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PQEFF Petroteq Energy

Filed: 19 Jan 21, 5:28pm

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended November 30, 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 

 

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 January 15, 2021 was 395,437,963.

 

Documents incorporated by reference: None.

 

 

 

 

 

PETROTEQ ENERGY INC.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, including but not limited to, 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, or costs and objectives of management for future acquisitions, 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. 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 Quarterly Report on Form 10-Q, “Petroteq Energy Inc” (“PQE”),” Petroteq, the “Company,” “we,” “us” and “our” refer to Petroteq Energy Inc.

 

 

 

 

PETROTEQ ENERGY INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 Page
PART I. FINANCIAL INFORMATION 
Item 1.Condensed Consolidated Financial Statements (unaudited)F-1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1
Item 3.Quantitative and Qualitative Disclosures About Market Risks3
Item 4.Controls and Procedures3
PART II. OTHER INFORMATION 
Item 1.Legal Proceedings4
Item 1A.Risk Factors4
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5
Item 3.Defaults Upon Senior Securities5
Item 4.Mine Safety Disclosures6
Item 5.Other Information7
Item 6.Exhibits7

 

i

 

 

Item 1.

 

PETROTEQ ENERGY INC.

 

TABLE OF CONTENTS

 

November 30, 2020

 

Condensed Consolidated Balance Sheets as of November 30, 2020 (unaudited) and August 31, 2020F-2
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months ended November 30, 2020 and 2019 (unaudited)F-3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended November 30, 2020 and 2019 (unaudited)F-4
Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2020 and 2019, (unaudited)F-5
Notes to the Unaudited Condensed Consolidated Financial StatementsF-6 – F-37

 

F-1

 

 

PETROTEQ ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

As at November 30, 2020 and August 31, 2020

Expressed in US dollars

  

  Notes November 30,
2020
  August 31,
2020
 
    (Unaudited)    
ASSETS        
Current assets        
Cash   $98,510  $62,404 
Trade and other receivables    317,303   12,830 
Ore inventory    14,749   14,749 
Other inventory    12,250   12,250 
Note receivable 4  90,107   89,159 
Prepaid expenses and other current assets 1  2,041,489   2,043,510 
Total Current Assets    2,574,408   2,234,902 
           
Non-Current assets          
Mineral leases 5  34,911,143   34,911,143 
Property, plant and equipment 6  39,744,437   35,582,512 
Right of use asset 7  198,977   209,101 
Intangible assets 8  707,671   707,671 
Total Non-Current Assets    75,562,228   71,410,427 
Total Assets   $78,136,636  $73,645,329 
           
LIABILITIES          
Current liabilities          
Accounts payable   $2,115,041  $2,406,665 
Accrued expenses    1,283,728   1,769,749 
Ore Sale advances    283,976   283,976 
Promissory notes payable    -   8,000 
Debt 9  576,329   683,547 
Current portion of convertible debentures 10  7,847,760   8,227,257 
Current portion of Federal relief loans 11  74,383   74,383 
Current portion of finance lease liabilities 7  178,200   172,374 
Current portion of operating lease liabilities 7  43,575   42,053 
Related party payables 18(c)  652,336   680,647 
Derivative liability 12  804,922   841,385 
Total Current Liabilities    13,860,250   15,190,036 
           
Non-Current liabilities          
           
Convertible debentures 10  747,203   607,067 
Federal relief loans 11  509,577   505,969 
Finance lease liabilities 7  28,210   75,058 
Operating lease liabilities 7  155,402   167,048 
Reclamation and restoration provision 13  2,970,497   2,970,497 
Total Non-Current Liabilities    4,410,889   4,325,639 
Total Liabilities    18,271,139   19,515,675 
           
Commitments and contingencies 23        
SHAREHOLDERS’ EQUITY          
Share capital 14,15,16  150,940,360   144,794,003 
Deficit    (91,074,863)  (90,664,349)
Total Shareholders’ Equity    59,865,497   54,129,654 
Total Liabilities and Shareholders’ Equity   $78,136,636  $73,645,329 

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

F-2

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

  Notes Three months
ended
November 30,
2019
  Three months
ended
November 30,
2019
 
    (Unaudited)  (Unaudited) 
           
Revenue from Licensing fees    2,000,000   - 
Revenues from hydrocarbon sales   $-  $100,532 
Production and maintenance costs    (345,286)  (677,463)
Advance royalty payments applied or expired    -   (92,271)
Gross Profit (Loss)    1,654,714   (669,202)
Expenses          
Depreciation, depletion and amortization 6  11,523   74,320 
Selling, general and administrative expenses 19  1,044,857   2,382,082 
Financing costs 20  621,387   509,294 
Mark to market of derivative liability 12  (156,998)  (35,547)
Other expense (income), net 21  544,459   (416,680)
Total Expenses, net    2,065,228   2,513,469 
           
Net loss before income taxes    410,514   3,182,671 
Income tax expense    -   - 
Net loss and Comprehensive loss    410,514   3,182,671 
Weighted Average Number of Shares Outstanding 17  302,133,325   191,973,146 
Basic and Diluted Loss per Share   $0.00   0.02 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

F-3

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended November 30, 2020 and 2019

(Unaudited)

Expressed in US dollars

 

  Number of
Shares
  Share     Shareholders’ 
  Outstanding  Capital  Deficit  Equity 
Balance at August 31, 2020  274,450,337   144,794,003   (90,664,349)  54,129,654 
Conversion of convertible debt  38,735,555   1,835,726   -   1,835,726 
Settlement of liabilities  60,023,777   2,849,661   -   2,849,661 
Common shares subscriptions  7,416,666   410,000   -   410,000 
Warrants exercised  2,268,169   68,045   -   68,045 
Share-based compensation  -   199,632   -   199,632 
Fair value of convertible debt warrants issued  -   783,293   -   783,293 
Net loss  -       (410,514)  (410,514)
Balance at November 30, 2020  382,894,504   150,940,360   (91,074,863)  59,865,497 

 

  Number of
Shares
  Share     Shareholders’ 
  Outstanding  Capital  Deficit  Equity 
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 debentures  1,111,111   200,000   -   200,000 
Settlement of liabilities  3,243,666   705,687   -   705,687 
Common shares subscriptions  17,002,446   2,494,744   -   2,494,744 
Share-based payments  90,000   28,500   -   28,500 
Share-based compensation  -   178,157   -   178,157 
Fair value of convertible debt warrants issued  -   310,422   -   310,422 
Net loss  -   -   (3,182,671)  (3,182,671)
Balance at November 30, 2019  197,938,969   139,724,435   (81,467,953)  58,628,802 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

F-4

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

  Three months
ended
November 30,
2020
  Three months
ended
November 30,
2019
 
  (Unaudited)  (Unaudited) 
Cash flow used for operating activities:        
Net loss $(410,514) $(3,182,671)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation, depletion and amortization  11,523   74,320 
Amortization of debt discount  333,748   353,095 
Loss on debt extinguishment  330,256     
Loss on conversion of debt  134,490   - 
Loss (Gain) on settlement of liabilities  80,661   (394,409)
Share-based compensation  199,632   178,157 
Shares issued for services  -   28,500 
Mark to market of derivative liabilities  (156,998)  (35,547)
Other  (951)  70,849 
Changes in operating assets and liabilities:        
Accounts payable  (22,623)  2,120,257 
Accounts receivable  (304,473)  1,147 
Accrued expenses  102,570   259,846 
Prepaid expenses and deposits  2,021   4,000 
Inventory  -   30,948 
Net cash used in operating activities  299,342   (491,508)
         
