NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
Petroteq
Energy Inc. (the “Company”) is an Ontario corporation which conducts oil sands mining and oil extraction operations
in the USA. It operates through its indirectly wholly owned subsidiary company, Petroteq Oil Recovery, LLC (“POSR”),
which is engaged in mining and oil extraction from tar sands, and its 44.7% owned and equity accounted company Accord GR Energy,
Inc. (“Accord”), which is engaged in using a specialized technology to extract oil from oil wells which have been
depleted using conventional extraction methods.
The
Company’s registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X
IE2, Canada and its principal operating office is located at 15165 Ventura Blvd, Suite 200, Sherman Oaks, California 91403, USA.
POSR
is engaged in a tar sands mining and oil processing operation, using a closed-loop solvent based extraction system that recovers
bitumen from surface mining, and has completed the construction of an oil processing plant in the Asphalt Ridge area of Utah.
On
July 4, 2016, the Company acquired 57.3% of the issued and outstanding common shares of Accord which, due to additional share
subscriptions in Accord by other shareholders since August 31, 2016, was reduced to 44.7% as of August 31, 2017. The investment
in Accord has therefore been recorded using the equity method for the three and nine months ended May 31, 2019 and 2018, and for
the years ended August 31, 2018 and 2017.
On
April 6, 2017, the shareholders of the Company approved the consolidation of its shares on a 30 for 1 basis, which was effected
on May 5, 2017. The number of shares issued and outstanding have been retroactively adjusted for this in these financial statements.
In
November 2017, the Company formed a wholly owned subsidiary, Petrobloq, LLC, to design and develop a blockchain-powered supply
chain management platform for the oil and gas industry.
On
June 1, 2018, the Company finalized the acquisition of a 100% interest in two leases for 1,312 acres of land within the Asphalt
Ridge, Utah area. The lease contains unproven bitumen deposits which increases our total bitumen deposits available for mining.
On
January 18, 2019, the Company paid a cash deposit of $1,800,000 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 $1,800,000 cash deposit and by the issuance of 15,000,000 shares at a deemed issue price of $0.60 per share.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
(a) unaudited condensed consolidated balance sheets as of May 31, 2019, which have been derived from the unaudited condensed consolidated
financial statements, and as of August 31, 2018, which have been derived from audited consolidated financial statements, and (b)
the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and
the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months
ended May 31, 2019 are not necessarily indicative of results that may be expected for the year ending August 31, 2019. These
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally
accepted accounting policies (“US GAAP”).
In
the opinion of management, all adjustments necessary to fairly present the results for the interim periods presented have been
made. All adjustments made are of a normal and recurring nature and no non-recurring adjustments have been made in the presentation
of these unaudited condensed consolidated financial statements.
All
amounts referred to in the notes to the consolidated financial statements are in US Dollars ($) unless stated otherwise.
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 consolidated financial statements. The entities included in these consolidated financial statements are as follows:
Entity
|
|
% of
Ownership
|
|
Jurisdiction
|
Petroteq Energy Inc.
|
|
Parent
|
|
Canada
|
Petroteq Energy CA, Inc.
|
|
100%
|
|
USA
|
Petroteq Oil Recovery, LLC (formerly known as MCW Oil Sands Recovery, LLC)
|
|
100%
|
|
USA
|
TMC Capital, LLC
|
|
100%
|
|
USA
|
Petrobloq LLC
|
|
100%
|
|
USA
|
The
Company has an investment in Accord Energy GR, Inc. (“Accord”). Accord is regarded as an Associate. An associate is
an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control
or joint control over those policies.
The
results and assets and liabilities of associates are incorporated in the unaudited condensed consolidated financial statements
using the equity method of accounting. Under the equity method, investment in associate is carried in the unaudited condensed
consolidated statement of financial position at cost as adjusted for changes in the Company’s share of the net assets of
the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest
in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that
the Company has incurred legal or constructive obligations or made payment on behalf of the associate.
The
Company has accounted for its investment in Accord on the equity basis since March 1, 2017. The Company had previously owned a
controlling interest in Accord and the results were consolidated in the Company’s financial statements. However, subsequent
cash contributions into Accord reduced the Company’s ownership to 44.7% as of March 1, 2017 and the results of Accord were
deconsolidated from that date.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
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 various 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
carrying and fair value of oil and gas properties and product and equipment inventories;
|
|
●
|
the
fair value of reporting units and the related assessment of goodwill for impairment, if applicable;
|
|
●
|
the
fair value of intangibles other than goodwill;
|
|
●
|
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.
Impact
of ASC 606 Adoption
In
January 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers (ASC 606). Since the Company
does not have any existing contracts, ASC 606 will be applied to all future contracts with customers. ASC 606 supersedes previous
revenue recognition requirements in ASC 605 and includes 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.
|
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
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 to the customer 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 accompanying unaudited condensed
consolidated comprehensive statements of 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 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 21.
Customers
Due
to the nature of the industry and the product the Company sells, the Company anticipates that it will have few customers which
will make up the bulk of its revenues.
|
(f)
|
General
and administrative expenses
|
General
and administrative expenses is presented net of any working interest owners, if any, of the oil and gas properties owned or leased
by the Company.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
The
Company may grant share purchase options to directors, officers, employees and others providing similar services. The fair value
of these share purchase 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.
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 unaudited condensed consolidated financial statements from such a position are measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company
would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in
a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax
expense.
|
(i)
|
Net
income (loss) per share
|
Basic
net income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted
net income (loss) per share is computed on the basis of the weighted average number of common shares and common share equivalents
outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
Dilution
is computed by applying the treasury stock method for share purchase options and share purchase warrants. Under this method, “in-the
money” share purchase 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.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
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.
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 and 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 proven reserves
can be assigned to such properties. The Company assesses its unproven 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.
Proven
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.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
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 earnings. Partial common operating field
sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to
capitalized costs with no gain or loss recognized.
The
company capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development
projects of oil and gas properties.
|
(m)
|
Other
Property and Equipment
|
Depreciation
and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line
method based on estimated useful lives ranging from three to ten years. Interest costs incurred and attributable to major
corporate construction projects are also capitalized.
|
(n)
|
Asset
Retirement Obligations
|
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.
|
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
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
November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808
and Topic 606.
A
collaborative arrangement, as defined by the guidance in Topic 808, is a contractual arrangement under which two or more parties
actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s
commercial success. Topic 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements,
and the accounting for those arrangements is often based on an analogy to other accounting literature or an accounting policy
election.
The
amendments in this Update provide guidance on whether certain transactions between collaborative arrangement participants should
be accounted for with revenue under Topic 606. The amendments in this Update make targeted improvements to generally accepted
accounting principles (GAAP) for collaborative arrangements as follows:
|
1.
|
Clarify
that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606
when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all
the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.
|
|
|
|
|
2.
|
Add
unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an
entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606
|
|
|
|
|
3.
|
Require
that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties,
presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement
participant is not a customer.
|
For
public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. An entity may
not adopt the amendments earlier than its adoption date of Topic 606. The amendments in this Update should be applied retrospectively
to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments
as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual
period that includes the date of the entity’s initial application of Topic 606. An entity may elect to apply the amendments
in this Update retrospectively either to all contracts or only to contracts that are not completed at the date of initial application
of Topic 606. An entity should disclose its election.
The
impact of this ASU on the consolidated financial statements is not expected to be material.
Any
new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon adoption.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
The
Company has incurred losses for several years and, at May 31, 2019, has an accumulated deficit of $75,550,551 (August 31, 2018
- $62,497,396) and working capital (deficiency) of $7,584,498 (August 31, 2018 - $374,567). These unaudited condensed consolidated
financial statements have been prepared on the basis that the Company will be able to realize its assets and discharge its liabilities
in the normal course of business. The ability of the Company to continue as a going concern is dependent on obtaining additional
financing, which it is currently in the process of obtaining. There is a risk that additional financing will not be available
on a timely basis or on terms acceptable to the Company. These unaudited condensed consolidated financial statements do not reflect
the adjustments or reclassifications that would be necessary if the Company were unable to continue operations in the normal course
of business.
|
4.
|
TRADE
AND OTHER RECEIVABLES
|
The
Company’s trade and other receivables consist of:
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
20,000
|
|
|
|
-
|
|
Goods and services tax receivable
|
|
$
|
59,013
|
|
|
$
|
59,013
|
|
Other receivables
|
|
|
70,000
|
|
|
|
345,000
|
|
|
|
$
|
149,013
|
|
|
$
|
404,013
|
|
Information
about the Company’s exposure to credit risks for trade and other receivables is included in Note 24.
The
Company’s notes receivables consist of:
|
|
|
|
|
|
|
Principal due
|
|
|
Principal due
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private debtor
|
|
March 15, 2020
|
|
|
5
|
%
|
|
|
76,000
|
|
|
|
76,000
|
|
Private debtor
|
|
August 20, 2021
|
|
|
5
|
%
|
|
|
439,000
|
|
|
|
300,000
|
|
Private debtor
|
|
August 20, 2021
|
|
|
5
|
%
|
|
|
1,195,223
|
|
|
|
-
|
|
Interest accrued
|
|
|
|
|
|
|
|
|
43,778
|
|
|
|
5,550
|
|
|
|
|
|
|
|
|
|
$
|
1,754,001
|
|
|
$
|
381,150
|
|
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
On
June 1, 2015, the Company acquired a 100% interest in TMC Capital LLC, which holds the rights to mine ore from the Asphalt Ridge
deposit. The mining and crushing of the bituminous sands has been contracted to an independent third party.
