Registration Statement No. 333-        

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended     

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to      

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

Commission file number

 

PETROTEQ ENERGY INC.

(Exact Name of Registrant)

 

 

Ontario

 

15165 Ventura Blvd., #200

Sherman Oaks, California 91403

(Jurisdiction of Incorporation or Organization)   (Address of principal executive offices)

 

Mr. David Sealock

15165 Ventura Blvd., #200

Sherman Oaks, California 91403

(800) 979-1987

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Copies to:

 

Leslie Marlow, Esq.

Hank Gracin, Esq.

Gracin & Marlow, LLP

The Chrysler Building

405 Lexington Avenue, 26th Floor

New York, New York 10174

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

     

 

Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Shares 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common shares as of the close of the period covered by the annual report. 

The number of common shares outstanding, as of September 30, 2018 is 88,215,263 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐  Yes  ☒ No 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ☐  Yes  ☐  No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☐ Yes  ☒ No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☐  Yes  ☐ No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐  Accelerated filer ☒ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: 

U.S. GAAP  ☐  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☒

  Other  ☐

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17  ☐ Item 18 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐  Yes  ☒ No

 

 

 

 

 

Table of Contents

 

INTRODUCTION 1
     
PART I 2
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 2
A. Directors and Senior Management 2
B. Advisers 2
C. Auditors 2
     
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 2
A. Offer Statistics
B. Method and Executed Time Table
     
ITEM 3. KEY INFORMATION 2
A. Selected Financial Data 2
B. Capitalization and Indebtedness 4
C. Reasons for the Offer and Use of Proceeds 4
D. Risk Factors 4
     
ITEM 4. INFORMATION ON THE COMPANY 19
A. History and Development of the Company 19
B. Business Overview 20
C. Organizational Structure 27
D. Property, Plants and Equipment 27
     
ITEM 4A. UNRESOLVED STAFF COMMENTS 29
     
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 29
A. Operating Results 29
B. Liquidity and Capital Resources 38
C. Research and Development, Patents and Licenses 39
D. Trend Information 39
E. Off-Balance Sheet Arrangements 39
F. Tabular Disclosure of Contractual Obligations 39
G. Safe Harbor 40
     
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 41
A. Directors and Senior Management 41
B. Compensation 43
C. Board Practices 48
D. Employees 52
E. Share Ownership 52
     
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 53
A. Major Shareholders 53
B. Related Party Transactions 53
C. Interests of Experts and Counsel 56
     
ITEM 8. FINANCIAL INFORMATION 56
A. Consolidated Statements and Other Financial Information 56
B. Significant Changes 57
   
ITEM 9. THE OFFER AND LISTING 57
A. Offer and Listing Details 57
B. Plan of Distribution 58
C. Markets 58
D. Selling Shareholders 58
E. Dilution 58
F. Expenses of the Issue 58

 

i

 

 

ITEM 10. ADDITIONAL INFORMATION 58
A. Share Capital 58
B. Memorandum and articles of Association 62
C. Material Contracts 65
D. Exchange Controls 65
E. Taxation 66
F. Dividends and Paying Agents 70
G. Statement by Experts 70
H. Documents on Display 70
I. Subsidiary Information 71
     
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 71
     
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 71
A. Debt Securities 71
B. Warrants and Rights 71
C. Other Securities 71
D. American Depositary Shares 71
     
PART II   72
   
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 72
   

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

72
   
ITEM 15. CONTROLS AND PROCEDURES 72
(a) Disclosure Controls and Procedures
(b) Managements Annual Report Over Financial Reporting
(c) Attestation Report of the Registrant
(d) Changes in Internal Control over Financial Report  
     
ITEM 16. RESERVED 72
   
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 72
     
ITEM 16B. CODE OF ETHICS 72
     
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 72
     
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 72
     
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 72
     
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 72
     
ITEM 16G. CORPORATE GOVERNANCE 72
     
ITEM 16H. MINE SAFETY DISCLOSURE 72
     
PART III   73
     
ITEM 17. FINANCIAL STATEMENTS 73
   
ITEM 18. FINANCIAL STATEMENTS 73
     
ITEM 19. EXHIBITS 73

 

ii

 

 

INTRODUCTION

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Except for the historical information contained in this registration statement on Form 20-F, the statements contained in this registration statement on Form 20-F are “forward-looking statements” which reflect our current view with respect to future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this registration statement, include, but are not limited to the validation of and commercial viability of our Extraction Technology (defined below); the environmental friendliness of the Extraction Technology; the bbl/d capacity of the Extraction Technology; the schedule for certain events to occur and full scale production to commence; capital efficacy and economics of the Extraction Technology; potential of our properties to contain reserves; our ability to meet our working capital needs; the plans, costs, timing and capital for future exploration and development of our property interests, including the costs and potential impact of complying with existing and proposed laws and regulations; management’s outlook regarding future trends; sensitivity analysis on financial instruments, which may vary from amounts disclosed; prices and price volatility for oil and gas; and general business and economic conditions. We remind investors that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. Please see the Risk Factors section that appears in Item 3.D. under the heading “Key Information –Risk Factors.”

 

Inherent in forward-looking statements are risks, uncertainties and other factors beyond our ability to predict or control. These risks, uncertainties and other factors include, but are not limited to, oil and gas reserves, price volatility, changes in debt and equity markets, timing and availability of external financing on acceptable terms, the uncertainties involved in interpreting geological data and confirming title to properties, the possibility that future exploration results or the validation of technology will not be consistent with our expectations, increases in costs, environmental compliance and changes in environmental and other local legislation and regulation, interest rate and exchange rate fluctuations, changes in economic and political conditions and other risks involved in the oil and gas industry. Readers are cautioned that the foregoing list of factors is not exhaustive of the factors that may affect the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this registration statement. Such statements are based on a number of assumptions that may prove to be incorrect, including, but not limited to, assumptions about the following: the availability of financing for our exploration and development activities; operating and exploration costs; our ability to retain and attract skilled staff; timing of the receipt of regulatory and governmental approvals for exploration and production projects and other operations; market competition; and general business and economic conditions.

 

1

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A. Directors and Senior Management 

 

For the names and functions of our directors and senior management, see Item 6.A under the heading “Directors, Senior Management and Employees –Directors and Senior Management” and Item 6.C under the heading “Directors, Senior Management and Employees –Board Practices.” The business address of our directors and senior management is 15165 Ventura Blvd, #200, Sherman Oaks, California 91403.

 

B. Advisers

 

Our principal United States legal advisers are Gracin & Marlow, LLP, located in the United States at The Chrysler Building, 26th Floor, 405 Lexington Avenue, New York, New York 10017, United States and our principal Canadian legal advisers are DLA Piper (Canada) LLP located in Canada at 1 First Canadian Place, Suite 6000, 100 King Street West, Ontario M5X 1E2.

 

C. Auditors

 

Hay & Watson, whose address is 900-1450 Creekside Drive, Vancouver, British Columbia V6J 5B3, is our current independent registered public accounting firm and audited our financial statements for the fiscal years ended August 31, 2017, 2016 and 2015. Hay & Watson has been our auditor since 2012. Hay & Watson are chartered professional accountants from Vancouver, British Columbia.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION 

 

A. Selected Financial Data

 

The following tables present our selected consolidated financial data as of the dates and for the periods indicated. We derived the selected consolidated statements of operations and comprehensive loss data for the years ended August 31, 2017 and 2016 and the selected consolidated balance sheet data as of August 31, 2017 and 2016, from our audited consolidated financial statements included elsewhere in this registration statement. We derived the selected consolidated statement of operations and comprehensive loss data for the three and nine months ended May 31, 2018 from the condensed consolidated interim financial statements for the three and nine months ended May 31, 2018 and the selected balanced sheet data as of May 31, 2018 from our unaudited consolidated financial statements included elsewhere in this registration statement. We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), which includes all standards issued by the International Accounting Standards Board (IASB) and related interpretations issued by the IFRS Interpretations Committee. Our historical results are not necessarily indicative of our future results.

 

You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this registration statement and the information in “Item 5. Operating and Financial Review and Prospects.”

 

Our functional currency is the U.S. Dollar.

 

2

 

 

The following selected financial information, for the annual periods as shown in the table, was prepared in accordance with IFRS:

 

Consolidated Statement of Operations and Comprehensive Loss Data: 

 

Year ended 

Nine Months Ended

May 31,

2018
($)

  

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

  

August 31, 2014

($)

  

August 31, 2013

($)

 
                         
Total revenues from continuing operations   Nil    Nil    204,735    Nil    Nil    Nil 
Total revenues from discontinued operations   Nil    Nil    Nil    116,697,604    451,837,071    431,932,384 
                               
(Income) loss from discontinued operations   Nil    Nil    Nil    (3,750,969)   3,657,286    22,863 
Loss from continuing operations   

8,557,082

    7,939,643    12,091,826    3,281,765    6,477,461    11,247,677 
Net (income) loss   

8,557,082

    7,939,643    12,091,826    (469,204)   10,134,747    11,270,540 
                               
Basic and diluted loss per share from continuing operations*   .15    0.66    4.26    1.90    4.48    8.99 
Basic and diluted (income) loss per share*   .15    0.66    4.26    (0.27)   7.01    9.01 

 

Consolidated Balance Sheet Data

 

 

Nine Months Ended

May 31,

2018
($)

  

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

  

August 31, 2014

($)

  

August 31, 2013

($)

 
                               
Total Assets   32,006,091    28,950,175    31,235,915    30,444,464    30,793,432    26,701,047 
                               
Total Non-Current Financial Liabilities   1,993,935    1,967,996    10,142,202    14,440,630    9,981,313    5,333,310 
                               
Cash Dividends Declared Per-Share for Each Class of Share        Nil    Nil    Nil    Nil    Nil 

 

* Adjusted for the 30-for-1 share consolidation which took place on May 5, 2017.

 

3

 

 

B. Capitalization and Indebtedness

 

The following table presents our capitalization as of May 31, 2018 on an actual unaudited historical basis.

 

This table should be read in conjunction with Item 5.A. “Operating and Financial Review and Prospectus – Operating Results” and Item 5B. “Operating and Financial Review and Prospects – Liquidity and Capital Resources” as well as the consolidated financial statements and accompanying notes. There have been no material changes in capitalization and indebtedness as of May 31, 2018 except as in Item 8B below:

 

The following table shows our indebtedness (distinguishing between guaranteed, unguaranteed, secured and unsecured indebtedness) as of May 31, 2018 and our capitalization as of May 31, 2018.

 

Total Current Debt    
Guaranteed  $- 
Secured   684,318 
Unsecured   2,226,522 
   $2,910,840 
      
Total non-current debt (current portion of non-current debt)     
Guaranteed  $- 
Secured   328,660 
Unsecured   764,472 
   $1,092,132 
      
Shareholders equity     
Share capital  $66,817,217 
Subscription receipts   442,300 
Other reserves   12,169,733 
Total  $79,429,250 

  

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

The following risks relate specifically to our business and should be considered carefully. Our business, financial condition and results of operations could be harmed by any of the following risks. As a result, the trading price of our common shares could decline and the holders could lose part or all of their investment.

 

4

 

 

We have a limited operating history, and may not be successful in developing profitable business operations.

 

Our oil extraction segment has a limited operating history. Our business operations must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the oil extraction business.  In May 2018 we recommenced our oil extraction activities, which is expected to be a significant source of our revenue. From 2015 until 2018, we temporarily ceased our oil extraction operations while we relocated our production plant. For a limited period, we made sales of hydrocarbon products to customers produced at the oil extraction plant we had completed on September 1, 2015. Due to the volatility in the oil markets production ceased as we were not able to operate profitably at low volumes of output. The losses from continuing operations over the past three fiscal years are largely due to us relocating our oil extraction plant to the TMC mineral lease site. As of the date of this registration statement, we have generated limited revenue from these activities and do not anticipate generating any significant revenue from these activities until the new facility is fully operational for at least a few months, which is not expected until the last quarter of fiscal 2019.  We have an insufficient history at this time on which to base an assumption that our oil extraction business operations will prove to be successful in the long-term.  Our future operating results will depend on many factors, including:

 

our ability to raise adequate working capital;
the success of our development and exploration;
the demand for oil;
the level of our competition;
our ability to attract and maintain key management and employees; and
our ability to efficiently explore, develop, produce or acquire sufficient quantities of marketable gas or oil in a highly competitive and speculative environment while maintaining quality and controlling costs.

 

To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance our production efforts, when commenced.  Despite our best efforts, we may not be successful in our exploration or development efforts, or obtain required regulatory approvals.  There is a possibility that some, or all, of the wells in which we obtain interests may never produce oil or gas.

 

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

 

At May 31, 2018 and August 31, 2017, we had an accumulated deficit of ($55,413,449) and ($46,856,367), respectively and we expect to continue to incur increasing expenses in the foreseeable future as we develop our oil extraction business. We incurred a net loss of ($8,557,082) and ($7,939,643), respectively as of the nine months ended May 31, 2018 and the year ended August 31, 2017.  As a result, we are sustaining substantial operating and net losses, and it is possible that we will never be able to sustain or develop the revenue levels necessary to attain profitability.

 

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

 

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

 

We have issued and outstanding $1,012,978 of notes and convertible notes to certain private investor which mature between January 1, 2019 and August 31, 2020 and are secured by a pledge of all of our assets.  If we fail to comply with the terms of the notes, the note holder could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against our assets would likely have a serious disruptive effect on our operations.

 

We have limited capital and will need to raise additional capital in the future.

 

We do not currently have sufficient capital to fund both our continuing operations and our planned growth.  We will require additional capital to continue to grow our business via acquisitions and to further expand our exploration and development programs.  We may be unable to obtain additional capital when required.  Future acquisitions and future exploration, development, production and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.

 

We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means.  We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means.  If we do not succeed in raising additional capital, our resources may not be sufficient to fund our planned operations and may force us to curtail operations or cancel planned projects.

