations vendors, resulting in the reversal of accrued expenses and management concentrating its efforts and resources on completing the plant re-commissioning for an anticipated start up within the next six months. | |
| b. | Professional fees were $2,614,540 and $6,194,176 for the years ended August 31, 2020 and 2019, respectively, a decrease of $3,579,636 or 57.8%. The decrease is primarily related to prior year legal fees incurred on the expansion of the plant, and the prior year filing of the Registration Statement on Form 10G/A with the SEC in the United States; the various fund-raising initiatives undertaken by the Company during the prior fiscal period; and the reduction in professional fees incurred on the plant expansion and management advisory fees related to the plant during the current fiscal period. |
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| c. | Salaries and wages were $1,043,647 and $1,404,793 for the years ended August 31, 2020 and 2019, respectively, a decrease of $361,146 or 25.7%. The decrease is primarily due to the impact of COVID-19 resulting in the temporary closure of our plant in Utah and management’s decision to enter into a Management and Operations services agreement with Valkor, resulting in the elimination of our operational workforce during the current period. | |
| d. | Share based compensation was $887,818 and $916,240 for the years ended August 31, 2020 and 2019, respectively, a decrease of $28,422 or 3.1%. The decrease is related to the current year resignation of certain officers and directors and the expiration of option awards granted to them, resulting in the cessation of amortization related to those option awards. | |
| e. | Travel and promotional expenses were $713,662 and $683,409 for the years ended August 31, 2020 and 2019, respectively, an increase of $30,253 or 4.2%. The increase is primarily related to travel expense incurred by management and professionals directly attributed to the development of the plant during the current fiscal year. | |
| f. | Other expenses were $1,016,257 and $747,344 for the years ended August 31, 2020 and 2019, respectively, an increase of $268,913 or 36.0%. The increase is attributable to an increase in general corporate overhead expenses, of which no significant expense is easily identifiable. |
Financing costs
Financing costs were $2,671,611 and $1,225,435 for the years ended August 31, 2020 and 2019, respectively, an increase of $1,446,176 or 118.0%. Finance costs consists of; (i)interest expense on borrowings of $1,256,985 and $8,095 for the years ended August 31, 2020 and 2019. The increase in interest expense is due to the capitalization of interest expense in the prior period directly related to the plant expansion expenses incurred, during the current year, interest has not been capitalized as the expansion project was largely completed in the prior year; and (ii) amortization of debt discount of $1,414,626 and $1,217,340 for the years ended August 31,2020 and 2019, respectively, an increase of $197,286 or 16.2%. The increase is primarily due to the increase in the debt discount associated with convertible notes advanced to the Company during the current fiscal year and the subsequent amortization thereof.
Impairment of investments
Impairment of investments was $75,000 and $914,468 for the years ended August 31, 2020 and 2019, respectively. In the prior year we provided against our equity investment in Accord GR Energy and Recruiter.com due to inactivity in these operations and the lack of demonstrable funding in each entity to justify the carrying value of the investments. In the current period the remaining commitment to fund our dormant Bitcoin operation was provided for upon settlement of our obligation.
Other expense (income), net
Other expenses (income), net were $746,564 and $451,413 for the years ended August 31, 2020 and 2019, respectively, an increase of $295,151 and represents the following:
| a. | Interest income on funds advanced to third parties of $29,317 and $83,067 for the years ended August 31, 2020 and 2019, respectively, a decrease of $53,750. The decrease is primarily due to the repayment and set off of consulting fees due to the counterparties to these advances to third parties. | |
| b. | (Gain) loss on settlement of liabilities was $(524,971) and $534,480 for the years ended August 31, 2020 and 2019, respectively, an increase of $1,09,451. We settled debt of $2,533,655 by the issuance of shares during the current fiscal year, realizing a gain on settlement due to the difference between the agree per share settlement price and the market price of the shares on the date of settlement. In the prior year we incurred a loss on settlement due to the difference between the agree per share settlement price and the market price of the shares on the date of settlement. | |
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| c. | Loss on conversion of convertible debt was $744,918 and $0 for the years ended August 31, 2020 and 2019, respectively. During the current period several variable rate convertible notes with conversion features at a discount to current market prices were converted by the note holders, resulting in a loss on conversion. | |
| d. | Gain on debt extinguishment was $54,378 and $0 for the years ended August 31, 2020 and 2019, respectively. The gain is related to the amendment of terms related to certain of our debt obligations during the current period to remedy potential note defaults. | |
| e. | Penalty on convertible notes was $610,312 and $0 for the years ended August 31, 2020 and 2019, respectively. During the current period a convertible note with an aggregate principal amount outstanding of $2,900,00 enforced a default penalty, resulting in an increase in the face value of the note by $610,312 as of the date of the default, this note was subsequently assigned to a third party and amended to rectify the maturity date default. |
Derivate liability movements
Derivative liability movements was $187,401 and $0 for the years ended August 31, 2020 and 2019, respectively. During the current year, the Company entered into several variable rate convertible notes, whereby the conversion rate is at a fixed discount to current market prices, these variable conversion rate convertible instruments meet the definition of a derivative in terms of ASC 815, resulting in a quarterly mark to market of the derivative liability.
Net loss before income taxes
Net loss before income tax was $12,379,067 and $15,787,886 for the years ended August 31, 2020 and 2019, respectively, a decrease of $3,408,819 or 21.6%, primarily due to the write off of the remaining balance of advanced royalties and the reduction in selling, general and administrative expenses offset by the increase in financing costs, as discussed above.
Net loss and comprehensive loss
Net loss and comprehensive loss was $12,379,067 and $15,787,886 for the years ended August 31, 2020 and 2019, respectively, a decrease of $3,408,819 or 21.6%, as discussed above.
Liquidity and Capital Resources
As at August 31, 2020, the Company had liquidity of approximately $62,404, which is composed entirely of cash. The Company also had a working capital deficiency of approximately $12,955,134, due primarily to increase in accounts payable, convertible debentures, related party advances made to the Company and the value of the derivative liability as of August 31, 2020. To date, we have not generated sufficient revenue to support our operating and general and administrative expenses. During the year ended August 31, 2020, we raised $3,143,374 in private placements, a further net proceeds of $2,337,438 from convertible debt, $356,154 from promissory notes and a further $577,490 from Federal relief loans. These funds were primarily used to fund operational expenditure during the current year.
Subsequent to August 31, 2020, in terms of various subscription agreements entered into with third parties, we raised an additional $445,000 in proceeds from private equity issues and a further $103,339 on warrants exercised.
Between September 22, 2020 and November 6, 2020, we raised an additional $436,500 from convertible debentures and promissory notes issued to various investors.
The Company continues to work on several other financing options to secure additional financing on reasonable terms. However, should the Company not be able to secure such funding its liquidity may not be sufficient to fund its operations, debt obligations, obligations under its mineral leases and the capital needed to complete development of its Extraction Technology.
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.
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Capital Expenditures
We have substantially completed our 400-500 barrel per day plant and expect capital expenditure to be channeled into construction of new oil extraction facilities to increase our production output. We expect to construct a further two facilities, each facility is estimated to cost $10,000,000 and minor modifications to the existing facility may cost an additional $500,000.
Other Commitments
In addition to commitments otherwise reported in this MD&A, the Company’s contractual obligations as at August 31, 2020, include:
| Contractual cash flows | ||||||||||||||||||||
| Carrying | 1 year | More than | ||||||||||||||||||
| (in ’000s of dollars) | amount | Total | or less | 2 - 5 years | 5 years | |||||||||||||||
| Accounts payable | $ | 2,407 | $ | 2,407 | $ | 2,407 | $ | - | $ | - | ||||||||||
| Accrued liabilities | 1,770 | 1,770 | 1,770 | - | - | |||||||||||||||
| Convertible debenture | 8,834 | 11,694 | 10,061 | 1,633 | - | |||||||||||||||
| Debt | 684 | 740 | 740 | - | - | |||||||||||||||
| Finance lease liabilities | 247 | 274 | 193 | 81 | - | |||||||||||||||
| Operating lease liabilities | 209 | 255 | 61 | 194 | - | |||||||||||||||
| Federal relief loans | 580 | 931 | 76 | 196 | 659 | |||||||||||||||
| $ | 14,731 | $ | 18,071 | $ | 15,308 | $ | 2,104 | $ | 659 | |||||||||||
Recently Issued Accounting Pronouncements
The recent Accounting Pronouncements are fully disclosed in note 2 to our 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 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
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Item 8. Financial Statements and Supplemental Data
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Petroteq Energy Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Petroteq Energy Inc. (the “Company”) as of August 31, 2020 and 2019, the related consolidated statements of loss and comprehensive loss, changes in shareholders’ equity and cash flows for each of the two years in the period ended August 31, 2020, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two year period ended August 31, 2020, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has had recurring losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ Hay & Watson
Chartered Professional Accountants
Vancouver, British Columbia, Canada
December 15, 2020
We have served as the Company’s independent auditor since 2012
F-2
CONSOLIDATED BALANCE SHEETS
As at August 31, 2020 and 2019
Expressed in US dollars
| Notes | August 31, 2020 | August 31, 2019 | ||||||||
| ASSETS | ||||||||||
| Current assets | ||||||||||
| Cash | $ | 62,404 | $ | 50,719 | ||||||
| Trade and other receivables | 4 | 12,830 | 144,013 | |||||||
| Current portion of advanced royalty payments | 7 | - | 446,362 | |||||||
| Ore inventory | 6 | 14,749 | 176,792 | |||||||
| Other inventory | 12,250 | 39,038 | ||||||||
| Current portion of notes receivable | 5 | 89,159 | 85,359 | |||||||
| Prepaid expenses and other current assets | 1 | 2,043,510 | 1,499,120 | |||||||
| Total Current Assets | 2,234,902 | 2,441,403 | ||||||||
| Non-Current assets | ||||||||||
| Advanced royalty payments | 7 | - | 421,667 | |||||||
| Notes receivable | 5 | - | 760,384 | |||||||
| Mineral leases | 8 | 34,911,143 | 34,911,143 | |||||||
| Property, plant and equipment | 9 | 35,582,512 | 33,613,650 | |||||||
| Right of use asset | 10 | 209,101 | - | |||||||
| Intangible assets | 11 | 707,671 | 707,671 | |||||||
| Total Non-Current Assets | 71,410,427 | 70,414,515 | ||||||||
| Total Assets | $ | 73,645,329 | $ | 72,855,918 | ||||||
| LIABILITIES | ||||||||||
| Current liabilities | ||||||||||
| Accounts payable | 12 | $ | 2,406,665 | $ | 2,081,756 | |||||
| Accrued expenses | 12 | 1,769,749 | 2,048,399 | |||||||
| Ore Sale advances | 283,976 | 283,976 | ||||||||
| Promissory notes payable | 8,000 | - | ||||||||
| Debt | 13 | 683,547 | 867,230 | |||||||
| Current portion of convertible debentures | 14 | 8,227,257 | 6,188,872 | |||||||
| Current portion of Federal relief loans | 15 | 74,383 | - | |||||||
| Current portion of finance lease liabilities | 10 | 172,374 | 189,933 | |||||||
| Current portion of operating lease liabilities | 10 | 42,053 | - | |||||||
| Related party payables | 22(c) | 680,647 | 50,000 | |||||||
| Derivative liability | 16 | 841,385 | - | |||||||
| Total Current Liabilities | 15,190,036 | 11,710,166 | ||||||||
| Non-Current liabilities | ||||||||||
| Convertible debentures | 14 | 607,067 | 140,597 | |||||||
| Federal relief loans | 15 | 505,969 | - | |||||||
| Finance lease liabilities | 10 | 75,058 | 215,695 | |||||||
| Operating lease liabilities | 10 | 167,048 | - | |||||||
| Reclamation and restoration provision | 17 | 2,970,497 | 2,970,497 | |||||||
| Total Non-Current Liabilities | 4,325,639 | 3,326,789 | ||||||||
| Total Liabilities | 19,515,675 | 15,036,955 | ||||||||
| Commitments and contingencies | 29 | |||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||
| Share capital | 18,19,20 | 144,794,003 | 136,104,245 | |||||||
| Deficit | (90,664,349 | ) | (78,285,282 | ) | ||||||
| Total Shareholders’ Equity | 54,129,654 | 57,818,963 | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | 73,645,329 | $ | 72,855,918 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-3
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| Notes | Year ended August 31, 2020 | Year ended August 31, 2019 | ||||||||
| Revenues from hydrocarbon sales | $ | 290,809 | $ | 59,335 | ||||||
| Production and maintenance costs | (1,713,638 | ) | (1,347,766 | ) | ||||||
| Advance royalty payments applied or expired | 7 | (988,029 | ) | (291,057 | ) | |||||
| Gross Loss | (2,410,858 | ) | (1,579,488 | ) | ||||||
| Expenses | ||||||||||
| Depreciation, depletion and amortization | 9 | 103,888 | 73,650 | |||||||
| Selling, general and administrative expenses | 24 | 6,183,745 | 11,543,432 | |||||||
| Financing costs | 25 | 2,671,611 | 1,225,435 | |||||||
| Impairment of investments | 2(b) | 75,000 | 914,468 | |||||||
| Other expenses (income), net | 26 | 746,564 | 451,413 | |||||||
| Derivative liability movements | 16 | 187,401 | - | |||||||
| Total Expenses, net | 9,968,209 | 14,208,398 | ||||||||
| Net loss before income taxes | 12,379,067 | 15,787,886 | ||||||||
| Income tax expense | - | - | ||||||||
| Net loss and Comprehensive loss | 12,379,067 | 15,787,886 | ||||||||
| Weighted Average Number of Shares Outstanding | 201,401,437 | 114,166,768 | ||||||||
| Basic and Diluted Loss per Share | $ | 0.06 | $ | 0.14 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| Number of Shares | Share | Shareholders’ | ||||||||||||||
| Outstanding | Capital | Deficit | Equity | |||||||||||||
| Balance at August 31, 2018 | 85,163,631 | $ | 95,426,796 | $ | (62,497,396 | ) | $ | 32,929,400 | ||||||||
| Settlement of debt | 462,011 | 424,604 | - | 424,604 | ||||||||||||
| Settlement of liabilities | 7,793,557 | 3,313,380 | - | 3,313,380 | ||||||||||||
| Common shares subscriptions | 36,397,547 | 12,177,513 | - | 12,177,513 | ||||||||||||
| Share based payment for mineral rights | 45,000,000 | 21,000,000 | 21,000,000 | |||||||||||||
| Share-based payments | 1,425,000 | 1,364,086 | - | 1,364,086 | ||||||||||||
| Share-based compensation | - | 916,240 | - | 916,240 | ||||||||||||
| Beneficial conversion feature of convertible debt | - | 728,356 | - | 728,356 | ||||||||||||
| Fair value of convertible debt warrants issued | - | 753,270 | - | 753,270 | ||||||||||||
| Net loss | - | - | (15,787,886 | ) | (15,787,886 | ) | ||||||||||
| Balance at August 31, 2019 | 176,241,746 | $ | 136,104,245 | $ | (78,285,282 | ) | $ | 57,818,963 | ||||||||
| Settlement of acquisition obligation | 250,000 | 75,000 | - | 75,000 | ||||||||||||
| Settlement of liabilities | 8,540,789 | 1,624,130 | - | 1,624,130 | ||||||||||||
| Settlement of debt | 19,853,808 | 822,529 | - | 822,529 | ||||||||||||
| Settlement of related party payables | 2,356,374 | 86,996 | - | 86,996 | ||||||||||||
| Common share subscriptions | 39,001,185 | 3,143,374 | - | 3,143,374 | ||||||||||||
| Share-based payments | 190,000 | 38,193 | - | 38,193 | ||||||||||||
| Share-based compensation | - | 887,818 | - | 887,818 | ||||||||||||
| Conversion of convertible debt | 28,016,435 | 1,155,059 | - | 1,155,059 | ||||||||||||
| Beneficial conversion feature on debt extinguishment | - | 109,275 | - | 109,275 | ||||||||||||
| Fair value of convertible debt warrants issued | - | 747,384 | - | 747,384 | ||||||||||||
| Net loss | - | - | (12,379,067 | ) | (12,379,067 | ) | ||||||||||
| Balance at August 31, 2020 | 274,450,337 | 144,794,003 | (90,664,349 | ) | 54,129.654 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Cash flow used for operating activities: | ||||||||
| Net loss | $ | (12,379,067 | ) | $ | (15,787,886 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation, depletion and amortization | 103,888 | 73,650 | ||||||
| Amortization of debt discount | 1,414,626 | 1,217,340 | ||||||