During
the nine months ended May 31, 2019, the cost of mining, hauling and crushing the ore, amounting to $270,000 (August 31, 2018:
$122,242), was recorded as the cost of the crushed ore inventory.
|
7.
|
ADVANCED
ROYALTY PAYMENTS
|
|
(a)
|
Advance
royalty payments to Asphalt Ridge, Inc.
|
During
the year ended August 31, 2015, the Company acquired TMC Capital, LLC, which has a mining and mineral lease with Asphalt Ridge,
Inc. (the TMC Mineral Lease”) (Note 8(a)). The mining and mineral lease with Asphalt Ridge, Inc. required the Company to
make minimum advance royalty payments which can be used to offset future production royalties for a maximum of two years following
the year the advance royalty payment was made.
On
October 1, 2015, the Company and Asphalt Ridge, Inc. amended the advance royalty payments in the TMC Mineral Lease. All previous
advance royalty payments required under the original agreement were deemed to be paid in full. The amended advance royalty payments
required were: $60,000 per quarter from October 1, 2015 to September 30, 2017, $100,000 per quarter from October 1, 2017 to June
30, 2020 and $150,000 per quarter thereafter.
On
March 12, 2016, a second amendment was made to the TMC Mineral Lease. The amended advanced royalty payments required are $60,000
per quarter from October 1, 2015 to February 28, 2018, $100,000 per quarter from March 1, 2018 to December 31, 2020 and $150,000
per quarter thereafter.
Effective
February 21, 2018, a third amendment was made to the TMC Mineral Lease. The amended advanced royalty payments required are $100,000
per quarter from July 1, 2018 to June 30, 2020 and $150,000 per quarter thereafter.
On
July 1, 2019, a fourth amendment was made to the TMC Mineral Lease, whereby the Company must construct or operate one or more
facilities having the capacity to produce an average daily quantity (“ADQ”) of oil or other hydrocarbon products from
oil sands mined or extracted from the lease that will achieve at least the following:
|
●
|
By
December 31, 2019, 80% of an ADQ of 1,000 barrels per day;
|
|
●
|
By
December 31, 2020, 80% of an ADQ of 2,000 barrels per day;
|
|
●
|
By
December 31, 2022, and for the remainder of the lease, 80% of an ADQ of 3,000 barrels
per day.
|
As at May 31, 2019, the Company
has paid advance royalties of $2,190,336 (August 31, 2018 - $1,890,336) to the lease holder, of which a total of $1,290,036 have
been used to pay royalties as they have come due under the terms of the TMC Mineral Lease. During the nine months ended May 31,
2019, $300,000 in advance royalties were paid and $198,786 has been used to pay royalties which had matured. The royalties expensed
have been recognized in cost of goods sold on the condensed consolidated statement of loss and comprehensive loss.
As
at May 31, 2019, the Company expects to record minimum royalties paid of $417,383 from these advance royalties either against
production royalties or for the royalties due within a one year period.
|
(b)
|
Unearned
advance royalty payments from Blackrock Petroleum, Inc.
|
During the year ended August
31, 2015, the Company entered into a sublease agreement with Blackrock Petroleum, Inc. (“Blackrock”), pursuant to which
it received $170,000 of unearned advance royalties. The sublease was for a portion of the mining and mineral lease with Asphalt
Ridge, Inc. (Note 8(a)). Blackrock is a company associated with Accord and the sublease was effectively terminated in the acquisition
by the Company of control of Accord on July 4, 2016.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
|
TMC
Mineral
Lease
|
|
|
POSR
Mineral
Lease
|
|
|
PQE
Mineral
Lease
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
11,091,388
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,091,388
|
|
Additions
|
|
|
-
|
|
|
|
19,755
|
|
|
|
-
|
|
|
|
19,755
|
|
August 31, 2018
|
|
|
11,091,388
|
|
|
|
19,755
|
|
|
|
-
|
|
|
|
11,111,143
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
10,800,000
|
|
|
|
10,800,000
|
|
May 31, 2019
|
|
$
|
11,091,388
|
|
|
$
|
19,755
|
|
|
$
|
10,800,000
|
|
|
$
|
21,911,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
August 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
May 31, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
11,091,388
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,091,388
|
|
August 31, 2018
|
|
$
|
11,091,388
|
|
|
$
|
19,755
|
|
|
$
|
-
|
|
|
$
|
11,111,143
|
|
May 31, 2019
|
|
$
|
11,091,388
|
|
|
$
|
19,755
|
|
|
$
|
10,800,000
|
|
|
$
|
21,911,143
|
|
On
June 1, 2015, the Company acquired TMC Capital, LLC (“TMC”). TMC holds a mining and mineral lease, subleased from
Asphalt Ridge, Inc., on the Asphalt Ridge property located in Uintah County, Utah (the “TMC Mineral Lease”).
The
primary term of the TMC Mineral Lease was from July 1, 2013 to July 1, 2018. During the primary term, the Company was required
to meet certain requirements for oil production. After July 1, 2018, the TMC Mineral Lease would remain in effect as long as certain
requirements for oil production continue to be met by the Company. If the Company failed to meet these requirements, the Lease
would automatically terminate 90 days after the calendar year in which the requirements were not met. In addition, the Company
was required to make certain advance royalty payments to the lessor (Note 7(a)). The TMC Mineral Lease was subject to a 10% royalty
for the first three years and varying percentages thereafter based on the price of oil. An additional 1.6% royalty is payable
to the previous lessees of the TMC Mineral Lease. The TMC Mineral Lease also required the Company to make minimum expenditures
on the property of $1,000,000 for the first three years, increasing to $2,000,000 for the next three years.
Amendments
were made to certain key terms of the TMC Mineral Lease on October 1, 2015, March 1, 2016, February 1, 2018, and November 21,
2018, which are summarized below.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
8.
|
MINERAL
LEASES (continued)
|
|
(a)
|
TMC
mineral lease (continued)
|
Among
the amendments, certain properties previously excluded were included in the lease agreement. In addition, the termination clause
was amended to read as follows:
|
(i)
|
Termination
will be automatic if TMC fails to obtain (a) by December 31, 2019, a written financial
commitment to fund a second processing facility (or a facility expansion) that will increase
the Company’s processing capacity by an additional 1,000 barrels per day (achieving
an aggregate capacity of 2,000 barrels per day), and (b) by December 31, 2021, a written
financial commitment to fund a third processing facility (or facility expansion) that
will increase the Company’s processing capacity by an additional 1,000 barrels
per day (achieving an aggregate capacity of 3,000 barrels per day). The Company expects
that the cost of constructing each of the two additional processing facilities (or any
expansion) will range between $10 million and $12 million, which the Company intends
to fund from revenue derived from operations or from third party funding sources.
|
|
(ii)
|
Cessation
of operations or inadequate production due to increased operating costs or decreased
marketability and if production is not restored to 80% of capacity within three months
of any such cessation will cause a termination.
|
|
(iii)
|
Cessation
of operations for longer than 180 days during any lease year or 600 days in any three
consecutive years will cause a termination.
|
|
(iv)
|
From
and after July 1, 2023, a failure of PQE’s processing facility to produce a minimum
of 80% of a rated capacity of 3,000 barrels per day during a period of at least 180 calendar
days during any lease year, the Lease may be terminated by the lessor.
|
|
(v)
|
TMC
may surrender the lease with 30 days written notice.
|
|
(vi)
|
In
the event of a breach of the material terms of the lease, the lessor will inform TMC
in writing and TMC will have 30 days to cure any monetary breach and 150 days to cure
any non-monetary breach.
|
Terms
to advance royalties required were amended to read as follows:
|
(i)
|
From
July 1, 2018 to June 30, 2020, minimum payments of $100,000 per quarter.
|
|
(ii)
|
From
July 1, 2020, minimum payments of $150,000 per quarter.
|
|
(iii)
|
Minimum
payments commencing on July 1, 2020 will be adjusted for CPI inflation.
|
Production
royalties payable are amended to 8% of the gross sales revenue, subject to certain adjustments up until June 30, 2020. After that
date, royalties will be calculated on a sliding scale based on crude oil prices ranging from 8% to 16% of gross sales revenues,
subject to certain adjustments.
|
(b)
|
Petroteq
Oil Recovery, LLC mineral lease (the “SITLA Mineral Lease”)
|
On
June 1, 2018, the Company acquired mineral rights under two mineral leases entered into between the State of Utah’s School
and Institutional Trust Land Administration (“SITLA”), as lessor, and Petroteq Oil Sands Recovery, LLC (“POSR”),
as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease (collectively, the “SITLA
Mineral Leases”).
The
SITLA Leases have a primary term of ten (10) years, and will remain in effect thereafter for as long as (a) bituminous sands are
produced in paying quantities, or (b) POSR is otherwise engaged in diligent operations, exploration or development activity and
certain other conditions are satisfied. Generally, the term of the SITLA Leases may not be extended beyond the twentieth year
of their effective dates except by production in paying quantities. An annual minimum royalty of $10 per acre must be paid during
the first ten years of the SITLA Leases; from and after the 11th year of the leases, the annual minimum royalty may be adjusted
by the lessor based on certain “readjustment” provisions in the SITLA Leases. Annual minimum royalties paid in any
lease year may be credited against production royalties accruing in the same year.
PETROTEQ
ENERGY INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2019
AND 2018
Expressed
in US dollars
|
8.
|
MINERAL
LEASES (continued)
|
|
(b)
|
Petroteq
Oil Recovery, LLC mineral lease (the “SITLA Mineral Lease”) (continued)
|
The
SITLA Leases provide that POSR must pay: (i) an annual rent equal to the greater of $1 per acre or a fixed sum of $500 (without
regard to acreage); and (ii) a production royalty of 8% of the market price received for products produced from the leases at
the point of first sale, less reasonable actual costs of transportation to the point of first sale. After the tenth year of the
leases, the lessor may increase the royalty rate by as much as one percent (1%) per year up to a maximum of 12.5%, subject to
a proviso that production royalties under the leases shall never be less than $3.00/bbl during the term of the leases). As the
sole lessee under the SITLA Leases, POSR owns 100% of the working interests under the leases, subject to payment of annual rentals,
advance annual minimum royalties, and production royalties.