Cash flows used for investing activities:        
Purchase and construction of property and equipment  (1,673,448)  (1,893,274)
Mineral rights deposits paid  -   (560,000)
Investment in notes receivable  -   (477,585)
Proceeds from notes receivable  -   10,000 
Advance royalty payments  -   (60,000)
Net cash used in investing activities  (1,673,448)  (2,980,859)
         
Cash flows from financing activities:        
Advances from related parties  -   134,505 
Repayments to related parties  (28,311)  - 
Proceeds on private equity placements  410,000   2,494,744 
Repayment of long-term debt  (10,000)  (51,019)
Proceeds from promissory notes  20,000     
Repayment of promissory notes  (28,000)  - 
Repayment of finance lease liability  (41,022)  - 
Proceeds from warrants exercised  68,045   - 
Proceeds from convertible debt  1,069,500   950,225 
Repayments of convertible debt  (50,000)  (75,000)
Net cash from financing activities  1,410,212   3,453,455 
         
Increase (decrease) in cash  36,106   (18,912)
Cash, beginning of the period  62,404   50,719 
Cash, end of the period $98,510  $31,807 
         
Supplemental disclosure of cash flow information        
Cash paid for interest $140,481  $14,317 

     

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

F-5

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

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, of which $100,000 is still owing.

 

Between March 14, 2019 and November 30, 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 accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the three months ended November 30, 2020 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year.

 

The unaudited condensed consolidated financial statements 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. Accordingly, all amounts referred to in the notes to the unaudited condensed consolidated financial statements are in U.S. dollars unless stated otherwise.

 

The Company is an “SEC Issuer” as defined under National Instrument 52-107 “Accounting Principles and Audit Standards” as adopted by the Canadian Securities Administrators 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 accordance with U.S. GAAP for Canadian securities law reporting purposes.

 

The unaudited condensed consolidated financial statements were authorized for issue by the Board of Directors on January 19, 2021.

 

F-6

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

(b)Consolidation

 

The unaudited condensed 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 unaudited condensed 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

 

 (c)Estimates

 

The preparation of these unaudited condensed 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 unaudited condensed 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 unaudited condensed 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.

 

F-7

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   

 (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.

  

Revenue from License Fees

 

Revenue from license fees include the sale of rights to utilize the technology developed by the Company. The License fee is recognized immediately as there is no requirement to provide ongoing services or support to the Licensee in terms of the License Agreement.

 

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 22. 

  

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-8

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   

 (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. 

 

 (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-9

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

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-10

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

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-11

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

   

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.  

 

F-12

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

3.GOING CONCERN

 

The Company has incurred losses for several years and, at November 30, 2020, has an accumulated deficit of $91,074,863, (August 31, 2020 - $90,664,349) and working capital (deficiency) of $11,285,842 (August 31, 2020 - $12,955,134). These unaudited condensed 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 unaudited condensed 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.

 

4.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 
Interest accrued        14,107   13,159 
        $90,107  $89,159 
               
Disclosed as follows:              
Current portion       $90,107  $89,159 
         -   - 
        $90,107  $89,159 

 

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.

 

5.MINERAL LEASES

 

  TMC  SITLA  BLM    
  Mineral  Mineral  Mineral    
  Lease  Lease  Lease  Total 
Cost                
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 
Additions  -   -   -   - 
November 30, 2020 $11,091,388  $19,755  $23,800,000  $34,911,143 
                 
Accumulated Amortization                
August 31, 2019, August 31, 2020 and November 30, 2020 $-  $-  $-  $- 
                 
Carrying Amounts                
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 
November 30, 2020 $11,091,388  $19,755  $23,800,000  $34,911,143 

 

F-13

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

    

5.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-14

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

         

5.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-15

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

         

5.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.

 

6.PROPERTY, PLANT AND EQUIPMENT

  

  Oil
Extraction
Plant
  Other
Property and
Equipment
  Total 
Cost            
August 31, 2019 $35,555,827  $438,168  $35,993,995 
Additions  2,072,058   692   2,072,750 
August 31, 2020  37,627,885   438,860   38,066,745 
Additions  4,173,448   -   4,173,448 
November 30, 2020 $41,801,333  $438,860  $42,240,193 
             
Accumulated Amortization            
August 31, 2019 $2,148,214  $232,131  $2,380,345 
Additions  -   103,888   103,888 
August 31, 2020  2,148,214   336,019   2,484,233 
Additions  -   11,523   11,523 
November 30, 2020 $2,148,214  $347,542  $2,495,756 
             
Carrying Amount            
August 31, 2019 $33,407,613  $206,037  $33,613,650 
August 31, 2020 $35,479,671  $102,841  $35,582,512 
November 30, 2020 $39,653,119  $91,318  $39,744,437 

 

F-16

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

         

6.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.

  

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.

 

7.LEASES

 

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.

 

F-17

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

          

7.LEASES (continued)

  

Right of use assets

 

Right of use assets included in the consolidated Balance Sheet are as follows:

 

  November 30,
2020
  August 31,
2020
 
Non-current assets        
Right of use assets – operating leases, net of amortization $198,977  $209,101 
Right of use assets – finance leases, net of depreciation – included in property, plant and equipment  708,109   718,193 

 

Lease costs consist of the following:

 

  Three months
ended

November 30,
2020
  Three months
ended
November 30,
2019
 
       
Finance lease cost: $17,483  $21,650 
Depreciation of right of use assets  10,085   10,085 
Interest expense on lease liabilities  7,398   11,565 
         
Operating lease expense  15,268   14,823 
         
Total lease cost $32,751  $36,473 

 

Other lease information:

 

  Three months
ended
November 30,
2020
  Three months
ended
November 30,
2019
 
Cash paid for amounts included in the measurement of lease liabilities        
Operating cash flows from finance leases $(7,398) $(11,565)
Operating cash flows from operating leases  (15,268)  (14,823)
Financing cash flows from finance leases $(41,022) $(51,018)
         
Right-of -use assets obtained in exchange for new operating leases $-   245,482 
Weighted average remaining lease term – finance leases  1.11 years   2.50 years 
Weighted average remaining lease term – operating leases  2.75 years   3.75 years 
Weighted average discount rate – finance leases  13.52%  12.86%
Weighted average discount rate – operating leases  10.00%  10.00%

 

F-18

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

7.LEASES (continued)

 

Maturity of Leases

 

The amount of future minimum lease payments under finance leases is as follows:

 

  November 30,
2020
  August 31,
2020
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year $193,680  $193,680 
1 to 2 years  32,280   80,700 
2 to 3 years  -   - 
   225,960   274,380 
Imputed interest  (19,550)  (26,948)
Total finance lease liability $206,410  $247,432 
         
Disclosed as:        
Current portion $178,200  $172,374 
Non-current portion  28,210   75,058 
  $206,410  $247,432 

 

