UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
or
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip code) |
(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.
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).
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 ☐ |
| 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 18, 2022 was
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, and 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,” “Petroteq,” the “Company,” “we,” “us” and “our” refer to Petroteq Energy Inc. and, if the context requires, its consolidated subsidiaries.
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 Operations | 1 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risks | 11 |
| Item 4. | Controls and Procedures | 12 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 13 |
| Item 1A. | Risk Factors | 13 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
| Item 3. | Defaults Upon Senior Securities | 15 |
| Item 4. | Mine Safety Disclosures | 15 |
| Item 5. | Other Information | 16 |
| Item 6. | Exhibits | 16 |
i
Item 1.
PETROTEQ ENERGY INC.
TABLE OF CONTENTS
November 30, 2021
F-1
PETROTEQ ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
As at November 30, 2021 and August 31, 2021
Expressed in US dollars
| Notes | November 30, 2021 | August 31, 2021 | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | $ | ||||||||||
| Trade and other receivables | ||||||||||||
| Ore inventory | ||||||||||||
| Other inventory | ||||||||||||
| Notes receivable – related party | 4 | |||||||||||
| Notes receivable | 4 | |||||||||||
| Prepaid expenses and other current assets | 1,5 | |||||||||||
| Total Current Assets | ||||||||||||
| Non-Current assets | ||||||||||||
| Mineral leases | 6 | |||||||||||
| Property, plant and equipment | 7 | |||||||||||
| Right of use asset | 8 | |||||||||||
| Intangible assets | 9 | |||||||||||
| Total Non-Current Assets | ||||||||||||
| Total Assets | $ | $ | ||||||||||
| LIABILITIES | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable | 10 | $ | $ | |||||||||
| Accrued expenses | 10 | |||||||||||
| Ore Sale advances | ||||||||||||
| Promissory notes payable | 11 | |||||||||||
| Current portion of convertible debentures, net of discount of $ | 12 | |||||||||||
| Current portion of Federal relief loans | 13 | |||||||||||
| Finance lease liabilities | 8 | |||||||||||
| Current portion of operating lease liabilities | 8 | |||||||||||
| Related party payables | 20 | |||||||||||
| Derivative liability | 14 | |||||||||||
| Total Current Liabilities | ||||||||||||
| Non-Current liabilities | ||||||||||||
| Convertible debentures, net of discount of $ | 12 | |||||||||||
| Federal relief loans | 13 | |||||||||||
| Operating lease liabilities | 8 | |||||||||||
| Reclamation and restoration provision | 15 | |||||||||||
| Total Non-Current Liabilities | ||||||||||||
| Total Liabilities | ||||||||||||
| Commitments and contingencies | 24 | |||||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||
| Share capital | 16,17,18 | |||||||||||
| Deficit | ( | ) | ( | ) | ||||||||
| Total Shareholders’ Equity | ||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||||||
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, 2021 and 2020
Expressed in US dollars
| Notes | Three months ended November 30, 2021 | Three months ended November 30, 2020 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Revenue from Licensing fees | $ | $ | ||||||||||
| Production and maintenance costs | ( | ) | ( | ) | ||||||||
| Gross (Loss) Profit | ( | ) | ||||||||||
| Expenses | ||||||||||||
| Depreciation, depletion and amortization | 7 | |||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Financing costs | 20 | |||||||||||
| Mark to market of derivative liability | 14 | ( | ) | ( | ) | |||||||
| Other expense (income), net | 21 | |||||||||||
| Total Expenses, net | ||||||||||||
| Net loss before income taxes | ||||||||||||
| Income tax expense | ||||||||||||
| Net loss and Comprehensive loss | $ | $ | ||||||||||
| Weighted Average Number of Shares Outstanding | 19 | |||||||||||
| Basic and Diluted Loss per Share | $ | $ | ||||||||||
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 30,2021 and 2020
(Unaudited)
Expressed in US dollars
| Number of Shares |
Share | Shareholders’ | ||||||||||||||
| Outstanding | Capital | Deficit | Equity | |||||||||||||
| Balance at August 31, 2021 | $ | $ | ( |
) | $ | |||||||||||
| Conversion of convertible debt | ||||||||||||||||
| Beneficial conversion feature on debt extinguishment | - | |||||||||||||||
| Restitution for conversion of convertible debt not in compliance with TSX Venture regulations | - | - | ||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||
| Balance at November 30, 2021 | $ | $ | ( |
) | $ | |||||||||||
| Number of Shares | Share | Shareholders’ | ||||||||||||||
| Outstanding | Capital | Deficit | Equity | |||||||||||||
| Balance at August 31, 2020 | $ | $ | ( | ) | $ | |||||||||||
| Conversion of convertible debt | ||||||||||||||||
| Settlement of liabilities | ||||||||||||||||
| Common shares subscriptions | ||||||||||||||||
| Warrants exercised | ||||||||||||||||
| Share-based compensation | - | |||||||||||||||
| Fair value of convertible debt warrants issued | - | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at November 30, 2020 | $ | $ | ( | ) | $ | |||||||||||
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, 2021 and 2020
Expressed in US dollars
| Three months ended November 30, 2021 |
Three months ended November 30, 2020 |
|||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flow used for operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash (used in) generated by operating activities | ||||||||
| Depreciation, depletion and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Loss on debt extinguishment | ||||||||
| Forgiveness of federal relief loans | ( |
) | ||||||
| Loss on conversion of debt | ||||||||
| Loss (Gain) on settlement of liabilities | ||||||||
| Share-based compensation | ||||||||
| Mark to market of derivative liabilities | ( |
) | ( |
) | ||||
| Other | ( |
) | ( |
) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable | ( |
) | ||||||
| Accounts receivable | ( |
) | ||||||
| Accrued expenses | ||||||||
| Prepaid expenses and deposits | ( |
) | ||||||
| Inventory | ||||||||
| Net cash (used in) generated by operating activities | ( |
) | ||||||
| Cash flows used for investing activities: | ||||||||
| Purchase and construction of property and equipment | ( |
) | ||||||
| Proceeds from notes receivable | ||||||||
| Net cash provided by (used in) investing activities | ( |
) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayments to related parties | ( |
) | ( |
) | ||||
| Proceeds on private equity placements | ||||||||
| Repayment of long-term debt | ( |
) | ||||||
| Proceeds from promissory notes | ||||||||
| Repayment of promissory notes | ( |
) | ||||||
| Restitution for conversion of convertible debt not in compliance with TSX Venture regulations | ||||||||
| Repayment of finance lease liability | ( |
) | ( |
) | ||||
| Proceeds from warrants exercised | ||||||||
| Proceeds from convertible debt | ||||||||
| Repayments of convertible debt | ( |
) | ||||||
| Net cash provided by financing activities | ||||||||
| (Decrease) increase in cash | ( |
) | ||||||
| Cash, beginning of the period | ||||||||
| Cash, end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
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, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION |
Petroteq Energy Inc. (the “Company” or “Petroteq”) is a holding company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and gas industry. Our primary focus is on the development and implementation of our proprietary oil sands mining and processing technology to recover oil from surface mined bitumen deposits. Our wholly-owned subsidiary, Petroteq Energy CA, Inc., a California corporation (“PCA”), conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company (“POR”), and TMC Capital, LLC, a Utah limited liability company (“TMC Capital”).
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.