In
April 2019, TMC acquired an undivided 50% of the operating rights and interests relating to oil sands under certain U.S. federal
oil and gas leases encompassing approximately 8,480 gross acres (4,240 net acres, less royalty) located in P.R. Springs and the
Tar Sands Triangle regions in the State of Utah (the “BLM Leases”), consisting of the right to explore for and produce
oil from oil sands formations and deposits from the surface down to a subsurface depth of 1,000 feet, for gross proceeds of $10,800,000
of which $1,800,000 was paid in cash and the remaining $9,000,000 was settled by the issue of 15,000,000 common shares at $0.40
per share. The operating rights assigned and transferred to TMC under certain of the BLM Leases also grant to TMC the right, subject
to similar depth limitation, to explore for and produce oil and gas from conventional sources. Each of the BLM Leases includes
lands that are located within a “Special Tar Sands Area” or “STSA”, a geographic area that has been designated
by the (U.S.) Department of Interior as containing substantial deposits of oil sands. Under the BLM Leases, production royalties
are governed by BLM regulations and are payable to the U.S. Department of Interior at the rate of 12.5% of the amount or value
of the production removed and sold. The interests acquired by TMC under the BLM Leases are also subject to a 6.25% overriding
royalty reserved by predecessors-in-title.
The
BLM Leases were originally issued by the U.S. Bureau of Land Management (“BLM”) under the Mineral Leasing Act of 1920
(the “MLA”). However, because the definition of “oil” in the MLA prior to 1981 did not include oil produced
from oil sands, the BLM Leases (and all other federal onshore mineral leases issued prior to 1981) did not authorize the development
and recovery of oil from oil sands, tar sands and bitumen-impregnated rocks and sediments. The Combined Hydrocarbon Leasing Act
of 1981 (“CHL Act”) expanded the definition of “oil” to include oil produced from oil sands and bitumen
deposits and authorized the issuance of new “combined hydrocarbon leases” or “CHLs” that permit exploration
and production of oil and gas from both conventional sources and from oil sands deposits.
For
federal onshore mineral leases that were in effect on November 16, 1981 (the CHL Act’s enactment date) and included lands
located within an STSA, the CHL Act granted to lessees the right to convert such leases to new CHLs. Upon issuance by BLM, each
CHL will constitute a new lease that will remain in effect for a primary term of ten (10) years and thereafter for as long as
oil or gas is produced in paying quantities.
Each
of the BLM Leases has been included in an application to BLM requesting their conversion to new CHLs. During the pendency of such
applications, the term (and any operations) of the BLM Leases are in “suspension status” under BLM regulations until
the new CHLs are issued.
On
July 22, 2019, the Company closed its acquisition of its previously announced agreement for the acquisition of the remaining 50%
of the operating rights and interests relating to the BLM Leases.
The
total consideration payable for the acquisition will be $13 million, with $1 million payable in cash and $12 million payable in
shares, namely 30 million common shares of the Company, at a deemed value of $0.40 per share.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
9.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
Oil
Extraction
Plant
|
|
|
Other Plant
and
Equipment
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
16,846,500
|
|
|
$
|
315,967
|
|
|
$
|
17,162,467
|
|
Additions
|
|
|
6,254,535
|
|
|
|
78,588
|
|
|
|
6,333,123
|
|
August 31, 2018
|
|
|
23,101,035
|
|
|
|
394,555
|
|
|
|
23,495,590
|
|
Additions
|
|
|
7,807,440
|
|
|
|
43,613
|
|
|
|
7,851,053
|
|
May 31, 2019
|
|
$
|
30,908,475
|
|
|
$
|
438,168
|
|
|
$
|
31,346,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
2,148,214
|
|
|
$
|
107,300
|
|
|
$
|
2,255,514
|
|
Additions
|
|
|
-
|
|
|
|
51,181
|
|
|
|
51,181
|
|
August 31, 2018
|
|
|
2,148,214
|
|
|
|
158,481
|
|
|
|
2,306,695
|
|
Additions
|
|
|
-
|
|
|
|
54,316
|
|
|
|
54,316
|
|
May 31, 2019
|
|
$
|
2,148,214
|
|
|
$
|
212,797
|
|
|
$
|
2,361,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
$
|
14,698,286
|
|
|
$
|
208,667
|
|
|
$
|
14,906,953
|
|
August 31, 2018
|
|
$
|
20,952,821
|
|
|
$
|
236,074
|
|
|
$
|
21,188,895
|
|
May 31, 2019
|
|
$
|
28,760,261
|
|
|
$
|
225,371
|
|
|
$
|
28,985,632
|
|
In
June 2011, the Company commenced the development of an oil extraction facility on its mineral lease in Maeser, Utah and entered
into construction and equipment fabrication contracts for this purpose. On September 1, 2015, the first phase of the plant was
completed and was ready for production of hydrocarbon products for resale to third parties. During the year ended August 31, 2017
the Company began the dismantling and relocating the oil extraction facility to its TMC Mineral Lease facility to improve production
and logistical efficiencies whilst continuing its project to increase production capacity to a minimum capacity of 1,000 barrels
per day. The plant has been relocated to the TMC mining site and expansion of the plant to production of 1,000 barrels per day
has been substantially completed.
The
cost of construction includes capitalized borrowing costs for the nine months ended May 31, 2019 of $nil (year ended August 31,
2018: $18,666) and total capitalized borrowing costs as at May 31, 2019 of $2,230,746 (August 31, 2018 - $2,230,746).
As
a result of the relocation of the plant and the planned expansion of the plant’s production capacity to 1,000 barrels per
day, and subsequently to an additional 3,000 barrels per day, the Company reevaluated the depreciation policy of the oil extraction
plant and the oil extraction technologies (see Note 10(a)) and determined that depreciation should be recorded on the basis of
the expected production of the completed plant at various capacities. No amortization has been recorded during the three and nine
months ended May 31, 2019 and the 2018 fiscal year as there has only been test production during that period.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
|
Oil
Extraction
Technology
|
|
Cost
|
|
|
|
August 31, 2017
|
|
$
|
809,869
|
|
Additions
|
|
|
-
|
|
August 31, 2018
|
|
|
809,869
|
|
Additions
|
|
|
-
|
|
May 31, 2019
|
|
$
|
809,869
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
August 31, 2017
|
|
$
|
102,198
|
|
Additions
|
|
|
-
|
|
August 31, 2018
|
|
|
102,198
|
|
Additions
|
|
|
-
|
|
May 31, 2019
|
|
$
|
102,198
|
|
|
|
|
|
|
Carrying Amounts
|
|
|
|
|
August 31, 2017
|
|
$
|
707,671
|
|
August 31, 2018
|
|
$
|
707,671
|
|
May 31, 2019
|
|
$
|
707,671
|
|
|
(a)
|
Oil
extraction technologies
|
During
the year ended August 31, 2012, the Company acquired a closed-loop solvent based oil extraction technology which facilitates the
extraction of oil from a wide range of bituminous sands and other hydrocarbon sediments. The Company has filed patents for this
technology in the USA, Russia and Canada and has employed it in its oil extraction plant. The Company commenced partial production
from its oil extraction plant on September 1, 2015 and was amortizing the cost of the technology over fifteen years, the expected
life of the oil extraction plant. Since the Company has substantially completed the increase in capacity of the plant to 1,000
barrels during fiscal 2018, and expects to further expand the capacity to an additional 3,000 daily, it determined that a more
appropriate basis for the amortization of the technology is the units of production at the plant after commercial production resumes.
No amortization of the technology was recorded during the three and nine months ended May 31, 2019 and for the 2018 fiscal year.
|
11.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts
payable as at May 31, 2019 and August 31, 2018 consist primarily of amounts outstanding for construction and expansion of the
oil extraction plant and other operating expenses that are due on demand.
Accrued
expenses as at May 31, 2019 and August 31, 2018 consist primarily of other operating expenses and interest accruals on long-term
debt (see Note 12) and convertible debentures (see Note 13).
Information about the Company’s exposure to liquidity risk is included in Note 24.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
|
|
|
|
|
|
Principal due
|
|
|
Principal due
|
|
Lender
|
|
Maturity Date
|
|
Interest Rate
|
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private lenders
|
|
December 2, 2018
|
|
|
10.00
|
%
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Private lenders
|
|
May 1, 2019
|
|
|
5.00
|
%
|
|
|
557,501
|
|
|
|
632,512
|
|
Private lenders
|
|
September 17, 2019
|
|
|
10.00
|
%
|
|
|
100,000
|
|
|
|
-
|
|
Private lenders
|
|
July 28, 2020
|
|
|
10.00
|
%
|
|
|
-
|
|
|
|
120,900
|
|
Private lenders
|
|
August 31, 2020
|
|
|
5.00
|
%
|
|
|
-
|
|
|
|
70,900
|
|
Equipment
loans
|
|
April 20, 2020 – November 7, 2021
|
|
|
4.30 - 12.36
|
%
|
|
|
455,032
|
|
|
|
602,239
|
|
Total loans
|
|
|
|
|
|
|
|
$
|
1,312,533
|
|
|
$
|
1,626,551
|
|
The
maturity date of the long-term debt is as follows:
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
Principal classified as repayable within one year
|
|
$
|
1,060,124
|
|
|
$
|
1,027,569
|
|
Principal classified as repayable later than one year
|
|
|
252,409
|
|
|
|
598,982
|
|
|
|
$
|
1,312,533
|
|
|
$
|
1,626,551
|
|
|
(i)
|
On
July 3, 2018, the Company received a $200,000 advance from a private lender bearing interest
at 10% per annum and repayable on September 2, 2018. The loan is guaranteed by the Chairman
of the Board. The loan was repaid on September 4, 2018. On October 30, 2018 the Company
received a further advance of $350,000 from the same lender, bearing interest at 0% per
annum and repayable on demand. On January 31, 2019, the Company repaid $150,000 of the
principal outstanding.
|
|
(ii)
|
On
October 10, 2014, the Company issued two secured debentures for an aggregate principal
amount of CAD $1,100,000 to two private lenders. The debentures bear interest at a rate
of 12% per annum, maturing on October 15, 2017 and are secured by all of the assets of
the Company. In addition, the Company issued common share purchase warrants to acquire
an aggregate of 16,667 common shares of the Company. On September 22, 2016, the two secured
debentures were amended to extend the maturity date to January 31, 2017. The terms of
these debentures were renegotiated with the debenture holders to allow for the conversion
of the secured debentures into common shares of the Company at a rate of CAD $4.50 per
common share and to increase the interest rate, starting June 1, 2016, to 15% per annum.