The amount of future minimum lease payments under operating leases is as follows:

 

  November 30,
2020
  August 31,
2019
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year $61,528  $61,070 
1 to 2 years  63,375   62,903 
2 to 3 years  65,276   64,790 
3 to 4 years  50,050   66,734 
   240,229   255,497 
Imputed interest  (41,252)  (46,396)
Total operating lease liability $198,977  $209,101 
         
Disclosed as:        
Current portion $43,575  $42,053 
Non-current portion  155,402   167,048 
  $198,977  $209,101 

 

F-19

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

8.INTANGIBLE ASSETS

  

  Oil
Extraction
 
  Technologies 
    
Cost    
August 31, 2019 $809,869 
Additions  - 
August 31, 2020  809,869 
Additions  - 
November 30, 2020 $809,869 
     
Accumulated Amortization    
August 31, 2019 $102,198 
Additions  - 
August 31, 2020  102,198 
Additions  - 
November 30, 2020 $102,198 
     
Carrying Amounts    
August 31, 2019 $707,671 
August 31, 2020 $707,671 
November 30, 2020 $707,671 

  

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 2021 and 2020 fiscal years.

 

F-20

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

9.DEBT

  

       Principal
due
  Principal
due
 
Lender Maturity Date Interest
Rate
  November 30,
2020
  August 31,
2020
 
            
Private lenders On demand  10.00%  105,000   115,000 
Private lenders August 31, 2020  5.00%  471,329   468,547 
Private lenders On demand  10.00%  -   100,000 
               
        $576,329  $683,547 

  

The maturity date of debt is as follows:

  

  November 30,
2020
  August 31,
2020
 
       
Principal classified as repayable within one year $576,329  $683,547 
Principal classified as repayable later than one year  -   - 
         
  $576,329  $683,547 

  

 (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 a further $10,000 during the three months ended November 30, 2020. On July 6, 2020 in accordance with the terms of a debt settlement agreement entered into, the lender converted $50,000 into 1,250,000 shares at a conversion price of $0.04 per share.

 

 (ii)On October 10, 2014, the Company issued two secured debentures for an aggregate principal amount of CAD $1,100,000 to two private lenders. The debentures 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. 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-21

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

10.CONVERTIBLE DEBENTURES

  

       Principal
due
  Principal
due
 
Lender Maturity Date Interest
Rate
  November 30,
2020
  August 31,
2020
 
            
Calvary Fund I LP July 31, 2021  12.00%  250,000   250,000 
  July 31, 2021  12.00%  480,000   480,000 
  August 7, 2021  0%  150,000   150,000 
SBI Investments LLC December 15, 2020  10.00%  250,000   250,000 
  January 16, 2021  10.00%  55,000   55,000 
Bay Private Equity, Inc. March 31, 2021  5.00%  -   3,661,874 
  February 20, 2021  5.00%  2,400,000   2,400,000 
Cantone Asset Management LLC October 19, 2020  7.00%  250,000   300,000 
  December 17, 2020  7.00%  240,000   240,000 
  January 14, 2021  7.00%  240,000   240,000 
  December 30, 2021  7.00%  300,000   - 
Private lender October 29, 2020  10.00%  200,000   200,000 
Petroleum Capital Funding LP. November 26, 2023  10.00%  318,000   318,000 
  December 4, 2023  10.00%  432,000   432,000 
  March 30, 2024  10.00%  471,000   471,000 
Power Up Lending Group LTD May 7, 2021  12.00%  -   64,300 
  June 4, 2021  12.00%  69,900   69,900 
  June 19, 2021  12.00%  82,500   82,500 
  November 11, 2021  12.00%  140,800   - 
EMA Financial, LLC April 22, 2021  8.00%  150,000   150,000 
Morison Management S.A July 31, 2021  10.00%  -   192,862 
Bellridge Capital LP. March 31, 2021  15.00%  2,900,000   - 
Stirling Bridge Resources October 29, 2021  10.00%  15,000   - 
Alpha Capital Anstalt August 6, 2021  21.00%  500,000   - 
Rijtec Enterprises Limited Pension Scheme November 11, 2021  10.00%  32,000   - 
Private lender November 30, 2021  10.00%  150,000   - 
         10,076,200   10,007,436 
Unamortized debt discount        (1,481,237)  (1,173,112)
Total loans       $8,594,963  $8,834,324 

  

The maturity date of the convertible debentures are as follows:

 

  November 30,
2020
  August 31,
2020
 
       
Principal classified as repayable within one year $7,847,760  $8,227,257 
Principal classified as repayable later than one year  747,203   607,067 
         
  $8,594,963  $8,834,324 

 

F-22

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

       

 (a)Cavalry Fund I LP

 

  (i)

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.

 

  (ii)

On August 19, 2019, the Company issued a convertible debenture to Calvary for an aggregate principal amount of $480,000, including an original issue discount of $80,000, for net proceeds of $374,980 after certain legal expenses, and a warrant exercisable for 2,666,666 common shares at an exercise price of $0.15 per share. The convertible debenture bore interest at 3.3% per annum and matured on August 29, 2020. The convertible debenture may be converted into common shares of the Company at a conversion price of $0.17 per share.

 

In terms of the ARA entered into on August 7, 2020, the maturity date of the convertible debenture was amended to July 31, 2021 and the conversion price was amended to $0.0412 per share and the exercise price of the warrant was amended to $0.0412 per share and the maturity date was amended to July 31, 2021.

 

  (iii)On August 7, 2020, the Company issued a convertible debenture to Calvary for an aggregate principal amount of $150,000, including an original issue discount of $25,000, for net proceeds of $125,000, and a warrant exercisable for 3,033,980 common shares at an exercise price of $0.0412 per share. The convertible debenture bore interest at 0.0% per annum and matured on August 7, 2021. The convertible debenture may be converted into common shares of the Company at a conversion price of $0.0412 per share.

 

(b)SBI Investments, LLC

  

 (i)

On October 15, 2018, the Company entered into an agreement with SBI Investments, LLC (“SBI”) whereby the Company issued 250 one year units for proceeds of $250,000, each debenture consisting of a $1,000 principal convertible unsecured debenture, bearing interest at 10% per annum and convertible into common shares at $0.86 per share, and a warrant exercisable for 1,162 shares of common stock at an exercise price of $0.86 per share.

 

The warrants expired on October 15, 2019 unexercised.

 

During December 2019, the maturity date of the convertible loan was extended to October 12, 2020 and the conversion price of the note was reset to $0.18 per share.

 

The Company repaid $50,000, and the maturity date of the loan has been extended to December 15, 2020.

 

 (ii)On January 16, 2020, the Company entered into an agreement with SBI whereby the Company issued a convertible promissory note for $55,000 for gross proceeds of $50,000, bearing interest at 10% per annum and convertible into common shares at $0.14 per share. The convertible note matures on January 16, 2021. In conjunction with the convertible promissory note, the Company issued a warrant exercisable for 357,142 shares of common stock at an exercise price of $0.14 per share, expiring on January 16, 2021.

 

F-23

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

 

(c)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.