| Loss on conversion of debt | 744,918 | 99,548 | ||||||
| Penalty on convertible debt | 610,312 | - | ||||||
| Gain on debt extinguishment | (54,378 | ) | - | |||||
| (Gain) loss on share based settlements | (524,971 | ) | 434,933 | |||||
| Impairment of investments | 75,000 | 914,468 | ||||||
| Share-based compensation | 887,818 | 916,240 | ||||||
| Shares issued for services | 38,193 | 470,602 | ||||||
| Shares issued to settle liabilities | 2,055,083 | 3,313,380 | ||||||
| Non-cash compensation expense | 553,333 | - | ||||||
| Derivative liability movement | 187,401 | - | ||||||
| Non-cash amortization of advanced royalty payments | 988,029 | 291,057 | ||||||
| Other | 8,315 | (72,671 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable | 324,909 | 161,000 | ||||||
| Accounts receivable | 131,183 | 225,000 | ||||||
| Accrued expenses | 118,830 | (235,765 | ) | |||||
| Prepaid expenses and deposits | 65,610 | 129,568 | ||||||
| Inventory | 188,831 | (22,198 | ) | |||||
| Net cash used for operating activities | (4,462,137 | ) | (7,871,734 | ) | ||||
| Cash flows used for investing activities: | ||||||||
| Purchase and construction of property and equipment | (2,072,750 | ) | (7,932,937 | ) | ||||
| Purchase of mineral lease rights | - | (1,800,000 | ) | |||||
| Mineral rights deposits paid | (610,000 | ) | (1,297,000 | ) | ||||
| Investment in notes receivable | (702,612 | ) | (2,694,000 | ) | ||||
| Proceeds from notes receivable | 1,150,522 | 1,043,500 | ||||||
| Advance royalty payments - net | (120,000 | ) | (360,000 | ) | ||||
| Net cash used for investing activities | (2,354,840 | ) | (13,040,437 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Advances from related parties | 724,902 | 347,256 | ||||||
| Proceeds on private equity placements | 3,143,374 | 12,177,514 | ||||||
| Payments of debt | (193,196 | ) | (546,611 | ) | ||||
| Proceeds from debt | - | 517,000 | ||||||
| Proceeds from convertible debt | 2,337,438 | 6,227,730 | ||||||
| Repayment of convertible debt | (117,500 | ) | (400,000 | ) | ||||
| Proceeds from promissory notes | 356,154 | - | ||||||
| Proceeds from Federal relief loans | 577,490 | - | ||||||
| Net cash from financing activities | 6,828,662 | 18,322,889 | ||||||
| Increase (decrease) in cash | 11,685 | (2,589,282 | ) | |||||
| Cash, beginning of the period | 50,719 | 2,640,001 | ||||||
| Cash, end of the period | $ | 62,404 | $ | 50,719 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 284,753 | $ | 19,700 | ||||
| Non cash financing and investing activities: | ||||||||
| Value of warrants issued to convertible debt holders | $ | 747,384 | $ | 753,270 | ||||
| Beneficial conversion feature on debt extinguishment | $ | 109,275 | $ | - | ||||
| Beneficial conversion feature of convertible debt issued | $ | - | $ | 728,356 | ||||
| Shares issued on conversion of convertible debt | $ | 1,155,059 | $ | - | ||||
| Shares issued to settle debt | $ | 822,529 | $ | 424,604 | ||||
| Shares issued to settle related party payables | $ | 86,996 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 1. | GENERAL INFORMATION |
Petroteq Energy Inc. (the “Company”) is an Ontario, Canada corporation which conducts oil sands mining and oil extraction operations in the USA. It operates through its indirectly wholly owned subsidiary company, Petroteq Oil Recovery, LLC (“POSR”), which is engaged in mining and oil extraction from tar sands.
The Company’s registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2, Canada and its principal operating office is located at 15315 W. Magnolia Blvd, Suite 120, Sherman Oaks, California 91403, USA.
POSR is engaged in a tar sands mining and oil processing operation, using a closed-loop solvent based extraction system that recovers bitumen from surface mining, and has completed the construction of an oil processing plant in the Asphalt Ridge area of Utah.
In November 2017, the Company formed a wholly owned subsidiary, Petrobloq, LLC, to design and develop a blockchain-powered supply chain management platform for the oil and gas industry.
On June 1, 2018, the Company finalized the acquisition of a 100% interest in two leases for 1,312 acres of land within the Asphalt Ridge, Utah area.
On January 18, 2019, the Company paid $10,800,000 for the acquisition of 50% of the operating rights under U.S. federal oil and gas leases, administered by the U.S. Department of Interior’s Bureau of Land Management (“BLM”) covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah. The total consideration of $10,800,000 was settled by the payment of $1,800,000 and by the issuance of 15,000,000 shares at an issue price of $0.60 per share.
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, and cash of $1,000,000, which has not been paid to date.
Between March 14, 2019 and August 31, 2020, the Company made cash deposits of $1,907,000, included in prepaid expenses and other current assets on the consolidated balance sheets for the acquisition of 100% of the operating rights under U.S. federal oil and gas leases, administered by the BLM in Garfield and Wayne Counties covering approximately 8,480 gross acres in P.R. Springs and the Tar Sands Triangle within the State of Utah. The total consideration of $3,000,000 has been partially settled by a cash payment of $1,907,000, with the balance of $1,093,000 still outstanding.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of preparation |
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting policies (“US GAAP”) and have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value. The Company’s reporting currency and the functional currency of all of its operations is the U.S. dollar, as it is the principal currency of the primary economic environment in which the Company operates.
The Company is an “SEC Issuer” as defined under National Instrument 52-107 “Accounting Principles and Audit Standards” and is relying on the exemptions of Section 3.7 of NI 52-107 and of Section 1.4(8) of the Companion Policy to National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102CP”) which permits the Company to prepare its financial statements in accord with U.S. GAAP.
The consolidated financial statements were authorized for issue by the Board of Directors on December 14, 2020.
F-7
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (b) | Consolidation |
The consolidated financial statements include the financial statements of the Company and its subsidiaries in which it has at least a majority voting interest. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:
| Entity | % of Ownership | Jurisdiction | ||
| Petroteq Energy Inc. | Parent | Canada | ||
| Petroteq Energy CA, Inc. | 100% | USA | ||
| Petroteq Oil Recovery, LLC | 100% | USA | ||
| TMC Capital, LLC | 100% | USA | ||
| Petrobloq, LLC | 100% | USA |
An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in the consolidated financial statements using the equity method of accounting. Under the equity method, investment in associate is carried in the consolidated statement of financial position at cost as adjusted for changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payment on behalf of the associate.
The Company has accounted for its investment in Accord GR Energy, Inc. (“Accord”) on the equity basis since March 1, 2017. The Company had previously owned a controlling interest in Accord and the results were consolidated in the Company’s financial statements. However, subsequent equity subscriptions into Accord reduced the Company’s ownership to 44.7% as of March 1, 2017 and the results of Accord were deconsolidated from that date. As of August 31, 2020, the Company has impaired 100% of the remaining investment in Accord due to inactivity and a lack of adequate investment in Accord to progress to commercial production and viability.
F-8
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (c) | Estimates |
The preparation of these consolidated financial statements in accordance with US GAAP requires the Company to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates its estimates, including those related to recovery of long-lived assets. The Company bases its estimates on historical experience and on other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to the Company’s reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements. Significant estimates include the following;
| ● | the useful lives and depreciation rates for intangible assets and property, plant and equipment; |
| ● | the carrying and fair value of oil and gas properties and product and equipment inventories; |
| ● | All provisions; |
| ● | the fair value of reporting units and the related assessment of goodwill for impairment, if applicable; |
| ● | the fair value of intangibles other than goodwill; |
| ● | income taxes and the recoverability of deferred tax assets |
| ● | legal and environmental risks and exposures; and |
| ● | general credit risks associated with receivables, if any. |
| (d) | Foreign currency translation adjustments |
The Company’s reporting currency and the functional currency of all its operations is the U.S. dollar. Assets and liabilities of the Canadian parent company are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Income, expenses and cash flows are translated using an average exchange rate during the reporting period. Since the reporting currency as well as the functional currency of all entities is the U.S. Dollar there is no translation difference recorded.
| (e) | Revenue recognition |
The Company recognizes revenue in terms of ASC 606 – Revenue from Contracts with Customers (ASC 606).
Revenue transaction are assessed using a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The five steps are as follows:
| i. | identify the contract with a customer; |
| ii. | identify the performance obligations in the contract; |
| iii. | determine the transaction price; |
| iv. | allocate the transaction price to performance obligations in the contract; and |
| v. | recognize revenue as the performance obligation is satisfied. |
F-9
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (e) | Revenue recognition (continued) |
Revenue from hydrocarbon sales
Revenue from hydrocarbon sales include the sale of hydrocarbon products and are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. The Company’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, upon delivery based on volumes at contractually based rates with payment typically received within 30 days after invoice date. Taxes assessed by governmental authorities on hydrocarbon sales, if any, are not included in such revenues, but are presented separately in the consolidated comprehensive statements of loss and comprehensive loss.
Transaction price allocated to remaining performance obligations
The Company does not anticipate entering into long-term supply contracts, rather it expects all contracts to be short-term in nature with a contract term of one year or less. The Company intends applying the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, the Company will apply the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if there is any variable consideration to be allocated entirely to a wholly unsatisfied performance obligation. The Company anticipates that with respect to the contracts it will enter into, each unit of product will typically represent a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Contract balances
The Company does not anticipate that it will receive cash relating to future performance obligations. However if such cash is received, the revenue will be deferred and recognized when all revenue recognition criteria are met.
Disaggregation of revenue
The Company has limited revenues to date. Disaggregation of revenue disclosures can be found in Note 28.
Customers
The Company anticipates that it will have a limited number of customers which will make up the bulk of its revenues due to the nature of the oil and gas industry.
| (f) | General and administrative expenses |
General and administrative expenses will be presented net of any working interest owners, if any, of the oil and gas properties owned or leased by the Company.
F-10
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (g) | Share-based payments |
The Company may grant stock options to directors, officers, employees and others providing similar services. The fair value of these stock options is measured at grant date using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. Share-based compensation expense is recognized on a straight-line basis over the period during which the options vest, with a corresponding increase in equity.
The Company may also grant equity instruments to consultants and other parties in exchange for goods and services. Such instruments are measured at the fair value of the goods and services received on the date they are received and are recorded as share-based compensation expense with a corresponding increase in equity. If the fair value of the goods and services received are not reliably determinable, their fair value is measured by reference to the fair value of the equity instruments granted.
| (h) | Income taxes |
The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes”. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax expense.
| (i) | Net income (loss) per share |
Basic net income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method for stock options and share purchase warrants. Under this method, “in-the-money” stock options and share purchase warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common shares at the average market price during the period.
F-11
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (j) | Cash and cash equivalents |
The Company considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.
| (k) | Accounts receivable |
The Company had minimal sales during the period of which all proceeds were collected therefore there are no accounts receivable balances.
| (l) | Oil and gas property and equipment |
The Company follows the successful efforts method of accounting for its oil and gas properties. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with delay rentals and exploration overhead are charged against earnings as incurred. Costs of successful exploratory efforts along with acquisition costs and the costs of development of surface mining sites are capitalized.
Site development costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, site development costs remain capitalized as proved properties. Costs of unsuccessful site developments are charged to exploration expense. For site development costs that find reserves that cannot be classified as proved when development is completed, costs continue to be capitalized as suspended exploratory site development costs if there have been sufficient reserves found to justify completion as a producing site and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future appraisal development activities are unlikely to occur, associated suspended exploratory development costs are expensed. In some instances, this determination may take longer than one year. The Company reviews the status of all suspended exploratory site development costs quarterly.
Capitalized costs of proved oil and gas properties are depleted by an equivalent unit-of-production method. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves. Capitalized costs of related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated over proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the DD&A rate (amortizable base divided by beginning of period proved reserves) to current period production.
Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable.
Proved properties will be assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating location. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review.
F-12
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (l) | Oil and gas property and equipment (continued) |
Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of loss and comprehensive loss. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.
The Company capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development projects of oil and gas properties.
| (m) | Other property and equipment |
Depreciation and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to ten years. Interest costs incurred and attributable to major corporate construction projects are also capitalized.
| (n) | Asset retirement obligations and environmental liabilities |
The Company recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The Company’s asset retirement obligations also include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.
| (o) | Commitments and contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with the Company’s accounting policy for property and equipment.
| (p) | Fair value measurements |
Certain of the Company’s assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:
| ● | Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, the Company measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. |
| ● | Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active. |
| ● | Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model. |
F-13
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (q) | Comparative amounts |
The comparative amounts presented in these consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year.
| (r) | Recent accounting standards |
Issued accounting standards not yet adopted
The Company will evaluate the applicability of the following issued accounting standards and intends to adopt those which are applicable to its activities.