On January 31, 2017, the two secured debentures were amended to extend the maturity date
to July 31, 2017. Additional transaction costs and penalties incurred for the loan modifications
amounted to $223,510. On February 9, 2018, the two secured debentures were renegotiated
with the debenture holders to extend the loan to May 1, 2019. A portion of the debenture
amounting to CAD $628,585 was amended to be convertible into common shares of the Company,
of which, CAD $365,000 have been converted on May 1, 2018. The remaining convertible
portion is interest free and was to be converted from August 1, 2018 to January 1, 2019.
The remaining non-convertible portion of the debenture was to be paid off in 12 equal
monthly instalments beginning May 1, 2018. On September 11, 2018, the remaining convertible
portion of the debenture was converted into common shares of the Company and a portion
of the non-convertible portion of the debenture was settled through the issue of 316,223
common shares of the Company.
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
(a)
|
Private
lenders (continued)
|
|
(iii)
|
On
October 4, 2018, the Company received an advance of $100,000 from Bay Private Equity
in terms of a debenture line of credit of $9,500,000 made available to the Company. The
debenture matures on September 17, 2019 and bears interest at 10% per annum. As compensation
for the debenture line of credit the Company issued 950,000 commitment shares to Bay
Private Equity and a further 300,000 shares as a finder’s fee to a third party.
|
|
(iv)
|
The
Company received advances from a private lender during the years ended August 31, 2018
and 2017 in the form of unsecured promissory notes. The promissory note matures on July
28, 2020, and bears interest at 10% per annum. The Company repaid the remaining private
lender and advanced the lender a further $1,195,123 (see note 6).
|
|
(v)
|
The
Company received advances from a private lender during the year ended August 31, 2018
and 2017 in the form of unsecured promissory notes. This promissory note matures on August
31, 2020 and bear interest at 5% per annum. On May 31, 2019, in terms of a debt settlement
agreement entered into, the Company issued 363,073 shares of common stock at an issue
price of $0.30 per share to settle the outstanding liability of $70,900 including interest
thereon of $27,130.
|
The
Company entered into two equipment loan agreements with financial institutions to acquire equipment for the oil extraction facility.
The loans had a term of 60 months and bore interest at rates between 4.3% and 4.9% per annum. Principal and interest were paid
in monthly installments. These loans were secured by the acquired assets.
On
May 7, 2018, the Company entered into a negotiable promissory note and security agreement with Commercial Credit Group to acquire
a crusher from Power Equipment Company for $660,959. An implied interest rate was calculated as 12.36% based timing on the initial
repayment of $132,200 and subsequent 42 monthly instalments of $15,571. The promissory note was secured by the equipment financed.
|
13.
|
CONVERTIBLE
DEBENTURES
|
|
|
|
|
|
|
|
Principal due
|
|
|
Principal due
|
|
Lender
|
|
Maturity Date
|
|
Interest Rate
|
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha Capital Anstalt
|
|
October 31, 2018
|
|
|
5.00
|
%
|
|
$
|
-
|
|
|
$
|
56,500
|
|
Private lenders
|
|
January 1, 2019
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
201,904
|
|
GS Capital Partners
|
|
May 1, 2019
|
|
|
12.00
|
%
|
|
|
143,750
|
|
|
|
-
|
|
Calvary Fund I LP
|
|
September 4, 2019
|
|
|
10.00
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
Calvary Fund I LP
|
|
September 4, 2019
|
|
|
10.00
|
%
|
|
|
250,000
|
|
|
|
-
|
|
SBI Investments LLC
|
|
September 4, 2019
|
|
|
10.00
|
%
|
|
|
250,000
|
|
|
|
-
|
|
Bay Private Equity, Inc.
|
|
September 17, 2019
|
|
|
5.00
|
%
|
|
|
2,900,000
|
|
|
|
-
|
|
Bay Private Equity, Inc
|
|
October 15, 2019
|
|
|
5.00
|
%
|
|
|
2,400,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
6,193,750
|
|
|
|
508,404
|
|
Unamortized debt discount
|
|
|
|
|
|
|
|
|
(936,190
|
)
|
|
|
-
|
|
Total loans
|
|
|
|
|
|
|
|
$
|
5,257,560
|
|
|
$
|
508,404
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
13.
|
CONVERTIBLE
DEBENTURES (continued)
|
The
maturity date of the convertible debentures are as follows:
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
Principal classified as repayable within one year
|
|
$
|
5,257,560
|
|
|
$
|
258,404
|
|
Principal classified as repayable later than one year
|
|
|
-
|
|
|
|
250,000
|
|
|
|
$
|
5,257,560
|
|
|
$
|
508,404
|
|
|
(a)
|
Alpha
Capital Anstalt
|
On
August 31, 2017, the Company issued a convertible secured note for $565,000 to Alpha Capital Anstalt. The convertible secured
note bears interest at a rate of 5% per annum and matures on October 31, 2018. The convertible secured note is convertible into
units, consisting of one common share of the Company and one common share purchase warrant of the Company, at a conversion price
of $0.29 per unit until August 31, 2022. Each warrant would entitle the holder to acquire one additional common share at an exercise
price of $0.315 per share until August 31, 2022. The convertible secured note is secured by all of the assets of the Company.
From
December 19, 2017 to May 22, 2018, a total of $508,500 of the principal of the convertible secured notes was converted into 1,753,447
units. From March 16, 2018 to July 11, 2018, Alpha Capital Anstalt exercised a total of 1,753,447 warrants to purchase 1,753,447
common shares of the Company. On December 3, 2018, the remaining $56,500 and accrued interest thereon of $13,479 was settled by
the issue of 145,788 common shares.
According
to the terms of an amendment made with two debenture holders and the Company on February 9, 2018, a portion of their debentures
was convertible into common shares (see Note 12(a)(iii)). On September 11, 2018, the remaining convertible portion of the debenture
was converted into common shares of the Company through the issue of 316,223 common shares of the Company
During December 2018, the Company
issued a convertible debenture of $143,750 including an original issue discount of $18,750, together with warrants exercisable
for 260,416 shares of common stock at an exercise price of $0.48 per share with a maturity date of April 29, 2019. The debenture
has a term of four months and one day and bears interest at a rate of 10% per annum payable at maturity and at the option of the
holder the purchase amount of the debenture (excluding the original issue discount of 15%) is convertible into 260,416 common shares
of the Company at $0.48 per share in accordance with the terms and conditions set out in the debenture.
On September 4, 2018, the Company
issued units to Calvary Fund I LP for $250,000, which was originally advanced on August 9, 2018. The units consist of 250 units
of $1,000 convertible debenture and 1,149,424 commons share purchase warrants. The convertible debenture bears interest at 10%,
matures on September 4, 2019 and is convertible one common share of the Company at a price of $0.87 per common share. The common
share purchase warrants entitle the holder to acquire additional common shares of the Company at a price of $0.87 per share and
expires on September 4, 2019.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
13.
|
CONVERTIBLE
DEBENTURES (continued)
|
On
October 12, 2018, the Company entered into an agreement with Calvary Fund I LP whereby the Company issued 250 one year units for
proceeds of $250,000, each unit consisting of a $1,000 principal convertible unsecured debenture, bearing interest at 10% per
annum and convertible into common shares at $0.86 per share, and a warrant exercisable for 1,162 common shares at an exercise
price of $0.86 per share.
On
October 15, 2018, the Company entered into an agreement with SBI Investments LLC 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.
|
(g)
|
Bay
Private Equity, Inc.
|
On September 17, 2018, the Company
issued 3 one year convertible units of $1,100,000 each to Bay Private Equity, Inc. (“Bay”) for net proceeds of $2,979,980
related to this agreement. These units bear interest at 5% per annum and mature one year from the date of issue. Each unit consists
of one senior secured convertible debenture of $1,100,000 and 250,000 common share purchase warrants. Each convertible debenture
may be converted to common shares of the Company at a conversion price of $1.00 per share. Each common share purchase warrant entitles
the holder to purchase an additional common share of the Company at a price of $1.10 per share for one year after the issue date.
On January 23, 2019, $400,000 of the principal outstanding was repaid out of the proceeds raised on the Bay Private Equity convertible
debenture (see Note 13(h)).
|
(h)
|
Bay
Private Equity, Inc.
|
On January 16, 2019, the Company
issued a convertible debenture of $2,400,000, including an original issue discount of $400,000, to Bay for net proceeds of $2,000,000
related to this agreement. The convertible debenture bears interest at 5% per annum and matures on October 19, 2019. The convertible
debenture may be converted to 5,000,000 common shares of the Company at a conversion price of $0.40 per share. $400,000 of the
proceeds raised was used to repay a portion of the $3,300,000 convertible debenture issued to Bay Private Equity on September 17,
2018 (see Note 13(g)).
|
14.
|
RECLAMATION
AND RESTORATION PROVISIONS
|
|
|
Oil Extraction Facility
|
|
|
Site Restoration
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2017
|
|
$
|
364,140
|
|
|
$
|
208,080
|
|
|
$
|
572,220
|
|
Accretion expense
|
|
|
7,283
|
|
|
|
4,161
|
|
|
|
11,444
|
|
Balance at August 31, 2018
|
|
|
371,423
|
|
|
|
212,241
|
|
|
|
583,664
|
|
Accretion expense
|
|
|
5,571
|
|
|
|
3,184
|
|
|
|
8,755
|
|
Balance at May 31, 2019
|
|
$
|
376,994
|
|
|
$
|
215,425
|
|
|
$
|
592,419
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
14.
|
RECLAMATION
AND RESTORATION PROVISIONS (continued)
|
In
accordance with the terms of the lease agreement, the Company is required to dismantle its oil extraction plant at the end of
the lease term, which is expected to be in 25 years. During the year ended August 31, 2015, the Company recorded a provision of
$350,000 for dismantling the facility.