Through PCA, our wholly owned subsidiary, and PCA’s two subsidiaries POR and TMC Capital, the Company is in the business of exploring for, extracting and producing oil and hydrocarbon products from oil sands deposits and sediments located in the Asphalt Ridge Are of Uintah County, Utah, utilizing our proprietary extraction technology (the “Petroteq Clean Oil Recovery Technology” or “Extraction Technology”). Our primary oil sands extraction and processing operations are conducted at our Asphalt Ridge processing facility (herein the “Asphalt Ridge Plant” or “Plant”), which is owned by POR.
Petroteq owns the intellectual property rights to the Petroteq Clean Oil Recovery Technology which is used at our Asphalt Ridge Plant to extract and produce crude oil from oil sands utilizing a closed-loop solvent based extraction system.
Mineral Rights
In
June 2018,
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 $900,000 has been paid to date.
Between March 14, 2019 and November 30, 2021, the Company made cash deposits of $1,907,000 (acting through TMC Capital), 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 in Garfield and Wayne Counties, Utah, 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.
F-6
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Mineral Rights (continued)
In a letter agreement dated April 17, 2020 between the transferor of the oil and gas leases and TMC Capital, as transferee, the parties, due to uncertainty as to whether all of the 10 leases for which the Company had initially paid deposits would be considered active by BLM and included in new Combined Hydrocarbon Leases (CHLs) under the Combined Hydrocarbon Act of 1981 - agreed to adjust the purchase price as follows: (a) should all 10 of the leases be available and included in CHL’s, the Company will pay the additional $1,093,000 for the rights under the leases; (b) if only a portion of the leases ranging from 4 to 9 of the leases are available and included in CHL’s, the final purchase price of the leases will be between $1.5 million and $2.5 million; and (c) notwithstanding the above, if after a period of 7 years from April 17, 2020, at least six of the leases are not determined to be active and are not included in CHLs the Company shall be entitled to demand a refund of $1.2 million or instruct the Seller to acquire other leases in the same area for up to $1.2 million.
TMC Capital, POR and Valkor have entered into an Agreement Governing Reciprocal Assignment of mineral Leases dated October 15, 2021 (the “Exchange Agreement”), under which (a) TMC and POR agreed to assign to Valkor all of their respective rights and interests in the TMC Mineral Lease (and the Short-Term Mining Lease dated August 10, 2020 held by Valkor) and in the Temple Mountain SITLA Leases, and (b) Valkor agreed to assign to TMC Capital all of its rights and interests (including the record lease title and operating rights) in the Asphalt Ridge NW Leases consisting of three Utah state mineral leases located in the Asphalt Ridge Northwest area of Uintah County, Utah. Under this agreement, once the exchange of SITLA Leases is approved by SITLA, Petroteq (acting through TMC Capital) will hold three new SITLA Leases encompassing approximately 3,458.22 acres in an area called “Asphalt Ridge Northwest”.
In
addition, under other agreements entered into between or among TMC Capital, POR and Valkor in October 2021, (a) Valkor granted to TMC
Capital the right to participate, up to a
Following completion of the exchange of mineral leases contemplated by the Exchange Agreement, TMC Capital, POR and Valkor, Petroteq (through POR) will continue to own the Asphalt Ridge Plant in the Temple Mountain area of Asphalt Ridge. It is anticipated that Petroteq (acting through TMC Capital) and Valkor will, during the ensuing year, determine whether a new 5,000 BPD oil sands processing plant utilizing Petroteq’s Clean Oil Recovery Technology should be constructed and operated on lands covered by the Asphalt Ridge NW Leases.
The assignment of the Temple Mountain SITLA leases by Petroteq’s subsidiaries to Valkor and Valkor’s assignment of the Asphalt Ridge NW Leases to TMC Capital are subject to approval by SITLA before the transactions are considered final.
Management and Operations
Under the terms of a Management and Operations Services Agreement (“Management Agreement”) entered into between the Company and Valkor dated November 22, 2020, effective May 1, 2020, Valkor will provide overall management and operations services at the oil sands recovery plant based in Utah. The agreement is for a period of one year and is renewable automatically for an additional four years unless either party provides the other party with written notice of non-renewal at least 90 days prior to the expiration of the original or renewal term. The company will reimburse Valkor for all costs and expenses incurred, as defined in the agreement, plus a Personnel Management Fee of 12% of the personnel costs and expenses and an operations Management Fee of 5% of the operations costs and expenses.
F-7
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Management and Operations (continued)
Valkor will provide the Company with quarterly production reports, including the following; (i) the quantity of oil bearing ore and sediments mined, extracted and produced from each of the leases and delivered to the plant; (ii) the quantity of oil products produced, saved and sold at the plant; (iii) the quantity of consumables purchased and used or consumed in operations and (iv) the gross proceeds derived from the sale of the oil products including applicable taxes and transportation costs incurred by Valkor.
Valkor will also provide quarterly operating reports detailing; (i) revenue received by Valkor from oil products sold; (ii) a detailed accounting of all costs and expenses; (iii) the operations Management fee and the Personnel Management fee earned during the quarter.
Valkor will also prepare quarterly Royalty Reports to be delivered to a third party to calculate royalties payable to the holders of royalty interests under various mineral rights leases.
On
November 24, 2020,
The Company has agreed to utilize Valkor as the exclusive provider of engineering, planning and construction for all oil sands plants built by Petroteq or Greenfield under this agreement, provided the fees charged by Valkor are reasonable and competitive.
The agreement between the Company and Valkor will remain in effect from November 14, 2020 until the expiration of the last valid patent claim, unless terminated by default or bankruptcy.
Suspension of trading on the TSX Venture Exchange
On August 6, 2021, the Ontario Securities Commission issued a cease trade order (the “CTO”) against the Company, as a result of its failure to file its quarterly report on Form 10-Q (and related certifications) for the period ended May 31, 2021 (the “2021 Q3 Filings”) on or before July 30, 2021, as required under Canadian National Instrument 51-102 – Continuous Disclosure Obligations.
The Company filed the 2021 Q3 Filings on SEDAR and with the Canadian Securities Administration on SEDAR, and with the United States Securities and Exchange Commission (the “SEC”) on EDGAR on August 19, 2021. As a result, the Ontario securities Commission revoked the CTO effective August 24,2021. In addition, on August 19, 2021, the Company’s amended financial statements and management’s discussion and analysis for the eight quarters from May 31, 2019 to February 28, 2021 were filed on SEDAR and with the SEC, as set forth in the Company’s amended annual reports on Form 10-K/A for the financial years ended August 31, 2019 and August 31, 2020, and in the Company’s amended quarterly reports on Form 10-Q/A for the periods ended May 31, 2019, November 30, 2019, February 29, 2020, May 31, 2020, November 30, 2020 and February 28, 2021. The Company’s amended financial statements and management discussion and analysis for the period ended February 28, 2019 were filed on SEDAR on August 23, 2021, and with the SEC on August 25, 2021, as exhibits to the Company’s current report on Form 8-K.
As a result of the issuance of the CTO on August 6, 2021, the TSX Venture Exchange (the “TSXV”) suspended trading of the Company’s Common Shares. As part of the TSXV’s review of the Company’s reinstatement application, the TSXV reviewed the Company’s financial statements for the three and nine months ended May 31, 2021 and raised concerns that certain transactions may not have been submitted to the TSXV for approval, as required under the TSXV’s policies. As a result of an internal investigation the Company identified several transactions (the “Transactions”) which although disclosed in the Company’s public filings on SEDAR and EDGAR, had not been submitted for approval by the TSXV.