 

Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our limited operating history, the location of our oil and gas properties and prices of oil and gas on the commodities markets (which will impact the amount of asset-based financing available to us, if any) and the departure of key employees.  Further, if oil or gas prices on the commodities markets decline, our future revenues, if any, will likely decrease and such decreased revenues may increase our requirements for capital.  If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.

 

5

 

 

Any additional capital raised through the sale of equity may dilute the ownership percentage of our shareholders.  Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity.  The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect.

 

Any additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:

 

  increase our vulnerability to general adverse economic and industry conditions;
  require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital, growth and other general corporate purposes; and
  limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

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

 

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

 

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

 

At May 31, 2018, we had not yet achieved profitable operations, had accumulated losses of $55,413,449 since our inception and a working capital deficit of ($4,650,914), and expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a going concern. We have incurred net losses for the past three years. As at August 31, 2017, we had an accumulated deficit of ($46,856,367) and a working capital deficit of ($4,250,552). The opinion of our independent registered accounting firm on our audited financial statements for the years ended August 31, 2017 and 2016 draws attention to our notes to the financial statements which describes certain material uncertainties regarding our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management’s plan to address our ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtaining loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow us to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.

 

Our ability to successfully acquire oil and gas interests, to establish reserves, and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment.  These realities are subject to change and our inability to maintain close working relationships with industry participants or continue to acquire suitable property may impair our ability to execute our business plan.

 

To continue to develop our business, we will endeavor to use the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them.  In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain our relationships.  If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.

 

6

 

 

We may not be able to successfully manage our growth, which could lead to our inability to implement our business plan.

 

Our growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have a small number of executive officers, employees and advisors. Further, as we enter into additional contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties. In addition, once we commence operations at our oil extraction facility, our strain on management will further increase. These requirements will be exacerbated in the event of our further growth or in the event that the number of our drilling and/or extraction operations increases. There can be no assurance that our systems, procedures and/or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations

 

Our operations are dependent upon us maintaining our mineral lease for the Asphalt Ridge Property.

 

TMC, our subsidiary 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”). We recently moved our production facility to a location near the site of the TMC Mineral Lease. The TMC Mineral Lease is subject to termination under various circumstances, including our non-payment of certain royalty fees as well as us not meeting certain production quotas. If the TMC Mineral Lease were to be terminated our operations would be significantly impacted until such time that we were able to enter into a substitute lease. There can be no assurance that we could enter into a substitute lease upon favorable terms if at all or that such lease would not require us to relocate our extraction facility.

 

The loss of key personnel would directly affect our efficiency and profitability.

 

Our future success is dependent, in a large part, on retaining the services of our current management team. Our executive officers possess a unique and comprehensive knowledge of our industry, our technology and related matters that are vital to our success within the industry.  The knowledge, leadership and technical expertise of these individuals would be difficult to replace.  The loss of one or more of our officers could have a material adverse effect on our operating and financial performance, including our ability to develop and execute our long term business strategy.  We do not maintain key-man life insurance with respect to any employees. We do not have employment agreements with any of our executive officers other than our Chief Executive Officer.  There can be no assurance that any of our officers will continue to be employed by us.

 

In the future, we may incur significant increased costs as a result of operating as a U.S reporting company, and our management may be required to devote substantial time to new compliance initiatives.

 

In the future, we may incur significant legal, accounting and other expenses as a result of operating as a public company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the U.S. Securities and Exchange Commission (the “SEC”), have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

 

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Licenses and permits are required for our company to operate in some jurisdictions, and the loss of or failure to renew any or all of these licenses and permits or failure to comply with applicable laws and regulations could prevent us from either completing current projects or obtaining future projects, and, thus, materially adversely affect our business.

 

Our operations will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities.  Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments, among other factors.  Our inability to obtain, or our loss of or denial of extension of, any of these licenses or permits could hamper our ability to produce revenues from our operations.

 

7

 

 

We are subject to various national, state, and local laws and regulations in the various countries in which we operate, including those relating to the renewable energy industry in general, and may be required to make significant capital expenditures to comply with laws and the applicable regulations and standards of governmental authorities and organizations. Moreover, the cost of compliance could be higher than anticipated. On the effective date hereof, our operations will become subject to compliance with the U.S. Foreign Corrupt Practices Act in addition to certain international conventions and the laws, regulations and standards of other foreign countries in which we operate. It is also possible that existing and proposed governmental conventions, laws, regulations and standards, including those related to climate and emissions of “greenhouse gases,” may in the future add significantly to our operating costs or limit our activities or the activities and levels of capital spending by our customers.

 

In addition, many aspects of our operations are subject to laws and regulations that relate, directly or indirectly, to the renewable industry. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and even criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that may limit or prohibit our operations. The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations curtailing production activity could materially limit our future contract opportunities, materially increase our costs or both.

 

We could be subject to litigation that could have an adverse effect on our business and operating results.

 

We are, from time to time, involved in litigation. The numerous operating hazards inherent in our business increase our exposure to litigation, which may involve, among other things, contract disputes, personal injury, environmental, employment, warranty and product liability claims, tax and securities litigation, patent infringement and other intellectual property claims and litigation that arises in the ordinary course of business. Our management cannot predict with certainty the outcome or effect of any claim or other litigation matter. Litigation may have an adverse effect on us because of potential negative outcomes such as monetary damages or restrictions on future operations, the costs associated with defending the lawsuits, the diversion of management’s resources and other factors.

 

Global political, economic and market conditions could negatively impact our business.

 

Our company’s operations are affected by global political, economic and market conditions. The recent economic downturn has generally reduced the availability of liquidity and credit to fund business operations worldwide and has adversely affected our customers, suppliers and lenders. Our limited capital resources have negatively impacted our activity levels and, in turn, our financial condition and results of operations. A sustained or deeper recession in regions in which we operate could limit overall demand for our renewable energy solutions and could further constrain our ability to generate revenues and margins in those markets and to grow overall.

 

War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on us, our suppliers (including, without limitation, refineries), logistics providers and customers (including, without limitation, branded and unbranded gas stations). Our business operations are subject to interruption by, among others, natural disasters (including, without limitation, earthquakes), fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile acts, labor disputes, public health issues, and other events beyond its control. Such events could decrease demand for our services and products, make it difficult or impossible for us to make and deliver fuel to gas stations, or to receive fuel from its suppliers, and create delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our customers and suppliers. The majority of our business operations, our corporate headquarters, and other critical business operations, including suppliers and customers, are in locations that could be affected by natural disasters. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.

 

We do not carry business interruption insurance, and any unexpected business interruptions could adversely affect our business.

 

Our operations are vulnerable to interruption by earthquake, fire, power failure and power shortages, hardware and software failure, floods, computer viruses, and other events beyond our control.  In addition, we do not carry business interruption insurance to compensate us for losses that may occur as a result of these kinds of events, and any such losses or damages incurred by us could disrupt our projects and our other operations without reimbursement. Because of our limited financial resources, such an event could threaten our viability to continue as a going concern and lead to dramatic losses in the value of our common shares.

 

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Certain Factors Related to Oil Sands Exploration

 

The Nature of Oil Sands Exploration and Development involves many risks.

 

Oil sands exploration and development are very competitive and involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. As with any exploration property, there can be no assurance that commercial deposits of bitumen will be produced from oil sands exploration licenses and our permit lands in Utah.

 

The Extraction Technology has never been implemented on a large commercial basis as an oil and gas recovery technology before and our assumptions and expectations may not be accurate causing actual results of the implementation of the Extraction Technology to be significantly different form our current expectations. As a result, our operations may not generate any significant revenues from the development of the bitumen resources. In addition, there is no assurance that reserve engineers or lenders will determine that the production resulting from the application of the Extraction Technology can be used to establish reserves.

 

Furthermore, the marketability of any resource will be affected by numerous factors beyond our control. These factors include, but are not limited to, market fluctuations of prices, proximity and capacity of pipelines and processing equipment, equipment and labor availability and government regulations (including, without limitation, regulations relating to prices, taxes, royalties, land tenure, allowable production, importing and exporting of oil and gas, land use and environmental protection). The extent of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital.

 

Supply risk is a function of the unavailability of third party bitumen, poor ore grade quality or density, unplanned mine equipment and extraction plant maintenance, storage costs and in situ reservoir and equipment performance could impact production targets. Our oil extraction activities will be dependent upon our supply of bitumen.

 

The viability of our business plan, business operations, and future operating results and financial condition are and will be exposed to fluctuating prices for oil, gas, oil products and chemicals

 

Prices of oil, gas, oil products and chemicals are affected by supply and demand, which can fluctuate significantly. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, or conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations can have a material effect on our ability to raise capital and fund our exploration activities, our potential future earnings, and our financial condition. For example, in a low oil and gas price environment oil sands exploration and development may not be financially viable or profitable. Prolonged periods of low oil and gas prices, or rising costs, could result in our exploration projects being delayed or cancelled, as well as the impairment of certain assets.

 

Environmental and regulatory compliance may impose substantial costs on us.

 

Our operations are or will be subject to stringent federal, provincial and local laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or to pay damages regardless of fault. Environmental laws also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.

 

Our exploration activities and drilling programs are or will be subject to extensive laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, land use, protection and remediation of the environment, protection of endangered and protected species, operational safety, toxic substances and other matters. Exploration and drilling is also subject to risks and liabilities associated with pollution of the environment and disposal of waste products. Compliance with these laws and regulations will impose substantial costs on us and will subject us to significant potential liabilities. In addition, should there be changes to existing laws or regulations, our competitive position within the oil sands industry may be adversely affected, as many industry players have greater resources than we do. 

 

We are required to obtain various regulatory permits and approvals in order to explore and develop our properties. The absence of a distinct overlying shale formation on portions of our leases may make it more difficult or costly to obtain regulatory approvals. There is no assurance that regulatory approvals for exploration and development of our properties will be obtained at all or with terms and conditions acceptable to us.

 

We may be exposed to third party liability and environmental liability in the operation of our business.

 

Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damage. We could be liable for environmental damages caused by previous owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, and the payment of such liabilities could have a material adverse effect on our financial condition and results of operations. The release of harmful substances in the environment or other environmental damages caused by our activities could result in us losing our operating and environmental permits or inhibit us from obtaining new permits or renewing existing permits. We currently have a limited amount of insurance and, at such time as we commence additional operations, we expect to be able to obtain and maintain additional insurance coverage for our operations, including limited coverage for sudden environmental damages, but we do not believe that insurance coverage for environmental damage that occurs over time is available at a reasonable cost. Moreover, we do not believe that insurance coverage for the full potential liability that could be caused by environmental damage is available at a reasonable cost. Accordingly, we may be subject to liability or may lose substantial portions of our properties in the event of certain environmental damage. We could incur substantial costs to comply with environmental laws and regulations which could affect our ability to operate as planned.

 

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American climate change legislation could negatively affect markets for crude and synthetic crude oil

 

Environmental legislation regulating carbon fuel standards in jurisdictions that import crude and synthetic crude oil in the United States could result in increased costs and/or reduced revenue. For example, both California and the United States federal governments have passed legislation which, in some circumstances, considers the lifecycle greenhouse gas emissions of purchased fuel and which may negatively affect our business, or require the purchase of emissions credits, which may not be economically feasible.

 

Because of the speculative nature of oil exploration, there is risk that we will not find commercially exploitable oil and gas and that our business will fail.

 

The search for commercial quantities of oil and gas as a business is extremely risky. We cannot provide investors with any assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of bitumen, oil and/or gas.  The exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas.  Problems such as unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing formations and other conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are unable to find commercially exploitable quantities of oil and gas, and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail our business plan, and as a result, any investment in us may become worthless.

 

The price of oil and gas has historically been volatile.  If it were to decrease substantially, our projections, budgets and revenues would be adversely affected, potentially forcing us to make changes in our operations.

 

Our future financial condition, results of operations and the carrying value of any oil and gas interests we acquire will depend primarily upon the prices paid for oil and gas production. Oil and gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and gas are subject to a variety of additional factors that are beyond our control. These factors include:

 

the level of consumer demand for oil and gas;
the domestic and foreign supply of oil and gas;
the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;
the price of foreign oil and gas;
domestic governmental regulations and taxes;
the price and availability of alternative fuel sources;
weather conditions;
market uncertainty due to political conditions in oil and gas producing regions, including the Middle East; and
worldwide economic conditions.

 

These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and gas price movements with any certainty. Declines in oil and gas prices affect our revenues and accordingly, such declines could have a material adverse effect on our financial condition, results of operations, our future oil and gas reserves and the carrying values of our oil and gas properties. If the oil and gas industry experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline in value or become worthless. If we acquire gasoline fuels from refineries at times when prices rise and thereafter the prices, we could be forced to sell our products at prices below the cost incurred by us.

 

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Because of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.

 

The oil and gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. There can be no assurance that our insurance in place will be adequate to cover any losses or liabilities. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us becoming worthless.

 

The market for oil and gas is intensely competitive, and competition pressures could force us to abandon or curtail our business plan.

 

The market for oil and gas exploration services is highly competitive, and we only expect competition to intensify in the future. Numerous well-established companies are focusing significant resources on exploration and are currently competing with us for oil and gas opportunities.  Other oil and gas companies may seek to acquire oil and gas leases and properties that we have targeted.  Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from investors.  Competitors include larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage.  Actual or potential competitors may be strengthened through the acquisition of additional assets and interests.  Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas but are manufactured from renewable resources. As a result, there can be no assurance that we will be able to compete successfully or that competitive pressures will not adversely affect our business, results of operations and financial condition. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.

 

Our estimates of the volume of recoverable resources could have flaws, or such resources could turn out not to be commercially extractable. Further, we may not be able to establish any reserves. As a result, our future revenues and projections could be incorrect.