 

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-24

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

 

(d)Cantone Asset Management, LLC

  

 (i)

On July 19, 2019, the Company issued a convertible debenture to Cantone Asset Management, LLC (“Cantone”) in the aggregate principal amount of $300,000, including an OID of $50,000 for net proceeds of $234,000 after certain issue expenses. The convertible debenture bears interest at 7% per annum and the gross proceeds, less the OID, of $250,000 is convertible into common shares at a conversion price of $0.19 per share, and matured on October 19, 2020.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,315,789 common shares at an exercise price of $0.24 per share, expiring on October 19, 2020.

 

On July 7, 2020, the Company entered into an Amending Agreement (“the Amendment”) whereby the conversion price of the convertible debenture was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share.

 

On September 23, 2020, $50,000 of the principal was repaid out of the proceeds of the $300,000 convertible note issued to Cantone Asset Management.

 

 (ii)

On September 19, 2019, the Company issued a convertible debenture to Cantone in the aggregate principal amount of $240,000, including an original issue discount of $40,000, for net proceeds of $200,000. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $200,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on December 17, 2020.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 952,380 common shares at an exercise price of $0.26 per share, expiring on December 17, 2020.

 

In accordance with the terms of the Amendment entered into on July 7, 2020, the conversion price was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share.

 

 (iii)

On October 14, 2019, the Company issued a convertible debenture to Cantone in the aggregate principal amount of $240,000, including an original issue discount of $40,000, for net proceeds of $200,000. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $200,000 is convertible into common shares at a conversion price of $0.17 per share, and matures on January 14, 2021.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,176,470 common shares at an exercise price of $0.17 per share, expiring on January 16, 2021.

 

In accordance with the terms of the Amendment entered into on July 7, 2020, the conversion price of the convertible debenture was amended to $0.037 per share and the warrant exercise price was amended to $0.03 per share.

   
 (iv)

On September 23, 2020, the Company issued a convertible debenture to Cantone Asset Management in the aggregate principal amount of $300,000, including an original issue discount of $50,000, for net proceeds of $247,500. The convertible debenture bears interest at 7% per annum and the gross proceeds less the OID, of $250,000 is convertible into common shares at a conversion price of $0.055 per share until September 23, 2021 and thereafter at $0.08 per share. The convertible debenture matures on December 23, 2021.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 4,545,454 common shares at an exercise price of $0.055 per share, expiring on December 23, 2021.

 

F-25

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

 

(e)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)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.

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 1,558,730 shares was amended to $0.055 per share.

 

 (ii)

On December 4, 2019, the Company concluded its second closing as contemplated by the term sheet entered into with PCF per (i) above and issued a convertible debenture in the aggregate principal amount of $432,000, including an OID of $72,000 for net proceeds of $318,600 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $360,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on December 4, 2023.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 2,117,520 common shares and a brokers warrant exercisable for 169,200 common shares, at an exercise price of $0.17 per share, expiring on December 4, 2023.

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 2,117,520 shares was amended to $0.055 per share. 

 

 (iii)

On March 30, 2020, the Company concluded its third closing as contemplated by the term sheet entered into with PCF per (i) above and issued a convertible debenture in the aggregate principal amount of $471,000, including an OID of $78,500 for net proceeds of $347,363 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $392,500 is convertible into common shares at a conversion price of $0.21 per share, and matures on March 30, 2024.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 4,906,250 common shares and a brokers warrant exercisable for 392,500 common shares, at an exercise price of $0.17 per share, expiring on March 30, 2024.

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 4,906,250 shares was amended to $0.055 per share.

 

F-26

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

 

(g)Power Up Lending Group LTD.

  

 (i)

On May 7, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $64,300, including an original issue discount of $6,300, for net proceeds of $55,000 after certain expenses. The note bears interest at 12% per annum and matures on May 7, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

Between November 11, 2020 and November 13, 2020, Power Up converted the aggregate principal sum of $64,300, including interest thereon of $3,480 into 2,256,939 common shares at an average conversion price of $0.03 per share, thereby extinguishing the note.

 

 (ii)On June 4, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $69,900, including an original issue discount of $6,900, for net proceeds of $60,000 after certain expenses. The note bears interest at 12% per annum and matures on June 4, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.
   
 (iii)

On June 19, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $82,500, including an original issue discount of $7,500, for net proceeds of $72,000 after certain expenses. The note bears interest at 12% per annum and matures on June 19, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

 (iv)On November 6, 2020, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $140,800, including an original issue discount of $12,800, for net proceeds of $125,000 after certain expenses. The note bears interest at 12% per annum and matures on November 6, 2021. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

F-27

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

  

10.CONVERTIBLE DEBENTURES (continued)

   

 (h)EMA Financial, LLC

  

 (i)On July 22, 2020, the Company issued a convertible promissory note to EMA for the aggregate principal sum of $150,000, including an original issue discount of $15,000, for net proceeds of $130,500 after certain expenses. The note bears interest at 8% per annum and matures on April 22, 2021. The note may be prepaid subject to a prepayment penalty of 130%. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to the lower of; (i) the lowest trading price of the Company’s common stock during the 15 trading days including and immediately preceding the issue date; and (ii) 70% of the two lowest average trading prices during the fifteen prior trading days including and immediately preceding the conversion date.

 

 (i)Morison Management S.A.

  

On August 26, 2020, the convertible debenture originally issued to GS Capital Partners in the aggregate principal sum of $143,750 together with accrued interest and penalty interest thereon of $49,112 was purchased and assigned to Morison Management S.A. (“Morison”). The Company cancelled the convertible debenture issued to GS and issued a replacement convertible debenture to Morison in the aggregate principal sum of $192,862 with a maturity date of August 26, 2021 and bearing interest at 10% per annum. The note is convertible into common shares at a conversion price equal to 50% of the lowest trading price on the preceding 20 days prior to the notice of conversion.

 

On October 1, 2020, in terms of a debt conversion agreement entered into the $192,862 convertible debenture was converted into 10,285,991 shares of common stock at a conversion price of $0.019 per share.

 

 (j)Bellridge Capital LP.

  

On September 1, 2020, in terms of an assignment agreement entered into between Bay Private Equity, Inc (“Bay”) and Bellridge Capital LP (“Bellridge”), Bay assigned a convertible debenture dated September 17, 2018, with a principal balance outstanding of $3,661,874 and interest accrued thereon of $525,203 to Bellridge. On September 23, 2020, the company entered into an amending agreement with Bellridge, whereby the maturity date of the loan was extended to March 31, 2021 and the conversion price was amended to $0.055 per share, simultaneously Bellridge entered into a debt conversion agreement with the Company converting $1,321,689 of the convertible debt into 24,030,713 shares of common stock at a conversion price of $0.055 per share.

 

 (k)Stirling Bridge Resources

  

On November 24, 2020, the Company issued a convertible debenture to Stirling Bridge Resources in the aggregate principal amount of $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.

 

 (l)Alpha Capital Anstalt

  

On November 6, 2020, the Company issued a convertible debenture to Alpha Capital Anstalt in the aggregate principal amount of $500,000, for net proceeds of $500,000. The convertible debenture bears interest at 21% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a five year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on August 6, 2021.

 

 (l)Rijtec Enterprises Limited Pension Scheme

  

On November 11, 2020, the Company issued a convertible debenture to Rijtec Enterprises limited Pension Scheme in the aggregate principal amount of $500,000, for net proceeds of $500,000. The convertible debenture bears interest at 10% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a two year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on November 11, 2021.