F-8
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Suspension of trading on the TSX Venture Exchange (continued)
Based
on the Company’s initial review of the Transactions, it is estimated that a total of
The Transactions, described below, were all disclosed in the Company’s financial statements (all dollar amounts are expressed in U.S. currency unless otherwise indicated):
| ● | On May 7, 2020, the Company issued to an arm’s length lender a $ |
| ● | On June 4, 2020, the Company issued to an arm’s length lender a $ |
| ● | On June 19, 2020, the Company issued to an arm’s length lender a $ |
| ● | On July 22, 2020, the Company issued to an arm’s length lender a $ |
| ● | On August 26, 2020, a convertible debenture (which was originally approved by the TSXV), bearing interest at |
F-9
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Suspension of trading on the TSX Venture Exchange (continued)
| ● | On November 6, 2020, the Company issued to an arm’s length lender a $ |
| ● |
| ● | On January 12, 2021, the Company issued an arm’s length lender a $ |
| ● | On February 25, 2021, the Company issued an arm’s length lender a $ |
| ● | On March 22, 2021, the Company and an arm’s length lender entered
into an amending agreement extending the maturity date of a convertible debenture originally issued on September 17, 2018 from March 31,
2021 to October 31, 2021. The original issuance of the convertible debenture, including a prior amendment to the debenture,
was approved by the TSXV. The current unpaid purchase price of the debenture ($ |
| ● | On April 21, 2021, the Company issued an arm’s length lender a $ |
| ● | On May 20, 2021, the Company issued an arm’s length lender a $ |
| ● | On October 30, 2018, an arm’s length lender loaned $ |
F-10
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Suspension of trading on the TSX Venture Exchange (continued)
| ● | On June 24, 2021, a non-convertible secured debenture, bearing interest at |
| ● | On June 24, 2021, a non-convertible secured debenture, bearing interest at |
| ● | On July 2, 2021, the Company issued to an arm’s length lender a $ |
The net proceeds of the Transactions that resulted in new funds to the Company were used for expansion of the Company’s extraction plant and working capital.
The Company continues to work with the TSXV on a reinstatement of trading and will update the market as things progress. However, the TSXV has indicated that these matters and their review of the Transactions may take some time to resolve and that a reinstatement to trading is not expected in the near term.
Unsolicited takeover bid by Viston United swiss AG
On October 27, 2021, 2869889 Ontario Inc., an indirect, wholly-owned subsidiary of Viston United Swiss AG commenced a conditional, unsolicited takeover bid (the “Offer”) to acquire all of the issued and outstanding Common Shares of the Company. Viston filed a Tender Offer Statement with the SEC relating to the Offer on Schedule TO under section 14(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on October 25, 2021, and an amendment to the Tender Offer Statement on October 27, 2021. As set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 under section 14(d)(4) of the Exchange Act filed with the SEC on November 9, 2021, shareholders were advised that the Board of Directors was then not yet in a position to make a recommendation to shareholders to accept or reject the Offer, and that the Company had retained Haywood Securities Inc. as financial advisor to the Company and the Board of Directors.
As set forth in the amendment to the Solicitation/Recommendation Statement on Schedule 14D-9, as filed with the SEC on January 4, 2022, on December 29, 2021, after thorough consideration of all aspects of the Viston Offer, the advice provided by Haywood and consulting with its other advisors, the Board unanimously determined to recommend that Shareholders accept the Viston Offer and tender their Common Shares, for reasons that include the following:
Results of Strategic Review
Based on the results of the strategic review presented by Haywood, the Board believes that the immediate cash value offered to Shareholders under the Viston Offer is more favorable to Shareholders than the potential value that might otherwise result from other alternatives reasonably available to Petroteq, including remaining as a stand-alone entity and pursuing Petroteq’s existing strategy, in each case taking into consideration the potential rewards, risks, timelines and uncertainties associated with those other alternatives.
F-11
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 1. | GENERAL INFORMATION (continued) |
Unsolicited takeover bid by Viston United swiss AG (continued)
Premium Over Market Price
The consideration of C$0.74 in cash per Common Share (the “Cash Consideration”) under the Viston Offer represents a premium of approximately 279% over the closing price of the Common Shares on the TSXV on August 6, 2021, being the last trading day that the Common Shares were traded on the TSXV.
Unlikelihood of Superior Proposal
The Board, with the assistance of Haywood, has taken active steps to assess and solicit strategic alternatives and has attempted to secure a proposal that would be superior to the Viston Offer. However, no superior alternative to the Viston Offer has emerged and Petroteq does not expect a superior alternative to emerge in the near term.
Common Shares Remain Relatively Illiquid
Trading in the Common Shares on the TSXV remains suspended, and there is no certainty as to when the TSXV will resume trading in the Common Shares.
Certainty of Outcome
The Viston
Offer provides
Possible Decline in Market Price
If the Viston Offer is not successful and another alternative offer with superior financial terms does not emerge, the market price of the Common Shares in the public markets may decline significantly.
Reduces Inherent Business Risk
Based on the strategic review conducted with Haywood, the Viston Offer appears to provide Shareholders with the value inherent in Petroteq’s portfolio of projects, assuming they are fully realized, without the long-term risks associated with the development and execution of those projects. Given the relatively early stage of Petroteq’s projects, it will be several years before the projects in Petroteq’s portfolio reach commercial production, if at all.
Significant Growth Funding Required
Petroteq’s projects have significant funding requirements to prove and scale its technology. Petroteq currently has limited cash to fund its necessary capital projects and near-term debt maturities, which will be a further drain on cash. Equity financing sufficient to repay debt and fund the progress of Petroteq’s business plan, if available, may be significantly dilutive to Shareholders.
Ability to Respond to Superior Proposals
Petroteq has not entered into a support or similar agreement with Viston in respect to the Viston Offer. The Board has reserved the ability to seek out or respond to proposals that may deliver greater value to Shareholders than the Viston Offer. There is nothing to prevent a third party from proposing or making a superior proposal or preclude Petroteq from changing its recommendation.
F-12
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 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, 2021 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, 2022.
| (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 unaudited condensed consolidated financial statements are as follows:
| Entity | % of Ownership | Jurisdiction | ||||||
| Petroteq Energy Inc. | ||||||||
| Petroteq Energy CA, Inc. | ||||||||
| Petroteq Oil Recovery, LLC | ||||||||
| TMC Capital, LLC | ||||||||
| Petrobloq, LLC | ||||||||
F-13
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (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.
| (e) | Revenue recognition |
The Company recognizes revenue in terms of ASC 606 – Revenue from Contracts with Customers (ASC 606).
Revenue transactions are assessed using a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The five steps are as follows:
| i. | identify the contract with a customer; |
| ii. | identify the performance obligations in the contract; |
| iii. | determine the transaction price; |
| iv. | allocate the transaction price to performance obligations in the contract; and |
| v. | recognize revenue as the performance obligation is satisfied. |
F-14
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (e) | Revenue recognition (continued) |
Revenue from hydrocarbon sales
Revenue from hydrocarbon sales include the sale of hydrocarbon products and are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. The Company’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, upon delivery based on volumes at contractually based rates with payment typically received within 30 days after invoice date. Taxes assessed by governmental authorities on hydrocarbon sales, if any, are not included in such revenues, but are presented separately in the consolidated comprehensive statements of loss and comprehensive loss.
Transaction price allocated to remaining performance obligations
The Company does not anticipate entering into long-term supply contracts, rather it expects all contracts to be short-term in nature with a contract term of one year or less. The Company intends applying the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, the Company will apply the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if there is any variable consideration to be allocated entirely to a wholly unsatisfied performance obligation. The Company anticipates that with respect to the contracts it will enter into, each unit of product will typically represent a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Contract balances
The Company does not anticipate that it will receive cash relating to future performance obligations. However if such cash is received, the revenue will be deferred and recognized when all revenue recognition criteria are met.