In August 2020, the FASB issued ASU No. 2020-06, debt with Conversion and Other Options (subtopic 470-20): and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). Certain accounting models for convertible debt instruments with beneficial conversion features or cash conversion features are removed from the guidance and for equity instruments the contracts affected are free standing instruments and embedded features that are accounted for as derivatives, the settlement assessment was simplified by removing certain settlement requirements.
This ASU is effective for fiscal years and interim periods beginning after December 15, 2021.
The effects of this ASU on the Company’s condensed consolidated financial statements is currently being assessed and is expected to have an immaterial impact on the financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected credit loss methodology that is referred to as the current expected credit loss (CECL) methodology. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments in this update are required to be applied using the modified retrospective method with an adjustment to accumulated deficit and are effective for the Company beginning with fiscal year 2020, including interim periods. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. An entity with trade receivables will be required to use historical loss information, current conditions, and reasonable and supportable forecasts to determine expected lifetime credit losses. Pooling of assets with similar risk characteristics is also required.
Since adopted on January 1, 2020, there has not been any material impact on the Company’s financial position, results of operations, and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), this update reduce the complexity in accounting for income taxes by removing certain exceptions to accounting for income taxes and deferred taxes and simplifying the accounting treatment of franchise taxes, a step up in the tax basis of goodwill as part of business combinations, the allocation of current and deferred tax to a legal entity not subject to tax in its own financial statements, reflecting changes in tax laws or rates in the annual effective rate in interim periods that include the enactment date and minor codification improvements.
This ASU is effective for fiscal years and interim periods beginning after December 15, 2020.
The effects of this ASU on the Company’s financial statements is not considered to be material.
Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
| 3. | GOING CONCERN |
The Company has incurred losses for several years and, at August 31, 2020, has an accumulated deficit of $90,664,349, (August 31, 2019 - $78,285,282) and working capital (deficiency) of $12,955,134 (August 31, 2019 - $9,268,763). These consolidated financial statements have been prepared on the basis that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent on obtaining additional financing, which it is currently in the process of obtaining. There is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company. These consolidated financial statements do not reflect the adjustments or reclassifications that would be necessary if the Company were unable to continue operations in the normal course of business.
F-14
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 4. | ACCOUNTS RECEIVABLE |
The Company’s accounts receivables consist of:
| August 31, 2020 | August 31, 2019 | |||||||
| Goods and services tax receivable | $ | 12,830 | $ | 59,013 | ||||
| Other receivables | - | 85,000 | ||||||
| $ | 12,830 | $ | 144,013 | |||||
Information about the Company’s exposure to credit risks for trade and other receivables is included in Note 31(a).
| 5. | NOTES RECEIVABLE |
The Company’s notes receivables consist of:
| Principal due | Principal due | |||||||||||||
| Maturity Date | Interest Rate | August 31, 2020 | August 31, 2019 | |||||||||||
| Private debtor | March 16, 2020 | 5 | % | $ | 76,000 | $ | 76,000 | |||||||
| Private debtor | August 20, 2021 | 5 | % | - | 642,581 | |||||||||
| Private debtor | August 20, 2021 | 5 | % | - | 117,000 | |||||||||
| Interest accrued | 13,159 | 10,162 | ||||||||||||
| $ | 89,159 | $ | 845,743 | |||||||||||
| Disclosed as follows: | ||||||||||||||
| Current portion | $ | 89,159 | $ | 85,359 | ||||||||||
| - | 760,384 | |||||||||||||
| $ | 89,159 | $ | 845,743 | |||||||||||
Manhatten Enterprises
The Company advanced Manhatten Enterprises the sum of $76,000 pursuant to a promissory note on March 16, 2017. The note, which bears interest at 5% per annum, matured on March 16, 2020. The Note has reached its maturity date and is currently on demand until a new agreement is negotiated.
Strategic IR
The Company advanced Strategic IR a total of $642,581 during the year ended August 31, 2019. This was memorialized by a promissory note that bears interest at 5% per annum and is repayable on August 20, 2021. During the year ended August 31, 2020, the Company advanced Strategic IR a further $125,000 and received repayments totaling $196,000. Consulting fees owing to Strategic IR in terms of a consulting agreement entered into amounting to $553,333 were offset against the balance owing to the Company. The Debt owing by Strategic IR was extinguished during the current year.
Beverly Pacific Holdings
The company advanced Beverly Pacific Holdings a net amount of $117,000 during the year ended August 31, 2019, memorialized by a promissory note that bears interest at 5% per annum and is repayable on August 20, 2021. During the current period, the Company advanced a further $577,612, which has subsequently been settled by Beverly Pacific. As of August 31, 2020, the balance owing to the Company is $0.
F-15
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 6. | ORE INVENTORY |
On June 1, 2015, the Company acquired a 100% interest in TMC Capital LLC (“TMC”), which through a sub-lease with Valkor, LLC (“Valkor”) holds the rights to mine ore from the Asphalt Ridge deposit. The mining and crushing of the bituminous sands has been contracted to an independent third party.
During the year ended August 31, 2020, the cost of mining, hauling and crushing the ore, amounting to $162,043 (2019 - $176,792), was recorded as the cost of the crushed ore inventory.
| 7. | ADVANCED ROYALTY PAYMENTS |
Advance royalty payments to Asphalt Ridge, Inc.
During the year ended August 31, 2015, the Company acquired TMC, which has a mining and mineral lease with Asphalt Ridge, Inc. (the “TMC Mineral Lease”) (Note 8(a)). The mining and mineral lease with Asphalt Ridge, Inc. required the Company to make minimum advance royalty payments which could be used to offset future production royalties for a maximum of two years following the year the advance royalty payment was made.
As at August 31, 2020, the Company has paid advance royalties of $2,370,336 (2019 - $2,250,336) to the lease holder, of which all had been expensed as of August 31, 2020 due to the termination of the TMC Mineral Lease as discussed in note 8(a) below.
| 8. | MINERAL LEASES |
| TMC | SITLA | BLM | ||||||||||||||
| Mineral | Mineral | Mineral | ||||||||||||||
| Lease | Lease | Lease | Total | |||||||||||||
| Cost | ||||||||||||||||
| August 31, 2018 | $ | 11,091,388 | $ | 19,755 | $ | - | $ | 11,111,143 | ||||||||
| Additions | - | - | 23,800,000 | 23,800,000 | ||||||||||||
| August 31, 2019 | 11,091,388 | 19,755 | 23,800,000 | 34,911,143 | ||||||||||||
| Additions | - | - | - | - | ||||||||||||
| August 31, 2020 | $ | 11,091,388 | $ | 19,755 | $ | 23,800,000 | $ | 34,911,143 | ||||||||
| Accumulated Amortization | ||||||||||||||||
| August 31, 2018, 2019 and 2020 | $ | - | $ | - | $ | - | $ | - | ||||||||
| Carrying Amounts | ||||||||||||||||
| August 31, 2018 | $ | 11,091,388 | $ | 19,755 | $ | - | $ | 11,111,143 | ||||||||
| August 31, 2019 | $ | 11,091,388 | $ | 19,755 | $ | 23,800,000 | $ | 34,911,143 | ||||||||
| August 31, 2020 | $ | 11,091,388 | $ | 19,755 | $ | 23,800,000 | $ | 34,911,143 | ||||||||
F-16
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 8. | MINERAL LEASES (continued) |
| (a) | TMC Mineral Lease |
Effective August 10, 2020, the TMC mineral lease was terminated and a new Short-Term Mining Lease agreement between Valkor and Asphalt Ridge, Inc was entered into with a back to back Short-Term Mining and Mineral sub-lease entered into between Valkor and TMC, whereby all of the rights and obligations of the lease were sub-let to TMC.
On June 1, 2015, the Company acquired TMC Capital, LLC (“TMC”). TMC holds a mining and mineral lease, subleased from Asphalt Ridge, Inc., on the Asphalt Ridge property located in Uintah County, Utah (the “TMC Mineral Lease”).
The salient terms of the lease are as follows:
| 1. | The exclusive right and privilege during the term of this Sublease to explore for and mine by any methods now known or hereafter developed, extract and sell or otherwise dispose of, any and all asphalt, bitumen, maltha, tar sands, oil sands (“Tar Sands”) and any and all other minerals of whatever kind or nature which are associated with or contained in any Tar Sands deposit, whether hydrocarbon, metalliferous, non-metalliferous or otherwise, including, but not limited to, gold, silver, platinum, sand and clays on and in the Property, and whether heretofore known or hereafter discovered (collectively, “Minerals”), from the ground surface to a depth of 3,000 feet above Mean Sea level (MSL), together with the products and byproducts of the processing of the Minerals, and together with the right to use so much of the surface of the Property as may be necessary in the exercise of said rights and in furtherance of the purposes expressed herein, including ingress and egress, and together with the right to construct on the Property such improvements as may be reasonably necessary to the exploration for and the mining, extraction, removal, processing, beneficiating, sale or other disposition of the Minerals, but not including the construction of any new roads without the prior written consent of Sublessor; and |
| 2. | The right to use any or all of the Water Rights at any time during the term of this Sublease in conducting its activities as provided for herein; provided that approval of change applications may need to be obtained in order to allow use of the Water Rights on the Property for mining purposes. |
| 3. | The term of the sub-lease is for the period ending June 30, 2021 unless the Short Term Mining Lease between Valkor and Asphalt Ridge is terminated earlier. |
| 4. | During the Term and subject to the Lessor Reserved Rights, Sublessee shall have the right to explore, develop, mine, drill, pump, process, produce and market the Minerals in, on, or under the Property, including any existing stockpiles or dumps, whether by drilling, surface, strip, contour, quarry, bench, underground, solution, in situ or other mining methods, and in connection therewith, Sublessee shall have the right to conduct the following activities and operations (“Operations”) on the Property in accordance with the terms of this Sublease and applicable laws and regulations: | |
| a. | To mine, process, mill, beneficiate, treat, concentrate, extract, refine, leach, convert, upgrade, prepare for market, any and all Minerals mined or otherwise extracted from the Property; |
| b. | To temporarily store or permanently dispose on the Property Minerals, water, waste or other materials resulting from Operations on the Property; |
| c. | to use and develop any and all ditches, flumes, water and Water Rights and appurtenant to the Property; and |
| d. | to use so much of the surface and surface resources of the Property as may be reasonably necessary in the exercise of said rights, or which Sublessee may deem desirable or convenient, including rights of ingress and egress in connection with its operations on the Property. During the term of the lease the sub-lessee has the right to use any or all of the Water Rights at any time during the term of this Sublease in conducting its activities as provided for herein; provided that approval of change applications may need to be obtained in order to allow use of the Water Rights on the Property for mining purposes. |
F-17
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 8. | MINERAL LEASES (continued) |
| (a) | TMC Mineral Lease (continued) |
| 5. | TMC will pay Valkor the sum of $25,000 on lease commencement, and thereafter $15,000 per month until expiration of the lease |
| 6. | TMC will pay a production royalty as follows: |
| a. | For “Bitumen Product” produced from Tar Sands mined or otherwise extracted from the Property shall be eight percent (8%) of the 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 additives and/or upgrading of the Bitumen Product |
| b. | The Production Royalty on all other Minerals produced from Bitumen Product mined or otherwise extracted from the Property and sold shall be eight percent (8%) of the gross sales revenue received by Sublessee. Subject to the provisions of Paragraph 1, wherein sales of products and byproducts are wholly accounted for, should sales occur to a third party purchaser that is engaged in marketing a variety of products or by-products made from such materials, payments to Sublessor may vary. If Sublessee’s receipts are measurably greater than comparable sales by others of 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 5% royalty on the gross value of the product and by-products sold by the third party or 50% of the gross revenue received by Sublessee from the sale of such products or byproducts, as the case may be. |
| c. | The 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 gross market value. |
| d. | Any sales of Minerals to third parties shall be of such a nature that the sales price adequately represents the market value of all potential products or by-products. |
| e. | 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. |
| 7. | Prior to commencing any 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 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. |
F-18
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 8. | MINERAL LEASES (continued) |
| (b) | SITLA Mineral Lease (Petroteq Oil Recovery, LLC mineral 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 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 rights for extensions based on reasonable production. The leases remain in effect beyond the original lease term so long as mining and sale of the tar sands are continued and sufficient to cover operating costs of the Company.
Advanced royalty of $10 per acre are due annually each year the lease remains in effect and can be applied 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%.
| (c) | BLM Mineral Lease |
On January 18, 2019, the Company paid $10,800,000 for the acquisition of 50% of the operating rights under U.S. federal oil and gas leases, administered by the U.S. Department of Interior’s Bureau of Land Management (“BLM”) covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah. The total consideration of $10,800,000 was settled by a cash payment of $1,800,000 and by the 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.
| 9. | PROPERTY, PLANT AND EQUIPMENT |
| Oil Extraction Plant | Other Property and Equipment | Total | ||||||||||
| Cost | ||||||||||||
| August 31, 2018 | $ | 23,101,035 | $ | 394,555 | $ | 23,495,590 | ||||||
| Additions | 12,454,792 | 43,613 | 12,498,405 | |||||||||
| 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 | ||||||
| Accumulated Amortization | ||||||||||||
| August 31, 2018 | $ | 2,148,214 | $ | 158,481 | $ | 2,306,695 | ||||||
| Additions | - | 73,650 | 73,650 | |||||||||
| 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 | ||||||
| Carrying Amount | ||||||||||||
| August 31, 2018 | $ | 20,952,821 | $ | 236,074 | $ | 21,188,895 | ||||||
| August 31, 2019 | $ | 33,407,613 | $ | 206,037 | $ | 33,613,650 | ||||||
| August 31, 2020 | $ | 35,479,671 | $ | 102,841 | $ | 35,582,512 | ||||||
F-19
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 9. | PROPERTY, PLANT AND EQUIPMENT(continued) |
| (a) | Oil Extraction Plant |
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 while continuing its project to increase production capacity to a minimum capacity of 400-500 barrels per day. The plant has been substantially relocated to the TMC mining site and expansion of the plant to production of 400-500 barrels per day has been substantially completed.
The cost of construction includes capitalized borrowing costs for the year ended August 31, 2020 of $0 (2019 - $2,190,309) and total capitalized borrowing costs as at August 31, 2020 of $4,421,055 (2019 - $4,421,055).
As a result of the relocation of the 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, 2019 which is capitalized to the cost of the plant and 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 400-500 barrels per day, and subsequently to an additional 3,000 barrels per day, the Company re-evaluated the depreciation policy of the oil extraction plant and the oil extraction technologies (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 2020 and 2019 fiscal years as there has only been test production during these years.