 

Estimates of recoverable resources and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. To date we have not established any reserves. Our actual amounts of production, revenue, taxes, development expenditures, operating expenses, and future quantities of recoverable oil and gas reserves may vary substantially from the estimates. There are numerous uncertainties inherent in estimating quantities of bitumen resources and recoverable reserves, including many factors beyond our control and no assurance can be given that the recovery of bitumen will be realized. In general, estimates of resources and reserves are based upon a number of factors and assumptions made as of the date on which the resources and reserve estimates were determined, such as geological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from estimated results. Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment. In addition, any estimates of our future net revenues and the present value thereof are based on assumptions derived in part from historical price and cost information, which may not reflect current and future values, and/or other assumptions made by us that only represent our best estimates. For these reasons, estimates of reserves and resources, the classification of such resources and reserves based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially. Investors are cautioned not to assume that all or any part of a resource is economically or legally extractable. Additionally, if declines in and instability of oil and gas prices occur, then write downs in the capitalized costs associated with any oil and gas assets we obtain may be required. Because of the nature of the estimates of our recoverable resources and future reserves and estimates in general, we can provide no assurance that our estimated bitumen resources or future reserves will be present and/or commercially extractable. If our recoverable bitumen resource estimates are incorrect, the value of our common shares could decrease and we may be forced to write down the capitalized costs of our oil and gas properties.

 

Decommissioning costs are unknown and may be substantial.  Unplanned costs could divert resources from other projects.

 

In the future, we may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production of oil and gas reserves.  Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.”  We accrue a liability for decommissioning costs associated with our wells but have not established any cash reserve account for these potential costs in respect of any of our properties.  If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs.  The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.

 

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We may have difficulty distributing production, which could harm our financial condition.

 

In order to sell the oil and gas that we are able to produce, if any, the operators of the wells we obtain interests in may have to make arrangements for storage and distribution to the market.  We will rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate.  This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities.  These factors may affect our and potential partners’ ability to explore and develop properties and to store and transport oil and gas production, increasing our expenses.

 

Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of oil and/or gas and in turn diminish our financial condition or ability to maintain our operations.

 

Challenges to our properties may impact our financial condition.

 

Title to oil and gas interests is often not capable of conclusive determination without incurring substantial expense.  While we intend to make appropriate inquiries into the title of properties and other development rights we acquire, title defects may exist.  In addition, we may be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all.  If title defects do exist, it is possible that we may lose all or a portion of our right, title and interests in and to the properties to which the title defects relate. If our property rights are reduced, our ability to conduct our exploration, development and production activities may be impaired.  To mitigate title problems, common industry practice is to obtain a title opinion from a qualified oil and gas attorney prior to the drilling operations of a well.

 

We rely on technology to conduct our business, and our technology could become ineffective or obsolete.

 

We rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates and to guide our exploration, development and production activities.  We and our operator partners will be required to continually enhance and update our technology to maintain its efficacy and to avoid obsolescence.  Our oil extraction business is dependent upon the Extraction Technology that we have developed but which has not yet been used on a large commercial scale. As such, the project carries with it a greater degree of technological risk than other projects that employ commercially proven technologies and the Extraction Technology may not perform as anticipated. If major process design changes are required, the costs of doing so may be substantial and may be higher than the costs that we anticipate for technology maintenance and development.  If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired.  Further, even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we would were our technology more efficient.

 

Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position.

 

We rely on a variety of intellectual property rights that we use in our services and products. We rely upon intellectual property rights and other contractual or proprietary rights, including copyright, trademark, trade secrets, confidentiality provisions, contractual provisions, licenses and patents. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries in which our services and products may be sold do not protect intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position. Without patent and other similar protection, other companies could use substantially identical technology to offer products for sale without incurring the sizable development costs we have incurred. Even if we spend the necessary time and money, a patent may not be issued or it may insufficiently protect the technology it was intended to protect. If our pending patent applications are not approved for any reason, the degree of future protection for our proprietary technology will remain uncertain. If we have to engage in litigation to protect our patents and other intellectual property rights, the litigation could be time consuming and expensive, regardless of whether we are successful. Despite our efforts, our intellectual property rights, particularly existing or future patents, may be invalidated, circumvented, challenged, infringed or required to be licensed to others. We cannot be assured that any steps we may take to protect our intellectual property rights and other rights to such proprietary technologies that are central to our operations will prevent misappropriation or infringement of the right to use or license others to use the Extraction Technology and accordingly may conduct an oil sands extraction operation similar to ours.

 

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Certain Factors Related to Our Common Shares

 

There presently is a limited market for our common shares, and the price of our common shares may continue to be volatile.

 

Our common shares are currently quoted on the TSX Venture, the Frankfurt Exchange and the OTC Pink.  Our common shares, however, are very thinly traded, and we have a very limited trading history.  There could continue to be volatility in the volume and market price of our common shares moving forward.  This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial estimates by securities analysts or our failure to meet our or their projected financial and operating results, litigation involving us, factors relating to the oil and gas industry, actions by governmental agencies, national economic and stock market considerations as well as other events and circumstances beyond our control could have a significant impact on the future market price of our common shares and the relative volatility of such market price.

 

Offers or availability for sale of a substantial number of shares of our common shares may cause the price of our common shares to decline.

 

Our shareholders could sell substantial amounts of common shares in the public market, including shares sold upon the filing of a registration statement that registers such shares and/or upon the expiration of any statutory holding period under Rule 144 of the Securities Act of 1933 (the “Securities Act”), if available, or upon trading limitation periods.  Such volume could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common shares could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to secure additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

We do not anticipate paying any cash dividends.

 

We do not anticipate paying cash dividends on our common shares for the foreseeable future.  The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition.  The payment of any dividends will be within the discretion of our Board of Directors.  We presently intend to retain all earnings, if any, to implement our business strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

 

The market price and trading volume of our common shares may continue to be volatile and may be affected by variability in our performance from period to period and economic conditions beyond management’s control.

 

The market price of our common shares may continue to be highly volatile and could be subject to wide fluctuations. This means that our shareholders could experience a decrease in the value of their common shares regardless of our operating performance or prospects. The market prices of securities of companies operating in the oil and gas sector have often experienced fluctuations that have been unrelated or disproportionate to the operating results of these companies. In addition, the trading volume of our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, our shareholders may be unable to resell our common shares at or above their purchase price, if at all. There can be no assurance that the market price of our common shares will not fluctuate or significantly decline in the future.

 

Some specific factors that could negatively affect the price of our common shares or result in fluctuations in their price and trading volume include:

 

  actual or expected fluctuations in our operating results;
  actual or expected changes in our growth rates or our competitors’ growth rates;
  our inability to raise additional capital, limiting our ability to continue as a going concern;
  changes in market prices for our product or for our raw materials;
  changes in market valuations of similar companies;
  changes in key personnel for us or our competitors;
 

speculation in the press or investment community;

  changes or proposed changes in laws and regulations affecting the renewable energy industry as a whole;
  conditions in the renewable energy industry generally; and
  conditions in the financial markets in general or changes in general economic conditions.

 

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In the past, following periods of volatility in the market price of the securities of other companies, shareholders have often instituted securities class action litigation against such companies. If we were involved in a class action suit, it could divert the attention of senior management and, if adversely determined, could have a material adverse effect on our results of operations and financial condition.

 

We may be classified as a foreign investment company for U.S. federal income tax purposes, which could subject U.S. investors in our common shares to significant adverse U.S. income tax consequences.

 

Depending upon the value of our common shares and the nature of our assets and income over time, we could be classified as a “passive foreign investment company”, or “PFIC”, for U.S. federal income tax purposes. Based upon our current income and assets and projections as to the value of our common shares, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. While we do not expect to become a PFIC, if among other matters, our market capitalization is less than anticipated or subsequently declines, we may be a PFIC for the current or future taxable years. The determination of whether we are or will be a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets. Because PFIC status is a factual determination made annually after the close of each taxable year, including ascertaining the fair market value of our assets on a quarterly basis and the character of each item of income we earn, we can provide no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

 

If we were to be classified as a PFIC in any taxable year, a U.S. holder (as defined in Item 10E.2 under the heading “Taxation – Untied States Federal Income Tax Consequences”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. holder could derive from investing in a non-U.S. corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. holder holds our common shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our common shares. For more information see Item 10E.2 under the heading “Taxation – Untied States Federal Income Tax Consequences –Passive Foreign Investment Company Considerations.

 

We are exposed to credit risk through our cash and cash equivalents held at financial institutions.

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations. We are exposed to credit risk through our cash and cash equivalents held at financial institutions. We have cash balances at four financial institutions. We have not experienced any loss on these accounts, although balances in the accounts may exceed the insurable limits.

 

Some of our officers and directors have conflicts of interest and cannot devote a substantial amount of time to our company.

 

Certain of our current directors and officers are, and may continue to be, involved in other industries through their direct and indirect participation in corporations, partnerships or joint ventures which may be potential competitors of ours. Several of our officers work for us on a part time basis. These officers have discretion as to what time they devote to our activities, which may result in lack of availability when needed due to responsibilities at other jobs. In addition, situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers may conflict with our interests. Directors and officers with conflicts of interest will be subject to and follow the procedures set out in applicable corporate and securities legislation, regulation, rules and policies. Certain of our directors and officers will only devote a portion of their time to our business and affairs and some of them are or will be engaged in other projects or businesses.

 

Issuances of common shares upon exercise or conversion of convertible securities, including pursuant to our equity incentive plans and outstanding warrants and convertible notes could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

We currently have warrants to purchase 11,134,290 common shares outstanding at exercise prices ranging from CDN$0.315 to CDN$28.35 (with a weighted average exercise price of $[     ]), and options to purchase 9,808,333 common shares and notes convertible into 470,424 common shares based on a stock price of CDN$1.39 per share on September 12, 2018. The issuance of the common shares underlying the warrants, options and convertible notes will have a dilutive effect on the percentage ownership held by holders of our common shares.

 

We intend to apply to list our common shares on the NASDAQ Capital Market (“NASDAQ”); however, there can be no assurance that our common shares will be approved for listing on NASDAQ or if approved that we will meet the continued listing requirements.

 

We intend to apply to list our common shares on NASDAQ, we currently do not meet the initial listing requirements of NASDAQ. In particular, we do not meet the stock price requirement and may be required to effect another reverse stock split in order to meet such requirement.

 

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If after listing we fail to satisfy the continued listing requirements of NASDAQ such as the corporate governance requirements, the stockholder’s equity requirement or the minimum closing bid price requirement, NASDAQ may take steps to de-list our common shares. Such a de-listing or even notification of failure to comply with such requirements would likely have a negative effect on the price of our common shares and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the NASDAQ’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common shares to become listed again, stabilize the market price or improve the liquidity of our common shares, prevent our common shares from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with the NASDAQ’s listing requirements.

 

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our common shares will be listed on NASDAQ, our common shares will be covered securities. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were to be delisted from NASDAQ, our common shares would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.

 

In order to meet the initial listing requirements of NASDAQ, we may need to effect a reverse stock split.

 

In order to meet the initial listing requirements of NASDAQ. We will likely need to effect a reverse stock split. There are risks associated with a reverse split, including that a reverse split may not result in a sustained increase in the per share price of our common shares. There is no assurance that:

 

  the market price per share of our common shares after a reverse split will rise in proportion to the reduction in the number of shares of our common shares outstanding before the reverse split;
  a reverse split will result in a per share price that will attract brokers and investors who do not trade in lower priced stocks;
  a reverse split will result in a per share price that will increase our ability to attract and retain employees and other service providers; and
  the market price per share will either exceed or remain in excess of the minimum bid price as required by NASDAQ Capital Market, or that we will otherwise meet the requirements of NASDAQ Capital Market for initial listing for trading on NASDAQ.

 

Even if the market price of our common shares does rise following a reverse split, we cannot assure you that the market price of our common shares immediately after a reverse split will be maintained for any period of time. Even if an increased per-share price can be maintained, a reverse split may not achieve the desired results that have been outlined above. Moreover, because some investors may view a reverse split negatively, we cannot assure you that a reverse split will not adversely impact the market price of our common shares.

 

The risks associated with penny stock classification could affect the marketability of our common shares and shareholders could find it difficult to sell their shares.

 

Our common shares are currently subject to “penny stock” rules as promulgated under the Securities and Exchange Act of 1934, as amended. The SEC adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Transaction costs associated with purchases and sales of penny stocks are likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on certain national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the exchange).

 

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker- dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common shares in the United States and shareholders may find it more difficult to sell their shares.

 

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The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.

 

We are incorporated under the Business Corporations Act (Ontario). The rights of holders of our common shares are governed by the laws of the Province of Ontario, including the Business Corporations Act (Ontario), by the applicable laws of Canada, and by our Articles, as amended (the “Articles”), and our by-laws (the “by-laws”). These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. The principal differences include without limitation the following:

 

Under the Business Corporations Act (Ontario), we have a lien on any common share registered in the name of a shareholder or the shareholder’s legal representative for any debt owed by the shareholder to us. Under U.S. state law, corporations generally are not entitled to any such statutory liens in respect of debts owed by shareholders. Our bylaws also provide that at least 25% of our Board of Directors must be resident Canadians.

 

With regard to certain matters, we must obtain approval of our shareholders by way of at least 66 2/3% of the votes cast at a meeting of shareholders duly called for such purpose being cast in favor of the proposed matter. Such matters include without limitation: (a) the sale, lease or exchange of all or substantially all of our assets out of the ordinary course of our business; and (b) any amendments to our Articles including, but not limited to, amendments affecting our capital structure such as the creation of new classes of shares, changing any rights, privileges, restrictions or conditions in respect of our shares, or changing the number of issued or authorized shares, as well as amendments changing the minimum or maximum number of directors set forth in the Articles. Under many U.S. state laws, the sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the outstanding shares, although in some cases approval by a higher percentage of the outstanding shares may be required. In addition, under U.S. state law the vote of a majority of the shares is generally sufficient to amend a company’s certificate of incorporation, including amendments affecting capital structure or the number of directors.