 

 m)Private lender

  

On November 30, 2020, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $150,000, for net proceeds of $150,000. The convertible debenture bears interest at 10% per annum and is convertible into common units at a conversion price of $0.0562 per unit. Each unit consisting of a common share and a two year share purchase warrant, exercisable for a common share at an exercise price of $0.0562 per share. The convertible debenture matures on November 30, 2021.

 

F-28

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

11.FEDERAL RELIEF LOANS

   

Small Business Administration Disaster Relief loan

 

On June 16, 2020, Petroteq Oil Recovery, LLC, received a Small Business Economic Injury Disaster loan amounting to $150,000, bearing interest at 3.75% per annum and repayable in monthly installments of $731 commencing twelve months after inception with the balance of interest and principal repayable on June 16, 2050. The loan is secured by all tangible and intangible assets of the Company. The proceeds are to be used for working capital purposes to alleviate economic injury caused by the COVID-19 pandemic.

 

On May 1, 2020 and July 27, 2020, Petroteq CA, Inc, received a Small Business Economic Injury Disaster loan amounting to $10,000 and $150,000, respectively, bearing interest at 3.75% per annum and repayable in monthly installments of $731 commencing twelve months after inception with the balance of interest and principal repayable on July 27, 2050. The loan is secured by all tangible and intangible assets of the Company. The proceeds are to be used for working capital purposes to alleviate economic injury caused by the COVID-19 pandemic.

 

Payroll Protection Plan loans (“PPP Loans”)

 

On April 11, 2020, Petroteq Oil Recovery, LLC, received a PPP Loan amounting to $133,600, bearing interest at 1.00% per annum and repayable in a single payment after 2 years. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for.

 

On April 23, 2020, Petroteq CA, Inc, received a PPP Loan amounting to $133,890, bearing interest at 0.98% per annum and repayable in monthly installments commencing on October 23, 2020. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for.

 

12.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 November 30, 2020, with a total change in fair value of $156,998 charged to the consolidated statement of loss and comprehensive loss. The value of the derivative liability will be re-assessed at each financial reporting date, with any movement thereon recorded in the statement of loss and comprehensive loss in the period in which it is incurred.

  

The following assumptions were used in the Black-Scholes valuation model:

 

  Three months ended
November 30,
2020
 
Conversion price  CAD$0.0375 to CAD$0.06 
Risk free interest rate  0.16 to 0.21%
Expected life of derivative liability  6 to 12 months 
Expected volatility of underlying stock  158.85 to 171.20%
Expected dividend rate  0%

 

F-29

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

12.DERIVATIVE LIABILITY (continued)

 

The movement in derivative liability is as follows:

 

  November 30,
2020
  August 31,
2020
 
       
Opening balance $841,385  $- 
Derivative financial liability arising from convertible notes  120,535   653,984 
Fair value adjustment to derivative liability  (156,998)  187,401 
   804,922  $841,385 

 

13.RECLAMATION AND RESTORATION PROVISIONS

 

  Oil       
  Extraction  Site    
  Facility  Restoration  Total 
Balance at August 31, 2019 $498,484   2,472,013   2,970,497 
Accretion expense  -   -   - 
Balance at August 31, 2020  498,484   2,472,013   2,970,497 
Accretion expense  -   -   - 
Balance at November 30, 2020 $498,484  $2,472,013  $2,970,497 

 

(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.

  

 (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.

  

F-30

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

14.COMMON SHARES

  

Authorizedunlimited common shares without par value
Issued and Outstanding382,894,504 common shares as at November 30, 2020.

 

 (a)Settlement of liabilities

 

Between September 21, 2020 and November 23, 2020, the Company issued 60,023,777 common shares to certain lenders to settle $2,769,000 of trade debt, including a loss realized thereon of $134,490.

 

 (b)Common share subscriptions

 

On November 13, 2020, the Company issued 7,416,666 common shares to various investors for net proceeds of $410,000.

 

 (c)Convertible debt conversions

 

Between October 1, 2020 and November 13, 2020, in terms of conversion notices received, the Company issued 38,735,555 common shares for convertible debt in the aggregate sum of $1,701,256, realizing a loss thereon of $80,661.

 

 (d)Warrants exercised

 

On September 17, 2020, warrants were exercised for 2,268,169 shares at an exercise price of $0.03 per share for gross proceeds of $68,045.

  

15.STOCK OPTIONS

  

During the three months ended November 30, 2020 the share-based compensation expense of $199,632 (2019 - $18,157) relates to the vesting of options granted during the current and prior fiscal year.

   

Stock option transactions under the stock option plan were: 

 

  Three months ended
November 30,  2020
  Year ended
August 31, 2020
 
  Number of Options  Weighted
average
exercise
price
  Number of options  Weighted
average
exercise
price
 
Balance, beginning of period  9,470,000  CAD$    0.63   9,808,333  CAD$      1.20 
Options granted  -       5,220,000   0.10 
Options forfeited  -       (5,558,333) CAD$1.14 
Balance, end of period  9,470,000  CAD$0.63   9,470,000  CAD$0.63 

  

Stock options outstanding and exercisable as at November 30, 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      4.9 years   4.8 years 

  

F-31

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

16.SHARE PURCHASE WARRANTS

 

Share purchase warrants outstanding as at November 30, 2020 are:

 

Expiry Date Exercise Price  Warrants
Outstanding
 
December 7, 2020 US$0.67   185,185 
December 7, 2020 US$1.50   3,188,735 
December 17, 2020 US$0.26   952,380 
January 10, 2021 US$1.50   1,437,557 
January 11, 2021 US$1.50   307,692 
January 14, 2021 US$0.20   1,176,470 
January 16, 2021 US$0.14   357,142 
Mar 29, 2021 US$0.465   1,481,481 
April 8, 2021 CAD$4.73   57,756 
May 22, 2021 US$0.91   6,000,000 
May 22, 2021 US$0.30   1,133,333 
May 22, 2021 US$1.50   65,759 
July 5, 2021 US$0.25   52,631 
July 5, 2021 US$0.28   131,578 
July 5, 2021 US$0.35   3,917,771 
July 21, 2021 US$0.0412   2,666,666 
August 7, 2021 US$0.0412   3,033,980 
August 16, 2021 CAD$0.29   120,000 
August 16, 2021 US$0.18   4,210,785 
September 20, 2021 US$0.23   1,111,111 
September 30, 2021 US$0.23   2,777,777 
December 30, 2021 US$0.055   4,545,454 
November 26, 2023 US$0.17   1,683,230 
December 4, 2023 US$0.17   2,286,720 
March 30, 2024 US$0.08   392,500 
March 30, 2024 US$0.15   4,906,250 
January 25, 2025 US$0.14   151,785 
       47,379,348 
Weighted average remaining contractual life      1.10 years 
Weighted average exercise price USD$0.38     

  

Warrants exercisable over 3,240,651 common shares at exercise prices ranging from $0.18 and $1.50 per share expired during the three months ended November 30, 2020.

  

On September 17, 2020, warrants for 2,268,169 shares were exercised at an exercise price of $0.03 per share for gross proceeds of $68,045.