F-20
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 10. | LEASES |
Adoption of ASC Topic 842, “Leases”
On September 1, 2019, the Company adopted Topic 842 using the prospective transition method applied to leases that were in place as of September 1, 2019. Results for reporting periods beginning after September 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 840.
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.
Right of use assets
Right of use assets included in the consolidated Balance Sheet are as follows:
| August 31, 2020 | August 31, 2019 | |||||||
| Non-current assets | ||||||||
| Right of use assets – operating leases, net of amortization | $ | 209,101 | $ | - | ||||
| Right of use assets – finance leases, net of depreciation – included in property, plant and equipment | 718,193 | 758,534 | ||||||
Lease costs consist of the following:
Year ended August 31, | Year ended August 31, | |||||||
| Finance lease cost: | $ | 82,878 | $ | 93,883 | ||||
| Depreciation of right of use assets | 40,341 | 40,341 | ||||||
| Interest expense on lease liabilities | 42,537 | 53,542 | ||||||
| Operating lease expense | 59,292 | - | ||||||
| Total lease cost | $ | 142,170 | $ | 93,883 | ||||
F-21
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 10. | LEASES (continued) |
Other lease information:
Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from finance leases | $ | (42,537 | ) | $ | (53,542 | ) | ||
| Operating cash flows from operating leases | (59,292 | ) | - | |||||
| Financing cash flows from finance leases | $ | (157,388 | ) | $ | (196,611 | ) | ||
| Right-of -use assets obtained in exchange for new operating leases | $ | 245,482 | - | |||||
| Weighted average remaining lease term – finance leases | 1.25 years | 2.25 years | ||||||
| Weighted average remaining lease term – operating leases | 4 years | - | ||||||
| Weighted average discount rate – finance leases | 12.36 | % | 11.54 | % | ||||
| Weighted average discount rate – operating leases | 10.00 | % | - | |||||
Maturity of Leases
The amount of future minimum lease payments under finance leases is as follows:
| August 31, 2020 | August 31, 2019 | |||||||
| Undiscounted minimum future lease payments | ||||||||
| Total instalments due: | ||||||||
| Within 1 year | $ | 193,680 | $ | 229,176 | ||||
| 1 to 2 years | 80,700 | 186,852 | ||||||
| 2 to 3 years | - | 46,713 | ||||||
| 274,380 | 462,741 | |||||||
| Imputed interest | (26,948 | ) | (57,113 | ) | ||||
| Total finance lease liability | $ | 247,432 | $ | 405,628 | ||||
| Disclosed as: | ||||||||
| Current portion | $ | 172,374 | $ | 189,933 | ||||
| Non-current portion | 75,058 | 215,695 | ||||||
| $ | 247,432 | $ | 405,628 | |||||
The amount of future minimum lease payments under operating leases is as follows:
| August 31, 2020 | August 31, 2019 | |||||||
| Undiscounted minimum future lease payments | ||||||||
| Total instalments due: | ||||||||
| Within 1 year | $ | 61,070 | $ | - | ||||
| 1 to 2 years | 62,903 | - | ||||||
| 2 to 3 years | 64,790 | - | ||||||
| 3 to 4 years | 66,734 | - | ||||||
| 255,497 | - | |||||||
| Imputed interest | (46,396 | ) | - | |||||
| Total operating lease liability | $ | 209,101 | $ | - | ||||
| Disclosed as: | ||||||||
| Current portion | $ | 42,053 | $ | - | ||||
| Non-current portion | 167,048 | - | ||||||
| $ | 209,101 | $ | - | |||||
F-22
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 11. | INTANGIBLE ASSETS |
| Oil Extraction | ||||
| Technologies | ||||
| Cost | ||||
| August 31, 2018 | $ | 809,869 | ||
| Additions | - | |||
| August 31, 2019 | 809,869 | |||
| Additions | - | |||
| August 31, 2020 | $ | 809,869 | ||
| Accumulated Amortization | ||||
| August 31, 2018 | $ | 102,198 | ||
| Additions | - | |||
| August 31, 2019 | 102,198 | |||
| Additions | - | |||
| August 31, 2020 | $ | 102,198 | ||
| Carrying Amounts | ||||
| August 31, 2018 | $ | 707,671 | ||
| August 31, 2019 | $ | 707,671 | ||
| August 31, 2020 | $ | 707,671 | ||
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 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 company has increased the capacity of the plant to 400 to 500 barrels daily during 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 begins again.
No amortization of the technology was recorded during the 2020 and 2019 fiscal years.
| 12. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable as at August 31, 2020 and 2019 consist primarily of amounts outstanding for construction and expansion of the oil extraction plant and other operating expenses that are due on demand.
Accrued expenses as at August 31, 2020 and 2019 consist primarily of other operating expenses and interest accruals on debt (Note 13) and convertible debentures (Note 14).
Information about the Company’s exposure to liquidity risk is included in Note 31(c).
F-23
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 13. | DEBT |
| Principal due | Principal due | |||||||||||||
| Lender | Maturity Date | Interest Rate | August 31, 2020 | August 31, 2019 | ||||||||||
| Private lenders | On demand | 10.00 | % | 115,000 | 200,000 | |||||||||
| Private lenders | August 31, 2020 | 5.00 | % | 468,547 | 567,230 | |||||||||
| Private lenders | On demand | 10.00 | % | 100,000 | 100,000 | |||||||||
| $ | 683,547 | $ | 867,230 | |||||||||||
The maturity date of debt is as follows:
| August 31, 2020 | August 31, 2019 | |||||||
| Principal classified as repayable within one year | $ | 683,547 | $ | 867,230 | ||||
| Principal classified as repayable later than one year | - | - | ||||||
| $ | 683,547 | $ | 867,230 | |||||
| (a) | Private lenders |
| (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. During the year ended August 31, 2020 the company repaid $35,000 of the principal outstanding and 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 initially bore interest at a rate of 12% per annum, were 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 were 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, 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. | |
| (iii) | On October 4, 2018, the Company entered into a debenture line of credit of $9,500,000 from Bay Private Equity and received an advance of $100,000. The debenture matured on September 17, 2019 and bears interest at 10% per annum. Subsequent to year end, on September 23, 2020, the principal amount of the debenture of $100,000 plus accrued interest of $18,904 was converted into 2,161,892 shares at a conversion price of $0.055 per share. |
F-24
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES |
| Principal due |
Principal due |
|||||||||||||
| Lender | Maturity Date | Interest Rate |
August 31, 2020 |
August 31, 2019 |
||||||||||
| GS Capital Partners | January 15, 2020 | 10.00 | % | - | 143,750 | |||||||||
| Calvary Fund I LP | September 4, 2019 | 10.00 | % | - | 250,000 | |||||||||
| July 31, 2021 | 12.00 | % | 250,000 | 250,000 | ||||||||||
| July 31, 2021 | 12.00 | % | 480,000 | 480,000 | ||||||||||
| August 7, 2021 | 0 | % | 150,000 | - | ||||||||||
| SBI Investments LLC | December 15, 2020 | 10.00 | % | 250,000 | 250,000 | |||||||||
| January 16, 2021 | 10.00 | % | 55,000 | - | ||||||||||
| Bay Private Equity, Inc. | March 31, 2021 | 5.00 | % | 3,661,874 | 2,900,000 | |||||||||
| February 20, 2021 | 5.00 | % | 2,400,000 | 2,400,000 | ||||||||||
| Cantone Asset Management LLC | October 19, 2020 | 7.00 | % | 300,000 | 300,000 | |||||||||
| December 17, 2020 | 7.00 | % | 240,000 | - | ||||||||||
| January 14, 2021 | 7.00 | % | 240,000 | - | ||||||||||
| Private lender | October 29, 2020 | 10.00 | % | 200,000 | - | |||||||||
| Petroleum Capital Funding LP. | November 26, 2023 | 10.00 | % | 318,000 | - | |||||||||
| December 4, 2023 | 10.00 | % | 432,000 | - | ||||||||||
| March 30, 2024 | 10.00 | % | 471,000 | - | ||||||||||
| Power Up Lending Group LTD | May 7, 2021 | 12.00 | % | 64,300 | - | |||||||||
| June 4, 2021 | 12.00 | % | 69,900 | - | ||||||||||
| June 19, 2021 | 12.00 | % | 82,500 | - | ||||||||||
| EMA Financial, LLC | April 22, 2021 | 8.00 | % | 150,000 | - | |||||||||
| Morison Management S.A | July 31, 2021 | 10.00 | % | 192,862 | - | |||||||||
| 10,007,436 | 6,973,750 | |||||||||||||
| Unamortized debt discount | (1,173,112 | ) | (644,281 | ) | ||||||||||
| Total loans | $ | 8,834,324 | $ | 6,329,469 | ||||||||||
The maturity date of the convertible debentures are as follows:
| August 31, 2020 | August 31, 2019 | |||||||
| Principal classified as repayable within one year | $ | 8,227,257 | $ | 6,188,872 | ||||
| Principal classified as repayable later than one year | 607,067 | 140,597 | ||||||
| $ | 8,834,324 | $ | 6,329,469 | |||||
F-25
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (a) | GS Capital Partners |
On December 28, 2018, the Company issued a convertible debenture to GS Capital Partners (“GS”)of $143,750 including an Original Issue Discount (“OID”) 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 August 26, 2020, the convertible debenture 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.
| (b) | Cavalry Fund I LP |
| (i) | On September 4, 2018, the Company issued units to Cavalry Fund I LP (“Cavalry”) for $250,000, which was originally advanced on August 9, 2018. The units consist of 250 units of $1,000 convertible debentures and a common share purchase warrant exercisable for 1,149,424 shares. The convertible debenture bore interest at 10% per annum and matured on September 4, 2019 and was convertible into common shares 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 expired on September 4, 2019.
On September 9, 2019, the Company repaid $75,000 of principal and $1,096 in interest in partial settlement of the convertible debenture. On September 19, 2019, the Company entered into an agreement with Calvary Fund, whereby the remaining principal and interest of $200,000 was settled by the issue of 1,111,111 common shares and a warrant exercisable for 1,111,111 common shares at an exercise price of $0.23 per share.
On August 7, 2020 the Company entered into an Amended and Restated Amending Agreement (“ARA”) with Cavalry whereby the maturity date of the warrant exercisable for 1,111,111 common shares was extended to July 31, 2021 and the exercise price was amended to $0.0412 per share.
| ||
| (ii) | On October 12, 2018, 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 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. |
| (iii) | 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. |
F-26
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (c) | 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.
Subsequent to year end, 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. |
| (d) | Bay Private Equity, Inc. |
| (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.
Subsequent to year end 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. |
F-27
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (e) | 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.
| ||
| (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. |
| (f) | Private lender |
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 $0.18 per share. The Company is currently renegotiating the terms 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 an exercise price of $0.18 per share, which warrant expired on October 29, 2020.
F-28
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (g) | Petroleum Capital Funding LP. |
All of the convertible 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 convertible debentures if the trading price of the Company’s common shares on the 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.
Subsequent to year end, 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.
Subsequent to year end, 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.
Subsequent to year end, 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. |
F-29
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (h) | Power Up Lending Group LTD. |
| (i) | On October 11, 2019, the Company issued a convertible promissory note to Power Up Lending Group LTD (“Power Up”) in the aggregate principal sum of $158,000, including an original issue discount of $15,000, for net proceeds of $140,000 after certain expenses. The note bore interest at 12% per annum and matured on October 17, 2020. The note could 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 was 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 May 5, 2020 and June 8, 2020, Power Up converted the aggregate principal sum of $158,000, including interest thereon of $8,580 into 6,861,225 common shares at an average conversion price of $0.024 per share, thereby extinguishing the note.
| ||
| (ii) | On December 17, 2019, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $81,000, including an original issue discount of $8,000, for net proceeds of $70,000 after certain expenses. The note bears interest at 12% per annum and matures on December 17, 2020. 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 June 18, 2020 and June 25, 2020, Power Up converted the aggregate principal sum of $81,000, including interest thereon of $3,960 into 4,317,500 common shares at an average conversion price of $0.020 per share, thereby extinguishing the note.
| ||
| (iii) | 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.
| ||
| (iv) | 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. |
| (v) | 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. |
F-30
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 14. | CONVERTIBLE DEBENTURES (continued) |
| (i) | EMA Financial, LLC |
| (i) | On November 21, 2019, the Company issued a convertible promissory note to EMA Financial, LLC (“EMA”) for the aggregate principal sum of $150,000, including an original issue discount of $22,500, for net proceeds of $123,750 after certain expenses. The note bears interest at 8% per annum and matures on August 20, 2020. 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 price during the fifteen trading days including and immediately preceding the conversion date.
Between June 8, 2020 and June 30, 2020, EMA converted the aggregate principal sum of $43,021 into 3,800,000 common shares at an average conversion price of $0.011 per share.
On July 31, 2020, the remaining principal balance of the note amounting to $106,979, including interest thereon of $8,273 was acquired by Global Business Partners (“GBP”) and the Company issued a new convertible note to GBP, bearing interest at 8% per annum and maturing on July 31, 2021. 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 70% of the two lowest average trading price during the previous fifteen prior trading days.
On August 3, 2020, the convertible note issued to GBP was assigned to Morison Management S.A. (“Morison”). On the same day, Morison converted the aggregate principal sum of $106,979, including interest thereon of $8,600 into 13,037,710 common shares at a conversion price of $0.009 per share, thereby extinguishing the note.
| ||
| (ii) | 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. |
| (j) | Morison Management S.A. |
On 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.
| 15. | 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.
F-31
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 16. | DERIVATIVE LIABILITY |
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 August 31, 2020, with a total change in fair value of $187,401 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:
| Year ended August 31, 2020 |
||||
| Conversion price | CAD$0.03 to CAD$0.25 | |||
| Risk free interest rate | 0.18 to 2.12 | % | ||
| Expected life of derivative liability | 6 to 12 months | |||
| Expected volatility of underlying stock | 93.9 to 231.8 | % | ||
| Expected dividend rate | 0 | % | ||
The movement in derivative liability is as follows:
| August 31, 2020 | ||||
| Opening balance | $ | - | ||
| Derivative financial liability arising from convertible notes | 653,984 | |||
| Fair value adjustment to derivative liability | 187,401 | |||
| $ | 841,385 | |||
F-32
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 17. | RECLAMATION AND RESTORATION PROVISIONS |
| Oil | ||||||||||||
| Extraction | Site | |||||||||||
| Facility | Restoration | Total | ||||||||||
| Balance at August 31, 2018 | $ | 371,340 | $ | 212,324 | $ | 583,664 | ||||||
| Re-evaluation of reclamation and restoration provision | 119,716 | 2,255,443 | 2,375,159 | |||||||||
| Accretion expense | 7,428 | 4,246 | 11,674 | |||||||||
| 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 | ||||||
| (a) | Oil Extraction Plant |
In accordance with the terms of the sub-lease agreement disclosed in note 8 above, the Company is required to dismantle its oil extraction plant at the end of the lease 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 August 31, 2019 was 2.0%.
| (b) | Site restoration |
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 is estimated to be 2.32% on operations that are expected to commence in September 2021.