 

Pursuant to our by-laws, two persons holding 5% of the shares entitled to vote at the meeting present in person or represented by proxy and each entitled to vote thereat shall constitute a quorum for the transaction of business at any meeting of shareholders. Under U.S. state law, a quorum generally requires the presence in person or by proxy of a specified percentage of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled to vote.

 

Under rules of the Ontario Securities Commission, a meeting of shareholders must be called for consideration and approval of certain transactions between a corporation and any “related party” (as defined in such rules). A “related party” is defined to include, among other parties, directors and senior officers of a corporation, holders of more than 10% of the voting securities of a corporation, persons owning a block of securities that is otherwise sufficient to affect materially the control of the corporation, and other persons that manage or direct, to a substantial degree, the affairs or operations of the corporation. At such shareholders’ meeting, votes cast by any related party who holds common shares and has an interest in the transaction may not be counted for the purposes of determining whether the minimum number of required votes have been cast in favor of the transaction. Under U.S. state law, a transaction between a corporation and one or more of its officers or directors can generally be approved either by the shareholders or a by majority of the directors who do not have an interest in the transaction.

 

Neither Canadian law nor our Articles or by-laws limit the right of a non-resident to hold or vote our common shares, other than as provided in the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”). The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian (other than a “WTO Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire our direct control, and the value of our assets were CDN$5.0 million or more (provided that immediately prior to the implementation of the investment in our company was not controlled by WTO Investors). An investment in our common shares by a WTO Investor (or by a non- Canadian other than a WTO Investor if, immediately prior to the implementation of the investment our company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire our direct control and the value of our assets equaled or exceeded certain threshold amounts determined on an annual basis.

 

The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the WTO; (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the Investment Act. A different threshold also applies if the Canadian business carries on a cultural business.

 

The 2018 threshold for WTO investors that are SOEs will be CDN$398 million based on the book value of the Canadian business’ assets, up from CDN$379 million in 2017.

 

The 2018 thresholds for review for direct acquisitions of control of Canadian businesses by private sector investor WTO investors (CDN$1 billion) and private sector trade-agreement investors (CDN$1.5 billion) remain the same and are both based on the “enterprise value” of the Canadian business being acquired.

 

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A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of our company for purposes of the Investment Act if he or she acquired a majority of our common shares. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of our company, unless it could be established that we are not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a “national” of a country (other than Canada) that is a member of the WTO (“WTO Member”) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO Investor-controlled entity,” pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions involving our common shares would be exempt from the Investment Act, including:

 

an acquisition of our common shares if the acquisition were made in connection with the person’s business as a trader or dealer in securities;
an acquisition of control of our company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and
an acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control of our company, through the ownership of voting interests, remains unchanged. Under U.S. law, except in limited circumstances, restrictions generally are not imposed on the ability of non- residents to hold a controlling interest in a U.S. corporation.

 

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. public companies.

 

We are a “foreign private issuer,” as defined in the SEC rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

 

As a foreign private issuer, we will file an annual report on Form 20-F within four months of the close of each fiscal year ended August 31 and reports on Form 6-K relating to certain material events promptly after we publicly announce these events. However, because of the above exemptions for foreign private issuers, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.

 

If our common shares are listed on NASDAQ, while we are a foreign private issuer, we are not subject to certain NASDAQ corporate governance rules applicable to U.S. listed companies.

 

If our common shares are listed for trading on NASDAQ, we will be entitled to rely on a provision in NASDAQ’s corporate governance rules that allows us to follow the Business Corporations Act (Ontario) with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on NASDAQ.

 

For example, we are exempt from NASDAQ regulations that require a listed U.S. company to (i) have a majority of the board of directors consist of independent directors, (ii) require non-management directors to meet on a regular basis without management present and (iii) promptly disclose any waivers of the code for directors or executive officers that should address certain specified items.

 

In accordance with our registration under the Exchange Act, our audit committee is required to comply with the provisions of Section 301 of the Sarbanes- Oxley Act of 2002, or the Sarbanes-Oxley Act, and Rule 10A-3 of the Exchange Act, both of which are also applicable to NASDAQ-listed U.S. companies. Because we are a foreign private issuer, however, our audit committee is not subject to additional NASDAQ requirements applicable to listed U.S. companies, including an affirmative determination that all members of the audit committee are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer. Furthermore, NASDAQ’s corporate governance rules require listed U.S. companies to, among other things, seek shareholder approval for the implementation of certain equity compensation plans and issuances of ordinary shares, which we are not required to follow as a foreign private issuer.

 

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We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

 

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. We may no longer be a foreign private issuer as early as June 30, 2019 (the end of our second fiscal quarter in the fiscal year following this direct listing), which would require us to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers as of February 1, 2019. In order to maintain our current status as a foreign private issuer, either (a) a majority of our common shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors cannot be U.S. citizens or residents, (ii) more than 50% of our assets must be located outside the United States and (iii) our business must be administered principally outside the United States. If we lose our status as a foreign private issuer, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and NASDAQ rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and is likely to make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board of Directors.

 

We are an emerging growth company within the meaning of the Securities Act and intend to take advantage of certain reduced reporting requirements.

 

We are an “emerging growth company,” or EGC, as defined in the Jumpstart Our Business Start-ups Act of 2012, or the JOBS Act. For as long as we continue to be an EGC, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As an EGC, we are required to report only two years of financial results and selected financial data compared to three and five years, respectively, for comparable data reported by other public companies. We may take advantage of these exemptions until we are no longer an EGC. We could be an EGC for up to five years, although circumstances could cause us to lose that status earlier, including if the aggregate market value of our common shares held by non- affiliates exceeds $700 million as of any June 30 (the end of our second fiscal quarter) before that time, in which case we would no longer be an EGC as of the following December 31 (our fiscal year-end). We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and the price of our common shares may be more volatile in the event that we decide to make an offering of our common shares following this direct listing.

 

Claims of U.S. civil liabilities may not be enforceable against us.

 

We are incorporated under Canadian law. Certain members of our Board of Directors and senior management are non- residents of the United States, and many of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible to serve process on such persons or us in the United States or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce judgments obtained in U.S. courts against them or us, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.

 

The United States and Canada do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in Canada. In addition, uncertainty exists as to whether Canadian courts would entertain original actions brought in the United Kingdom against us or our directors or senior management predicated upon the securities laws of the United States or any state in the United States. Any final and conclusive monetary judgment for a definite sum obtained against us in U.S. courts would be treated by the courts of Canada as a cause of action in itself and sued upon as a debt at common law so that no retrial of the issues would be necessary, provided that certain requirements are met. Whether these requirements are met in respect of a judgment based upon the civil liability provisions of the U.S. securities laws, including whether the award of monetary damages under such laws would constitute a penalty, is an issue for the court making such decision. If a Canadian court gives judgment for the sum payable under a U.S. judgment, the Canadian judgment will be enforceable by methods generally available for this purpose. These methods generally permit the Canadian court discretion to prescribe the manner of enforcement.

 

As a result, U.S. investors may not be able to enforce against us or our senior management, Board of Directors or certain experts named herein who are residents of the United Kingdom or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.

 

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

 

As of May 31, 2018, we had accumulated net operating losses (NOLs), of approximately $8.6 million. Varying jurisdictional tax codes have restrictions on the use of NOLs, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, R&D credits and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership. Based upon an analysis of our equity ownership, we do not believe that we have experienced such ownership changes and therefore our annual utilization of our NOLs is not limited. However, should we experience additional ownership changes, our NOL carry forwards may be limited.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We were incorporated as “AXEA Capital Corp.” on January 4, 2008 pursuant to the Business Corporations Act (British Columbia). On October 15, 2012, MCW Energy Group Limited (“MCW NB”), a corporation incorporated in the Province of New Brunswick, completed a reverse acquisition of AXEA Capital Corp. (the “RTO”) and as a result MCW NB became a wholly owned subsidiary of AXEA Capital Corp. which also changed its name from “AXEA Capital Corp.” to “MCW Enterprises Ltd.” Pursuant to articles of continuance filed on December 7, 2012, MCW NB changed its jurisdiction of governance by continuing from the Province of New Brunswick into the Province of Ontario. Pursuant to articles of continuance filed on December 12, 2012, MCW Enterprises Ltd. changed its jurisdiction of governance by continuing from the Province of British Columbia into the Province of Ontario and changed its name to MCW Enterprises Continuance Ltd. Pursuant to a certificate of amalgamation dated December 12, 2012, MCW Enterprises Continuance Ltd. and MCW NB amalgamated in the Province of Ontario and continued under the name “MCW Energy Group Limited”.

 

We are governed by the Business Corporations Act (Ontario) and our registered office is located at Suite 6000, 1 First Canadian Place, PO Box 367, 100 King Street West, Toronto, Ontario M5X 1E2, Canada and our principal place of business is located at 15165 Ventura Blvd., #200, Sherman Oaks, California 91403. Our telephone number is (866) 571-9613.

 

Our common shares are publicly traded on the TSX Venture Exchange (the “TSXV”) under the trading symbol “PQE”, the Frankfurt Exchange under the trading symbol PQCF.F and on the OTC Pink under the trading symbol “PQEFF”.

 

On July 4, 2016, we acquired a controlling interest of 57.3% of Accord GR Energy, Inc., however, we currently hold a 44.7% interest in Accord.

 

Pursuant to articles of amendment filed on May 5, 2017, we changed our name from “MCW Energy Group Limited” to “Petroteq Energy Inc.” and we changed our TSXV trading symbol from MCW to PQE. On June 2, 2017, our OTCQX trading symbol was changed from MCW to PQEFF. Since March 15, 2018, our stock has traded on the OTC Pink market when it no longer traded on the OTCQX International Market.

 

On May 5, 2017, we effected a share consolidation (reverse stock split) on a 1-for-30 basis. Unless otherwise included, all shares amounts and per share amounts in this registration statement have been prepared on a pro forma basis to reflect the 1-for-30 reverse stock split of our outstanding shares of common shares that we effected May 5, 2017.

 

Recently through our wholly owned subsidiary Petroteq Energy CA, Inc., we formed a new subsidiary Petrobloq, LLC. We have also acquired a 25% investment in a recruitment venture with three other parties providing a website based for careers in the oil and gas industry.

 

Additional information related to our company may be found on our website at www.petroteq.energy. Information contained in our website does not form part of the registration statement and is intended for informational purposes only.

 

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B. Business Overview

 

We are a Canadian-registered holding company that is engaged in various aspects of the oil and gas industry. Our primary focus is on two aspects of heavy oil recovery: (i) the development and implementation of our proprietary oil sands mining and processing technology to recover oil from surface mined bitumen deposits; and (ii) oil and gas exploration through the use of two oil enhanced recovery technologies. Our wholly owned subsidiary, Petroteq Energy CA, Inc., a California corporation (PQE), conducts our oil sands extraction business through its two wholly owned active subsidiary companies, Petroteq Oil Sands Recovery, LLC, a Utah limited liability company (“PQE Oil”), and TMC Capital, LLC, a Delaware limited liability company (“TMC”). Some of our oil and gas exploration activities are conducted through our investment in Accord GR Energy, Inc., a Delaware corporation (“Accord”), which uses two oil enhanced recovery technologies that it licenses from one of its affiliated entities to conduct its exploration work. Our newly formed indirect subsidiary, Petrobloq, LLC, a California limited liability company also wholly owned by PQE, is developing a blockchain-powered supply chain management platform for the oil and gas industry. We also own a 25% interest in Recruiter.com Oil and Gas Group LLC, a Delaware limited liability company (“Recruiter. OGG”), a recruitment venture that provides a website focused on careers in the oil and gas industry.

 

 

 

Oil Sands Mining

 

PQE, through its wholly owned subsidiaries PQE Oil and TMC, is in the business of oil sands mining and processing. Historically, all of PQE’s oil sands mining has occurred on a leased property in Asphalt Ridge, Utah where it mines surfaced bitumen deposits. Once mined, the bitumen deposits are processed at a production facility owned by PQE using PQE’s proprietary extraction technology. In 2016, PQE Oil’s mining operations were temporarily suspended due to the relocation of its plant to the location of the TMC mineral lease described below where the mining activities occur to improve logistical and production efficiencies and increase production capacity. PQE recommenced its oil sands mining activities at the end of May 2018 and production at full capacity is expected in the last quarter of fiscal 2019.

 

Oil Sands Exploration and Production Plant

 

In June 2011, PQE commenced the development of an oil sands extraction facility at Maeser, Utah and entered into construction and equipment fabrication contracts for the purpose of applying its proprietary extraction technology (the “Extraction Technology”) described below to the oil extracted from the bitumen mined on the leased property described below. By January 2014 the initial facility was fully permitted and construction was completed by October 1, 2014. This was a pilot plant with the production capacity of up to 250 barrels per day. The Extraction Technology has been tested at full capacity. During 2015, the plant produced 10,000 barrels of oil from the local oil sands ore in the Asphalt Ridge including PQE’s own Temple Mountain oil sands deposit. Most of the produced oil was sold to oil and gas distributors, or refineries. The initial processing plant was flexible in that it had the ability to produce both high quality heavy crude oil as well as the lighter oil if needed.

 

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In 2015 when oil prices fell to very low levels, PQE determined that the transportation costs of hauling the ore from the mining site to the production facility was having a detrimental effect on the economics of the extraction operation and in 2016 temporarily suspended operations. In 2017, the plant was disassembled and moved from the Maeser, Utah mining site to the Temple Mountain mining site and has been rebuilt at that location. During the reassembly of the facility, additional equipment has been installed to increase the capacity of the plant from 250 barrels per day to 1,000 barrels per day. The new production plant restarted operations and production of heavy crude oil from the Temple Mountain oil sands deposits in the end of May 2018; however, production at full capacity is not anticipated until the last quarter of fiscal 2019. Management’s current estimate of the total cost of the facility, including the expansion of the production capacity of the facility, exclusive of capitalized borrowing costs and lease costs, is between $18 million and $19 million.