Disaggregation of revenue
The Company has limited revenues to date. Disaggregation of revenue disclosures can be found in Note 23.
Customers
The Company anticipates that it will have a limited number of customers which will make up the bulk of its revenues due to the nature of the oil and gas industry.
| (f) | General and administrative expenses |
General and administrative expenses will be presented net of any working interest owners, if any, of the oil and gas properties owned or leased by the Company.
F-15
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| (g) | Share-based payments |
The Company may grant stock options to directors, officers, employees and others providing similar services. The fair value of these stock options is measured at grant date using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. Share-based compensation expense is recognized on a straight-line basis over the period during which the options vest, with a corresponding increase in equity.
The Company may also grant equity instruments to consultants and other parties in exchange for goods and services. Such instruments are measured at the fair value of the goods and services received on the date they are received and are recorded as share-based compensation expense with a corresponding increase in equity. If the fair value of the goods and services received are not reliably determinable, their fair value is measured by reference to the fair value of the equity instruments granted.
| (h) | Income taxes |
The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes”. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the
consolidated financial statements from such a position are measured based on the largest benefit that has a greater than
| (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-16
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
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-17
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
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
| (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-18
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
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.
Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
| 3. | GOING CONCERN |
The Company has incurred losses for
several years and, at November 30, 2021, has an accumulated deficit of $
| 4. | NOTES RECEIVABLE |
The Company’s notes receivables consist of:
| Principal due | Principal due | |||||||||||||
| Maturity Date | Interest Rate | November 30, 2021 | August 31, 2021 | |||||||||||
| Notes Receivable – Related Party | ||||||||||||||
| Manhatten Enterprises | % | $ | $ | |||||||||||
| Interest accrued | ||||||||||||||
| $ | $ | |||||||||||||
| Notes Receivable | ||||||||||||||
| Deweast Limited | $ | $ | ||||||||||||
| Unhide Inc | ||||||||||||||
| $ | $ | |||||||||||||
F-19
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 4. | NOTES RECEIVABLE (continued) |
Manhatten Enterprises – Related Party
The Company advanced Manhatten Enterprises
the sum of $
Manhatten Enterprises is controlled by a director of the Company, Dr. Vladimir Podlipsky.
Deweast Limited
On August 31, 2021, in terms of an
unsecured loan agreement entered into with Deweast Limited (“Deweast”) the Company advanced the sum of $
The principal sum of $
Unhide, Inc.
On August 31, 2021, in terms of an
unsecured loan agreement entered into with Unhide Inc. (“Unhide”) the Company advanced the sum of $
The principal sum of $
| 5. | PREPAYMENTS AND OTHER CURRENT ASSETS |
In terms of a letter agreement dated April 17, 2020 between the transferor of the oil and gas leases and TMC, as transferee, due to uncertainty as to whether all of the 10 leases which the Company had initially paid deposits for are available, an adjustment to the purchase price has been agreed upon as follows: (i) should all 10 of the leases be available, the Company will pay the additional $1,093,000 for the rights under the leases; (ii) if only a portion of the leases ranging from 4 to 9 of the leases are available, the Company will adjust the final purchase price of the leases to between $1.5 million and $2.5 million; and (iii) notwithstanding the above, if after a period of 7 years from April 17, 2020, if at least six of the leases are not available to the Company, then the Company may demand a refund of $1.2 million or instruct the Seller to acquire other leases in the same area for up to $1.2 million.
In addition, included in prepayments
and other current assets is an amount of $
The assignment of the SITLA leases are subject to approval by SITLA before the agreement comes into effect.
As of November 30, 2021, the Company
has paid retainers to lawyers of $
F-20
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 6. | MINERAL LEASES |
| TMC | SITLA | BLM | ||||||||||||||
| Mineral | Mineral | Mineral | ||||||||||||||
| Lease | Lease | Lease | Total | |||||||||||||
| Cost | ||||||||||||||||
| August 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| August 31, 2021 | ||||||||||||||||
| Additions | ||||||||||||||||
| November 30, 2021 | $ | $ | $ | $ | ||||||||||||
| Accumulated Amortization | ||||||||||||||||
| August 31, 2020, 2021 and November 30, 2021 | $ | $ | $ | $ | ||||||||||||
| Carrying Amounts | ||||||||||||||||
| August 31, 2020 | $ | $ | $ | $ | ||||||||||||
| August 31, 2021 | $ | $ | $ | $ | ||||||||||||
| November 30, 2021 | $ | $ | $ | $ | ||||||||||||
During October 2021, the Company, acting through its indirect wholly owned subsidiaries TMC and POR, and Valkor, have entered into the Exchange Agreement governing reciprocal assignment of mineral leases dated as of October 15, 2021 under which TMC and POR agreed to assign all of their respective interests in the TMC mineral leases and the short term mining lease dated August 10, 2020 as amended on July 1, 2021, sub-leased from Valkor and two mineral leases entered into between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and POR, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease and Valkor agreed to assign to TMC Capital LLC, the record lease title and all of its rights and interest under three SITLA Utah state oil sands leases located in an area referred to as “Asphalt Ridge Northwest” in Uintah County Utah.
In addition, the Corporation, acting
through TMC, and Valkor entered into an Agreement and Assignment of Participation Rights in Mineral Leases and Properties, dated as of
October 15, 2021, in which Valkor agreed to grant to TMC a right to participate in any oil sands development operations conducted
by Valkor in the future on or within the privately owned Temple Mountain Lease; and the Company, acting through TMC and Valkor entered
into an Agreement Governing Assignment of Operating Rights Under Utah State Mineral Leases, dated as of October 15, 2021, in
under which TMC agreed to assign to Valkor all of the operating rights under the Asphalt Ridge North West Leases at depths and intervals
located 500 feet or more below the surface, with TMC reserving the right to participate in (a) any exploratory or production operation
conducted by Valkor at the deeper depths or intervals (below 500 feet from the surface) at and with up to a
The assignment of the SITLA leases are subject to approval by SITLA before the agreement comes into effect.
F-21
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 6. | 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.