The discount rate used in the calculation of the provision as at August 31, 2019 was 2.0%.
F-33
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 18. | COMMON SHARES |
| Authorized | unlimited common shares without par value |
| Issued and Outstanding | 274,450,337 common shares as at August 31, 2020. |
| (a) | Settlement of debt |
Between September 19, 2019 and August 20, 2020, the Company issued 19,853,808 common shares and 1,111,111 warrants to certain lenders to settle $909,288 of unpaid principal and interest on promissory notes and convertible debt.
| (b) | Settlement of liabilities |
Between September 24, 2019 and August 20, 2020, the Company issued 8,540,789 common shares to several vendors in settlement of $2,055,083 of trade debt.
| (c) | Common share subscriptions |
Between September 19, 2019 and August 24, 2020, the Company issued 39,001,185 common shares to various investors for net proceeds of $3,733,824.
| (d) | Convertible debt conversions |
Between May 8, 2020 and August 4, 2020, in terms of conversion notices received, the Company issued 28,016,435 common shares for convertible debt in the aggregate sum of $410,140.
| (e) | Share based payments for services |
Between September 24, 2019 and May 21, 2020, the Company issued 190,000 shares valued at $38,193 as compensation for professional services and labor rendered to the Company.
| (e) | Shares issued to settle investment obligations |
On October 28, 2019, the Company issued 250,000 shares valued at $75,000 to settle the outstanding investment obligation in Petrobloq.
| (f) | Shares issued to settle Related Party payables |
On August 20, 2020, the company issued 2,356,374 common shares to a related party to settle debt in the aggregate sum of $92,255.
| 19. | STOCK OPTIONS |
| (a) | Stock option plan |
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 54,890,067 common shares reserved for issue at August 31, 2020.
On August 7, 2020, the Company issued a five-year option exercisable for 3,000,000 common shares, vesting over nine months, at an exercise price of CAD$0.085 per share to its newly appointed Chief Operating Officer.
On August 20, 2020, the Company issued a six-month option exercisable for 2,220,000 common shares, vesting immediately, at an exercise price of CAD$0.11 per share to a lender.
F-34
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 19. | STOCK OPTIONS (continued) |
| (a) | Stock option plan (continued) |
During the year ended August 31, 2020 the share-based compensation expense of $887,818 (2019 - $916,240) relates to the vesting of options granted during the current fiscal year and the fiscal year ended August 31, 2018.
| (b) | Stock options |
Stock option transactions under the stock option plan were:
| Year ended August 31, 2020 |
Year ended August 31, 2019 |
|||||||||||||||
| Number of Options | Weighted average exercise price |
Number of options | Weighted average exercise price |
|||||||||||||
| Balance, beginning of period | 9,808,333 | CAD$ | 1.20 | 9,858,333 | CAD$ | 1.22 | ||||||||||
| Options granted | 5,220,000 | CAD$ | 0.10 | - | - | |||||||||||
| Options forfeited | (5,558,333 | ) | CAD$ | 1.14 | (50,000 | ) | CAD$ | 4.80 | ||||||||
| Balance, end of period | 9,470,000 | CAD$ | 0.63 | 9,808,333 | CAD$ | 1.20 | ||||||||||
Stock options outstanding and exercisable as at August 31, 2020 are:
| 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 | 5.1 years | 4.8 years | ||||||||||
The total grant-date fair value of stock options granted during the year ended August 31, 2020 was $259,220, determined by applying the Black-Scholes option pricing model with the following inputs and assumptions:
| Year ended August 31, 2020 |
||||
| Conversion price | CAD$0.085 to CAD$0.11 | |||
| Risk free interest rate | 0.19 to 0.30 | % | ||
| Expected life of derivative liability | 0.5 to 5 years | |||
| Expected volatility of underlying stock | 135 to 192 | % | ||
| Expected dividend rate | 0 | % | ||
F-35
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 20. | SHARE PURCHASE WARRANTS |
Share purchase warrants outstanding as at August 31, 2020 are:
| Expiry Date | Exercise Price | Warrants Outstanding |
||||||
| September 6, 2020 | US$ | 1.01 | 925,925 | |||||
| October 11, 2020 | US$ | 1.35 | 510,204 | |||||
| October 11, 2020 | US$ | 1.50 | 10,204 | |||||
| October 19, 2020 | US$ | 0.24 | 1,315,789 | |||||
| October 29, 2020 | US$ | 0.18 | 555,555 | |||||
| November 7, 2020 | US$ | 0.61 | 20,408 | |||||
| November 7, 2020 | US$ | 0.66 | 300,000 | |||||
| November 8, 2020 | US$ | 1.01 | 918,355 | |||||
| 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 | |||||
| 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 | |||||
| 48,342,714 | ||||||||
| Weighted average remaining contractual life | 1.21 years | |||||||
| Weighted average exercise price | USD$ | 0.43 | ||||||
Warrants exercisable over 9,776,815 common shares at exercise prices ranging from $0.22 and $21.53 per share expired during the year ended August 31, 2020.
From September 17, 2019 to August 7, 2020, the Company issued 19,384,900 warrants to convertible debt note holders and subscribers for common shares, in accordance with the terms of subscription unit agreements entered into with the convertible note holders and subscribers. The fair value of the warrants granted was estimated at $918,147 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 $78,792.
From September 6, 2018 to May 22, 2019, the Company issued 23,375,948 warrants in accordance with the 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 $0.049 and $0.36 per warrant.
F-36
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 20. | SHARE PURCHASE WARRANTS (continued) |
The share purchase warrants issued, during the year ended August 31, 2020, were valued at $918,147 using the relative fair value method. The fair value of share purchase warrants was estimated using the Black-Scholes valuation model utilizing the following weighted average assumptions:
| Year ended August 31, 2020 |
||||
| Share price | CAD$ | 0.18 | ||
| Exercise price | CAD$ | 0.22 | ||
| Expected share price volatility | 123.5 | % | ||
| Risk-free interest rate | 1.11 | % | ||
| Expected term | 2.69 | |||
| 21. | DILUTED LOSS PER SHARE |
The Company’s potentially dilutive instruments are convertible debentures and stock 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 years ended August 31, 2020 and 2019, the following stock options, share purchase warrants and convertible securities were excluded from the computation of diluted loss per share as the result of the computation was anti-dilutive:
| Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Share purchase options | 9,470,000 | 9,808,333 | ||||||
| Share purchase warrants | 48,342,714 | 50,660,474 | ||||||
| Convertible securities | 93,941,474 | 39,593,517 | ||||||
| 151,754,188 | 100,062,324 | |||||||
| 22. | RELATED PARTY TRANSACTIONS |
Related party transactions not otherwise separately disclosed in these consolidated financial statements are:
| (a) | Key management personnel and director compensation |
At August 31, 2020, $547,660 was due to members of key management and directors for unpaid salaries, expenses and directors’ fees (2019 – $748,682).
| (b) | Transactions with directors and officers |
During the year ended August 31, 2020, no common shares were granted as compensation to key management and directors of the Company.
On September 19, 2019 and July 31, 2020, the Chairman of the board subscribed for 696,153 and 15,000,000 common shares for gross proceeds of $90,500 and $600,000.
On August 20, 2020, a Company controlled by the Chairman of the board entered into a debt settlement agreement, whereby 2,356,374 shares were issued to settle an outstanding promissory note of $94,255.
On October 31, 2019 and March 11, 2020, a director advanced the Company $50,000 and $25,000, respectively as a short-term loan. The loan is interest free and is expected to be repaid within three months. The total loan outstanding as of August 31, 2020 was $125,000.
| (c) | Due to/from director |
As of August 31, 2020 and 2019, the Company owed the chairman of the Board and the various companies controlled by him $395,647 and $0, respectively, in funds advanced to the Company for working capital purposes, in addition, the Company owes the chairman of the board $160,000, and $286,000 respectively, in unpaid salaries.
As of August 31, 2020 and 2019, the Company owed a director $125,000 and $50,000, respectively in working capital advances to the Company. The advance is interest free with no fixed terms of repayment.
F-37
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 23. | INVESTMENTS |
On November 11, 2016, the Company and three other parties entered into an agreement for the operation of a website for careers in the oil and gas industry. The Company has a 25% interest in this venture and had made advances of $68,331 to the venture as of August 31, 2018. Due to the lack of activity in the venture, the Company has fully provided against the investment of $68,331.
On November 1, 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 which had 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. During the year ended August 31, 2019, the Company incurred a further $152,500 in costs related to the agreement and on September 6, 2019, the Company agreed to pay 250,000 common shares to FBCC as a final settlement of the agreement. The investment has been fully provided for as of August 31, 2020.
| 24. | SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
Selling, general and administrative expenses consists of the following:
| Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Investor relations and public relations | $ | (92,179 | ) | $ | 1,484,845 | |||
| Professional fees | 2,614,540 | 6,194,176 | ||||||
| Research and development expenses | - | 112,625 | ||||||
| Salaries and wages | 1,043,647 | 1,404,793 | ||||||
| Share-based compensation | 887,818 | 916,240 | ||||||
| Travel and promotional expenses | 713,662 | 683,409 | ||||||
| Other | 1,016,257 | 747,344 | ||||||
| $ | 6,183,745 | $ | 11,543,432 | |||||
| 25. | FINANCING COSTS, NET |
Financing costs, net, consists of the following:
| Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Interest expense on borrowings | $ | 1,256,985 | $ | 8,095 | ||||
| Amortization of debt discount | 1,414,626 | 1,217,340 | ||||||
| $ | 2,671,611 | $ | 1,225,435 | |||||
F-38
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 26. | OTHER EXPENSE (INCOME), NET |
Other expense (income), net, consists of the following:
| Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| (Gain) loss on settlement of liabilities | $ | (524,971 | ) | $ | 534,480 | |||
| Loss on conversion of convertible debt | 744,918 | - | ||||||
| Gain on debt extinguishment | (54,378 | ) | - | |||||
| Penalty on convertible notes | 610,312 | - | ||||||
| Interest income | (29,317 | ) | (83,067 | ) | ||||
| $ | 746,564 | $ | 451,413 | |||||
| 27. | INCOME TAXES |
The Company’s deferred tax assets (liabilities), resulting from temporary differences that will change taxable incomes of future years, are:
| 2020 | 2019 | |||||||
| Property, plant and equipment and intangible assets | $ | (18,502,900 | ) | $ | (18,458,345 | ) | ||
| Non-capital tax loss carry-forwards | 14,418,180 | 12,508,132 | ||||||
| Other tax-related balances and credits | (160,286 | ) | 162,286 | |||||
| Valuation allowance | 4,247,006 | 5,787,927 | ||||||
| Net deferred tax assets (liabilities) | $ | - | $ | - | ||||
A reconciliation of the provision for income taxes is:
| 2020 | 2019 | |||||||
| Net loss before income taxes | $ | 12,379,067 | $ | 15,787,886 | ||||
| Combined federal and state statutory income tax rates | 26.5 | % | 26.5 | % | ||||
| Tax recovery using the Company’s domestic tax rate | 3,280,453 | 4,183,790 | ||||||
| Effect of tax rates in foreign jurisdictions | - | (1,043,076 | ||||||
| Net effect of (non-deductible) deductible items | (2,369,610 | ) | (589,711 | ) | ||||
| Current year deductible amounts | 1,638,692 | 35,489 | ||||||
| Current period losses not recognized | (2,549,535 | ) | (2,586,492 | ) | ||||
| Provision for income taxes | $ | - | $ | - | ||||
As at August 31, 2020, the Company has, on a consolidated basis, non-capital losses of approximately $91 million for income tax purposes which may be used to reduce taxable incomes of future years. If unused, these losses will expire between 2030 and 2040.
F-39
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 28. | SEGMENT INFORMATION |
The Company operated in two reportable segments within the USA during the year ended August 31, 2020 and 2019, 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 consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There were limited operations in the mining operations segment during the year ended August 31, 2020 and 2019. Other information about reportable segments are:
| August 31, 2020 | ||||||||||||
| Oil | Mining | |||||||||||
| (in ’000s of dollars) | Extraction | Operations | Consolidated | |||||||||
| Additions to non-current assets | $ | 2,073 | $ | 50 | $ | 2,123 | ||||||
| Reportable segment assets | 40,405 | 33,240 | 73,645 | |||||||||
| Reportable segment liabilities | $ | 19,416 | $ | 100 | $ | 19,516 | ||||||
| August 31, 2019 | ||||||||||||
| Oil | Mining | |||||||||||
| (in ’000s of dollars) | Extraction | Operations | Consolidated | |||||||||
| Additions to non-current assets | $ | 12,498 | 23,800 | 36,298 | ||||||||
| Reportable segment assets | 36,690 | 36,166 | 72,856 | |||||||||
| Reportable segment liabilities | $ | 11,663 | 3,374 | 15,037 | ||||||||
| August 31, 2020 | ||||||||||||
| (in ’000s of dollars) | Oil Extraction | Mining operations | Consolidated | |||||||||
| Revenues from hydrocarbon sales | $ | 291 | $ | - | $ | 291 | ||||||
| Other production and maintenance costs | (1,714 | ) | - | (1,714 | ) | |||||||
| Advance royalty payments | - | (988 | ) | (988 | ) | |||||||
| Gross Loss | (1,423 | ) | (988 | ) | (2,411 | ) | ||||||
| Operating Expenses | ||||||||||||
| Depreciation, depletion and amortization | 104 | - | 104 | |||||||||
| Selling, general and administrative expenses | 6,180 | 4 | 6,184 | |||||||||
| Investor relations | (92 | ) | - | (92 | ) | |||||||
| Professional fees | 2,613 | 1 | 2,614 | |||||||||
| Salaries and wages | 1,044 | - | 1,044 | |||||||||
| Share-based compensation | 888 | - | 888 | |||||||||
| Travel and promotional expenses | 714 | - | 714 | |||||||||
| Other | 1,013 | 3 | 1,016 | |||||||||
| Financing costs | 2,672 | - | 2,672 | |||||||||
| Impairment of investments | 75 | - | 75 | |||||||||
| Other expense (income) | 746 | - | 746 | |||||||||
| Gain on settlement of liabilities | (525 | ) | - | (525 | ) | |||||||
| Loss on conversion of convertible debt | 745 | - | 745 | |||||||||
| Gain on debt extinguishment | (55 | ) | - | (55 | ) | |||||||
| Penalty on convertible note | 610 | - | 610 | |||||||||
| Other income | (29 | ) | - | (29 | ) | |||||||
| Derivative liability movements | 187 | - | 187 | |||||||||
| Net loss | $ | 11,387 | $ | 992 | $ | 12,379 | ||||||
F-40
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 28. | SEGMENT INFORMATION (continued) |
| August 31, 2019 | ||||||||||||
| (in ’000s of dollars) | Oil Extraction | Mining operations | Consolidated | |||||||||
| Revenues from hydrocarbon sales | $ | 59 | $ | - | $ | 59 | ||||||
| Other production and maintenance costs | 1,347 | - | 1,347 | |||||||||
| Advance royalty payments | - | 291 | 291 | |||||||||
| Gross Loss | (1,288 | ) | (291 | ) | (1,579 | ) | ||||||
| Operating Expenses | ||||||||||||
| Depreciation, depletion and amortization | 74 | - | 74 | |||||||||
| Selling, general and administrative expenses | 11,531 | 13 | 11,544 | |||||||||
| Investor relations | 1,485 | - | 1,485 | |||||||||
| Professional fees | 6,194 | - | 6,194 | |||||||||
| Research and development expenses | 113 | - | 113 | |||||||||
| Salaries and wages | 1,405 | - | 1,405 | |||||||||
| Share-based compensation | 916 | - | 916 | |||||||||
| Travel and promotional expenses | 683 | - | 683 | |||||||||
| Other | 735 | 13 | 748 | |||||||||
| Financing costs | 1,225 | - | 1,225 | |||||||||
| Impairment of investments | 914 | - | 914 | |||||||||
| Other expense (income) | 452 | - | 452 | |||||||||
| Gain on settlement of liabilities | 535 | - | 535 | |||||||||
| Interest income | (83 | ) | - | (83 | ) | |||||||
| Net loss | $ | 15,484 | $ | 304 | $ | 15,788 | ||||||
| 29. | COMMITMENTS |
The company has commitments under equipment financing arrangements entered into in prior periods, see Note 10, above.