 

Resources and Mining Operations

 

Through its acquisition of TMC on June 1, 2015, PQE obtained rights to a 2,230 acre oil sands lease (more fully described below) in the Temple Mountain area in Asphalt Ridge, Utah to support and maintain its growing production capabilities. At this time TMC’s land holdings include 2,541.73 acres. The lands contain an estimated 87.495 million barrels of bitumen, which is classified as a contingent resource, according to an independent resource evaluation report prepared effective May 31, 2018 by Chapman Petroleum Engineering Ltd. Since the Extraction Technology is proprietary, not widely used in the industry and has not been used in consistent commercial production, our bitumen resources are classified as a contingent resource, because they are not currently considered to be commercially recoverable. Further, we cannot be certain that the bitumen resources will be economically producible and thus cannot be classified as proved or probable reserves in accordance with Regulation S-X Item 4-10. According to the evaluation report, the main contingencies relate to, in order of importance, verification of: (i) actual full-scale processing and operating costs; (ii) mining costs being in line with initial estimates and similar on all PQE lands; and (iii) the granting of regulatory permission for all future stages.

 

Full mining permits have been granted to PQE from the State of Utah Division of Oil, Gas, and Mining for the mining and development of this resource. Mining operations, including the initial development of an open pit at the property and removal of the overburden soil layer has already been performed. In addition to the mining permits, all environmental, construction, utility and other local permits necessary for the construction of the plant and the processing of the oil sands have been granted to PQE.

 

TMC holds the TMC Mineral Lease which is a mining and mineral lease, subleased from Asphalt Ridge, Inc., on the Asphalt Ridge property located in Uintah County, Utah, which lease was amended on October 1, 2015 and further amended on March 1, 2016 and February 21, 2018. The primary term of the TMC Mineral Lease, as amended, commenced July 1, 2013 and continues for six years. In addition, the Lease continues on extension for so long as we continue to meet and maintain certain specified production levels. During the primary term, PQE must meet certain requirements for oil production including the construction of one or more facilities that have the capacity to produce certain quantities of synthetic crude oil and/or bitumen product from bituminous ores, sand and compounds mined or extracted from the leased property. More specifically, the TMC Mineral Lease will terminate if PQE fails to produce a minimum average daily quantity of bitumen, crude oil and/or bitumen products, for a minimum of 180 days during each lease year and 600 days in the three consecutive succeeding lease years, of:

 

(i)80% of 1,000 barrels per day, by July 1, 2018 plus the extension period;
(ii)80% of 3,000 barrels per day, by July 1, 2020 plus the extension period; and
(iii)80% of 5,000 barrels per day, by July 1, 2022 through the remainder of the TMC Mineral Lease, plus the extension period.

 

The TMC Mineral Lease is also subject to termination under the circumstances described below:

 

(i)Termination will be automatic if there is a lack of a written financial commitment to fund PQE’s proposed second 1,000 barrels per day production facility prior to March 1, 2019 or a lack of a written financial commitment to fund a proposed third 1,000 barrels per day production facility prior to March 1, 2020.
(ii)Cessation of operations or inadequate production due to increased operating costs or decreased marketability and 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)A failure of PQE’s proposed three 1,000 barrels per day plants to produce a minimum of 80% of their rated capacity for at least 180 calendar days during the lease year commencing July 1, 2020 plus any extension periods will cause a termination.
(v)PQE 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 the lessee in writing and PQE will have 30 days to cure financial breaches and 150 days to cure any other non-monetary breach.

  

In addition, PQE is required to make certain advance royalty payments to the lessor as described below. Future advance royalties required are:

 

(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.

 

21

 

 

Production royalties payable as amended are eight percent (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. As at May 31, 2018, we have paid advance royalties of $1,824,836 (August 31, 2017 - $1,356,040) to the lease holder, of which a total of $1,057,500 have been used to pay royalties as they have come due under the terms of the TMC Mineral Lease. During the three months ended May 31, 2018, $134,500 in advance royalties were paid and $33,750 have been used to pay royalties which have come due.

 

Minimum expenditures to be incurred on the leased property are $2,000,000 per year commencing July 1, 2020 if a minimum daily production of 3,000 barrels per day during a 180 day period is not achieved.

 

During the three and nine months ended May 31, 2018 and the fiscal years ended August 31, 2017 and 2016 we did not have any sales from production related to the TMC Mineral Lease as we temporarily suspended operations while we relocated our oil sands extraction facility. Our average sales from production and average costs of production related to the TMC Mineral Lease during the fiscal year ended August 31, 2015 were as follows:

 

i) Average sales price for fiscal year 2015

 

Month 

Average

Sales Price

   Net Barrels 
August  $30.39    1,277.00 
September  $32.97    1,926.53 
October  $33.79    1,866.99 
November  $30.42    898.21 
December  $24.83    1,808.60 
Total        7,777.33 

 

ii) Average production costs for fiscal year 2015

 

Month 

Average

Production

Cost

 
August  $28.38 
September  $29.75 
October  $29.26 
November  $26.25 
December  $22.15 

 

Extraction Technology

 

PQE intends to continue to develop its operations by processing purchased native oil sands ore, as well as native oil sands ore produced through the mining operations of its subsidiary (TMC) using its patented closed loop, continuous flow, anticipated scalable and environmentally safe Extraction Technology. The Extraction Technology process allows the extraction of hydrocarbons from a wide range of both “water- wet” and/or “oil-wet” oil sands deposits and other hydrocarbon sediment types. PQE’s oil extraction process takes place in a completely closed loop system that continuously re-circulates and recycles the solvent after it has completely separated the asphalting and heavy oils from the oil sands. The closed loop system is capable of recovering over 99% of the all hydrocarbons from the oil sands, making this technology very environmentally friendly. The only two end products of the process are high quality heavy oil and clean sand.

 

The Extraction Technology utilizes no water in the process, is anticipated to produce no greenhouse gases, requires no high temperature and/or pressure for the extraction process, and expects to extract up to 99% of all hydrocarbon content and recycle up to 99% of the solvents. The proprietary solvent composition consists of hydrophobic, hydrophilic and polycyclic hydrocarbons. It is expected to dissolve up to 99% of heavy bitumen/asphalt and other lighter hydrocarbons from the oil sands, and prevent their precipitation during the extraction process. Solvents used in this composition form an azeotropic mixture which has a low boiling point of 70 – 75 C degrees and it is expected to allow recycling of over 99% of the solvent. These features, in the event they produce as anticipated by PQE, make it possible to perform hydrocarbon extraction from oil sands at mild temperatures of 50 – 60 degrees C, with no vacuum or/and pressure applied that would lead to high energy and economic efficiency of the extraction of oil from the overall oil sands extraction process.

 

22

 

 

Another key element of the PQE Extraction Technology process is applying its own extractor, based on a proprietary/patented “liquid fluidized bed” solvent extraction system for bitumen/oil from oil sands extraction. A “liquid fluidized bed” style reactor is anticipated to provide continuous mixing of the (liquid) solvent and the solid ore particles. It is intended to allow a continuous flow process with optimal material/mass/energy balances. PQE’s solvent based technology uses only a fraction of the energy needed to produce a barrel of oil from the water based technologies used in Canada. PQE’s process also employs multiple energy saving technologies to reduce energy consumption even further. This has resulted in a high level of energy efficiency during the oil extraction process. PQE’s patented design also includes exceptionally efficient heat exchange and distillation/rectification systems. This energy efficiency makes extraction facilities economical to operate.

 

PQE has obtained issued patents in the United States, Canada and Russia that protect its proprietary Extraction Technology. See “Intellectual Property” below.

 

On March 27, 2013, PQE entered into an intellectual property license agreement with a private arm’s length Canadian company, TS Energy Ltd., which has agreed to act as the sole and exclusive licensee of the Extraction Technology within Canada and the Republic of Trinidad and Tobago.

 

Intellectual Property

 

We rely upon patents to protect our intellectual property. We have obtained issued patents in the United States, Canada and Russia that protect our proprietary Extraction Technology. The following sets forth details of our issued patents.

 

DOCKET   TITLE   COUNTRY  

DATE FILED

SERIAL NO.

 

DATE ISSUED

PATENT NO./STATUS

1492.2  

Oil From Oil Sands

Extraction Process

  USA  

09/26/12

13/627,518

-----------------------

10/07/11

61/545,034

 

02/06/18

9,884,997

Expires: 10/07/31

Summary: A system for extracting bitumen from oil sands includes an extractor tank which incorporates a plurality of jet injectors. Operationally, the jet injectors provide jet streams of an extractant in the extractor tank that creates a fluidized bed of the extractant. A reaction between crushed oil sands and the fluidized bed then separates bitumen from the oil sands.

 

Corresponding Foreign Patent Properties

 

11492.2a   Oil Extraction Process   Canada  

09/30/11

2,754,355

  Received Notice of Allowance; patent payment submitted to Commission of Patents
                 
11492.2d  

Oil From Oil Sands

Extraction Process

  Russia  

04/28/14

2014117162

 

12/20/15

2571827

Expires: 09/27/2032

 

23

 

 

The Oil Sands Market

 

As a non-convention hydrocarbon resource, oil sands hold hundreds of billions of barrels of oil all over the world. Although Canada is the only country that is currently extracting large quantities of oil from its oil sands deposits, it should be noted that the United States also has large oil sands resources that can be developed commercially. It was estimated by a 2007 Report on North American Heavy Oil, Oil Sands and Oil Shale Resources prepared by the Utah Heavy Oil Program, Institute For Clean and Secure Energy and The University of Utah for the U.S. Department of Energy (the “2007 Report”) that the United States has 50 to 70 billion barrels of bitumen and heavy oil in oil sands deposits that are close enough to the surface to economically develop. Within the United States, Utah is known to have the richest oil sands resources, with 20 to 30 billion barrels of heavy oil and bitumen estimated by the 2007 Report to be contained within its oil sands deposits. Within Utah, the most developed region for oil sands development, in terms of both supporting infrastructure and existing oil and gas production, is Asphalt Ridge. It was estimated by the 2007 Report that there are close to 1 billion barrels of heavy oil and bitumen in the oil sands deposits in Asphalt Ridge, of which most are surface deposits which can be economically processed. The worldwide growing demand for heavy crude oil and the recent decline in heavy oil production from such places as Venezuela, makes the high quality, low sulfur, heavy oil found in oil sands deposits in the United States a valuable resource that has been underdeveloped to date. The development of “tight shale” oil plays in the United States has produced significant quantities of light, sweet crude oil reserves, but heavy oil development in the United States has lagged. The development of oil sands in the United States has the potential to turn the United States into a major supplier of heavy oil to the world market. To date, oil sands development has been limited by the absence of a viable technology that can extract the heavy oil from the oil sands in an economical and environmentally responsible manner. To that end, PQE has developed, and patented its technology that aims to develop oil sands reserves in an economical and environmentally responsible manner PQE is currently expanding its commercial oil sands extraction operation in Asphalt Ridge, Utah. The process is economical, environmentally friendly and produces high quality heavy oil.

 

It is important to note that PQE has tested its Extraction Technology on oil sands from different locations around the world that have very different hydrocarbon chemical compositions. PQE has found that the efficiency and consistency of its Extraction Technology is not affected by differences in the chemical composition of the oil/bitumen in the oil sands. An example of the Extraction Technology’s efficiency and consistency, despite dramatic differences in oil/bitumen chemistry, are the results of extensive testing on oil sands samples sourced from Utah, Canada, Middle East, and China. In all cases, PQE’s recovery efficiency exceeded 99%. Extensive testing by PQE demonstrates that its process is universal and does not depend on the material source and hydrocarbon content/fingerprint.

 

Accord Acquisition

 

Since July 4, 2016, when we acquired a 57.3% interest in Accord, which has subsequently been diluted down to 44.7% by third party equity investments into Accord, we have also been engaged in the recovery of heavy oil. Accord has been utilizing two technologies licensed to it from certain of its affiliated entities. The licenses allow Accord to utilize the technologies on any oil field it acquires. The first technology, known as SWEPT, is designed to recover hydrocarbons from wells and structures with low pressure or no energy drive mechanism, from residual or partially depleted properties in mature fields, and from structures having complex geophysical matrices or that contain tight oil, in each case by improving rock and fluid properties through the introduction of directed energy waves. The second technology, known as S-BRPT, is designed to recover solid and liquid hydrocarbons through conversion to gaseous forms followed by well-based recovery at greater depths, combining both specially designed on-site well production and recovery methodologies. Accord is currently utilizing these licensed technologies on parts of the 7,000 acres under mineral leases that it acquired in 2016 located in southwest Texas, which include 81 shallow oil wells that historically had limited production. To date, Accord has drilled three new wells on these properties and the fields treated with the technology licensed by Accord is expected to increase oil production, although commercial production has not commenced as yet.

 

Petrobloq, LLC

 

In November 2017, through our wholly owned subsidiary, PQE, we formed a subsidiary Petrobloq. Petrobloq has 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. The platform is being designed to be a “one-stop shop” that will provide both small and large oil and gas producers and operators with the ability to customize their own distributed ledger modules that will permit each company, in a secure “closed” environment, to document, track, and account for the supply of equipment, materials and services in project, field, and lease development. The agreement with FBCC requires that Petroteq pay FBCC $500,000 for the services to be provided, of which an initial $100,000 has been paid.

 

In February 2018, Petrobloq leased a 1,800 square foot office in Calabasas, California to serve as its headquarters. The office is staffed with four employees serving as Project Manager; Director of Operations, Solutions Architect and Senior Database Developer, respectively.

 

Recruiter.com

 

In November 2016, we entered into a joint venture with Recruiter.com, Inc. and OilPrice.com and formed a Delaware limited liability company, Recruiter.com Oil and Gas Group LLC (“Recruiter. OGG”), which is owned 25% by us, 25% by Recruiter.com, Inc., 45% by OilPrice.com and 5% by two individuals. Net profits are split in accordance with ownership interests. In consideration of our 25% equity interest, we issued Recruiter.com, Inc. 83,333 shares of our stock. Recuiter. OGG is a recruitment venture providing a website based for careers in the oil and gas industry.