Because
of the long-term nature of the liability, the greatest uncertainties in estimating this provision are the costs that will be incurred
and the timing of the dismantling of the oil extraction facility. In particular, the Company has assumed that the oil extraction
facility will be dismantled using technology and equipment currently available and that the plant will continue to be economically
viable until the end of the lease term.
The
discount rate used in the calculation of the provision as at May 31, 2019 and August 31, 2018 is 2.0%.
In
accordance with environmental laws in the United States, the Company’s environmental permits and the lease agreements, the
Company is required to restore contaminated and disturbed land to its original condition before the end of the lease term, which
is expected to be in 25 years. During the year ended August 31, 2015, the Company provided $200,000 for this purpose.
The
site restoration provision represents rehabilitation and restoration costs related to oil extraction sites. This provision has
been created based on the Company’s internal estimates. Significant assumptions in estimating the provision include the
technology and equipment currently available, future environmental laws and restoration requirements, and future market prices
for the necessary restoration works required.
The
discount rate used in the calculation of the provision as at May 31, 2019 and August 31, 2018 is 2.0%.
|
Authorized:
|
unlimited
common shares without par value
|
|
Issued
and Outstanding:
|
131,797,097
common shares as at May 31, 2019.
|
Between
September 4, 2018 and May 31, 2019, the Company issued 5,216,034 shares of common stock to several investors in settlement of
$2,368,562 of trade debt.
Between September 1, 2018 and
April 1, 2019, the Company issued 1,375,000 shares valued at $1,354,861 as compensation for professional services rendered to the
Company, including 1,250,000 shares of common stock issued as fees for the Bay Private Equity convertible debt raise (see Note
13(g)).
On
September 6, 2018, the Company issued 1,234,567 units to an investor for net proceeds of $1,000,000. Each unit consists of one
share of common stock and three quarters of a share purchase warrant for a total warrant exercisable over 925,925 shares of common
stock.
On September 28, 2018, the Company
issued 316,223 shares to two private investors in settlement of the remaining portion of their convertible debt of $255,078 (see
Note 13(b)).
On
October 11, 2018, the Company issued 81,229 shares of common stock to investors for net proceeds of $79,605. In addition, a further
752,040 units were issued to investors for net proceeds of $737,000. Each unit consisting of one share of common stock and a warrant
exercisable for a share of common stock at exercise prices ranging from $1.35 to $1.50.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
15.
|
SHARE
CAPITAL (continued)
|
On
November 7, 2018, the Company issued 320,408 units to investors for net proceeds of $169,000. Each unit consisting of one share
of common stock and a warrant exercisable for a share of common stock at an exercise price ranging from $0.61 to $0.66 per share.
On
December 3, 2018, the Company issued 145,788 shares of common stock to a private investor in settlement of the remaining portion of their
convertible debt of $56,500 including interest thereon of $13,479 (see Note 13(a)).
On
December 7, 2018, the Company issued a total of 3,868,970 shares of common stock to investors for net proceeds of $2,190,200.
Certain of the subscription agreements were unit agreements, whereby warrants exercisable over 3,373,920 shares of common stock
were issued to investors at exercise prices ranging from $0.67 to $1.50 per share.
On
December 7, 2018, the Company issued 1,190,476 units to an investor for net proceeds of $500,000, each unit consisting of one
share of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.525 per share.
On
January 10, 2019, the company issued a total of 1,522,080 shares of common stock to investors for net proceeds of $645,100. Certain
of the subscription agreements were unit agreements, whereby warrants exercisable over 1,437,557 shares of common stock were issued
to investors at an exercise price of $1.50 per share.
On
January 11, 2019, the Company issued 307,692 units to an investor for net proceeds of $200,000, each unit consisting of one share
of common stock and a warrant exercisable for a share of common stock at an exercise price of $1.50 per share.
On
January 25, 2019, the Company issued 147,058 units to an investor for net proceeds of $50,000, each unit consisting of one share
of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.37 per share.
On
February 27, 2019, the Company issued a total of 7,242,424 shares of common stock to investors for net proceeds of $2,390,000.
On
February 27, 2019, the Company issued 135,135 units to an investor for net proceeds of $50,000, each unit consisting of one share
of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.37 per share.
On
February 27, 2019, the CEO of the Company subscribed for 62,500 shares of common stock for net proceeds of $25,000.
On
March 11, 2019, the Chairman of the Board subscribed for 2,222,222 shares of common stock for net proceeds of $1,000,000.
On
March 29, 2019 the Company cancelled 18,518 shares previously issued to an investor and returned the subscription proceeds of
$10,000.
On
March 29, 2019, the Company issued 1,481,481 units to an investor for net proceeds of $400,000, each unit consisting of one share
of common stock and a warrant exercisable for a share of common stock at an exercise price of $0.465 per share. In addition, the
Company issued 248,782 shares of common stock to investors for gross proceeds of $82,000.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
15.
|
SHARE
CAPITAL (continued)
|
On
April 1, 2019, the Company issued 15,000,000 shares valued at $9,000,000 in settlement of the remaining purchase consideration
in terms of the acquisition of the BLM leases disclosed under note 8 above.
On
May 22, 2019, the Company issued 3,431,828 units to investors for gross proceeds of $886,950, each unit consisting of one share
of common stock and one warrant exercisable for a share of common stock at exercise prices ranging from $0.28 to $1.50 per share,
in addition, the Company issued a further 35,714 shares to a private investor for gross proceeds of $25,000.
On
May 22, 2019, the Company issued 308,333 shares of common stock to the Chairman of the Board for gross proceeds of $74,000.
|
16.
|
SHARE
PURCHASE OPTIONS
|
The
Company has a stock option plan which allows the Board of Directors of the Company to grant options to acquire common shares of
the Company to directors, officers, key employees and consultants. The option price, term and vesting are determined at the discretion
of the Board of Directors, subject to certain restrictions as required by the policies of the TSX Venture Exchange. The stock
option plan is a 20% fixed number plan with a maximum of 17,969,849 common shares reserved for issuance.
During
the three and nine months ended May 31, 2019, no share options were granted. During the year ended August 31, 2018 the Company
granted 9,775,000 share options to directors, officers and consultants of the Company. The weighted average fair value of the
options granted was estimated at $0.87 per share at the grant date using the Black-Scholes option pricing model.
On
December 31, 2018, options to acquire 50,000 shares of common stock, at an exercise price of CAD$4.80 expired, unexercised.
|
(b)
|
Share
purchase options
|
Share
purchase option transactions under the stock option plan were:
Share
purchase options outstanding and exercisable as at May 31, 2019 are:
Expiry Date
|
|
Exercise
Price
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
February 1, 2026
|
|
CAD $5.85
|
|
|
33,333
|
|
|
|
33,333
|
|
November 30, 2027
|
|
CAD $2.27
|
|
|
1,425,000
|
|
|
|
1,425,000
|
|
June 5, 2028
|
|
CAD $1.00
|
|
|
8,350,000
|
|
|
|
3,400,000
|
|
|
|
|
|
|
9,808,333
|
|
|
|
4,858,333
|
|
Weighted average remaining contractual life
|
|
|
|
|
8.9 years
|
|
|
|
8.9 years
|
|
Weighted average exercise price
|
|
|
|
|
CAD $1.20
|
|
|
|
CAD $1.41
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
17.
|
SHARE
PURCHASE WARRANTS
|
Share
purchase warrants outstanding as at May 31, 2019 are:
Expiry Date
|
|
Exercise Price
|
|
Warrants Outstanding
|
|
August 19, 2019
|
|
USD $7.50
|
|
|
66,665
|
|
September 4, 2019
|
|
USD $0.87
|
|
|
287,356
|
|
September 17, 2019
|
|
USD $1.10
|
|
|
750,000
|
|
October 12, 2019
|
|
USD $0.86
|
|
|
290,500
|
|
October 15, 2019
|
|
USD $ 0.86
|
|
|
290,500
|
|
November 5, 2019
|
|
CAD $28.35
|
|
|
25,327
|
|
January 25, 2020
|
|
USD $0.37
|
|
|
147,058
|
|
February 27, 2020
|
|
USD $0.37
|
|
|
135,135
|
|
March 9, 2020
|
|
USD $1.50
|
|
|
114,678
|
|
May 22, 2020
|
|
USD $0.28
|
|
|
678,571
|
|
May 22, 2020
|
|
USD $0.30
|
|
|
1,554,165
|
|
June 7, 2020
|
|
USD $0.525
|
|
|
1,190,476
|
|
June 14, 2020
|
|
USD $1.50
|
|
|
329,080
|
|
July 26, 2020
|
|
USD $1.50
|
|
|
1,637,160
|
|
August 28, 2020
|
|
USD $0.94
|
|
|
1,311,242
|
|
August 28, 2020
|
|
USD $1.00
|
|
|
246,913
|
|
August 28, 2020
|
|
USD $1.50
|
|
|
35,714
|
|
September 6, 2020
|
|
USD $1.01
|
|
|
925,925
|
|
October 11, 2020
|
|
USD $ 1.35
|
|
|
510,204
|
|
October 11, 2020
|
|
USD $1.50
|
|
|
10,204
|
|
November 7, 2020
|
|
USD $0.61
|
|
|
20,408
|
|
November 7, 2020
|
|
USD $0.66
|
|
|
300,000
|
|
November 8, 2020
|
|
USD $1.01
|
|
|
918,355
|
|
December 7, 2020
|
|
USD $0.67
|
|
|
185,185
|
|
December 7, 2020
|
|
USD $1.50
|
|
|
3,188,735
|
|
January 10, 2021
|
|
USD $1.50
|
|
|
1,437,557
|
|
January 11, 2021
|
|
USD $1.50
|
|
|
307,692
|
|
Mar 29, 2021
|
|
USD $0.465
|
|
|
1,481,481
|
|
April 8, 2021
|
|
CAD $4.73
|
|
|
57,756
|
|
May 22, 2021
|
|
USD $0.91
|
|
|
6,000,000
|
|
May 22, 2021
|
|
USD $0.30
|
|
|
1,133,333
|
|
May 22, 2021
|
|
USD $1.50
|
|
|
65,759
|
|
|
|
|
|
|
25,633,134
|
|
Weighted average remaining contractual life
|
|
|
|
|
1.45 years
|
|
Weighted average exercise price
|
|
USD $0.99
|
|
|
|
|
From
September 6, 2018 to December 28, 2019, the Company issued 1,878,772 warrants to convertible debt note holders in terms of subscription
unit agreements entered into with the convertible note holders (see Note 13(c) to 13 (h)). The fair value of the warrants granted
was estimated using the relative fair value method at between $0.07 to $0.39 per warrant.