The salient terms of the lease were 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-22
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 6. | MINERAL LEASES (continued) |
| (a) | TMC Mineral Lease (continued) |
| 5. | TMC will pay Valkor the sum of $ |
| 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 ( |
| 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 ( |
| 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-23
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 6. | 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 SITLA, as lessor, and POR, 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 $
Production royalties payable are
| (c) | BLM Mineral Lease |
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 $
| 7. | PROPERTY, PLANT AND EQUIPMENT |
| Oil Extraction Plant | Other Property and Equipment | Total | ||||||||||
| Cost | ||||||||||||
| August 31, 2020 | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| August 31, 2021 | ||||||||||||
| Additions | ||||||||||||
| November 30, 2021 | $ | $ | $ | |||||||||
| Accumulated Amortization | ||||||||||||
| August 31, 2020 | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| August 31, 2021 | ||||||||||||
| Additions | ||||||||||||
| November 30, 2021 | $ | $ | $ | |||||||||
| Carrying Amount | ||||||||||||
| August 31, 2020 | $ | $ | $ | |||||||||
| August 31, 2021 | $ | $ | $ | |||||||||
| November 30, 2021 | $ | $ | $ | |||||||||
F-24
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 7. | PROPERTY, PLANT AND EQUIPMENT (continued) |
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
Included in the cost of construction
is capitalized borrowing costs as at November 30, 2021 and August 31, 2021 of $
| 8. | 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
The initial value of the right-of-use
asset was $
During April 2015, the Company entered
into two equipment loan agreements in the aggregate amount of $
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 $
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
F-25
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 8. | LEASES (continued) |
Right of use assets
Right of use assets included in the consolidated Balance Sheet are as follows:
| November 30, 2021 | August 31, 2021 | |||||||
| Non-current assets | ||||||||
| Right of use assets – operating leases, net of amortization | $ | $ | ||||||
| Right of use assets – finance leases, net of depreciation – included in property, plant and equipment | ||||||||
Lease costs consist of the following:
| Three months ended November 30, 2021 | Three months ended November 30, 2020 | |||||||
| Finance lease cost: | $ | $ | ||||||
| Depreciation of right of use assets | ||||||||
| Interest expense on lease liabilities | ||||||||
| Operating lease expense | ||||||||
| Total lease cost | $ | $ | ||||||
Other lease information:
| Three months ended November 30, 2021 | Three months ended November 30, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from finance leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from operating leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | $ | ( | ) | $ | ( | ) | ||
| Weighted average remaining lease term – finance leases | ||||||||
| Weighted average remaining lease term – operating leases | ||||||||
| Weighted average discount rate – finance leases | % | % | ||||||
| Weighted average discount rate – operating leases | % | % | ||||||
F-26
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 8. | LEASES (continued) |
Maturity of Leases
The amount of future minimum lease payments under finance leases is as follows:
| November 30, 2021 | August 31, 2021 | |||||||
| Undiscounted minimum future lease payments | ||||||||
| Total instalments due: | ||||||||
| Within 1 year | $ | $ | ||||||
| Imputed interest | ( | ) | ( | ) | ||||
| Total finance lease liability | $ | $ | ||||||
| Disclosed as: | ||||||||
| Current portion | $ | $ | ||||||
The amount of future minimum lease payments under operating leases is as follows:
| November 30, 2021 | August 31, 2021 | |||||||
| Undiscounted minimum future lease payments | ||||||||
| Total instalments due: | ||||||||
| Within 1 year | $ | $ | ||||||
| 1 to 2 years | ||||||||
| 2 to 3 years | ||||||||
| Imputed interest | ( | ) | ( | ) | ||||
| Total operating lease liability | $ | $ | ||||||
| Disclosed as: | ||||||||
| Current portion | $ | $ | ||||||
| Non-current portion | ||||||||
| $ | $ | |||||||
F-27
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 9. | INTANGIBLE ASSETS |
| Oil Extraction | ||||
| Technologies | ||||
| Cost | ||||
| August 31, 2020 | $ | |||
| Additions | ||||
| August 31, 2021 | ||||
| Additions | ||||
| November 30, 2021 | $ | |||
| Accumulated Amortization | ||||
| August 31, 2020 | $ | |||
| Additions | ||||
| August 31, 2021 | ||||
| Additions | ||||
| November 30, 2021 | $ | |||
| Carrying Amounts | ||||
| August 31, 2020 | $ | |||
| August 31, 2021 | $ | |||
| November 30, 2021 | $ | |||
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.
No amortization of the technology was recorded during the three months ended November 30, 2021 and the year ended august 31, 2021.
| 10. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable as at November 30, 2021 and August 31, 2021 consist primarily of amounts outstanding for construction and expansion of the oil extraction plant and other operating expenses that are due on demand.
Accrued expenses as at November 30, 2021 and August 31, 2021 consist primarily of other operating expenses and interest accruals on promissory notes (Note 11) and convertible debentures (Note 12).
F-28
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 11. | PROMISSORY NOTES PAYABLE |
| Principal due | Principal due | |||||||||||||
| Lender | Maturity Date | Interest Rate | November 30, 2021 | August 31, 2021 | ||||||||||
| Promissory notes | ||||||||||||||
| Private lender | % | $ | $ | |||||||||||
On April 29,2021 the Company issued
a promissory note to a private lender in the aggregate sum of $
| 12. | CONVERTIBLE DEBENTURES |
| Principal due | Principal due | |||||||||||||
| Lender | Maturity Date | Interest Rate | November 30, 2021 | August 31, 2021 | ||||||||||
| Calvary Fund I LP | % | $ | $ | |||||||||||
| % | ||||||||||||||
| Cantone Asset Management LLC | % | |||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| Private lender | % | |||||||||||||
| Petroleum Capital Funding LP. | % | |||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| Power Up Lending Group LTD | % | |||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| EMA Financial, LLC | % | |||||||||||||
| Morison Management S.A | % | |||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| % | ||||||||||||||
| Bellridge Capital LP. | % | |||||||||||||
| % | ||||||||||||||
| Private lender | % | |||||||||||||
| Unamortized debt discount | ( | ) | ( | ) | ||||||||||
| Total loans | $ | $ | ||||||||||||
The maturity date of the convertible debentures are as follows:
| November 30,
2021 | August 31, 2021 | |||||||
| Principal classified as repayable within one year | $ | $ | ||||||
| Principal classified as repayable later than one year | ||||||||
| $ | $ | |||||||
F-29
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (a) | Cavalry Fund I LP |
| (i) | On August 19, 2019, the Company issued a convertible debenture to Calvary
Fund LLP (“Cavalry”) for an aggregate principal amount of $
In terms of an Amended and Restated Amending Agreement between the
parties 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 $
On April 13, 2021, in terms of a conversion notice received, the Company issued a total of
The aggregate principal amount of $ | ||
| (ii) | On August 7, 2020, the Company issued a convertible debenture to Calvary for an aggregate principal amount of $
On May 26, 2021, in terms of a conversion notice received, the Company issued a total of
The aggregate principal amount of $ |
F-30
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (b) | Cantone Asset Management, LLC |
| (i) | On September 17, 2019, the Company issued a convertible debenture to
Cantone Asset Management, LLC (“Cantone”) in the aggregate principal amount of $
In conjunction with the convertible debenture, the Company issued a warrant exercisable for
In accordance with the terms of an Amending Agreement entered into on July 7, 2020, the conversion price was amended to $
On March 17, 2021, The company entered into an amending agreement whereby the conversion price of the convertible note was amended to $
On March 17, 2021, the Company entered into a debt conversion agreement whereby outstanding interest of $
On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $132,007, consisting of outstanding interest of $92,007 accrued until June 1, 2021 on various convertible notes and a principal amount outstanding of $40,000 on one convertible note, was converted into 949,688 shares of common stock. | ||
| (ii) | On September 23, 2020, the Company issued a convertible debenture to Cantone Asset Management in the aggregate principal amount of $
In conjunction with the convertible debenture, the Company issued a warrant exercisable for
On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $132,007, consisting of outstanding interest of $92,007 accrued until June 1, 2021 on various convertible notes and a principal amount outstanding of $40,000 on one convertible note, was converted into 949,688 shares of common stock. The debt conversion agreement included $
On August 30, 2021, in terms of a conversion notice received, the Company issued a total of | ||
| (iii) | On July 1, 2021, in terms of a subscription agreement entered into
with Cantone Asset Management, LLC, the Company issued a convertible debenture in the aggregate principal amount of $ |
F-31
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (c) | Private lender |
On
October 29, 2019, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $
In conjunction with the convertible
debenture, the Company issued a warrant exercisable for
The
aggregate principal amount of $
| (d) | 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
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 $
| (i) | On November 26, 2019, further to a term sheet entered into with PCF,
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 June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $ | |
| (ii) | On December 4, 2019,
In conjunction with the convertible debenture, the Company issued a warrant exercisable for
On September 22, 2020, the Company entered into an Amending Agreement,
whereby the conversion price of the convertible debenture was amended to $
On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $ |
F-32
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (d) | Petroleum Capital Funding LP (continued) |
| (iii) | On March 30, 2020,
In conjunction with the convertible debenture, the Company issued a warrant exercisable for
On September 22, 2020, the Company entered into an Amending Agreement,
whereby the conversion price of the convertible debenture was amended to $
On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $ | |
| (iv) | On July 21, 2021, in terms of a subscription agreement for debentures and warrants, the Company entered into a convertible debenture agreement with PCF in the aggregate principal amount of $
In conjunction with the convertible debenture, the Company issued a warrant exercisable for |
| (e) | Power Up Lending Group Ltd. |
| (i) | On April 21, 2021, the Company issued a convertible promissory note
to Power Up Lending Group Ltd. (“Power Up”) in the aggregate principal sum of $
On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management S.A. (“Morison Management”), whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $ |
F-33
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (e) | Power Up Lending Group Ltd. (continued) |
| (ii) | On May 20, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $
On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $ | |
| (iii) | On July 2, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $
On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $ |
| (f) | EMA Financial, LLC |
On July 22, 2020,
Between January 25, 2021 and March 2, 2021, EMA converted the aggregate principal sum of $161,880 into 5,200,000 common shares.