 

24

 

 

Enforceability of Civil Liabilities

 

We are a company incorporated in Ontario, Canada. Certain of our directors and officers named in this registration statement reside outside the U.S. In addition, some of our assets and the assets of our directors and officers are located outside of the United States. As a result, it may be difficult for investors who reside in the United States to effect service of process upon these persons in the United States. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.

 

Furthermore, there is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against us or these persons on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court agrees to hear a claim, it may determine that Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Canadian law.

 

Regulation

 

Exploration and production operations are subject to various types of regulation at the federal, state and local levels. This regulation includes requiring permits to drill wells, maintaining bonding requirements to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, and the plugging and abandoning of wells. Full mining permits have been granted to PQE from the State of Utah Division of Oil, Gas, and Mining for the mining and development of the Temple Mountain site in Asphalt Ridge, Utah. In addition to the mining permits, all environmental, construction, utility and other local permits necessary for the construction of the plant and the processing of the oil sands have been granted to PQE. Our operations are also subject to various conservation laws and regulations.

 

Typically, oil enhancements such as hydraulic fracturing operations are overseen by state regulators as part of their oil and gas regulatory programs; however, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and has released draft permitting guidance for hydraulic fracturing activities that use diesel in fracturing fluids in those states where EPA is the permitting authority. As a result, we may be subject to additional permitting requirements for our operations. These permitting requirements and restrictions could result in delays in operations at well sites as well as increased costs to make wells productive. In addition, legislation introduced in Congress provides for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and require the public disclosure of certain information regarding the chemical makeup of hydraulic fracturing fluids. Moreover, on November 23, 2011, the EPA announced that it was granting in part a petition to initiate a rulemaking under the Toxic Substances Control Act, relating to chemical substances and mixtures used in oil and gas exploration and production. Further, on May 4, 2012, the Department of the Interior’s Bureau of Land Management (“BLM”) issued a proposed rule to regulate hydraulic fracturing on public and Indian land.

 

On August 16, 2012, the EPA published final rules that establish new air emission control requirements for natural gas and NGL production, processing and transportation activities, including New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds, and National Emission Standards for Hazardous Air Pollutants (NESHAPS) to address hazardous air pollutants frequently associated with gas production and processing activities. Among other things, these final rules require the reduction of volatile organic compound emissions from natural gas wells through the use of reduced emission completions or “green completions” on all hydraulically fractured wells constructed or refractured after January 1, 2015. In addition, gas wells are required to use completion combustion device equipment (e.g., flaring) by October 15, 2012 if emissions cannot be directed to a gathering line. Further, the final rules under NESHAPS include maximum achievable control technology (MACT) standards for “small” glycol dehydrators that are located at major sources of hazardous air pollutants and modifications to the leak detection standards for valves. Compliance with these requirements, especially the imposition of these green completion requirements, may require modifications to certain of our operations, including the installation of new equipment to control emissions at the well site that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business.

 

In addition to these federal legislative and regulatory proposals, some states such as Pennsylvania, West Virginia, Texas, Kansas, Louisiana and Montana, and certain local governments have adopted, and others are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, including requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of water for use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may be used in hydraulic fracturing operations. For example, the Railroad Commission of Texas adopted rules in December 2011 requiring disclosure of certain information regarding the components used in the hydraulic fracturing process. In addition, Pennsylvania’s Act 13 of 2012 became law on February 14, 2012 and amended the state’s Oil and Gas Act to impose an impact fee for drilling, increase setbacks from certain water sources, require water management plans, increase civil penalties, strengthen the Pennsylvania Department of Environmental Protection’s (PaDEP) authority over the issuance of drilling permits, and require the disclosure of chemical information regarding the components in hydraulic fracturing fluids.

 

We believe that the technologies we are cleaner and environmentally friendlier than the known fracking or tar sand technologies. Regulatory and social resistance, sometimes prohibits fracking recovery methods in some states and we intend to consider entering in those states with our technologies offering to the regulators and the public solutions that we believe would help to lift the bans and ease resistance to oil and gas field development.

 

25

 

 

(b)

OSHA and Other Laws and Regulations.

 

We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA), and comparable state laws. The OSHA hazard communication standard, the EPA community right-to-know regulations under the Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards related to workplace exposure to hazardous substances and employee health and safety.

 

(c)

Oil Pollution Act.

 

The Federal Oil Pollution Act of 1990 (OPA) and resulting regulations impose a variety of obligations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The term “waters of the United States” has been broadly defined to include inland water bodies, including wetlands and intermittent streams. The OPA assigns joint and several strict liability to each responsible party for oil removal costs and a variety of public and private damages. We believe that we substantially comply with the Oil Pollution Act and related federal regulations.

 

(d)

Clean Water Act.

 

The Federal Water Pollution Control Act (Clean Water Act) and resulting regulations, which are primarily implemented through a system of permits, also govern the discharge of certain contaminants into waters of the United States. Sanctions for failure to comply strictly with the Clean Water Act are generally resolved by payment of fines and correction of any identified deficiencies. However, regulatory agencies could require us to cease construction or operation of certain facilities or to cease hauling wastewaters to facilities owned by others that are the source of water discharges. We believe that we substantially comply with the Clean Water Act and related federal and state regulations.

 

Competition

 

Competition in the oil industry is intense. We compete with other companies seeking to acquire sub economic oil fields, many with substantial financial and other resources. We will also compete with technologies such as gas injection, polymer flooding, microbial injection and thermal methods. As a new technology, we also compete with many of the other technologies that have been proven to be economically successful in enhancing oil production in the United States. As a result of this competition, we may be unable to attract the necessary funding or qualified personnel. If we are unable to successfully compete for funding or for qualified personnel, our activities may be slowed, suspended or terminated, any of which would have a material adverse effect on our ability to continue operations. However due to the innovative nature of our technology and the ecological benefit it provides, while remaining economically efficient, we believe that Competition will not be a significant impediment to our operations or expansion.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year: (a) following the fifth anniversary of the date of the first sale of our common shares pursuant to an effective registration statement filed under the Securities Act; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning associated with that term in the JOBS Act.

 

26

 

 

C. Organizational Structure

 

The table below lists our material direct and indirect subsidiaries and the jurisdictions in which they are registered.

 

 

D. Property, Plant and Equipment

 

Our registered office address in Canada is Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario M5X 1E2, Canada. Our principal executive offices are located at 15165 Ventura Blvd, #200, Sherman Oaks, California 91403. The monthly base rent is $0 for the approximately 1,800 square foot premises and the lease is for a month-to-month term.

 

Petrobloq’s headquarters are located at 4768 Park Granada, Calabasas, California 91302. The monthly base rent is $3,870 for the 1,800 square foot premises and the lease is for a three year term.

 

TMC holds a mining and mineral lease, as amended, subleased from Asphalt Ridge, Inc., on the Asphalt Ridge property which is approximately 2,230 acres located in Uintah County, Utah (the “TMC Mineral Lease”). We are completing construction of a 20,000 square foot extraction facility based on this leased property that is anticipated to be approximately three acres.

 

27

 

 

A map of the TMC Mineral Lease property is set forth below:

 

 

 

Figure 1. The Index map showing the location of the PQE Oil sands mine in Vernal, Utah, USA. The mine and lease is on, or about Section 31, Township 5S Range 22E, Uintah County, Utah.

 

Source: JT Boyd, 2015.

 

28

 

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated historical financial statements as at August 31, 2017 and 2016 and for the three years ended August 31, 2017 (the “Consolidated Annual Financial Statements”) and the unaudited condensed consolidated interim historical financial statements as at May 31, 2018 and 2017 and related notes (together the “Historical Financial Information”). The Historical Financial Information has been included in “Item 18. Financial Statements.” The following discussion should also be read in conjunction with the other information relating to our business contained in this registration statement, including “Item 3.A. Selected Financial Data” and “Item Risk Factors.”

 

The Historical Financial Information has been prepared in accordance with IFRS as issued by the International Accounting Standards Board.

 

The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs and involves risks and uncertainties. Our actual results could differ materially from those discussed in these statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this registration statement, particularly in “Item 3.D. Risk Factors.”

 

Overview

 

Since our corporate reorganization and agreement to dispose of our interest in MCW Fuels, LLC (“MCW Fuels”), which was effective May 13, 2015 and for which regulatory approval was received on June 19, 2015, we have had one wholly owned subsidiary, PQE, which has two wholly owned active subsidiary companies, PQE Oil and TMC.

 

Through our wholly owned subsidiary PQE, and its two subsidiaries PQE Oil and TMC, we are in the business of oil sands mining on property that TMC leases and processing the mined bitumen deposits using proprietary Extraction Technology to recover oil from surface mined bitumen deposits. PQE Oil is based in Uintah, Utah. The proprietary Extraction Process is conducted in a plant that was recently relocated to the TMC mining site to improve logistical and production efficiencies of the oils sands recovery process. We once again commenced production at the end of May 2018 and expect to continue our expansion project to increase production to at least 1,000 barrels per day by the last quarter of fiscal 2019. Until our expansion project is completed and we are at full production levels our revenue will suffer. In addition, once we are operating at full production levels, we anticipate that we will need to hire additional staff. We expect that we will require additional capital to continue our operations and planned growth. There can be no assurance that funding will be available if needed or that the terms will be acceptable.

 

PQE owns the intellectual property rights to the patented Extraction Technology which it has used at the plant to extract oil from oil sands utilizing a closed-loop solvent based extraction system, as more completely described below.

 

On July 4, 2016, PQE acquired a controlling interest of 57.3% in Accord. Accord’s assets include a limited license for two enhanced oil recovery (EOR) technologies for use on Accord’s southwest Texas oil opportunities and can also be used on PQE’s 2,200 acre oil sands property in Temple Mountain, Utah. It also includes equitable title pursuant to a purchase agreement to 7,000 acres in southwest Texas, with 88 drilled and completed wells. The oil is categorized as “medium crude” and the deposits are in the light gravity range of heavy oil at 18-22 API gravity.

 

Due to additional cash injections and share subscriptions in Accord by the outside shareholders, PQE has relinquished control of Accord and has deconsolidated the results of Accord from the financial statements and now accounts for the investment in Accord on the equity basis of accounting. The effective holding in Accord as of August 31, 2017 is 44.7%.

 

Our indirect subsidiary, Petrobloq, is developing a blockchain-powered supply chain management platform for the oil and gas industry. We also own a 25% interest in Recruiter OGG, a recruitment venture that provides a website focused on careers in the oil and gas industry.

 

A.Operating Results

 

Results of Operations for the Three and Nine Months Ended May 31, 2018 and 2017

 

The following MD&A of our financial position and results of operations for the three and nine months ended May 31, 2018 and 2017, was prepared in accordance with the requirements of National Instrument 51-102 – Continuous Disclosure Obligations by our management on July 30, 2018 and should be read in conjunction with the condensed consolidated interim financial statements for the three and nine months ended May 31, 2018 and 2017 and the audited consolidated financial statements and notes thereto for the years ended August 31, 2017 and 2016.

 

29

 

 

The condensed consolidated interim financial statements for the three and nine months ended May 31, 2018 and 2017 and any comparative information presented therein, have been prepared in accordance with IFRS as issued by IASB and interpretations of the IFRS Interpretations Committee (“IFRIC”) as of July 30, 2018.

 

All dollar figures in this management discussion and analysis are presented in United States dollars unless otherwise indicated.

 

Summary of Quarterly Results

 

The following selected financial information, for the quarters as shown in the table, was prepared in accordance with IFRS:

 

Three months ended 

May 31,

2018
($)

   February 28, 2018
($)
   November 30, 2017
($)
   August 31, 2017
($)
 
Total revenues   Nil    Nil    Nil    Nil 
Loss from operations   3,178,839    1,732,532    3,645,712    3,101,430 
Basic and diluted loss per share*   0.05    0.03    0.07    0.12 

 

*Adjusted for the 30 for 1 share consolidation which took place on May 5, 2017.

 

The net loss for the three months ended May 31, 2018, includes marketing and public relations activity of approximately $1,560,000 and professional fees of $890,000 primarily advisory fees on developing the business strategy, salaries and wages has also increased significantly to approximately $252,000 as the company completed its expansion project and employed skilled people to assist with the project.

 

The net loss for the three months ended February 28, 2018, has no significant and abnormal expenditures, general and administrative expenses have increased as we prepare for the completion of the expansion project, in addition marketing expenditure has increased as we increase awareness of the impending completion of the expansion project.

 

The net loss for the three months ended November 30, 2017 includes stock based compensation of $2,505,647 related to the grant of 1,425,000 stock options to certain of our directors. In addition to this we incurred an increase in public relations expenditure of $202,844 to renew interest in our oil sands recovery business.

 

The net loss for the three months ended August 31, 2017 includes a loss on conversion of equity of $1,459,172 related primarily to an agreement entered into whereby debt due to the Chairman of the Board totaling $3,000,000, including interest thereon, was converted to equity at a loss of $1,545,821.

 

Three months ended 

May 31,

2017
($)

   February 28, 2017
($)
   November 30, 2016
($)
   August 31, 2016
($)
 
Total revenues   Nil    Nil    Nil    Nil 
Loss from operations   3,583,788    514,637    741,788    1,745,747 
Basic and diluted loss per share*   0.46    0.08    0.11    0.47 

 

*Adjusted for the 30 for 1 share consolidation which took place on May 5, 2017.

 

The net loss for the three months ended May 31, 2017 includes a loss on conversion of equity of $2,253,385 related primarily to agreements entered into whereby debt totaling $12,189,956 was converted into 31,083,281 common shares on May 19, 2017. These shares were issued subsequent to the quarter end.

 

The net loss for the three months ended February 28, 2017 includes a gain on settlement of liabilities of $875,369 related primarily to the issuance of shares on the conversion of $2,300,000 of debt to a third party, offset by the reversal of a gain previously recognized of $499,894 which gain has been deferred until such time as regulatory approval has been obtained.