From
September 6, 2018 to May 22, 2019, the Company issued 13,271,888 warrants in terms of common share subscription agreements entered
into with various investors. The fair value of the warrants granted was estimated using the relative fair value method at between
$0.09 and $0.36 per warrant.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
17.
|
SHARE
PURCHASE WARRANTS (continued)
|
On
November 8, 2018, the Company issued 918,355 warrants to certain debt holders in settlement of certain debt. The fair value of
the warrants granted was estimated using a black Scholes valuation method at $0.42 per warrant.
The warrants issued in terms of
the convertible debt subscription agreements during the nine months ended May 31, 2019, were valued at $557,407 using the relative
fair value method. The fair value of warrants was estimated using the Black-Scholes valuation model.
The warrants issued in terms
of share subscription agreements entered into during the nine months ended May 31, 2019, were valued at $2,097,215 using the relative
fair value method. The fair value of warrants was estimated using the Black-Scholes valuation model.
The
following assumptions were used in the Black Scholes valuation model:
|
|
Nine months ended
May 31, 2019
|
Share price
|
|
CAD $0.40 to CAD $1.55
|
Exercise price
|
|
CAD $0.38 to CAD $2.01
|
Expected share price volatility
|
|
88% to 137%
|
Risk-free interest rate
|
|
1.55% to 2.34%
|
Expected term
|
|
1 to 2 years
|
|
18.
|
DILUTED
LOSS PER SHARE
|
The
Company’s potentially dilutive instruments are convertible debentures and share purchase options and share purchase warrants.
Conversion of these instruments would have been anti-dilutive for the periods presented and consequently, no adjustment was made
to basic loss per share to determine diluted loss per share. These instruments could potentially dilute earnings per share in
future periods.
For
the nine months ended May 31, 2019 and 2018, the following share purchase options, share purchase warrants and convertible securities
were excluded from the computation of diluted loss per share as the results of the computation was anti-dilutive:
|
|
Nine months
ended May 31,
2019
|
|
|
Nine months
ended May 31,
2018
|
|
|
|
|
|
|
|
|
Share purchase options
|
|
|
9,808,333
|
|
|
|
1,508,333
|
|
Share purchase warrants
|
|
|
25,633,134
|
|
|
|
7,034,531
|
|
Convertible securities
|
|
|
11,084,020
|
|
|
|
235,344
|
|
|
|
|
46,525,487
|
|
|
|
8,778,208
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
19.
|
RELATED
PARTY TRANSACTIONS
|
Related
party transactions not otherwise separately disclosed in these unaudited condensed consolidated financial statements are:
|
(a)
|
Key
management personnel and director compensation
|
The
remuneration of the Company’s directors and other members of key management, who have the authority and responsibility for
planning, directing, and controlling the activities of the Company, consist of the following amounts:
|
|
Three months ended
|
|
|
|
May 31,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
Salaries, fees and other benefits
|
|
$
|
162,114
|
|
|
$
|
195,300
|
|
Share-based compensation
|
|
|
305,413
|
|
|
|
-
|
|
|
|
$
|
467,527
|
|
|
$
|
195,300
|
|
|
|
Nine months ended
|
|
|
|
May 31,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
Salaries, fees and other benefits
|
|
$
|
523,620
|
|
|
$
|
484,800
|
|
Share-based compensation
|
|
|
916,239
|
|
|
|
2,505,647
|
|
|
|
$
|
1,439,859
|
|
|
$
|
2,990,447
|
|
At
May 31, 2019, $326,957 (August 31, 2018: $1,065,392) was due to members of key management and directors for unpaid salaries, expenses
and directors’ fees.
During
the three and nine months ended May 31, 2019 and 2018, no common shares were granted as compensation to key management and directors
of the Company.
|
(b)
|
Transactions
with directors and officers
|
On
November 8, 2018 the Company entered into a debt settlement agreement with Robert Dennewald, a director of the Company, whereby
the company issued 28,880 shares of common stock in settlement of $23,393 of travel related payables.
On
February 25, 2019, the Company entered into debt settlement agreements whereby directors’ fees owing to the directors were
settled by the issue of shares of common stock as follows:
Name
|
|
Description
|
|
Amount
|
|
|
Shares issued
|
|
|
|
|
|
|
|
|
|
|
Aleksandr Blyumkin
|
|
Directors fees
|
|
$
|
61,989
|
|
|
|
154,972
|
|
Gerald Bailey
|
|
Directors fees
|
|
|
61,989
|
|
|
|
154,972
|
|
Travis Schneider
|
|
Directors fees
|
|
|
18,841
|
|
|
|
47,102
|
|
Robert Dennewald
|
|
Directors fees
|
|
|
61,989
|
|
|
|
154,972
|
|
David Sealock
|
|
Directors fees
|
|
|
3,107
|
|
|
|
7,767
|
|
|
|
|
|
$
|
207,915
|
|
|
|
519,785
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
19.
|
RELATED
PARTY TRANSACTIONS (continued)
|
|
(b)
|
Transactions
with directors and officers (continued)
|
On
February 27, 2019, the CEO of the Company subscribed for 62,500 shares of common stock for gross proceeds of $25,000.
On
March 5, 2019, the Chairman of the Board, subscribed for 2,222,222 shares of common stock for gross proceeds of $1,000,000.
On
March 29, 2019, Nefco Petroleum, a Company controlled by the Chairman of the Board, subscribed for 197,058 shares of common stock
for gross proceeds of $67,000.
On
May 22, 2019, the Chairman of the Board, subscribed for 308,333 shares of common stock for gross proceeds of $74,000.
On
May 31, 2019, Palmira Associates, a Company controlled by the Chairman of the Board, entered into a debt settlement agreement
whereby debt of $98,030 was settled by the issue of 363,073 shares of common stock.
As
of May 31, 2019, and August 31, 2018, the Company owed various private companies controlled by the Chairman of the Board the aggregate
sum of $nil and $nil, respectively.
As
at August 31, 2017, the Company had received loans of $419,322 from the Chairman of the Board. These loans were interest free
and were repaid prior to August 31, 2018.
On
September 4, 2018, the Company entered into a Debt Settlement Agreement whereby it agreed to convert $249,285 of advances made
to the Company by the Chairman of the Board into 336,871 common shares at a conversion price of $0.74 per share.
As
at May 31, 2019, the Chairman of the Board owed the Company $272,820.
|
20.
|
INVESTMENT
IN JOINT VENTURE
|
On
November 11, 2016, the Company and three other parties entered into a joint venture for the operation of a website for careers
in the oil and gas industry. The Company has a 25% interest in this joint venture and has made advances of $68,331 to the joint
venture as of August 31, 2017. The joint venture has not commenced operations as of May 31, 2019.
In
November 2017, the Company entered into an agreement with First Bitcoin Capital Corp. (“FBCC”), a global developer
of blockchain-based applications, to design and develop a blockchain-powered supply chain management platform for the oil and
gas industry to be marketed to oil and gas producers and operators. On January 8, 2018, the Company paid the first instalment
of $100,000 to FBCC and is currently renegotiating the terms of the agreement. The initial $100,000 has been applied to operating
costs incurred by Petrobloq, LLC related to an office lease beginning March 1, 2018 and research costs related to payments to
the development team consisting of four employees. A further $106,500 was advanced to First Bitcoin Capital during the nine months
ended May 31, 2019. These funds were used to fund certain operating costs and payments to the development team.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
The
Company operated in two reportable segments within the USA during the three and nine months ended May 31, 2019 and 2018: oil extraction
and processing operations and mining operations.
Once
the expansion of the plant has reached a stage of completion where it is viable to commence production and the requisite licenses
have been obtained, the Company’s oil extraction segment will be able to commence commercial production and will generate
revenue from the sale of hydrocarbon products to third parties.