F-34
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (g) | Morison Management S.A. |
| (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, expiring on October 15, 2019.
During December 2019, the maturity date of the convertible loan was extended to October 15, 2020 and the conversion price of the note was reset to $0.18 per share. On February 25, 2021, the Company repaid principal of $16,516 and interest thereon of $33,484, totaling $50,000 and on March 9, 2021, the Company repaid a further $49,232 of principal and interest of $768, totaling 50,000.
On August 3, 2021, in terms of a debt assignment agreement entered into with SBI Investments, SBI Investments assigned an October 15, 2018 convertible debenture with an aggregate principal amount outstanding of $ | |
| (ii) | On January 16, 2020,
On August 3, 2021, in terms of a debt assignment agreement entered into with SBI Investments, SBI Investments assigned a January 26, 2020 convertible debenture with an aggregate principal amount outstanding of $ | |
| (iii) | On April 21, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $
On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $ |
F-35
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (g) | Morison Management S.A. (continued) |
| (iv) | On May 20, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $
On November 17, 2021, Power up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $ | |
| (v) | On July 2, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $
On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.
On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $103,750 will be convertible under the note at a conversion price of $0.042 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum. |
F-36
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (h) | Bellridge Capital LP. |
| (i) | 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 $
On March 22, 2021, the maturity date of the convertible note was extended to October 31, 2021, all other terms remain the same.
On November 10, 2021, in terms of a conversion notice received, Bellridge Capital LP, converted the aggregate principal sum of $ | |
| (ii) | On April 23, 2021, Bellridge took assignment of a $
Simultaneously with the debt assignment, on April 23, 2021, Bellridge converted the aggregate principal sum of $
On September 21, 2021, in terms of a conversion notice received, Bellridge Capital LP, converted the aggregate principal sum of $ |
| (i) | Private lender |
On
July 24, 2021,
In
conjunction with the convertible debenture, the Company issued a warrant exercisable for
| 13. | FEDERAL RELIEF LOANS |
Small Business Administration Disaster Relief loan
F-37
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 13. | FEDERAL RELIEF LOANS (continued) |
Payroll Protection Plan loans (“PPP Loans”)
On
April 11, 2020, POR received a PPP Loan amounting to $
On
January 20, 2021, POR received a further PPP Loan amounting to $
On
April 23, 2020, PCA received a PPP Loan amounting to $
On
May 3, 2021, the PPP loan amounting to $
On
February 3, 2021, PCA received a PPP Loan amounting to $
On November
15, 2021, The remaining PPP loan in the Company’s wholly owned subsidiary, PCA amounting to $
| 14. | DERIVATIVE LIABILITY |
| ● | 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. In terms of amending agreements entered into with Morison Management, as disclosed on note 12(g) (iii) to (v), the terms of the notes were amended and the variable conversion price was amended to fixed conversion prices. The derivative liability was no longer applicable. The derivative liability was evaluated on November 17, 2021, the date of amendment, and the net value of the derivative liability at that date was included in the calculation of the loss on debt extinguishment, based on the beneficial conversion feature of the amended notes on November 17, 2021.
F-38
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 14. | DERIVATIVE LIABILITY (continued) |
The following assumptions were used in the Black-Scholes valuation model:
| Three months ended November 30, 2021 | ||||
| Conversion price | USD$ | |||
| Risk free interest rate | % | |||
| Expected life of derivative liability | ||||
| Expected volatility of underlying stock | % | |||
| Expected dividend rate | % | |||
The movement in derivative liability is as follows:
| November 30, 2021 | August 31, 2021 | |||||||
| Opening balance | $ | $ | ||||||
| Derivative financial liability arising from convertible notes | ||||||||
| Fair value adjustment to derivative liability | ( | ) | ( | ) | ||||
| Fair value of derivative included in beneficial conversion feature | ( | ) | ||||||
| $ | $ | |||||||
| 15. | RECLAMATION AND RESTORATION PROVISIONS |
| Oil | ||||||||||||
| Extraction | Site | |||||||||||
| Facility | Restoration | Total | ||||||||||
| Balance at August 31, 2020 | $ | $ | $ | |||||||||
| Accretion expense | ||||||||||||
| Balance at August 31, 2021 | ||||||||||||
| Accretion expense | ||||||||||||
| Balance at November 30, 2021 | $ | $ | $ | |||||||||
| (a) | Oil Extraction Plant |
In accordance with the terms of the
sub-lease agreement disclosed in note 6 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 $
During the year ended August 31, 2019,
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.
F-39
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 15. | RECLAMATION AND RESTORATION PROVISIONS (continued) |
| (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
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,
| 16. | COMMON SHARES |
| Authorized | unlimited common shares without par value |
| Issued and Outstanding |
Contractual obligations to issue common shares
On July 1, 2021, the Company
entered into debt conversion agreements with 4 directors whereby
On
July 9, 2021, the Company entered into a debt conversion agreement with Alpha Capital Anstalt whereby $
During
August 2021 the company received $
On August 27, 2021, the Company entered into a debt conversion agreement with a creditor whereby an unpaid invoice for $30,000 for services rendered was convertible into 250,000 common shares at a conversion price of $0.12 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.
On August 27, 2021, the Company entered into a debt conversion agreement with a creditor whereby an unpaid invoice for $670,000 for services rendered was convertible into 5,583,333 common shares at a conversion price of $0.12 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.