 

On September 30, 2020, the Company issued warrant exercisable for 4,545,454 shares to a convertible debt note holder. The fair value of the warrants granted was estimated at $101,475 using the relative fair value method. In addition, warrants valued on debt extinguishment agreements entered into with certain convertible note holders, whereby the exercise price and in certain cases, the expiry date of the warrant were amended, amounted to $149,354. 

 

The fair value of share purchase warrants was estimated using the Black-Scholes valuation model utilizing the following weighted average assumptions:

  

  Three months ended November 30,
2020
 
Share price CAD$0.075 
Exercise price US$0.055 
Expected share price volatility  147.2%
Risk-free interest rate  0.21%
Expected term  1.27 

 

F-32

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

17.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 three months ended November 30, 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:

 

  Three months ended November 30,
2020
  Three months ended November 30,
2019
 
       
Share purchase options  9,470,000   9,808,333 
Share purchase warrants  47,379,348   45,347,469 
Convertible securities  97,608,979   16,909,330 
   154,458,327   72,065,132 

 

18.RELATED PARTY TRANSACTIONS

 

Related party transactions not otherwise separately disclosed in these consolidated financial statements are: 

 

(a)Key management personnel and director compensation

 

At November 30, 2020, $785,087 was due to members of key management and directors for unpaid salaries, expenses and directors’ fees (August 31, 2020 – $547,660).

 

 (b)Transactions with directors and officers

 

During the three months ended November 30, 2020, no common shares were granted as compensation to key management and directors of the Company.

 

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 November 30, 2020 was $125,000.

 

 (c)Due to/from director

 

As of November 30, 2020 and August 31, 2020, the Company owed the chairman of the Board and the various companies controlled by him $527,336 and $395,647 respectively, in funds advanced to the Company for working capital purposes, in addition, the Company owes the chairman of the board $220,000, and $160,000 respectively, in unpaid salaries.

 

As of November 30, 2020 and August 31, 2020, the Company owed a director $125,000 and $125,000, respectively in working capital advances to the Company. The advance is interest free with no fixed terms of repayment.

 

19.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses consists of the following:

 

  Three months ended November 30,
2020
  Three months ended November 30,
2019
 
       
Investor relations and public relations $87,936  $23,946 
Professional fees  399,129   1,026,765 
Salaries and wages  87,936   200,474 
Share-based compensation  199,632   178,157 
Travel and promotional expenses  83,464   571,492 
Other  186,760   381,248 
  $1,044,857  $2,382,082 

F-33

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

20.FINANCING COSTS, NET

 

Financing costs, net, consists of the following:

 

  Three months ended
November 30,
2020
  Three months ended November 30,
2019
 
       
Interest expense on borrowings $287,639  $143,308 
Amortization of debt discount  333,748   353,095 
   -   12,891 
  $621,387  $509,294 

 

21.OTHER EXPENSE (INCOME), NET

 

Other expense (income), net, consists of the following:

 

  Three months ended November 30,
2020
  Three months ended November 30,
2019
 
       
Loss (gain) on settlement of liabilities $134,490  $(394,409)
Loss on conversion of convertible debt  80,661   - 
Loss on debt extinguishment  330,256   - 
Interest income  (948)  (22,271)
  $544,459  $(416,680)

 

22.SEGMENT INFORMATION

 

The Company operated in two reportable segments within the USA during the three months ended November 30, 2020 and 2019, oil extraction and processing operations and mining operations.

  

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 three months ended November 30, 2020 and 2019. Other information about reportable segments are: 

 

  November 30, 2020 
  Oil  Mining    
(in ’000s of dollars) Extraction  Operations  Consolidated 
Additions to non-current assets $4,173  $-  $4,173 
Reportable segment assets  44,897   33,240   78,137 
Reportable segment liabilities $18,171  $100  $18,271 

 

  November 30, 2019 
  Oil  Mining    
(in ’000s of dollars) Extraction  Operations  Consolidated 
Additions to non-current assets $1,893  $-  $1,893 
Reportable segment assets  40,918   34,794   75,712 
Reportable segment liabilities $13,113  $3,970  $17,083 

 

F-34

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

22.SEGMENT INFORMATION (continued)

 

  November 30, 2020 
(in ’000s of dollars) Oil
Extraction
  Mining operations  Consolidated 
Revenue from license fees $2,000  $         -  $2,000 
Revenues from hydrocarbon sales -  -  - 
Other production and maintenance costs  (345)  -   (345)
Gross Profit  1,655   -   1,655 
Operating Expenses            
Depreciation, depletion and amortization  12   -   12 
Selling, general and administrative expenses  1,045   -   1,045 
Investor relations  88   -   88 
Professional fees  399   -   399 
Salaries and wages  88   -   88 
Share-based compensation  200   -   200 
Travel and promotional expenses  83   -   83 
Other  187   -   187 
             
Financing costs  621   -   621 
Other expense (income)  544   -   544 
Gain on settlement of liabilities  134   -   134 
Loss on conversion of convertible debt  80   -   80 
Loss on debt extinguishment  330   -   330 
Derivative liability movements  (157)  -   (157)
             
Net loss $410  $-  $410 

 

  November 30, 2019 
(in ’000s of dollars) Oil Extraction  Mining operations  Consolidated 
          
Revenues from hydrocarbon sales $101  $            -  $101 
Other production and maintenance costs  678   -   678 
Advance royalty payments  -   92   92 
Gross Loss  (577)  (92)  (669)
Expenses            
Depreciation, depletion and amortization  74   -   74 
Selling, general and administrative expenses  2,379   3   2,382 
Investor relations  24   -   24 
Professional fees  1,026   1   1,027 
Salaries and wages  200   -   200 
Share-based compensation  178   -   178 
Travel and promotional expenses  571   -   571 
Other  380   2   382 
             
Financing costs, net  509   -   509 
Other income  (416)  -   (416)
Gain on settlement of liabilities  (394)  -   (394)
Interest income  (22)  -   (22)
Derivative liability movements  (35)  -   (35)
Net loss $3,088  $95  $3,183 

 

F-35

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

23.COMMITMENTS

 

The company has commitments under equipment financing arrangements entered into in prior periods, see Note 7, above.

 

Maturity of Leases

 

The amount of future minimum lease payments under finance leases is as follows:

 

  November 30,
2020
  August 31,
2020
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year $193,680  $193,680 
1 to 2 years  32,280   80,700 
2 to 3 years  -   - 
   225,960   274,380 

 

The amount of future minimum lease payments under operating leases is as follows:

 

  November 30, 2020  August 31,
2020
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year $61,528  $61,070 
1 to 2 years  63,375   62,903 
2 to 3 years  65,276   64,790 
3 to 4 years  50,050   66,734 
   240,229   255,497 

 

24.SUBSEQUENT EVENTS

 

Events after the reporting date not otherwise separately disclosed in these consolidated financial statements are:

 

 (a)Common shares

 

On December 9, 2020, a warrant holder exercised warrants over a total of 1,176,470 shares for gross proceeds of $35,294 at an exercise price of $0.03 per share.

 

 (b)Debt settlements

 

On December 7, 2020, the Company entered into lability settlement agreements with a vendor, whereby 1,538,461 shares were issued in settlement of liabilities amounting to $60,000. 