Maturity of Leases
The amount of future minimum lease payments under finance leases is as follows:
| August 31, 2020 | ||||
| Undiscounted minimum future lease payments | ||||
| Total instalments due: | ||||
| Within 1 year | $ | 193,680 | ||
| 1 to 2 years | 80,700 | |||
| Total finance lease liability | $ | 274,380 | ||
The Company has entered into an office lease arrangement which, including the Company’s share of operating expenses and property taxes, will require estimated minimum annual payments of:
The amount of future minimum lease payments under operating leases is as follows:
| August 31, 2020 | ||||
| Undiscounted minimum future lease payments | ||||
| Total instalments due: | ||||
| Within 1 year | $ | 61,070 | ||
| 1 to 2 years | 62,903 | |||
| 2 to 3 years | 64,790 | |||
| 3 to 4 years | 66,734 | |||
| Total operating lease liability | $ | 255,497 | ||
F-41
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 30. | MANAGEMENT OF CAPITAL |
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 costs of capital. The Company considers its capital for this purpose to be its shareholders’ equity and debt and convertible debentures.
The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may seek additional financing or dispose of assets.
In order to facilitate the management of its capital requirements, the Company monitors its cash flows and credit policies and prepares expenditure budgets that are updated 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.
| 31. | MANAGEMENT OF FINANCIAL RISKS |
The risks to which the Company’s financial instruments are exposed to are:
| (a) | Credit risk |
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 August 31, 2020 and 2019, the Company had $12,830 and $144,013 in trade and other receivables, respectively and $89,159 and $845,743 in notes receivable, respectively. The Company considers it maximum exposure to credit risk to be its trade and other receivables and notes receivable. The Company expects to collect these amounts in full and has not provided an expected credit loss allowance against these amounts.
| (b) | Interest rate risk |
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 obligations of varying maturities as well as through certain floating rate instruments. The Company considers its exposure to interest rate risk to be minimal.
| (c) | Liquidity risk |
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.
F-42
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2019 and 2018
Expressed in US dollars
| 31. | MANAGEMENT OF FINANCIAL RISKS (continued) |
| (c) | Liquidity risk (continued) |
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 August 31, 2020
| Contractual cash flows | ||||||||||||||||||||
| Carrying | 1 year | More than | ||||||||||||||||||
| (in ’000s of dollars) | amount | Total | or less | 2 - 5 years | 5 years | |||||||||||||||
| Accounts payable | $ | 2,407 | $ | 2,407 | $ | 2,407 | $ | - | $ | - | ||||||||||
| Accrued liabilities | 1,770 | 1,770 | 1,770 | - | - | |||||||||||||||
| Convertible debenture | 8,834 | 11,694 | 10,061 | 1,633 | - | |||||||||||||||
| Debt | 684 | 740 | 740 | - | - | |||||||||||||||
| Finance lease liabilities | 247 | 274 | 193 | 81 | - | |||||||||||||||
| Operating lease liabilities | 209 | 255 | 61 | 194 | - | |||||||||||||||
| Federal relief loans | 580 | 931 | 76 | 196 | 659 | |||||||||||||||
| $ | 14,731 | $ | 18,071 | $ | 15,308 | $ | 2,104 | $ | 659 | |||||||||||
| 32. | SUBSEQUENT EVENTS |
Events after the reporting date not otherwise separately disclosed in these consolidated financial statements are:
| (a) | Common shares |
On September 17, 2020 and December 9, 2020, a warrant holder exercised warrants over a total of 3,444,639 shares for gross proceeds of $103,339 at an exercise price of $0.03 per share.
On November 13, 2020 the Company entered into subscription agreements with various investors whereby 7,416,666 common shares were issued for gross proceeds of $445,000.
| (b) | Debt settlements |
Between September 21, 2020 and December 7, 2020, the Company entered into lability settlement agreements with various vendors, whereby 87,754,843 shares were issued in settlement of liabilities amounting to $4,091,943.
| (c) | Debt conversions |
Between October 1, 2020 and November 13, 2020, convertible note holders converted $260,642 of convertible debt into 12,542,950 common shares at an average conversion price of $0.045 per share.
| (d) | Related party settlements |
On December 9, 2020, the Company entered into debt settlement agreements with certain directors whereby outstanding directors fees as of November 30, 2020, amounting to $277,165 were settled by the issue of 3,959,498 shares at an issue price of $0.07 per share.
F-43
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 32. | SUBSEQUENT EVENTS (continued) |
| (e) | Financing Activity |
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.
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.
On October 5, 2020, the Company issued a promissory note to an investor for gross proceeds of $49,000, the promissory note bears interest at 0% per annum and matures on September 21, 2021. On October 14, 2020, the Company entered into a debt settlement agreement with the investor whereby the Company issued 671,232 shares to settle the aggregate principal amount of $49,000 thereby extinguishing the note.
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.
On November 24, 2020, the Company issued a convertible debenture to Stirling Bridge Resources in the aggregate principal amount of $15,000, for net proceeds of $15,000. 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 24, 2021.
F-44
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 32. | SUBSEQUENT EVENTS (continued) |
| (f) | Management and Operations Services Agreement |
In terms of a Management and operations Services Agreement (“Management Agreement”) entered into between the Company and Valkor LLC, (“Valkor”) dated November 22, 2020, effective May 1, 2020, Valkor will provide overall management and operations services at the oil sands recovery plant based in Utah. The agreement is for a period of one year and is renewable automatically for an additional four years unless either party provides the other party with written notice of non-renewal at least 90 days prior to the expiration of the original or renewal term. The company will reimburse Valkor for all costs and expenses incurred, as defined in the agreement, plus a Personnel Management Fee of 12% of the personnel costs and expenses and an operations Management Fee of 5% of the operations costs and expenses.
Valkor will provide the Company with quarterly production reports, including the following; (i) the quantity of oil bearing ore and sediments mined, extracted and produced from each of the leases and delivered to the plant; (ii) the quantity of oil products produced, saved and sold at the plant; (iii) the quantity of consumables purchased and used or consumed in operations and (iv) the gross proceeds derived from the sale of the oil products including applicable taxes and transportation costs incurred by Valkor.
Valkor will also provide quarterly operating reports detailing; (i) revenue received by Valkor from oil products sold; (ii) a detailed accounting of all costs and expenses; (iii) the operations Management fee and the Personnel Management fee earned during the quarter.
Valkor will also produce quarterly Royalty Reports to be delivered to a third party to calculate royalties due to the holders of royalty interest under the various mineral rights leases.
| (g) | Technology License Agreement |
On November 24, 2020, the Company entered into a Technology License Agreement (“License Agreement”) with Greenfield Energy, LLC (“Greenfield”), whereby the Company grants to Greenfield a non-exclusive, non-transferable license under the patent rights and know-how for use in the design, construction and operation of any and all future oil sands plants in the US. Greenfield agrees to pay a license fee of $2,000,000 for oil sands plants designed, developed and constructed by Greenfield. The parties recognize that $1,500,000 has been invested in the Petroteq Oil Sands plant based in Utah and that another $500,000 in further plant development and improvements. Greenfield will pay to the Company a 5% royalty based on net revenue received from production and disposition of licensed products, unless the licensed product is not covered by a valid claim then the royalty is reduced to 3%.
The Company undertakes to utilize Valkor as the exclusive provider of engineering, planning and construction for all oil sands plants built or Greenfield under this agreement, provide the fees charged by Valkor are reasonable and competitive.
The agreement will remain in effect from November 14, 2020 until the expiration of the last valid patent claim, unless terminated by default or bankruptcy.
F-45
PETROTEQ ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
Expressed in US dollars
| 33. | SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS |
Supplemental unaudited information regarding the Company’s oil and gas activities is presented in this note.
The Company has not commenced commercial operations, therefore the disclosure of the results of operations of hydrocarbon activities is limited to advance royalties paid. All expenditure incurred to date is capitalized as part of the development cost of the company’s oil extraction plant.
The Company does not have any proven hydrocarbon reserves or historical data to forecast the standardized measure of discounted future net cash flows related to proven hydrocarbon reserve quantities. Upon the commencement of production, the Company will be able to forecast future revenues and expenses of its hydrocarbon activities.
Costs incurred
The following table reflects the costs incurred in hydrocarbon property acquisition and development expenses.
All costs were incurred in the US.
| (In US$ 000’s) | Year ended August 31, 2020 | Year ended August 31, 2019 | ||||||
| Advanced royalty payments | $ | 120 | $ | 360 | ||||
| Mineral lease acquisition costs – Unproven properties | - | 23,800 | ||||||
| Construction of oil extraction plant | 2,073 | 12,455 | ||||||
| $ | 2,193 | $ | 36,615 | |||||
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 maintenance and personnel costs incurred.
All costs were incurred in the US.
| (In US$ 000’s) | Year ended August 31, 2020 | Year ended August 31, 2019 | ||||||
| Advanced royalty payments applied or expired | $ | 988 | $ | 291 | ||||
| Production and maintenance costs | 1,714 | 1,348 | ||||||
| $ | 2,702 | $ | 1,639 | |||||
Proven reserves
The Company does not have any proven hydrocarbon reserves as of August 31, 2020 and 2019.
F-46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of 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 Annual Report on Form 10-K/A, 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 Chief Executive Officer and the Company’s Chief Financial Officer, after evaluating the effectiveness of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K/A, have concluded that due to a lack of segregation of duties that the Company’s disclosure controls and procedures are ineffective 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 Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, 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.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Management conducted an assessment of the Company’s internal control over financial reporting as of August 31, 2020 based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework 2013 (“COSO”). The COSO framework requires rigid adherence to control principles that require sufficient and adequately trained personnel to operate the control system. The Company has insufficient accounting personnel for it to be able to segregate duties as required by COSO or to maintain all reference material required to ensure Company personnel are properly advised or trained to operate the control system. Based on the assessment, management concluded that, as of August 31, 2020, the Company’s internal control over financial reporting was ineffective based on those criteria.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Changes in Internal Control Over Financial Reporting
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 fourth fiscal quarter ended August 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report on Form 10-K/A does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
None.
42
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth certain information about our executive officers, key employees and directors as of December 14, 2020.
| Name | Age | Positions and Offices with the Registrant | ||
| Aleksandr Blyumkin | 49 | Executive Chairman, Chief Executive Officer and Chairman of the Board of Directors | ||
| George Stapleton | 67 | Chief operating Officer | ||
| Mark Korb | 53 | Chief Financial Officer | ||
| Gerald Bailey | 78 | Director and President | ||
| Vladimir Podlipskiy | 56 | Chief Technology Officer | ||
| Robert Dennewald | 67 | Director | ||
| James Fuller | 81 | Director |
Biographies
The following are brief biographies of our officers and directors:
Aleksander Blyumkin, Executive Chairman and Chairman of the Board of Directors
Mr. Blyumkin has been our Executive Chairman since March 26, 2018 and the Chairman of our Board of Directors of our company and MCW Fuels, Inc. (formerly McWhirter Distributing Co. Inc.) since November 2006. He also has served as our Executive Chairman from December 12, 2012 to July 18, 2017 and as our Chief Executive Officer from July 2017 to March 26, 2018. Mr. Blyumkin has vast experience in the oil and fuel industry. He has owned and managed several ventures in the oil and fuel industry and has developed oil properties in Eastern Europe, Central Asia and, most recently, in the United States. Since 2011, Mr. Blyumkin has been the Chief Executive Officer of Dalex Industries, Inc., a developer and operator of gasoline service stations in California. Mr. Blyumkin studied Economics and International Relations at Odessa State University, Ukraine.
Mr. Blyumkin was selected to serve on our board due to his vast experience in the oil and fuel industry.
George Stapleton, Chief operating officer
Mr. Stapleton brings over forty years of experience in all aspects of design, construction, fabrication and project management for onshore and offshore plant and energy infrastructure related projects. Mr. Stapleton spent over 20 years of his career with McDermott, Inc., a premier international engineering, construction and procurement firm. Most recently he held the position of Senior Director for all fabrication operations for McDermott, Inc. in North, Central and South America.
Mr. Stapleton was a Director of E-T Energy Ltd. from 2003-2017 where he was responsible for the definition and development of a pilot program to prove the application of patented environmental remediation technology to the production of bitumen from shallow Athabasca oil sands and managed the design and construction of surface production facilities.
In connection with Mr. Stapleton’s recruitment and as part of his compensation package with Petroteq he was awarded 1,000,000 common shares of the Company and incentive stock options vesting over eight months for 3,000,000 common shares at $0.085 per share expiring after five years. The 1,000,000 common shares issuable to Mr. Stapleton are subject to approval of the TSX Venture Exchange.