On October 15, 2021, the Company entered
into a debt conversion agreement with Strategic IR whereby the aggregate amount due to Strategic of $
On October 15, 2021, the Company entered into a debt conversion agreement with Morison Management whereby the aggregate principal amount
of convertible debt of $
F-40
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 16. | COMMON SHARES (continued) |
Convertible debt conversions
Between September 2, 2021 and November
10, 2021, in terms of conversion notices received, the Company issued
Between November 3, 2021 and November 15, 2021, the Company received
$
| 17. | STOCK OPTIONS |
During the three months ended November
30, 2021 and 2020, the share-based compensation expense was $
Stock option transactions under the stock option plan were:
Three months ended November 30, 2021 | Year ended August 31, 2021 | |||||||||||||||
| Number
of Options | Weighted average exercise price | Number
of options | Weighted average exercise price | |||||||||||||
| Balance, beginning of period | CAD$ | CAD$ | | |||||||||||||
| Options granted | ||||||||||||||||
| Options forfeited | ( | ) | CAD$ | |||||||||||||
| Balance, end of period | CAD$ | | CAD$ | |||||||||||||
Stock options outstanding and exercisable as at November 30, 2021 are:
| Expiry Date | Exercise Price | Options Outstanding | Options Exercisable | |||||||||
| August 7, 2025 | CAD$ | | ||||||||||
| November 30, 2027 | CAD$ | |||||||||||
| June 5, 2028 | CAD$ | |||||||||||
| Weighted average remaining contractual life | ||||||||||||
| 18. | SHARE PURCHASE WARRANTS |
During
August 2021
A summary of the Company’s warrant activity during the period September 1, 2020 and November 30, 2021 is as follows:
| Three months ended November 30, 2021 | Year ended August 31, 2021 | |||||||||||||||
| Number of Options | Weighted average exercise price | Number of options | Weighted average exercise price | |||||||||||||
| Balance, beginning of period | $ | $ | ||||||||||||||
| Warrants granted | ||||||||||||||||
| Warrants exercised | ( | ) | ||||||||||||||
| Warrants forfeited | ( | ) | ( | ) | ||||||||||||
| Balance, end of period | $ | $ | ||||||||||||||
F-41
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 18. | SHARE PURCHASE WARRANTS (continued) |
The following table summarizes information about warrants outstanding as of November 30, 2021:
| Warrants outstanding and exercisable | ||||||||
| Exercise price | Number of shares | Weighted average remaining years | ||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
The warrants exercisable for
In terms of a subscription
agreement entered into with Cantone, a warrant exercisable for
| 19. | DILUTED LOSS PER SHARE |
The Company’s potentially dilutive instruments are convertible debentures, stock options, share purchase warrants and contractual obligations to issue securities. 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 31, 2021 and 2020, the following stock options, share purchase warrants, convertible securities and contractual obligations to issue 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, 2021 | Three months ended November 30, 2020 | |||||||
| Share purchase options | ||||||||
| Share purchase warrants | ||||||||
| Convertible securities | ||||||||
| Contractual obligations to issue securities | ||||||||
Included in the share purchase warrants are warrants exercisable for
The Company has contractual obligations to issue 13,285,869 common shares in terms of various debt conversion agreements entered into, in addition in terms of a subscription agreement, a further 6,250,000 common shares and a warrant exercisable for 6,250,000 common shares is still to be issued. Refer note 16 above.
F-42
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 20. | RELATED PARTY TRANSACTIONS |
Related party transactions are as follows:
The
Company owes outstanding directors fees of $
Related party payables represent non-interest-bearing payables that are due on demand.
The balances outstanding are as follows:
| Related Party payables | November 30, 2021 | August 31, 2021 | ||||||
| Payable to Aleksandr Blyumkin | $ | $ | ||||||
Alex Blyumkin
On
August 20, 2020, a Company controlled by Mr. Blyumkin entered into a debt settlement agreement, whereby
On
April 28, 2021, Mr. Blyumkin subscribed for
On July 1, 2021, Mr. Blyumkin
entered into a debt conversion agreement whereby $
On
July 12, 2021, the Company issued Mr. Blyumkin
On
July 27, 2021, Mr. Blyumkin subscribed for
Mr. Blyumkin has resigned as an officer and director of the Company effective August 6, 2021.
During the current quarter, Mr. Blyumkin
made restitution payments to the Company of $
The
Company owed Mr. Blyumkin $
George Stapleton
On
January 25, 2021, Mr. Stapleton was awarded
On
August 7, 2020, Mr. Stapleton was awarded options exercisable for
On November 30, 2021, Mr. George Stapleton retired as the Chief Operating Officer of the Company.
F-43
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 20. | RELATED PARTY TRANSACTIONS (continued) |
Dr. Gerald Bailey
On July 1, 2021, Dr. Bailey entered
into a debt conversion agreement whereby $
On
July 12, 2021, the Company issued Dr. Bailey
On
August 6, 2021, the Board of Directors of the Company has appointed Dr. R. Gerald Bailey, a current director and former Chief Executive
Officer of the Company, as Chairman of the Board of Directors and Interim Chief Executive Officer. The Company has not entered into a
written employment agreement with Dr. Bailey. Dr. Bailey is entitled to cash compensation of $
Robert Dennewald
During June 2021, in terms of an exchange agreement entered into with Mr. Dennewald, Mr. Dennewald exchanged three promissory notes dated August 1, 2019, October 31, 2019 and March 3, 2020 totaling $125,000 for a $125,000 convertible promissory note bearing interest at 8% per annum and maturing on February 12, 2022.
On
June 10, 2021, in terms of an Assignment and Purchase of Debt Agreement entered into between Mr. Dennewald and Equilibris Management AG
(“Equilibris”), the $
On
July 1, 2021, Mr. Dennewald entered into a debt conversion agreement whereby $
On
July 12, 2021, the Company issued Mr. Dennewald
James Fuller
On July 1, 2021, Mr. Fuller entered
into a debt conversion agreement whereby $
On
July 12, 2021, the Company issued Mr. Fuller
Dr. Vladimir Podlipsky
The Board of Directors has appointed Dr. Vladimir Podlipsky, currently the Chief Technology Officer of the Company, as a director, with effect from August 6, 2021, to fill the vacancy on the Board created by Mr. Blyumkin’s resignation.
The Company advanced Manhatten Enterprises,
a company controlled by Dr. Podlipsky, the sum of $
During
the current quarter, the Company paid $
Ron Cook
Mr. Cook was appointed as the Chief Financial Officer of the Company with effect from October 31, 2021.
Mark Korb
Mr. Korb resigned as CFO of the Company with effect from October 31, 2021.
F-44
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 21. | FINANCING COSTS, NET |
Financing costs, net, consists of the following:
| Three months ended November 30, 2021 | Three months ended November 30, 2020 | |||||||
| Interest expense | $ | $ | ||||||
| Amortization of debt discount | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| 22. | OTHER EXPENSE (INCOME), NET |
Other expense (income), net, consists of the following:
| Three months ended November 30, 2021 | Three months ended November 30, 2020 | |||||||
| Loss (gain) on settlement of liabilities | $ | $ | ||||||
| Loss (gain) on conversion of convertible debt | ||||||||
| Loss on debt extinguishment | ||||||||
| Forgiveness of federal relief loan | ( | ) | ||||||
| Interest income | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| 23. | SEGMENT INFORMATION |
The Company operated in
| November 30, 2021 | ||||||||||||
| Oil | Mining | |||||||||||
| (in ’000s of dollars) | Extraction | Operations | Consolidated | |||||||||
| Additions to non-current assets | $ | $ | $ | |||||||||
| Reportable segment assets | ||||||||||||
| Reportable segment liabilities | ( |
) | ( |
) | ||||||||
| $ | $ | $ | ||||||||||
| November 30, 2020 | ||||||||||||
| Oil | Mining | |||||||||||
| (in ’000s of dollars) | Extraction | Operations | Consolidated | |||||||||
| Additions to non-current assets | $ | $ | $ | |||||||||
| Reportable segment assets | ||||||||||||
| Reportable segment liabilities | ( |
) | ( |
) | ( |
) | ||||||
| $ | $ | $ | ||||||||||
F-45
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 23. | SEGMENT INFORMATION (continued) |
| November 30, 2021 | ||||||||||||
| (in ’000s of dollars) | Oil Extraction | Mining operations | Consolidated | |||||||||
| Revenue from license fees | $ | $ | $ | |||||||||
| Other production and maintenance costs | ( | ) | ( | ) | ||||||||
| Gross Loss | ( | ) | ( | ) | ||||||||
| Operating Expenses | ||||||||||||
| Depreciation, depletion and amortization | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Investor relations | ||||||||||||
| Professional fees | ||||||||||||
| Research and development | ||||||||||||
| Salaries and wages | ||||||||||||
| Travel and promotional expenses | ||||||||||||
| Other | ||||||||||||
| Financing costs | ||||||||||||
| Other expense (income) | ||||||||||||
| Forgiveness of federal relief loans | ( | ) | ( | ) | ||||||||
| Loss on debt extinguishment | ||||||||||||
| Interest income | ( | ) | ( | ) | ||||||||
| Derivative liability movements | ( | ) | ( | ) | ||||||||
| Net loss | $ | $ | $ | |||||||||
| November 30, 2020 | ||||||||||||
| (in ’000s of dollars) | Oil Extraction | Mining operations | Consolidated | |||||||||
| Revenue from license fees | $ | $ | $ | |||||||||
| Other production and maintenance costs | ( | ) | ( | ) | ||||||||
| Gross Profit | ||||||||||||
| Operating Expenses | ||||||||||||
| Depreciation, depletion and amortization | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Investor relations | ||||||||||||
| Professional fees | ||||||||||||
| Salaries and wages | ||||||||||||
| Share-based compensation | ||||||||||||
| Travel and promotional expenses | ||||||||||||
| Other | ||||||||||||
| Financing costs | ||||||||||||
| Other expense (income) | ||||||||||||
| Gain on settlement of liabilities | ||||||||||||
| Loss on conversion of convertible debt | ||||||||||||
| Loss on debt extinguishment | ||||||||||||
| Derivative liability movements | ( | ) | ( | ) | ||||||||
| Net loss | $ | $ | $ | |||||||||
F-46
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 24. | COMMITMENTS AND CONTINGENCIES |
The company has commitments under equipment financing arrangements entered into in prior periods, see Note 8, above.