 

 (c)Debt conversions

 

Between December 15, 2020 and January 13, 2021, convertible note holders converted $128,080 of convertible debt into 4,423,123 common shares at an average conversion price of $0.029 per share.

On January 7, 2021, Cantone Asset Management converted $200,000 of convertible debt maturing on January 14, 2021 into 5,405,405 shares of common stock at a conversion price of $0.037 per share.

 

 (d)Financing Activity

 

On January 12, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $86,350, including an original issue discount of $7,850, for net proceeds of $75,000 after certain expenses. The note bears interest at 12% per annum and matures on January 12, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest trading bid price during the previous fifteen prior trading days.

 

F-36

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2020 and 2019

Expressed in US dollars

 

25.SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS

 

Supplemental unaudited information regarding the Company’s oil and gas activities is presented in this note.

 

The Company has not commenced commercial operations, therefore the disclosure of the results of operations of hydrocarbon activities is limited to advance royalties paid. All expenditure incurred to date is capitalized as part of the development cost of the company’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) Three months ended November 30, 2020  Three months ended November 30,
2019
 
       
Advanced royalty payments $-  $60 
Mineral lease acquisition costs – Unproven properties  -   560 
Construction of oil extraction plant  4,173   1,893 
  $4,173  $2,513 

 

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) Three months ended November 30, 2020  Three months ended November 30, 2019 
       
Advanced royalty payments applied or expired $-  $92 
Production and maintenance costs  345   677 
  $345  $769 

 

Proven reserves 

 

The Company does not have any proven hydrocarbon reserves as of November 30, 2020 and August 31, 2020.

 

F-37

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Form 10-K/A filed with the Securities and Exchange Commission on December 28, 2020. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Overview and recent developments

 

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 (the “Extraction Technology”). Our wholly-owned subsidiary, Petroteq Energy CA, Inc., a California corporation, conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company (“POSR”), and TMC Capital, LLC, a Utah limited liability company (“TMC”).

 

Through PCA, and its two subsidiaries POSR and TMC, we are in the business of oil sands mining operations on the TMC Mineral Lease in Uintah County, Utah, where we process mined oil sands ores using our 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.

 

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.

 

On July 2, 2020, TomCo Energy PLC (“TomCo”) announced that, following the establishment by TomCo of Greenfield Energy LLC (“Greenfield”) as a joint venture company with Valkor LLC (“Valkor”) on June 17, 2020, Greenfield would take over the management and operations of our Asphalt Ridge processing facility. Valkor remains party to a non-exclusive technology licensing agreement with Petroteq dated July 2, 2019, as amended, in respect of the plant.

 

Since assuming responsibility for the management of the Asphalt Ridge facility in July 2020, Greenfield has made certain upgrades to the plant to improve its capacity and reliability, and is undertaking tests to assess its potential commerciality. All critical equipment has been received and installed at the plant. In addition, buildings have been erected over the nitrogen system and the vapor recovery system, and wind-walls have been erected at the mixing tank area and decanter deck, to better allow for operations during winter months. Pressure testing of piping systems is currently underway as part of plant pre-commissioning activities in preparation for plant start-up, which is expected to occur in the near term.

 

The Company expects that Greenfield will also be in a position to restart mining and ore handling operations in the near term. All site personnel completed mandatory Mine Safety and Health Administration (MSHA) training in late November 2020, and rental equipment needed for ore crushing and handling has arrived on site. Valkor has completed its evaluation of recently received mining quotations and has selected a mining contractor. The mining contract has been executed and the mining contractor has already begun mobilizing equipment to site. After initial work to prepare the site, it is expected that mining of oil sands ore will begin in late January 2021.

 

Even once we resume production, we anticipate that our revenue will be limited until we are at full production. 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.

 

1

 

 

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. 

 

Results of Operations for the three months ended November 30, 2020 and the three months ended November 30, 2019

 

Net Revenue, Cost of Sales and Gross Loss

 

During the current period, the Company entered into a Technology License Agreement with Valkor whereby Valkor paid $2,000,000 for a non-exclusive license to the Oil Sands Recovery Technology, the Company has no obligation to delivery any technology or know-how on an ongoing basis to Valkor, therefore the revenue is recognizable immediately.

 

There has been no sale of hydrocarbon products during the three months ended November 30, 2020 and minimal sales of $100,532 during the three months ended November 30, 2019.

 

The cost of sales during the three months ended November 30, 2020 consists of fees charged to Petroteq by Valkor for plant operations recovery expenses. The cost of sales for the three months ended November 30, 2019 consists of; i) advance royalty payments which expire at the end of the calendar year two years after the payment has been made; and ii) certain production related expenses consisting of labor and maintenance expenditure.

 

Expenses

 

Expenses were $2,065,228 and $2,513,469 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $448,241 or 17.8%. The decrease in expenses is primarily due to:

 

Depletion, depreciation and amortization

 

Depletion, depreciation and amortization was $11,523 and $74,320 for the three months ended November 30, 2020 and 20190, respectively, a decrease of $62,797 or 84.5%. The decrease is primarily due to the accelerated amortization of leasehold improvements in the prior period which were incurred at premises previously occupied by the Company.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses was $1,044,857 and $2,382,082 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $1,337,225 or 56.1%. Included in selling, general and administrative expenses are the following major expenses:

 

 a.Professional fees was $399,129 and $1,026,765 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $627,636. The decrease is primarily related to other professional fees incurred on plant set up in the prior year prior to conclusion of the agreement with Valkor. Valkor have expertise in oil field operations which is expected to result in significant expense savings to the Company.

 

 b.Travel and promotional fees was $83,464 and $571,492 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $488,028, the decrease is due to an overall reduction in travel expenditure to the site, impacted by the COVID-19 pandemic and lower promotion expenditure incurred as Valkor readies the site for production.
   
 c.Salaries and wages was $87,936 and $200,474 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $112,538. The decrease is primarily due to Valkor assuming operational responsibility for the plant all salaries and wages are currently administrative in nature.
   
 d.General and administrative expenses was $234,696 and $381,248 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $146,552. The overall decrease is due to Valkor assuming operational responsibility of the production site.

 

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Financing costs

 

Financing costs was $621,387 and $509,294 for the three months ended November 30, 2020 and 2019, respectively, an increase of $112,093. Financing costs includes; (i) interest expense of $287,639 and $143,308 for the three months ended November 30, 2020 and 2019, respectively, an increase of $144,331, is attributable to the increase in debt and convertible debt outstanding over the prior fiscal period; (ii) amortization of debt discount of $333,748 and $353,095 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $19,347, primarily due to the timing of the debt agreements entered into and the subsequent amortization of the discount over the life of the debt.

 

Other expense (income), net

 

Other expense was $544,459 and other income was $(416,680) for the three months ended November 30, 2020 and 2019, respectively, an increase of $961,139. In the current fiscal period we realized a loss on settlement of labilities and on convertible debt which had conversion terms at a discount to market prices. In Addition we renegotiated the maturity dates of several convertible notes as well as the conversion price of these instruments, resulting in a loss on debt extinguishment of $330,256

 

Mark to market of derivative liability

 

The mark to market of the derivative liability was $(156,998) and $(35,547) for the three months ended November 30, 2020 and 2019, respectively. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The charge during the current period represents the mark-to-market of the derivative liability outstanding as of November 30, 2020, which depends on our current share price, risk free interest rates and the volatility of our common share price.