The presentation of the condensed
consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There
were minimal operations in the mining operations segment during the three and nine months ended May 31, 2019 and 2018. Other information
about reportable segments are:
|
|
May 31, 2019
|
|
(in ’000s of dollars)
|
|
Oil
Extraction
|
|
|
Mining operations
|
|
|
Consolidated
|
|
Additions to non-current assets
|
|
$
|
7,851
|
|
|
$
|
10,800
|
|
|
$
|
18,651
|
|
Reportable segment assets
|
|
|
37,291
|
|
|
|
19,655
|
|
|
|
56,946
|
|
Reportable segment liabilities
|
|
$
|
10,584
|
|
|
$
|
169
|
|
|
$
|
10,753
|
|
|
|
May 31, 2018
|
|
(in
’000s of dollars)
|
|
Oil
Extraction
|
|
|
Mining operations
|
|
|
Consolidated
|
|
Additions to non-current assets
|
|
$
|
3,025
|
|
|
$
|
-
|
|
|
$
|
3,025
|
|
Reportable segment assets
|
|
|
22,959
|
|
|
|
9,047
|
|
|
|
32,006
|
|
Reportable segment liabilities
|
|
$
|
7,821
|
|
|
$
|
169
|
|
|
$
|
7,990
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
21.
|
SEGMENT
INFORMATION (continued)
|
Segment
operating results are as follows:
|
|
May
31, 2019
|
|
(in
’000s of dollars)
|
|
Oil
Extraction
|
|
|
Mining
operations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
External
Revenues
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
59
|
|
Cost of Goods Sold
|
|
|
729
|
|
|
|
199
|
|
|
|
928
|
|
Gross Loss
|
|
|
(670
|
)
|
|
|
(199
|
)
|
|
|
(869
|
)
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
593
|
|
|
|
13
|
|
|
|
606
|
|
Travel and promotion
|
|
|
1,959
|
|
|
|
-
|
|
|
|
1,959
|
|
Professional fees
|
|
|
3,363
|
|
|
|
-
|
|
|
|
3,363
|
|
Legal fees
|
|
|
1,343
|
|
|
|
-
|
|
|
|
1,343
|
|
Research and development
|
|
|
113
|
|
|
|
-
|
|
|
|
113
|
|
Salaries and wages
|
|
|
1,043
|
|
|
|
-
|
|
|
|
1,043
|
|
Share-based compensation
|
|
|
916
|
|
|
|
-
|
|
|
|
916
|
|
Loss on settlement of liabilities
|
|
|
98
|
|
|
|
-
|
|
|
|
98
|
|
Loss on convertible debt
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
Interest expense
|
|
|
2,534
|
|
|
|
-
|
|
|
|
2,534
|
|
Equity loss
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
Other income
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Depreciation and amortization
|
|
|
54
|
|
|
|
-
|
|
|
|
54
|
|
Net
loss
|
|
$
|
12,841
|
|
|
$
|
212
|
|
|
$
|
13,053
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
21.
|
SEGMENT
INFORMATION (continued)
|
Segment
operating results are as follows:
|
|
May 31, 2018
|
|
(in ’000s of dollars)
|
|
Oil
Extraction
|
|
|
Mining
operations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
External Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Goods Sold
|
|
|
29
|
|
|
|
205
|
|
|
|
234
|
|
Gross Loss
|
|
|
(29
|
)
|
|
|
(205
|
)
|
|
|
(234
|
)
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
401
|
|
|
|
11
|
|
|
|
412
|
|
Travel and promotion
|
|
|
2,087
|
|
|
|
-
|
|
|
|
2,087
|
|
Professional fees
|
|
|
1,576
|
|
|
|
-
|
|
|
|
1,576
|
|
Legal fees
|
|
|
140
|
|
|
|
-
|
|
|
|
140
|
|
Salaries and wages
|
|
|
639
|
|
|
|
-
|
|
|
|
639
|
|
Share-based compensation
|
|
|
2,523
|
|
|
|
-
|
|
|
|
2,523
|
|
Gain on settlement of liabilities
|
|
|
(216
|
)
|
|
|
-
|
|
|
|
(216
|
)
|
Interest expense
|
|
|
323
|
|
|
|
-
|
|
|
|
323
|
|
Other income
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
(51
|
)
|
Equity income from investment in Accord Energy
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
890
|
|
|
|
-
|
|
|
|
890
|
|
Net loss
|
|
$
|
8,341
|
|
|
$
|
216
|
|
|
$
|
8,557
|
|
|
22.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company has entered into two office lease arrangement which, including the Company’s share of operating expenses and property
taxes, will require estimated minimum annual payments of:
2019
|
|
$
|
33,615
|
|
2020
|
|
|
124,440
|
|
2021
|
|
|
101,220
|
|
2022
|
|
|
78,000
|
|
2023
|
|
$
|
65,000
|
|
For
the nine months ended May 2019, the Company made $51,883 (2018 - $nil) in office lease payments.
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 $6,000,000 (the “Note”)
with a maturity date of 27 December 2020, bearing interest at 10% per annum; and (iii) a Security Agreement (together with the Settlement
Agreement and the Note, the “Redline Agreements”) among the Company, Redline, and TMC Capital, LLC (“TMC”), an
indirect wholly-owned subsidiary of the Company.
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.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
23.
|
MANAGEMENT
OF CAPITAL
|
The
Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern and
to maintain a flexible capital structure which optimizes the costs of capital at an acceptable level. The Company considers its
capital for this purpose to be its shareholders’ equity and long-term liabilities.
The
Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics
of the underlying assets. To maintain or adjust the capital structure, the Company may seek additional financing or dispose of
assets.
In
order to facilitate the management of its capital requirements, the Company monitors its cash flows and credit policies and prepares
expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general
industry conditions. The budgets are approved by the Board of Directors. There are no external restrictions on the Company’s
capital.
|
24.
|
MANAGEMENT
OF FINANCIAL RISKS
|
The
risks to which the Company’s financial instruments are exposed to are:
Credit
risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations.
The Company is exposed to credit risk through its cash held at financial institutions, trade receivables from customers and notes
receivable.
The
Company has cash balances at various financial institutions. The Company has not experienced any loss on these accounts, although
balances in the accounts may exceed the insurable limits. The Company considers credit risk from cash to be minimal.
Credit
extension, monitoring and collection are performed for each of the Company’s business segments. The Company performs ongoing
credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness,
as determined by a review of the customer’s credit information.
Accounts
receivable, collections and payments from customers are monitored and the Company maintains an allowance for estimated credit
losses based upon historical experience with customers, current market and industry conditions and specific customer collection
issues.
At
May 31, 2019 and August 31, 2018, the Company had minimal trade receivables. The Company considers it maximum exposure to credit
risk to be its trade and other receivables and notes receivable.
Interest
rate risk is the risk that changes in interest rates will affect the fair value or future cash flows of the Company’s financial
instruments. The Company is exposed to interest rate risk as a result of holding fixed rate investments of varying maturities
as well as through certain floating rate instruments. The Company considers its exposure to interest rate risk to be minimal.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
24.
|
MANAGEMENT
OF FINANCIAL RISKS (continued)
|
Liquidity
risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities
as they become due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable
losses.
The
following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted
and include estimated interest payments. The Company has included both the interest and principal cash flows in the analysis as
it believes this best represents the Company’s liquidity risk.
At May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual cash flows
|
|
(in ’000s of dollars)
|
|
Carrying
amount
|
|
|
Total
|
|
|
1 year
or less
|
|
|
2 - 5 years
|
|
|
More than 5
years
|
|
Accounts payable
|
|
$
|
2,058
|
|
|
$
|
2,058
|
|
|
$
|
2,058
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accrued liabilities
|
|
|
748
|
|
|
|
748
|
|
|
|
748
|
|
|
|
-
|
|
|
|
-
|
|
Convertible debenture
|
|
|
5,258
|
|
|
|
6,516
|
|
|
|
6,516
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt
|
|
|
1,313
|
|
|
|
1,516
|
|
|
|
1,236
|
|
|
|
280
|
|
|
|
-
|
|
|
|
$
|
9,377
|
|
|
$
|
10,838
|
|
|
$
|
10,558
|
|
|
$
|
280
|
|
|
$
|
-
|
|
At August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual cash flows
|
|
(in ’000s of dollars)
|
|
Carrying
amount
|
|
|
Total
|
|
|
1 year
or less
|
|
|
2 - 5 years
|
|
|
More than 5
years
|
|
Accounts payable
|
|
$
|
1,102
|
|
|
$
|
1,102
|
|
|
$
|
1,102
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accrued liabilities
|
|
|
1,900
|
|
|
|
1,900
|
|
|
|
1,900
|
|
|
|
-
|
|
|
|
-
|
|
Convertible debenture
|
|
|
508
|
|
|
|
533
|
|
|
|
258
|
|
|
|
275
|
|
|
|
-
|
|
Long-term debt
|
|
|
1,627
|
|
|
|
1,880
|
|
|
|
1,159
|
|
|
|
721
|
|
|
|
-
|
|
|
|
$
|
5,137
|
|
|
$
|
5,415
|
|
|
$
|
4,419
|
|
|
$
|
996
|
|
|
$
|
-
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
25.
|
RECONCILIATION
OF CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
|
Liabilities
arising from financing activities include corporate loans and loans payable to officers and related companies. A reconciliation
of changes in these liabilities is:
For the nine months ended
|
|
May
31,
2019
|
|
|
May
31,
2018
|
|
|
|
|
|
|
|
|
Balance, beginning of the period
|
|
$
|
2,134,955
|
|
|
$
|
2,804,202
|
|
|
|
|
|
|
|
|
|
|
Changes from financing cash flows
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
517,000
|
|
|
|
1,328,056
|
|
Proceeds from convertible debt
|
|
|
5,618,750
|
|
|
|
5,200,171
|
|
Proceeds from officer loan
|
|
|
-
|
|
|
|
-
|
|
Repayment of long-term loans
|
|
|
(497,206
|
)
|
|
|
(947,720
|
)
|
Repayment of convertible loans
|
|
|
(400,000
|
)
|
|
|
|
|
Advances from executive officers
|
|
|
-
|
|
|
|
9,196
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign exchange rate
|
|
|
(21,838
|
)
|
|
|
(23,277
|
)
|
|
|
|
|
|
|
|
|
|
Other changes
|
|
|
|
|
|
|
|
|
Debt settled through share issuance
|
|
|
(192,395
|
)
|
|
|
(4,392,171
|
)
|
Conversion of convertible debt
|
|
|
(257,082
|
)
|
|
|
-
|
|
Debt applied to notes receivable
|
|
|
(120,900
|
)
|
|
|
|
|
Interest accrual
|
|
|
-
|
|
|
|
2,160
|
|
Interest capitalized
|
|
|
-
|
|
|
|
446,355
|
|
Value placed on warrants issued
|
|
|
(557,407
|
)
|
|
|
-
|
|
Value placed on beneficial conversion feature
|
|
|
(621,166
|
)
|
|
|
-
|
|
Gain on debt deposit
|
|
|
-
|
|
|
|
(50,982
|
)
|
Accretion of loan balance
|
|
|
967,382
|
|
|
|
56,500
|
|
Balance, end of the period
|
|
$
|
6,570,093
|
|
|
$
|
4,432,490
|
|
|
26.
|
RECONCILIATION
OF IFRS DISCLOSURE TO US GAAP DISCLOSURE
|
The
Company’s primary listing is on the Toronto Ventures Exchange (“TSXV”). The unaudited condensed consolidated
financial statements filed on that exchange are prepared in terms of International Financial Reporting Standards (“IFRS”).