The amount of future minimum lease payments under finance leases is as follows:
| November 30, 2021 | ||||
| Undiscounted minimum future lease payments | ||||
| Total instalments due: | ||||
| Within 1 year | $ | |||
| $ | ||||
The amount of future minimum lease payments under operating leases is as follows:
| November 30, 2021 | ||||
| Undiscounted minimum future lease payments | ||||
| Total instalments due: | ||||
| Within 1 year | $ | |||
| 1 to 2 years | ||||
| 2 to 3 years | ||||
| $ | ||||
Legal Matters
On December 27, 2018, the Company executed
and delivered: (i) a Settlement Agreement (the “Settlement Agreement”) with Redline Capital Management S.A. (“Redline”)
and Momentum Asset Partners II, LLC; (ii) a secured promissory note payable to Redline in the principal amount of $
After undertaking an in-depth analysis of the Redline Agreements in the context of the underlying transactions and events, special legal counsel to the Company has opined that the Redline Agreements are likely void and unenforceable.
The Company’s special legal counsel regards the possibility of Redline’s success in pursuing any claims against the Company or TMC under the Redline Agreements as less than reasonably possible and therefore no provision has been raised against these claims.
The Company is currently evaluating the options and remedies that are available to it to ensure that the Redline Agreements are declared as void or are rescinded and extinguished.
F-47
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 25. | SUBSEQUENT EVENTS |
Events after the reporting date not otherwise separately disclosed in these consolidated financial statements are:
Unsolicited takeover bid by Viston United swiss AG
On October 27, 2021, 2869889 Ontario Inc., an indirect, wholly-owned subsidiary of Viston United Swiss AG commenced a conditional, unsolicited takeover bid (the “Offer”) to acquire all of the issued and outstanding Common Shares of the Company. Viston filed a Tender Offer Statement with the SEC relating to the Offer on Schedule TO under section 14(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on October 25, 2021, and an amendment to the Tender Offer Statement on October 27, 2021. As set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 under section 14(d)(4) of the Exchange Act filed with the SEC on November 9, 2021, shareholders were advised that the Board of Directors was not yet in a position to make a recommendation to shareholders to accept or reject the Offer, and that the Company has retained Haywood Securities Inc. as financial advisor to the Company and the Board of Directors.
As set forth in the amendment to the Solicitation/Recommendation Statement on Schedule 14D-9, as filed with the SEC on January 4, 2022, on December 29, 2021 after thorough consideration of all aspects of the Viston Offer, the advice provided by Haywood and consulting with its other advisors, the Board unanimously determined to recommend that Shareholders accept the Viston Offer and tender their Common Shares, for reasons that include the following:
Results of Strategic Review
Based on the results of the strategic review presented by Haywood, the Board believes that the immediate cash value offered to Shareholders under the Viston Offer is more favorable to Shareholders than the potential value that might otherwise result from other alternatives reasonably available to Petroteq, including remaining as a stand-alone entity and pursuing Petroteq’s existing strategy, in each case taking into consideration the potential rewards, risks, timelines and uncertainties associated with those other alternatives.
Premium Over Market Price
The consideration of C$0.74 in cash per Common Share (the “Cash Consideration”) under the Viston Offer represents a premium of approximately 279% over the closing price of the Common Shares on the TSXV on August 6, 2021, being the last trading day that the Common Shares were traded on the TSXV.
Unlikelihood of Superior Proposal
The Board, with the assistance of Haywood, has taken active steps to assess and solicit strategic alternatives and has attempted to secure a proposal that would be superior to the Viston Offer. However, no superior alternative to the Viston Offer has emerged and Petroteq does not expect a superior alternative to emerge in the near term.
Common Shares Remain Relatively Illiquid
Trading in the Common Shares on the TSXV remains suspended, and there is no certainty as to when the TSXV will resume trading in the Common Shares.
Certainty of Outcome
The Viston
Offer provides
Possible Decline in Market Price
If the Viston Offer is not successful and another alternative offer with superior financial terms does not emerge, the market price of the Common Shares in the public markets may decline significantly.
Reduces Inherent Business Risk
Based on the strategic review conducted with Haywood, the Viston Offer appears to provide Shareholders with the value inherent in Petroteq’s portfolio of projects, assuming they are fully realized, without the long-term risks associated with the development and execution of those projects. Given the relatively early stage of Petroteq’s projects, it will be several years before the projects in Petroteq’s portfolio reach commercial production, if at all.
Significant Growth Funding Required
Petroteq’s projects have significant funding requirements to prove and scale its technology. Petroteq currently has limited cash to fund its necessary capital projects and near-term debt maturities, which will be a further drain on cash. Equity financing sufficient to repay debt and fund the progress of Petroteq’s business plan, if available, may be significantly dilutive to Shareholders.
F-48
PETROTEQ ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2021 and 2020
Expressed in US dollars
| 25. | SUBSEQUENT EVENTS (continued) |
Unsolicited takeover bid by Viston United swiss AG (continued)
Ability to Respond to Superior Proposals
Petroteq has not entered into a support or similar agreement with Viston in respect to the Viston Offer. The Board has reserved the ability to seek out or respond to proposals that may deliver greater value to Shareholders than the Viston Offer. There is nothing to prevent a third party from proposing or making a superior proposal or preclude Petroteq from changing its recommendation.
Exercise of warrants
In terms of
warrant exercise notices received from various investors, warrants exercisable for
Other than disclosed above, the Company has evaluated subsequent events through the date the financial statements were issued, other than disclosed above, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
| 26. | 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. 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 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, | Three months ended November 30, | ||||||
| Construction of oil extraction plant | $ | $ | ||||||
| $ | $ | |||||||
Results of operations
The only operating expenses incurred to date on hydrocarbon activities relate to certain maintenance and personnel costs incurred.
All costs were incurred in the US.
| (In US$ 000’s) | Three months ended | ||