 

The net loss for the three months ended November 30, 2016 includes a gain on settlement of liabilities of $470,601 related primarily to the issuance of shares on the conversion of loans due to the Chairman of the Board of Directors.

 

30

 

 

The net loss of $1,745,747 for the three months ended August 31, 2016 includes a reduction in interest expense of $175,000 for interest capitalized on the expansion of the oil extraction plant and the write-off of all remaining ore inventory which was utilized during the testing of the oil extraction facility.

 

  

Three months
ended

May 31,

2018

  

Three months

ended

May 31,

2017

  

Change

($)

  

Change

%

 
                 
Cost of Goods Sold   46,712    111,250    (64,538)   -58.0%
General and administrative   117,297    123,615    (6,318)   -5.1%
Travel and promotion   1,743,444    101,868    1,641,576    1611.5%
Professional fees   889,862    91,501    798,361    872.5%
Salaries and wages   252,555    152,000    100,555    66.2%
Share-based compensation   17,834    -    17,834    100.0%
Gain on settlement of liabilities   (216,297)   2,253,385    (2,469,682)   -109.6%
Interest expense   81,656    500,555    (418,899)   -83.7%
Depreciation and amortization   296,758    298,171    (1,413)   -0.5%
Other income   (50,982)   -    (50,982)   100.0%
Gain on deconsolidation of subsidiary   -    (48,506)   48,506    -100.0%

 

  

Nine months

ended

May 31,

  

Nine months ended

May 31,

   Change   Change 
   2018   2017   ($)   % 
                 
Cost of Goods Sold   234,120    315,184    (81,064)   -25.7%
General and administrative   411,917    330,684    81,233    24.6%
Travel and promotion   2,086,914    420,304    1,666,610    396.5%
Professional fees   1,715,757    475,345    1,240,412    260.9%
Salaries and wages   638,645    451,000    187,645    41.6%
Share-based compensation   2,523,481    15,992    2,507,489    15679.6%
Gain on settlement of liabilities   (216,297)   907,415    (1,123,712)   -123.8%
Interest expense   323,254    1,079,606    (756,352)   -70.1%
Depreciation and amortization   890,273    893,187    (2,914)   -0.3%
Other income   (50,982)   -    (50,982)   100.0%
Gain on deconsolidation of subsidiary   -    (48,506)   48,506    -100.0%

 

We incurred capital expenditures of approximately $3,024,500 and $500,000 for the nine months ended May 31, 2018 and 2017, respectively. The capital expenditures during the current year were incurred on the production facility post relocation to the TMC mineral site. These capital expenditures increased production capacity to approximately 1,000 barrels per day.

 

In terms of the mineral lease agreement entered into with Asphalt Ridge, we spent $468,796 and $261,000 on advance royalty payments for the nine months ended May 31, 2018 and 2017, respectively.

 

Comparison of results for the three months ended May 31, 2018 and 2017

 

Net Revenue, Cost of Sales and Gross Loss

 

Due to the volatility in oil markets and the limited production capacity at the plant, no production took place during the nine months ended May 31, 2017, resulting in no revenue generation. During the nine months ended May 31, 2018, we had relocated our production plant to the Asphalt Ridge mineral site and expanded production capacity to approximately 1,000 barrels per day, management expects to generate some revenues from the plant in the 4th quarter of the current fiscal year or early in the next fiscal year. The cost of sales during fiscal 2018 consists primarily of advance royalty payments which expire at the end of the calendar year two years after the payment has been made. These expired royalties have been expensed.

 

31

 

 

Operating Expenses

 

Operating expenses were $3,132,127 and $3,472,536 for the three months ended May 31, 2018 and 2017, respectively. The decrease in operating expenses is primarily due to:

 

An increase in travel and promotion expenditure of $1,641,576 or 1,611.5% as we completed our expansion product and embarked on a public relations and investor relations exercise to communicate progress to the market.
Professional fees increased by $798,361 or 872.5%, primarily due to advisory services offered to us in formulating the business operations and strategy.
Salaries and wages had increased by $100,555 or 66.2% as we had recruited a number of employees related to the expansion of the facility.
Gain on settlement of liabilities was $(216,297) and 2,253,385 for the three months ended May 31, 2018 and 2017, respectively. The gain on settlement in the prior year arose on certain debt conversions settled at a discount to the carrying value of the debt. The current year gain was as a result of settling liabilities at a discount by the issue of shares.
Interest expense decreased by 83.7% due to the conversion of a significant amount of debt into equity during the prior year to improve our equity position and allow future funding to expand the production facility.
Depreciation is in line with prior year, the current expenditure on plant is still regarded as capital work in progress, has not been brought into use yet and is therefore not depreciated as yet.

 

Comparison of results for the nine months ended May 31, 2018 and 2017

 

Net Revenue, Cost of Sales and Gross Loss

 

Due to the volatility in oil markets and the limited production capacity at the plant, no production took place during the nine months ended May 31, 2017, resulting in no revenue generation. During the nine months ended May 31, 2018, we had relocated our production plant to the Asphalt Ridge mineral site and has expanded production capacity to approximately 1,000 barrels per day, management expects to generate some revenues from the plant in the 4th quarter of the current fiscal year or early in the next fiscal year. The cost of sales during fiscal 2018 consists primarily of advance royalty payments which expire at the end of the calendar year two years after the payment has been made. These expired royalties have been expensed.

 

Operating Expenses

 

Operating expenses were $8,322,962 and $4,525,028 for the nine months ended May 31, 2018 and 2017, respectively. The increase in operating expenses is primarily due to:

 

An increase in general and administrative expenditure of 24.6% as we prepare to go into production. The expansion project at the end of May 31, 2018 was substantially complete and production at an initial limited capacity is expected to resume shortly, with production at full capacity expected in the last quarter of fiscal 2019.
Travel and promotional expenses increased by $1,666,610 or 396.5%. We had substantially completed our expansion product and embarked on a public relations and investor relations exercise to communicate progress to the market.
Professional fees increased by $1,240,412 or 260.9%, primarily due to advisory services offered to us during the most recent fiscal quarter, in formulating the business operations and strategy.
Salaries and wages had increased by 41.6% as we had recruited a number of employees related to the expansion facility during the last six months of the current year.
Share based compensation of $2,523,481 and $15,992 for the nine months ended May 31, 2018 and 2017, respectively, an increase of $2,489,655. The increase is primarily due to the grant of 1,425,000 stock options to certain directors on November 30, 2017. The prior year stock based compensation consists of the amortization of stock options granted to an officer in 2016, in accordance with the vesting terms of the options.
Gain on settlement of liabilities of $216,297 and $(907,415) for the nine months ended May 31, 2018 and 2017, respectively. The gain on settlement in the current year represents the settlement of third party liabilities by the issue of common shares at favorable settlement rates to us. In the prior year, certain liabilities were settled by the issuance of shares at prices higher than the corresponding debt.

 

Interest expense decreased by 70.1% due to the conversion of a significant amount of debt into equity during the prior year to improve the equity position of the Company and allow future funding to expand the production facility.

 

Depreciation is in line with prior year, the current expenditure on plant is still regarded as capital work in progress, has not been brought into use yet and is therefore not depreciated as yet.

 

32

 

 

Results of Operations for the Fiscal Years Ended August 31, 2017, 2016 and 2015

 

Introduction

 

The following MD&A of our financial position and results of operations was prepared in accordance with the requirements of National Instrument 51-102 – Continuous Disclosure Obligations by our management on December 29, 2017 and should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended August 31, 2017, 2016 and 2015.

 

The consolidated financial statements for the year ended August 31, 2017 and any comparative information presented therein, have been prepared in accordance with IFRS as issued by the IASB and interpretations of the IFRIC as of December 29, 2017.

 

All amounts in this MD&A are presented in United States dollars unless otherwise indicated.

 

Selected Annual Financial Information

 

The following selected financial information, for the annual periods as shown in the table, was prepared in accordance with IFRS:

 

Year ended 

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

 
             
Total revenues from continuing operations   Nil    204,735    Nil 
Total revenues from discontinued operations   Nil    Nil    116,697,604 
                
(Income) loss from discontinued operations   Nil    Nil    (3,750,969)
Loss from continuing operations   7,939,643    12,091,826    3,281,765 
Net (income) loss   7,939,643    12,091,826    (469,204)
                
Basic and diluted loss per share from continuing operations*   0.66    4.26    1.90 
Basic and diluted (income) loss per share*   0.66    4.26    (0.27)
                
Total Assets   28,950,175    31,235,915    30,444,464 
                
Total Non-Current Financial Liabilities   1,967,996    10,142,202    14,440,630 
                
Cash Dividends Declared Per-Share for Each Class of Share   

 

Nil

    

 

Nil

    

 

Nil

 

 

*Adjusted for the 30 for 1 share consolidation which took place on May 5, 2017.

 

33

 

 

Our oil extraction plant was completed on September 1, 2015. For a limited period thereafter, we made sales of hydrocarbon products to customers. Due to the volatility in the oil markets production ceased as we were not able to operate profitably at low volumes of output.

 

We consolidated our operations by disposing of our fuel distribution business during the year ended August 31, 2015 and now concentrate solely on our oil extraction business. The income from discontinued operations for the year ended August 31, 2015 includes gains on the disposal of fuel assets of $4,382,092 and the gain on the disposal of the fuel subsidiary of $2,171,258, offset by the operating loss incurred by the fuel subsidiary until its disposal on May 13, 2015.

 

The losses from continuing operations over the past three fiscal years are due to us relocating the plant to its TMC Mineral Lease site to increase production and logistical efficiencies and previously its ongoing construction of its oil extraction plant in Utah and evaluation of its mineral lease interests.

 

The loss from continuing operations for the year ended August 31, 2016 included share based compensation of $3,013,965, a loss on settlement of liabilities of $1,502,628 which arises from the settlement of certain of our financial liabilities through the issuance of common shares and the amendment of the terms of certain long-term debts of ours, interest expense of $1,501,460 where a significant portion was previously capitalized during the construction phase of the oil extraction plant and amortization expense of $1,212,674 due to the completion of the construction of the oil extraction plant and the commencement of intended operations.

 

The loss from continuing operations for the year ended August 31, 2017 included $2,366,587, arising primarily on the conversion of interest bearing debt and convertible debt to equity during the current year, an interest expense of $1,106,808, a decrease from the prior year, due to the conversion of substantial debt to equity during the current year and depreciation and amortization expense of $1,165,830 due to the completion of the oil extraction facility in September 2015.

 

Between fiscal 2015 and 2016, total assets increased primarily due to the acquisition of a controlling interest in Accord, which includes capitalized mineral lease costs of $1,052,350 and intangible assets of $1,556,000. This increase was partially offset by a decrease in advance royalty payments which were used by us during the year or have expired unused.

 

The decrease in total assets between fiscal 2016 and 2017 from $31,235,915 to $28,950,175 was primarily due to the loss of control of Accord due to outside shareholders investing in Accord and reducing our interest to 44.7% as at August 31, 2017 from 57.3% as of August 31, 2016. This resulted in a reduction in capitalized mineral lease costs of $1,052,350 and a reduction in intangible assets of $1,534,784, offset by the recording of a net equity investment in Accord Energy of $1,141,561.

 

The decrease in non-current financial liabilities from fiscal 2015 to 2016 was primarily due to the settlement of $2,500,000 of promissory notes issued on the acquisition of TMC through the issuance of our common shares and the settlement of $2,513,750 received from private lenders through the issuance of our common shares. This was partially offset by the issue of a promissory note of $750,000 to Altlands Overseas Corp.

 

The decrease in non-current financial liabilities from fiscal 2016 to 2017 was primarily due to the decrease in long-term debt during the current year to improve our capital position, partially offset by the issuance of new debt of $1,063,080 during the current year.

 

Comparison of results of Operations from Continuing Operations

 

Net Revenue, Cost of Sales and Gross Loss

 

Due to the volatility in oil markets and the limited production capacity at the plant, no production took place during fiscal 2017, resulting in no revenue generation. The cost of sales during fiscal 2017 consists of advance royalty payments which expire at the end of the calendar year two years after the payment has been made. These expired royalties have been expensed.

 

During the year ended August 31, 2016, we commenced production of hydrocarbon products from our oil extraction plant. Our revenues during this first year of commercial operations were minimal due to the depressed price of crude oil during the fiscal 2016 year and as we continued to refine and expand its production capacity. The cost of sales during this period included approximately $451,000 in production royalties, of which approximately $424,000 relates to the expiry of advance royalty payments required under its lease agreement. The gross loss of $1,194,504 incurred during the fiscal 2016 year is primarily due to initial production costs, including labor costs, exceeding revenues, depressed crude oil prices and reduced plant capacity during the initial period of production.

 

34

 

 

Operating Expenses

 

Operating expenses from continuing operations were $7,314,968 for the year ended August 31, 2017, compared to $10,897,322 for the year ended August 31, 2016. The decrease in operating expenses is primarily due to:

 

1)A decrease in share-based compensation of $2,997,972. In the prior year share-based compensation included a one-time charge of $2,722,179 for 190,971 bonus common shares issued to Mr. Blyumkin for personally guaranteeing $16,500,000 of our debt and approximately $292,000 related to the issuance of common share purchase options to an officer and a director of ours. The current year charge represents the remaining charge for the share purchase options issued to an officer in the prior year.

 

2)A reduction in professional fees of $1,171,766 due to lower activity levels as our planned the relocation of its plant and a concerted effort to reduce operating expenses.

 

3)An increase in the loss realized on settlement of liabilities of $863,959 primarily due to conversion of $18,008,990 of long and short term debt and convertible debt during the current year and a loss realized in the prior year on settlement of $691,590 on the extinguishment of a promissory note of $3,500,000 from Altlands Overseas Corp. which was settled by the issuance of 200,754 common shares and the issuance of a new promissory note for $3,500,000 which bears interest at a rate of 10% per annum and matures in one year, and a loss on settlement of approximately $841,000 related to the settlement of approximately $2,447,000 in long-term debt from a private lender through the issuance of 882,455 of our common shares.