The
Company’s unaudited condensed consolidated financial statements on this Form 10-Q is prepared in terms of US GAAP.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
26.
|
RECONCILIATION
OF IFRS DISCLOSURE TO US GAAP DISCLOSURE (continued)
|
The
main differences between IFRS and US GAAP are as follows:
For the three months ended
|
|
May 31,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss in accordance with IFRS
|
|
$
|
4,792,890
|
|
|
$
|
3,178,839
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(248,912
|
)
|
|
|
-
|
|
Debt issue costs
|
|
|
(43,799
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss in accordance with US GAAP
|
|
$
|
4,500,179
|
|
|
$
|
3,178,839
|
|
For the nine months ended
|
|
May 31,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss in accordance with IFRS
|
|
$
|
13,747,997
|
|
|
$
|
8,557,082
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(746,736
|
)
|
|
|
-
|
|
Debt issue costs
|
|
|
51,894
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss in accordance with US GAAP
|
|
$
|
13,053,155
|
|
|
$
|
8,557,082
|
|
|
|
May 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity in accordance with IFRS
|
|
$
|
46,193,400
|
|
|
$
|
32,929,400
|
|
|
|
|
|
|
|
|
|
|
Components
of share capital in accordance with IFRS
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
100,109,913
|
|
|
|
77,870,606
|
|
Shares to be issued
|
|
|
1,068,000
|
|
|
|
996,401
|
|
Share option reserve
|
|
|
14,485,974
|
|
|
|
12,823,000
|
|
Share warrant
reserve
|
|
|
6,246,032
|
|
|
|
3,207,915
|
|
|
|
|
121,909,919
|
|
|
|
94,897,922
|
|
Adjustment for:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
(217,862
|
)
|
|
|
528,874
|
|
Total
share capital in accordance with US GAAP
|
|
|
121,692,057
|
|
|
|
95,426,796
|
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit in accordance with IFRS
|
|
|
(75,716,519
|
)
|
|
|
(61,968,522
|
)
|
Adjustment for:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
217,862
|
|
|
|
-
|
|
Debt
issue costs
|
|
|
(51,894
|
)
|
|
|
(528,874
|
)
|
Accumulated
deficit in accordance with US GAAP
|
|
|
(75,550,551
|
)
|
|
|
(62,497,396
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders
equity in accordance with US GAAP
|
|
$
|
46,141,506
|
|
|
$
|
32,929,400
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
26.
|
RECONCILIATION
OF IFRS DISCLOSURE TO US GAAP DISCLOSURE (continued)
|
Share-based
compensation
The
Company granted certain directors, officers and consultants of the Company share purchase options with vesting terms attached
thereto, 25% vested immediately and a further 25%, per annum will vest on the grant date of the share purchase options. These
share purchase options were valued using a Black Scholes valuation model utilizing the assumptions as disclosed in note 16 above.
Under
IFRS share-based compensation paid to certain directors, consultants and employees were amortized over the vesting period of the
option grant using a weighted average expense over the vesting period, including the immediately vesting share purchase options.
Under
US GAAP, the share purchase options issued to consultants were expensed immediately and the share purchase options issued to directors
and officers were amortized as follows; (i) the value of the twenty five percent of the options that vested immediately were expensed
immediately; (ii) the remaining value of the seventy five percent of the options which vest equally on an annual basis are being
expensed over the vesting period on a straight line basis.
The difference in treatment between
IFRS and US GAAP gave rise to a reversal of expense of $248,912 and $746,736 for the three months and nine months ended May 31,
2019, respectively. There was no impact on the prior periods as all options issued during that period vested immediately and were
accordingly expensed immediately.
Debt
issue costs
The
Company settled certain commitment fees and finders fees related to the issue of convertible notes by the issue of common shares
valued at $1,276,980. Under IFRS, these debt issue costs were originally expensed in the three month period ended November 30,
2018 and subsequently recorded as a prepaid commitment fee in the nine month period ended May 31, 2019. Under IFRS this commitment
fee is not directly linked to the convertible debt and is amortized on a straight-line basis over the commitment period.
In terms of US GAAP, the commitment
fee and finder’s fee is regarded as directly related to the debt and is recorded as a debt discount which is amortized over the
life of the debt, including any accelerated amortization due to repayment or early settlement of the debt.
The
difference in treatment between IFRS and US GAAP gave rise to a reversal of the prepaid commitment fee of $1,276,980 and the subsequent
amortization thereof of $894,587 and the raising of additional debt discount of $1,276,980 and the amortization thereof of $946,481.
The difference between the amortization of the prepaid commitment fee and the debt discount amortization to the statement of loss
and comprehensive loss was a credit of $43,799 and a charge of $51,894 for the three months and nine months ended May 31, 2019,
respectively.
Subsequent
events after the reporting date not otherwise separately disclosed in these unaudited condensed consolidated financial statements
are:
On
July 3, 2019, the Company cancelled 390,625 shares previously issued to an investor for gross proceeds of $250,000, due to the
proceeds never being received.
On July 5, 2019, the Company issued
6,732,402 shares of common stock and warrants exercisable to purchase 4,601,980 shares of common stock at exercise prices ranging
from $0.25 per share to $0.40 per share, for gross proceeds of $1,546,149. Included in this issuance was 210,526 shares of common
stock issued to a company controlled by the Chairman of the Board.
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
27.
|
SUBSEQUENT
EVENTS (continued)
|
On July 22, 2019, the Company issued
to an arm’s length lender a $300,000 principal amount (including an original issue discount of 20%) unsecured convertible
debenture, and warrants to purchase up to 1,315,789 common shares of the Company at $0.24 per share for 15 months. The debenture
has a term of 15 months and bears interest at a rate of 7% per annum payable quarterly, and at the option of the holder the purchase
amount of the debenture (excluding the original issue discount of 20%) is convertible into 1,315,789 common shares of
the Company at $0.19 per share in accordance with the terms and conditions set out in the debenture.
The
Company entered into debt settlement agreements whereby debt of $93,500 was settled by the issue of 410,000 shares of common stock.
The Company entered into a shares
for debt transaction, pursuant to which it will issue 838,714 common shares in satisfaction of $176,130 of indebtedness currently
owed to an arm’s length service provider.
|
28.
|
SUPPLEMENTAL
INFORMATION ON OIL AND GAS OPERATIONS
|
Supplemental
unaudited information regarding the Company’s oil and gas activities is presented in this note.
The
Company has not commenced commercial operations, therefore the disclosure of the results of operations of hydrocarbon activities
is limited to advance royalties paid. All expenditure incurred to date is capitalized as part of the development cost of the Company’s
oil extraction plant.
The
Company does not have any proven hydrocarbon reserves or historical data to forecast the standardized measure of discounted future
net cash flows related to proven hydrocarbon reserve quantities. Upon the commencement of production, the Company will be able
to forecast future revenues and expenses of its hydrocarbon activities.
Costs
incurred
The
following table reflects the costs incurred in hydrocarbon property acquisition and development expenses.
All
costs were incurred in the US.
(In US$ 000’s)
|
|
Nine months ended
May 31,
2019
|
|
|
Nine months ended
May 31,
2018
|
|
|
|
|
|
|
|
|
Advanced royalty payments
|
|
$
|
300
|
|
|
$
|
469
|
|
Mineral rights acquired
|
|
|
10,800
|
|
|
|
-
|
|
Construction of oil extraction plant
|
|
|
7,851
|
|
|
|
3,025
|
|
|
|
$
|
18,951
|
|
|
$
|
3,494
|
|
PETROTEQ
ENERGY INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
Expressed
in US dollars
|
28.
|
SUPPLEMENTAL
INFORMATION ON OIL AND GAS OPERATIONS (continued)
|
Results
of operations
The
only operating expenses incurred to date on hydrocarbon activities relate to minimum royalties paid on mineral leases that the
Company has entered into and certain operating expenses related to plant maintenance.
All
costs were incurred in the US.
(In US$ 000’s)
|
|
Nine months ended
May 31,
2019
|
|
|
Nine months ended
May 31,
2018
|
|
|
|
|
|
|
|
|
Plant maintenance expenses
|
|
$
|
729
|
|
|
$
|
-
|
|
Advanced royalty payments
|
|
|
199
|
|
|
|
234
|
|
|
|
$
|
928
|
|
|
$
|
234
|
|
Proven
reserves
The
Company does not have any proven hydrocarbon reserves as of May 31, 2019.