Mark Korb, Chief Financial Officer
Mark Korb has served as our Chief Financial Officer since August 2014. Mr. Korb has over 20 years’ experience with high-growth companies and experience taking startup operations to the next level. Since July 2011, First South Africa Management, a company for which Mr. Korb has served as the Chief Financial Officer since January 2010 has been providing consulting services to us, including the financial expertise required of public companies. First South Africa Management provides financial management and strategic management services to various companies.
From 2007 to 2009, Mr. Korb was the group chief financial officer and director of Foodcorp (Proprietary) Limited (“Foodcorp”), a multimillion dollar consumer goods company based in South Africa. In his role as chief financial officer, Mr. Korb delivered operational and strategic leadership for the full group financial function during a period of change including mergers, acquisitions and organic growth. As a board director he cultivated relationships with shareholders, bond holders, financial institutions, rating agencies, and auditors. Mr. Korb was also responsible for leading the group IT strategy and implementation and supervised 16 direct reports including 10 divisional financial directors. From 2001 to 2007 Mr. Korb was the group Chief Financial Officer of First Lifestyle, initially a publicly traded company on the Johannesburg Stock Exchange in South Africa which was then purchased by management which included Mr. Korb. He anchored the full group financial function with responsibility for mergers and acquisitions activity, successfully leading the process whereby the company was sold to Foodcorp mentioned above. Upon completion of the merger, Mr. Korb was appointed as the group Chief Financial Officer of Foodcorp. Mr. Korb is also the Chief Financial Officer to several other companies including, Icagen, Inc., a Delaware corporation engaged in pharmaceutical industry.
43
Gerald Bailey, President and Director
Dr. Bailey has over 50 years of experience in the international petroleum industry in all aspects, both upstream and downstream with specific Middle East skills and U.S. onshore/offshore sectors. Dr. Bailey currently serves as our President, a position he has held since July 2017 when he resigned as our Chief Executive Officer. He previously served as our Chief Executive Officer from 2014 until July 2017 and has been a member of our Board of Directors since 2011. Dr. Bailey is currently the Chairman of Bailey Petroleum, LLC, a consulting firm for major oil and gas exploration/development corporations, a position he has held since 1997. In addition, Dr. Bailey is Chief Operating Officer of Indoklanicsa, Nicaragua (since 2012), and Vice Chairman, Trinity Energy Group, Inc. (since 2012) Dr. Bailey is retired from Exxon, lastly as President, Arabian Gulf. During his Exxon career, he also served as the Assistant General Manager, Administration & Commercial, Abu Dhabi Onshore Oil Company; Operations Manager, Qatar General Petroleum Corp., Dukhan Operations and the Operations Manager, Qatar General Petroleum Corp., Umm Said Operations. He was also the Operations Superintendent, Exxon Lago Oil, Aruba and has spent time in Libya as Operations Superintendent for Esso Standard, Libya, Brega, with experience in LNG and oil field production. His earlier career included service with Texaco where he gained skills in oil additives and petrochemicals manufacturing.
Dr. Bailey holds a BS Degree in Chemical Engineering from the University of Houston, an MS Degree in Chemical Engineering from the New Jersey Institute of Technology, Newark, New Jersey, a PhD Degree from Columbia Pacific University, San Rafael, California and is a graduate of Engineering Doctoral Studies from Lamar University, Beaumont, TX. He has written many articles, papers and studies on the oil industry, and has been a keynote speaker of many international industry conferences including the Money Show conference with his address, “The Future of Oil & Gas Developments,” and FreedomFest Conference, “Investing in Oil,” and also has appeared recently on national Chinese television discussing the “World Energy Outlook.” He is a member of the Middle East Policy Council, Society of Petroleum Engineers and the American Institute of Chemical Engineers.
We selected Dr. Bailey to serve on our board because he brings a strong business background to our Company and adds significant strategic, business and financial experience. Dr. Bailey’s business background provides him with a broad understanding of the issues facing our Company, the financial markets and the financing opportunities available to us.
Vladimir Podlipskiy, Chief Technology Officer
Mr. Podlipskiy has served as our Chief Technology Officer since May 2011. He has extensive experience as a researcher in many senior science disciplines, involved in oil extraction technologies, automobile care, household consumer and cosmetic products and research into mold remediation products, all with a focus on the utilization of benign solvents/solutions. Previously, he held research appointments in new product development for EMD Biosciences, Inc., (Merck KgaA, Darnstadt, Germany), and worked as Chief Chemist in Research & Development for Nanotech, Inc., Los Angeles, California, and as Chief Chemist for Premier Chemical, Compton, California. He is a former Premier Chemical Scientist at UCLA’s Department of Chemistry. Mr. Podlipskiy owns patents for innovative fuel additives and car care products and has authored several papers involving fuel re-formulator products and mold remediation. He is currently involved in research and development of new petroleum industry products, systems and technologies.
Mr. Podlipskiy is the principal research scientist responsible for the development of Petroteq Energy Inc.’s technologies used in its various oil extraction programs in Utah, and has recently finalized all fabrication/assembly details for the company’s first oil sands extraction plant installed at Asphalt Ridge, Utah. He has worked extensively with a variety of suppliers from the U.S. and Eastern Europe in the planning and design stages of the extraction unit’s systems. He holds a PhD Degree in Bio-Organic Chemistry from the Institute of Bio-Organic Chemistry & Petroleum Chemistry, Kiev, Ukraine, and a Degree in MS-Organic Chemistry from the Department of Chemistry, Kiev State University, Kiev, Ukraine.
Robert Dennewald, Director
Mr. Dennewald has served as a member of our board since April 2015. He has been the Chairman of Business Federation Luxembourg (FEDIL) since 2006 and is a Vice President of the Luxembourg Chamber of Commerce. He is also a member of the Board of Directors of the Jean-Pierre Pescatore Charity Foundation. He is a director of ING Luxembourg S.A. and of Redline Capital Partners S.A., the president of investment fund EUREFI S.A. and the angel investor of Cleantech Company APATEQ and IT company e-Kenz. In 2006 he initiated, together with four financial partners, a MBO/LBO takeover of the Eurobeton Group. In 2010, through a secondary buy-out, he took a controlling interest in Eurobeton, which is a main supplier of building materials in Luxembourg with its subsidiary Chaux de Contern. Mr. Dennewald obtained a degree in civil engineering at the University of Liège (B).
We selected Mr. Dennewald to serve on our board because he brings a strong business background to our Company and adds significant strategic, business and financial experience. Mr. Dennewald’s business background provides him with a broad understanding of the issues facing us, the financial markets and the financing opportunities available to us.
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James Fuller, Director
Mr. James W. Fuller, MBA, was appointed to our Board of Directors in March 2020. He has been the Chief Executive Officer, President, Chief Financial Officer and Secretary of Beauty Brands Group Inc. since February 5, 2013 and serves as its Chairman and Principal Accounting Officer. Since March 2008, Mr. Fuller has been a Partner in the Private equity firm, Baytree Capital Associates, LLC, where he oversees the West Coast operations and their interests in the Far East including China. In 2007 and 2008, he was the Owner of Northcoast Financial brokerage. He served as Senior Vice President of Marketing for Charles Schwab and Company from 1981 to 1985. Subsequently, he served key roles as the President of Bull & Bear Group, a mutual fund/discount brokerage company in New York. He served as the Senior Vice President of the New York Stock Exchange (NYSE) from 1976 to 1981, where he was responsible for corporate development, marketing, corporate listing and regulation oversight, research and public affairs. He served as Senior Vice president of Bridge Information Systems. He was the Founder and Head of Morgan Fuller Capital Group. He has over 30 years’ experience in the brokerage and related financial services industries. His financial career started in 1968 with J. Barth & Company in San Francisco. He served as West Coast Managing Director for New York based investment banking and trading firm from 1972 to 1974. He managed the consulting practice for the Investment Industries Division of SRI International, where he directed a study on the future of the Securities Industry from 1974 to 1976. His other projects included the development and implementation of the Cash Management Account for Merrill Lynch, which is a standard throughout the brokerage industry. He served as the Chairman of Pacific Research Institute. He has been a Director at Beauty Brands Group Inc. since February 5, 2013, Kogeto, Inc. since April 10, 2015 and Oklahoma Energy Corp. since 1998. He has been an Independent Director of Cavitation Technologies, Inc., since February 15, 2010 and serves as its Member of Advisory Board. He served as a Director of Bridge Information Systems. He served as an Independent Director of Propell Technologies Group, Inc. from October 14, 2011 to February 17, 2015. He served as a Director of TapImmune, Inc. from May 18, 2012 to February 6, 2013. He served on the Board of Trustees of the University of California, Santa Cruz for 12 years. He served on the Board of Directors of the Securities Investor Protection Corporation (SIPC) until 1987. He is a Member of the Board of the International Institute of Education. He is an Elected Member and Vice Chairman for Finance of the San Francisco Republican Central Committee and is a Member of the Pacific Council for International Policy, Commonwealth Club. He was a Member of the Committee of Foreign Relations. Mr. Fuller received his MBA in Finance from California State University and Bachelor of Science in Marketing and Political Science from San Jose State University.
We chose Mr. Fuller to serve as a member of our Board of Directors due to his extensive business experience, which makes him a valuable member of our Board of Directors.
Family Relationships
There are no family relationships between any of our directors or executive officers.
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Item 11. Executive Compensation.
Executive Compensation
The following table sets forth for the two years ended August 31, 2020 and August 31, 2019 the compensation awarded to, paid to, or earned by, our Chief Executive Officer, Chief Financial Officer and our other most highly compensated executive officer whose total compensation during such years exceeded $100,000. We refer to these officers as our “named executive officers.” Certain columns were excluded as the information was not applicable.
Summary Compensation Table
| Name and Principal Position(1) | Year | Salary ($) |
Bonus ($) |
All
Other Compensation(2) |
Stock Awards ($) |
Option Awards ($)(7)(8) |
Total $ |
|||||||||||||||||||
| Aleksander Blyumkin | 2020 | 366,254 | - | 60,000 | (2) | - | 426,254 | |||||||||||||||||||
| Executive Chairman and director | 2019 | 240,000 | - | 46,000 | (3) | - | 286,000 | |||||||||||||||||||
| David Sealock | 2020 | 39,185 | - | 18,387 | (4) | 127,256 | (5) | 184,828 | ||||||||||||||||||
| Former Chief Executive Officer and director | 2019 | 88,718 | - | 27,107 | (5) | 183,250 | (6) | 299,075 | ||||||||||||||||||
| Vladimir Podlipskiy | 2019 | - | - | - | 173,068 | (6) | 173,068 | |||||||||||||||||||
| Chief Technology Officer | 2019 | 74,788 | - | - | 183,250 | (6) | 258,038 | |||||||||||||||||||
| (1) | The business address for each officer listed above is: Petroteq Energy Inc., 15315 Magnolia Blvd., #120, Sherman Oaks, California 91403. |
| (2) | Mr. Blyumkin earned $60,000 of director’s fees for the financial years ended August 31, 2020. |
| (3) | Mr. Blyumkin earned $46,000 of director’s fees for the financial years ended August 31, 2019. |
| (4) | Mr. Sealock earned $18,387 of director’s fees for the financial years ended August 31, 2020. |
| (5) | Mr. Sealock earned $27,107 of director’s fees for the financial years ended August 31, 2019. |
| (6) | On June 6, 2018, David Sealock and Vladimir Podlipskiy were awarded ten year share purchase options exercisable over 1,000,000 common shares at an exercise price of CDN$1.00 per share, these share purchase options vest in equal amounts over a three year period. Mr. Sealock resigned with effect from March 3, 2020, his options expired on June 3, 2020 and were no longer amortized from that date. |
| (7) | The share purchase options issued to directors and officers on November 30, 2017 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$2.27, exercise price CDN$2.27, term of share purchase option: 10 years, risk free interest rate of 1.64% and computed volatility of the underlying stock of 127% and expected dividend yield of 0%. |
| (8) | The share purchase options issued to directors and officers on June 6, 2018 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$1.00, exercise price CDN$1.00, term of share purchase option: 10 years, risk free interest rate of 2.16% and computed volatility of the underlying stock of 125% and expected dividend yield of 0%. |
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Outstanding Equity Awards at Fiscal Year End
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of August 31, 2020:
| OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||
Number of securities underlying unexercised options Exercisable |
Number of securities underlying unexercised options Unexercisable |
Equity incentive plan awards: Number of securities underlying unearned options |
Option exercise price |
Option expiry | Number of shares or units of stock that have not vested |
Market value of shares or units of stock that have not vested |
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested |
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested |
||||||||||||||||||||||||||
| Name | (#) | (#) | (#) | ($) | Date | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||
| Aleksandr Blyumkin | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Mark Korb | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Vladimir Podlipskiy(1) | 750,000 | 250,000 | - | CDN | 1.00 | 6/6/2028 | - | - | - | - | ||||||||||||||||||||||||
| George Stapleton(2) | - | 3,000,000 | - | CDN | 0.085 | 8/7/25 | - | - | - | - | ||||||||||||||||||||||||
| (1) | Dr. Podlipskiy was awarded 1,000,000 options on June 6, 2018 of which 750,000 are vested the remaining 250,000 vest on June 6, 2021. |
| (2) | Mr. Stapleton was awarded a five year option exercisable for 3,000,000 shares of common stock at an exercise price of CDN$0.085 per share, 750,000 vesting on each of October 7, 2020, December 7, 2020, February 7, 2021 and April 7, 2021. Mr. Stapleton was also awarded 1,000,000 restricted shares which shares are only issuable upon approval by the Canadian TSXV Exchange, these shares have not been issued as of December 14, 2020. |
Narrative to Compensation Tables
Overview
During the financial years ended August 31, 2020 and 2019, our executive compensation program was administered by our Board of Directors. Our executive compensation program has the objective of attracting and retaining a qualified and cohesive group of executives, motivating team performance and aligning the interests of executives with the interests of our shareholders through a package of compensation that is simple and easy to understand and implement. Compensation under the program was designed to achieve both current and our long-term goals of and to optimize returns to shareholders. In addition, in order to further align the interests of executives with the interests of our shareholders, we have implemented share ownership incentives through incentive share purchase options. Our overall compensation objectives are in line with its peer group of oil sands technology companies with opportunities to participate in equity.
In determining the total compensation of any member of senior management, our directors consider all elements of compensation in total rather than one element in isolation. Our directors also examine the competitive positioning of total compensation and the mix of fixed, incentive and share-based compensation.
Base Salary
While there is no official set of benchmarks that we rely on and there is no a defined list of issuers that we use as a benchmark, we make ourselves aware of, and are cognizant of, how comparable issuers in our business compensate their executives. Our peer group in connection with salary compensation consists of a sampling of other oil sands technology companies both private and public. The Executive Chairman and Chief Executive Officer review and update our directors on the peer group and other informal channels and compares the salaries offered by us against those of the peer group generally to ensure our salary compensation is within the range of expected annual base salary for the group.