 

Net loss before income taxes and Net loss and Comprehensive loss

 

Net loss before income taxes was $410,514 and $3,182,671 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $2,772,157 or 87.1%. The decrease is primarily due to the $2,000,000 technology license fee and an overall reduction in operating expenses as Valkor prepares itself for production at the plant.

 

Liquidity and Capital Resources

 

As at November 30 2020, we had cash of approximately $98,510. We also had a working capital deficiency of approximately $11,285,842, due primarily to accounts payable, short term debt, convertible debentures and accrued interest thereon which remain outstanding as of November 30, 2020. During the three months ended November 30, 2020, we raised $1,547,545 in private placements warrant exercises and convertible debt issuances, to meet operational requirements and plant improvement expenditure.

 

Subsequent to November 30, 2020, we raised a further $75,000 in the form of a convertible debt and promissory note.

 

We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy and do not have sufficient cash on hand to implement our business strategy. Our financial statements have been prepared assuming we are a going concern. To date, we have generated minimal revenue from operations and have financed our operations primarily through sales of our securities, and we expect to continue to seek to obtain our required capital in a similar manner. During the quarter ended November 30, 2020, our primary sources of funding were from our sales of convertible notes through which we received gross proceeds of approximately $1,069,500. There can be no assurance that we will be able to generate sufficient revenue to cover our operating costs and general and administrative expense or continue to raise funds through the sale of debt. If we raise funds by securities convertible into common shares, the ownership interest of our existing shareholders will be diluted.

 

Capital Expenditures

 

We continue to incur capital expenditure on the oil extraction plant as we refine our processes and improve on our efficiencies. These expenses are at times unpredictable but we do not anticipate spending more than $2,000,000 on the existing plant.

 

We also intend to construct two new oil extraction facilities and expand the existing facility. Each facility is estimated to cost $10,000,000.

 

3

 

Other Commitments

 

The Company has various commitments including those disclosed under Commitments in note 23 to the financial statements, in addition the Company has commitments to repay convertible notes, promissory notes and debt as fully disclosed in notes 9,10 and 11 to the financial statements.

 

Recently Issued Accounting Pronouncements

 

The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.

 

Off-balance sheet arrangements

 

We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

 

Inflation

 

The effect of inflation on our revenue and operating results was not significant.

 

Climate Change

 

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing or revenue generated from operations, the Company intends to retain additional individuals to remedy the ineffective controls.

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended November 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

4

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our Annual Report Form 10-K/A as filed with the Securities and Exchange Commission (the “SEC”) on December 28, 2020. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report Form 10-K/A as filed with the SEC on December 28, 2020.

  

We have suffered operating losses since inception and we may not be able to achieve profitability.

 

At November 30, 2020, August 31, 2020 and August 31, 2019, we had an accumulated deficit of $(91,074,863) $(90,664,349) and $(81,467,953), respectively and we expect to continue to incur increasing expenses in the foreseeable future as we develop our oil extraction business. We incurred a net loss of ($410,514) for the three months ended November 30, 2020 and $(12,379,067) and $(15,787,886) as of 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 sustain or develop the revenue levels necessary to attain profitability.

 

Our ability to be profitable will depend in part upon our ability to manage our operating costs and to generate revenue from our extraction operations. Operating costs could be impacted by inflationary pressures on labor, volatile pricing for natural gas used as an energy source in transportation of fuel and in oil sands processes, and planned and unplanned maintenance.

 

The failure to comply with the terms of our secured notes could result in a default under the terms of the note and, if uncured, it could potentially result in action against the pledged assets.

 

As of November 30, 2020, we had issued and outstanding notes in the principal amount of $576,329 and convertible notes in the principal amount of $10,076,200 to certain private investors which mature between November 30 2020 and January 7, 2022, and are secured by a pledge of all of our assets.  If we fail to comply with the terms of the notes, the note holder could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against our assets would likely have a serious disruptive effect on our operations.

 

There is substantial doubt about our ability to continue as a going concern.

 

At November 30,2020, we had not yet achieved profitable operations, had accumulated losses of ($91,074,863) since our inception and a working capital deficit of ($11,285,842), and expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a going concern. We have incurred net losses for the past four years. 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.

 

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 shareholders and could cause our share price to fall.

 

We currently have share purchase warrants to purchase 47,379,348 common shares outstanding at exercise prices ranging from US$0.03 to CAD$4.73 and options to purchase 9,470,000 common shares with a weighted average exercise price of CDN $0.63 and notes convertible into 97,608,979 common shares based on conversion prices ranging from $0.03 to $0.18 per share. The issuance of the common shares underlying the share purchase warrants, options and convertible notes will have a dilutive effect on the percentage ownership held by holders of our common shares.

 

5

 

 

Our ability to use our net operating losses and certain other tax attributes may be limited.

 

As of August 31, 2020, we had accumulated net operating losses (NOLs), of approximately CDN $91 million. Varying jurisdictional tax codes have restrictions on the use of NOLs, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, R&D credits and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership. Based upon an analysis of our equity ownership, we do not believe that we have experienced such ownership changes and therefore our annual utilization of our NOLs is not limited. However, should we experience additional ownership changes, our NOL carry forwards may be limited.

 

 limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

The incurrence of additional indebtedness could require acceptance of covenants that, if violated, could further restrict our operations or lead to acceleration of the indebtedness that would necessitate winding up or liquidation of our company. In addition to the foregoing, our ability to obtain additional debt financing may be limited and there can be no assurance that we will be able to obtain any additional financing on terms that are acceptable, or at all.

 

We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs.  We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On January 12, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $86,350, including an original issue discount of $7,850, for net proceeds of $75,000 after certain expenses. The note bears interest at 12% per annum and matures on January 12, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest trading bid price during the previous fifteen prior trading days.

 

All sales to U.S. persons in each of the transactions set forth above were issued relying on Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The recipients of the securities in each of these transactions relying on Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the share certificates issued in these transactions. All recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to information about us. The sales of these securities were made without any general solicitation or advertising. 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

6

 

 

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

 

7

 

 

Item 5. Other Information.

 

None

  

Item 6. Exhibits

 

31.1 Certification of Aleksandr Blyumkin, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) (1)
31.2 Certification of Mark Korb, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) (1)
32.1 Certification of Aleksandr Blyumkin, Chief Executive Officer, pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 (1)
32.2 Certification Mark Korb, Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 (1)
101. INS XBRL Instance Document (1)
101. SCH XBRL Taxonomy Extension Schema Document (1)
101. CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
101. DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
101. LAB XBRL Taxonomy Extension Label Linkbase Document (1)
101. PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)

 

(1)Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.

 

Petroteq Energy Inc.

 

/s/ Aleksandr Blyumkin 
Aleksandr Blyumkin 
Chief Executive Officer and President 
(Principal Executive Officer) 
  
/s/ Mark Korb 
Mark Korb 
Chief Financial Officer 
(Principal Financial and Accounting Officer) 
  
Date: January 19, 2021 

 

 

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