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Bonus Framework
While our directors believe that a well-balanced executive compensation program must simultaneously motivate and reward participants to deliver financial results while maintaining focus on long-term goals that track financial progress and value creation, during the fiscal years ended August 31, 2019 and 2018, we did not have in place an annual team bonus or discretionary individual bonus plan and we did not pay any bonuses.
Group Benefits
We do not offer a group benefits plan of any kind.
Perquisites and Personal Benefits
While we reimburse our executive officers for expenses incurred in the course of performing their duties as executive officers of our company, we did not provide any compensation that would be considered a perquisite or personal benefit to executive officers.
Equity Compensation
2019 Option Plan
Incentive share purchase options are currently granted under the 2019 Option Plan, a fixed number share option plan approved by shareholders on November 23, 2018, which amended and replaced our 2018 Option Plan. Pursuant to the 2019 Option Plan our Board of Directors may from time to time, in its discretion and in accordance with the TSXV requirements, grant to directors, officers and employees, as well as management company employees and consultants (as such terms are defined in Policy 4.4 as amended from time to time), non-transferable options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed 54,890,067, exercisable for a period of up to ten (10) years from the date of the grant. The number of common shares reserved for issuance to any individual director or officer of our company will not exceed 5% of the issued and outstanding common shares (2% in the case of optionees providing investor relations services to us) unless disinterested shareholder approval is obtained. The exercise price of any option granted pursuant to the 2019 Option Plan shall be determined by our Board of Directors when granted, but shall not be less than the Discounted Market Price (as such term is defined in Policy 4.4 as amended from time to time). Options granted pursuant to the 2019 Option Plan are non-assignable, except by means of a will or pursuant to the laws of descent and distribution.
The options may be exercised no later than 12 months following the date the optionee ceases to be a director, officer or consultant of our company, subject to the expiry date of such option. However, if the employment of an employee or consultant is terminated for cause no option held by such optionee may be exercised following the date upon which termination occurred.
The following table sets forth information about the securities authorized for issuance under our equity compensation plans for the fiscal year ended August 31, 2020.
| Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options |
Number of securities remaining for future issuance under equity compensation plans | |||||||||
| Equity Compensation plans approved by the stockholders | 9,470,000 | CDN$ | 0.86 | 45,420,067 | |||||||
Employment Agreements
We do not have any written employment agreements with any of our executive officers or other employees.
Pursuant to a Technology Transfer Agreement, effective November 7, 2011, whereby we acquired from Vladimir Podlipskiy certain intellectual property rights relating to extracting bitumen from oil sands (the “Acquired Technology”), we also agreed to employ Mr. Podlipskiy to oversee and operate the Acquired Technology with the compensation of $120,000.00 per year for as long as the Acquired Technology is utilized by us. In consideration for the Acquired Technology, we issued to Mr. Podlipskiy’s designee 100,000 shares of our common shares and agreed to issue an additional 1,900,000 shares of our common shares on the date when our extraction facility at the TMC Mineral Lease in Vernal, Utah is assembled and tested. We further agreed to pay Mr. Podlipskiy upon the construction of a second plant utilizing the Acquired Technology and any plants thereafter using the Acquired Technology a royalty fee of 2% of gross sales if the price of heavy oil is below $60.00 per barrel; 3% of gross sales if the price of heavy oil is between $60.00 and $69.99 per barrel; 3.5% of gross sales if the price of heavy oil is between $70.00 and $79.99 and 4% of gross sales if the price of heavy oil is greater than $80.00.
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Director Compensation
The following table sets forth information for the fiscal year ended August 31, 2020 regarding the compensation of our directors who at August 31, 2020 were not also named executive officers.
| Name | Fees Earned or Paid in Cash $ |
Option Awards $(3)(4) |
Other Compensation $ |
Total $ |
||||||||||||
| Robert Dennewald | 36,000 | (1) | 173,068 | (2) | - | 209,068 | ||||||||||
| Travis Schneider | 18,387 | (1) | 127,256 | (2) | - | 145,643 | ||||||||||
| Gerald Bailey | 36,000 | (1) | 173,068 | (2) | 4,000 | (3) | 213,068 | |||||||||
| 1. | Mr. Dennewald and Dr. Bailey have each earned $36,000 of director’s fees for the financial year ended August 31, 2020. Mr. Schneider earned $18,387 in directors fees up to the date of his resignation from the Company on March 3, 2020. |
| 2. | On June 6, 2018, Mr. Schneider, Mr. Dennewald and Dr. Bailey were each awarded ten-year share purchase options exercisable over 1,000,000 common shares at an exercise price of CDN$1.00 per share, these share purchase options vest annually over a three year period. Mr. Schneider’s options expired on June 3, 2020, three months after his resignation. |
| 3. | Dr. Bailey was paid a fee of $4,000 for serving as President of the Company, prior to his resignation. |
| 4. | As of August 31, 2020, the following are the aggregate number of option and stock awards held by each of our directors who were not also named Executive Officers: |
| Name | Option (Amount) |
Stock awards (Amount) |
||||||
| Robert Dennewald(a) | 1,475,000 | - | ||||||
| Gerald Bailey(b) | 1,475,000 | - | ||||||
| (a) | The options outstanding includes; (i) on November 30, 2017, Mr. Dennewald was awarded an option to purchase 475,000 common shares of which all are vested; (ii) on June 6, 2018, Mr. Dennewald was awarded an option to purchase 1,000,000 common shares of which 500,000 are vested and the remaining 500,000 will vest equally on June 6, 2020 and 2021. |
| (b) | The options outstanding includes; (i) on November 30, 2017, Mr. Bailey was awarded an option to purchase 475,000 common shares of which all are vested; (ii) on June 6, 2018, Mr. Bailey was awarded an option to purchase 1,000,000 common shares of which 500,000 are vested and the remaining 500,000 will vest equally on June 6, 2020 and 2021. |
The share purchase options issued to directors on November 30, 2017 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$2.27, exercise price CDN$2.27, term of share purchase option: 10 years, risk free interest rate of 1.64% and computed volatility of the underlying stock of 127% and expected dividend yield of 0%.
The share purchase options issued to directors on June 6, 2018 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$1.00, exercise price CDN$1.00, term of share purchase option: 10 years, risk free interest rate of 2.16% and computed volatility of the underlying stock of 125% and expected dividend yield of 0%.
Compensation Committee Interlocks
Not Applicable
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Item 12. Security Ownership Of Certain Beneficial Owners And Management.[to be updated]
The following table sets forth as of December 10, 2020, the number and percentage of the outstanding shares of common shares which, according to the information supplied to us, were beneficially owned by (1) each person who is currently a director, (2) each executive officer, (3) all current directors and executive officers as a group, and (4) each person who, to our knowledge, is the beneficial owner of more than 5% of the outstanding common shares.
| Name and Address(1) | Number of Shares Beneficially Owned | Percentage of Outstanding shares owned(2) | ||||||
| Aleksandr Blyumkin, Director (Chairman) and Executive Chairman | 25,274,388 | (3) | 6.6 | % | ||||
| Gerald Bailey, Director and President | 1,388,831 | (4) | * | |||||
| Mark Korb, Chief Financial Officer | 7,079 | (5) | * | |||||
| Vladimir Podlipskiy, Chief Technology Officer | 766,667 | (6) | * | |||||
| Robert Dennewald, Director | 1,519,030 | (7) | * | |||||
| All executive officers and directors as a group (5 persons) | 30,567,730 | 7.9 | % | |||||
| 5% shareholders | ||||||||
| Valkor LLC | 60,624,666 | (8) | 15.8 | % | ||||
| Petrollo LP Corp. | 30,678,571 | (9) | 8.0 | % | ||||
| * | Less than 1% |
| (1) | The business address for each officer and director listed above is: Petroteq Energy Inc., 15315 Magnolia Blvd., #120, Sherman Oaks, California 91403. |
| (2) | Based on 384,432,965 common shares outstanding as of December 11, 2020. |
| (3) | Is comprised of 24,765,274 common shares held directly, 2,016 common shares held through the Alexander & Polina Blyumkin Trust and 507,098 common shares held indirectly through five entities in which Mr. Blyumkin has a controlling interest. |
| (4) | Is comprised of 163,831 common shares and share purchase options exercisable for 1,475,000 common shares, of which 1,225,000 are vested and 0 which vest within the next 60 days. |
| (5) | Is comprised of 7,079 common shares. |
| (6) | Is comprised of 16,667 common shares and share purchase options exercisable for 1,000,000 common shares, of which 750,000 are vested and 0 which vest within the next 60 days. |
| (7) | Is comprised of 294,030 common shares and share purchase options exercisable for 1,475,000 common shares, of which 1,225,000 are vested and 0 which vest within the next 60 days. |
| (8) | Is comprised of 60,624,666 common shares. The registered address of Valkor LLC is 21,732 Provincial Blvd. Suite 160, Katy, Texas. Steven Byle exercises voting and/or dispositive power with respect to the common shares beneficially owned by Valkor LLC. |
| (9) | Is comprised of 30,678,571 common shares. The registered address of Petrollo LP Corp. is 401 Ryland Street, Suite 200A, Reno, Nevada, 89502. Elena Housherr exercises voting and/or dispositive power with respect to the common shares beneficially owned by Petrollo LP Corp. |
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Item 13. Certain Relationships And Related Transactions, And Director Independence
Except as disclosed in this section and under “Item 6. Executive Compensation” there were no related party transactions during the current year or the prior year.
Director Independence and Related Transactions
Our Board of Directors is comprised of Aleksander Blyumkin, Gerald Bailey, Robert Dennewald, and James Fuller, of which Messrs. Dennewald, Bailey and Fuller are deemed to be independent within the meaning of the TSX Ventures Exchange Corporate Finance Manual (the “TSXV Manual”) and applicable Canadian securities regulations.
The Board of Directors has appointed only one standing committee, the Audit Committee. The Board members comprising our Audit Committee are Alex Blyumkin, James Fuller and Robert Dennewald, of which only Messrs. Dennewald and Fuller are deemed to be independent within the meaning of the TSXV Manual and applicable Canadian securities regulations.
The Audit Committee meets at least four times per year.
Certain Relationships and Related Transactions
On September 19, 2019 and July 31, 2020, the Chairman of the board subscribed for 696,153 and 15,000,000 common shares for gross proceeds of $90,500 and $600,000.
On August 20, 2020, a Company controlled by the Chairman of the board entered into a debt settlement agreement, whereby 2,356,374 shares were issued to settled an outstanding promissory note of $94,255.
On October 31, 2019 and March 11, 2020, a director advanced the Company $50,000 and $25,000, respectively as a short-term loan. The loan is interest free and is expected to be repaid within three months. The total loan outstanding as of August 31, 2020 was $125,000.
On August 7, 2020, the Company granted 3,000,000 stock options to Mr. Stapleton, our Chief operating Officer, which options vest equally over an eight month period.
On December 9, 2020, 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 issuable | |||||||
| Aleksandr Blyumkin | Directors fees | $ | 114,934 | 1,641,917 | ||||||
| Gerald Bailey | Directors fees | 68,716 | 981,655 | |||||||
| Robert Dennewald | Directors fees | 68,934 | 984, | |||||||
| James Fuller | Directors fees | 24,581 | 351,152 | |||||||
| $ | 277,165 | 3,959,498 | ||||||||
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Item 14. Principal Accountant Fees and Services
Hay and Watson serves as our independent registered public accounting firm.
Independent Registered Public Accounting Firm Fees and Services
The following table sets forth the aggregate fees including expenses billed to us for the years ended August 31, 2020 and 2019 by our auditors:
Year ended August 31, 2020 | Year ended August 31, 2019 | |||||||
| Audit fees and expenses | $ | 155,000 | $ | 155,000 | ||||
| Taxation preparation fees | 5,000 | 5,000 | ||||||
| Audit related fees | 20,000 | 20,000 | ||||||
| Other fees | - | - | ||||||
| $ | 180,000 | $ | 180,000 | |||||
| (1) | Audit fees and expenses were for professional services rendered for the audit and reviews of the consolidated financial statements of the Company, professional services rendered for issuance of consents and assistance with review of documents filed with the SEC. |
| (2) | Taxation preparation fees were fees for professional services rendered to file our federal and state tax returns. |
| (3) | We incurred fees to our independent auditors of $20,000 and $20,000 for audit related fees during the fiscal years ended August 31, 2020 and 2019, respectively. |
| (4) | We incurred fees to our independent auditors of $0 for other fees during the fiscal years ended August 31, 2020 and 2019. |
Audit Committee’s Pre-Approval Practice.
Prior to our engagement of our independent auditor, such engagement was approved by our board of directors. The services provided under this engagement may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Pursuant our requirements, the independent auditors and management are required to report to our board of directors at least quarterly regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. Our board of directors may also pre-approve particular services on a case-by-case basis.
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Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K/A
| (a)(1) | The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K/A for the fiscal year ended August 31, 2020. |
| 1. | Independent Auditor’s Report |
| 2. | Consolidated Balance Sheets as of August 31, 2020 and 2019 |
| 3. | Consolidated Statements of Loss and Comprehensive Loss for the years ended August 31, 2020 and 2019 |
| 4. | Consolidated Statements of changes in Shareholders’ Equity for the years ended August 31, 2020 and 2019 |
| 5. | Consolidated Statements of Cash Flows for the years ended August 31, 2020 and 2019 |
| 6. | Notes to Consolidated Financial Statements |
| (a)(2) | All financial statement schedules have been omitted as the required information is either inapplicable or included in the Financial Statements or related notes included in Part II, Item 8 hereof. |
| (a)(3) | The following exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been identified. |
Exhibits:
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| * | Filed herewith |
Not applicable.
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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.
| Signature | Title | Date | ||
| /s/ Aleksandr Blyumkin | Chief Executive Officer and President | December 28, 2020 | ||
| Aleksandr Blyumkin | (Principal Executive Officer) | |||
| /s/ Mark Korb | Chief Financial Officer | December 28, 2020 | ||
| Mark Korb | (Principal Financial and Accounting Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Aleksandr Blyumkin and Mark Korb, acting individually, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: December 28, 2020 | By: | /s/ Aleksandr Blyumkin |
| Aleksandr Blyumkin | ||
| Executive Chairman and Chief Executive Officer | ||
| Date: December 28, 2020 | By: | /s/ James Fuller |
| James Fuller | ||
| Director | ||
| Date: December 28, 2020 | By: | /s/ Robert Dennewald |
| Robert Dennewald | ||
| Director | ||
| Date: December 28, 2020 | By: | /s/ Gerald Bailey |
| Gerald Bailey | ||
| Director |
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