 

4)A reduction in salaries and wages expense of approximately $162,000 due to the cessation of all production activity and a concerted effort to reduce overhead during the 2017 period.

 

Comparison of Results of Discontinued Operations for the periods ended August 31, 2017 and 2016

 

Fuel Operations

 

We completed the sale of our Branded Reseller Distribution Agreements and associated liabilities, which formed the basis of our fuel distribution operating segment, on December 17, 2014. Effective May 13, 2015, we sold our 100% interest in MCW Fuels.

 

As the sale of our fuel distribution segment was effective by May 13, 2015, no disclosure of discontinued operations for the year ended August 31, 2017 was required.

 

Summary of Quarterly Results

 

The following selected financial information for the previous eight quarters, as shown in the following table, was prepared in accordance with IFRS.

 

3 months ended 

August 31, 2017

($)

  

May 31, 2017

($)

  

February 28, 2017

($)

  

November 30, 2016

($)

 
                 
Total revenues   -    -    -    - 
                     
Net loss   3,101,430    3,583,788    514,637    741,788 
                     
Basic and diluted net loss per share*   0.12    0.46    0.08    0.11 

 

*Adjusted for 30-for-1 share consolidation on May 5, 2017.

 

35

 

 

3 months ended 

August 31, 2016

($)

  

May 31, 2016

($)

  

February 28, 2016

($)

  

November 30, 2015

($)

 
                 
Total revenues from operations   -    -    51,303    153,432 
                     
Net loss   1,745,747    1,736,101    3,784,589    4,825,389 
                     
Basic and diluted loss per share*   0.36    0.43    1.38    2.30 

 

*Adjusted for 30 for 1 share consolidation on May 5, 2017.

 

The net loss for the three months ended August 31, 2017 includes a loss on conversion of equity of $1,459,172 related primarily to an agreement entered into whereby debt due to the Chairman of the Board totaling $3,000,000, including interest thereon was converted to equity at a loss of $1,545,821.

 

The net loss for the three months ended May 31, 2017 includes a loss on conversion of equity of $2,253,385 related primarily to agreements entered into whereby debt totaling $12,189,956 was converted into 31,083,281 common shares on May 19, 2017, these shares were issued subsequent to the quarter end.

 

The net loss for the three months ended February 28, 2017 includes a gain on settlement of liabilities of $875,369 related primarily to the issuance of shares on the conversion of $2,300,000 of debt to a third party, offset by the reversal of a gain previously recognized of $499,894 which gain has been deferred until such time as regulatory approval has been obtained.

 

The net loss for the three months ended November 30, 2016 includes a gain on settlement of liabilities of $470,601 related primarily to the issuance of shares on the conversion of loans due to the Chairman of the Board of Directors.

 

The net loss of $1,745,747 for the three months ended August 31, 2016 includes a reduction in interest expense of $175,000 for interest capitalized on the expansion of the oil extraction plant and the write-off of all remaining ore inventory which was utilized during the testing of the oil extraction facility.

 

The net loss for the three months ended May 31, 2016, includes a gain on settlement of liabilities of $256,949 related primarily to the issuance of shares on the conversion of debt into equity and depreciation and amortization expense of $324,031 primarily due to depreciation on the capitalized oil extraction facility costs which commenced limited commercial production on September 1, 2015.

 

The net loss for the three months ended February 29, 2016, includes a loss on settlement of liabilities of $948,720 related primarily to the issuance of shares for the conversion of debt into equity and a further loss of $689,877 on common shares issued on the modification of a debt agreement and depreciation and amortization expense of $294,356 primarily due to depreciation on the capitalized oil extraction facility costs which commenced limited commercial production on September 1, 2015.

 

The net loss for the three months ended November 30, 2015, includes a charge of $2,722,129 for 5,729,142 bonus common shares (190,971 post consolidated shares) issued to Mr. Blyumkin for personally guaranteeing $16,500,000 of our debt and depreciation and amortization expense of $293,999 primarily due to depreciation on the capitalized oil extraction facility costs which commenced limited commercial production on September 1, 2015.

 

Analysis of Quarter ended August 31, 2017 and August 31, 2016

 

During the quarter ended August 31, 2017, no revenue or gross profit was generated by us from operations as the oil extraction plant had not operated during the year ended December 31, 2017 and was in the process of being relocated to the TMC mineral lease to improve logistical and operating efficiencies.

 

36

 

 

Overall operating expenses increased from approximately $1,456,000 for the quarter ended August 31, 2016 to $2,988,000 for the quarter ended August 31, 2017, an increase of $1,532,000. This increase was primarily due to:

 

1)An increase in the loss realized on the conversion of debt to equity of approximately $1,338,000, primarily debt owed to the Chairman of our Board.

 

2)A decrease in interest expense from approximately $154,000 for the quarter ended August 31, 2016 to $27,000 for the quarter ended August 31, 2017, a decrease of approximately $127,000 primarily due to the conversion of $17,700,000 of debt and interest thereon into equity during the current year, reducing the overall amount of interest bearing debt carried by us.

 

3)A decrease in share based compensation of approximately $247,000, due to one-time vesting of common share purchase options granted to an officer and a director of ours in fiscal year 2016.

 

4)A decrease of professional fees of approximately $188,000, due to our effective operating cost control.

 

Results of Operations for the Fiscal Years Ended August 31, 2016 and 2015

 

Results of Operations from Continuing Operations

 

The Company completed the sale of its Branded Reseller Distribution Agreements and associated liabilities, which formed the basis of the Company’s fuel distribution operating segment, on December 17, 2014. On May 13, 2015, the Company completed the sale of its interest in MCW Fuels to Mr. Blyumkin. In accordance with the disclosure requirements of IFRS the comparative amounts on the consolidated statements of (income) loss and comprehensive (income) loss and cash flows have been reclassified to disclose the discontinued operations separately from continuing operations

 

A discussion of the Company’s continuing operations for the fiscal years ended August 31, 2016, and 2015 is as follows:

 

Net Revenue, Cost of Sales and Gross Loss

 

During the year ended August 31, 2016, the Company commenced production of hydrocarbon products from its Oil Extraction Plant. The Company’s revenues during this first year of commercial operations were minimal due to the depressed price of crude oil during the fiscal 2016 year and as the Company continued to refine and expand its production capacity. The cost of sales during this period include approximately $451,000 in production royalties of which approximately $424,000 relates to the expiration of advance royalty payments required under its lease agreement, at the end of the calendar year, two years after the payment has been made. The gross loss of $1,194,504 incurred during the fiscal 2016 year was primarily due to initial production costs, including labor costs, exceeding revenues, depressed crude oil prices and reduced plant capacity during the initial commencement of production. No revenue, cost of sales or gross loss was generated by the Company from its continuing operations during the year ended August 31, 2015 as the Company was still in the construction and testing phase of its Oil Extraction Plan and no production of commercial hydrocarbon products was completed during the fiscal year.

 

Operating Expenses

 

Operating expenses from continuing operations were $10,897,322 for the year ended August 31, 2016, compared to $3,281,765 for the year ended August 31, 2015. The increase in operating expenses was primarily due to:

 

1)An increase in amortization expense of $1,198,244, primarily due to the commencement of amortization on the capitalized Oil Extraction Plant which commenced operational production on September 1, 2015.
2)An increase in interest expense of $1,206,853 due to a combination of additional loans entered into by the Company near the end of the fiscal 2015 year and during the fiscal 2016 year, primarily the $10,000,000 promissory notes issued on the acquisition of TMC, and the interest on a significant amount of loans no longer being included in the capitalized cost of the Oil Extraction Plant due to the completion of the first phase of the Oil Extraction Plant.
3)An increase in the loss on settlement of liabilities of $1,550,512 related primarily to the following:
i.A loss on settlement of approximately $691,590 on the extinguishment of a promissory note of $3,500,000 from Atlands Overseas Corp. which was settled by the issuance of 6,022,625 bonus common shares and the issuance of a new promissory note for $3,500,000 which bears interest at a rate of 10% per annum and matures in one year.
ii.A loss on settlement of approximately $841,000 related to the settlement of approximately $2,447,000 in long-term debt from a private lender through the issuance of 26,473,642 common shares of the Company.
4)An increase in professional fees of $610,959, due to certain costs incurred in researching additional markets for the Company’s products and services and professional fees previously capitalized to the oil extraction facility during the construction phase but now form part of the operational costs of the facility.
5)An increase in share based compensation of $3,013,965 due to a one-time charge of $2,722,179 for 5,729,142 bonus common shares issued to Mr Blyumkin for personally guaranteeing $16,500,000 of the Company’s debt and approximately $292,000 related to the issuance of common share purchase options to an officer and a director of the Company.
6)An increase general and administrative expenses of $427,164, due to an increase in activity at the Oil Extraction Plant.

 

37

 

 

Analysis of Quarter ended August 31, 2016 and 2015

 

During the quarter ended August 31, 2016, no revenue or gross profit was generated by the Company from its continuing operations as operations at the Oil Extraction Plant were temporarily suspended due to low oil prices and high production costs.

 

Overall operating expenses increased from approximately $815,000 during the quarter ended August 31, 2015 to $1,456,000 for the quarter ended August 31, 2016. This was primarily due to:

 

1)An increase in amortization expense of approximately $286,000 primarily due to the commencement of amortization on the capitalized Oil Extraction Plant which commenced operational production on September 1, 2015.
2)An increase in interest expense of approximately $63,200 primarily due to the interest on a significant amount of loans no longer being included in the capitalized cost of the Oil Extraction Plant due to the completion of the first phase of the construction of the Oil Extraction Plant.
3)An increase in share based compensation of approximately $247,000 due to the vesting of common share purchase options granted to an officer and a director of the Company.
4)An increase general and administrative expenses of $179,000, due to an increase in activity from the commencement of operations at the Oil Extraction Plant.

 

Results of Discontinued Operations for the periods ended August 31, 2016 and 2015

 

Fuel Operations

 

The Company completed the sale of its Branded Reseller Distribution Agreements and associated liabilities, which formed the basis of the Company’s fuel distribution operating segment, on December 17, 2014. On May 13, 2015, the Company completed the sale of its 100% interest in MCW Fuels.

 

As the Company had completed the sale of its fuel distribution segment by May 13, 2015, no disclosure of discontinued operations for the year ended August 31, 2016 was required.

 

B. Liquidity and Capital Resources

 

As at May 31, 2018, we had liquidity of approximately $245,242, which was composed entirely of cash. We also had a working capital deficiency of approximately $4,650,914 due to short term loans and accrued interest thereon which remains outstanding as of May 31, 2018. Approximately $2,500,000 of this debt was converted to equity subsequent to May 31, 2018. These loan funds were primarily used to relocate the plant to the TMC mineral lease site and to expand the production capacity of the plant to 1,000 barrels per day.

 

We continue to issue shares and borrow funds to fund the ongoing plant expansion and operations. Subsequent to May 31, 2018, in terms of various subscription agreements entered into with third parties, we raised additional proceeds of $232,000. Proceeds from these subscriptions were used for general working capital purposes and in relocation of the plant to the TMC mineral lease site.

 

On July 26, 2018, we announced the issuance of an aggregate of 2,765,115 common shares, and 1,232,150 common share purchase warrants, to 15 arm’s length parties, for gross proceeds of an aggregate US$1,832,600. Each warrant entitles the holder to acquire one of our common shares at an exercise price of US$1.50 per common share for 24 months from the date of issuance. The net proceeds will be used by us for use on our extraction technology in Asphalt Ridge, Utah, and for working capital.

 

Subsequent to May 31, 2018 up to June 28, 2018, in terms of various subscription agreements entered into with third parties, we had received an additional $232,000 in subscription receipts.

 

On June 1, 2018, warrants over 517,241 shares were exercised by one of our lenders, for gross proceeds of $162,931.

 

On June 11, 2018, several convertible debenture holders converted a total of $2,502,020 into shares of common stock at a conversion price of $0.59 per common share.

 

Subsequent to May 31, 2018, our Executive Chairman of the Board converted a total of $1,175,424 of loans and amounts owing to him into 1,992,244 shares of common stock at a conversion price of $0.59 per share. During April 2018, our Executive Chairman of the Board converted $774,387 of long term debt owed to him into 60 month convertible debentures, earning interest at 10% per annum and convertible into units at a conversion price of $1.09 per unit, each unit consisting of one share of common stock and a share purchase warrant convertible into one share of common stock at a conversion price of $1.30 per share.

 

On December 1, 2017 we announced we had successfully purchased oil extraction equipment valued approximately at $3,000,000 for a discounted price of $838,000.

 

On November 2, 2017, we entered into a loan agreement with the Chairman of the Board to receive funding up to a maximum of $2,000,000.

 

38

 

 

On September 11, 2017, in order to fund the relocation of the plant and the expansion of the production capacity, we executed a memorandum of understanding with Deloro Energy LLC (the “Memorandum”). Under the terms of the Memorandum, Deloro agreed to loan us $10,000,000 USD in tranches which Deloro could, under the terms and conditions of the Memorandum, convert into an equity interest of up to 49% of PQE Oil and 49% of TMC, subject to regulatory and other approvals. As of May 31, 2018, Deloro had advanced the Company $3,650,982, of which $3,600,000 was converted to equity as described below, and the remaining $50,982 represented a non-refundable deposit. Deloro also agreed to advance a second tranche of $3,500,000 which was to take place prior to February 28, 2018 for a further economic royalty interest of 10% (a total of 35%) from PQE Oil and TMC, commencing and calculated from when the oil extraction plant achieves commercial production of at least 1,000 barrels per day. This tranche was not advanced. Deloro had also agreed to advance a third and final tranche of $3,950,000 on or before June 1, 2018 which will entitle Deloro to receive an additional economic royalty interest of 14% (a total of 49%) from PQE Oil and TMC, commencing and calculated from when the oil extraction plant achieves commercial production of at least 1,000 barrels per day. The Memorandum provided that if Deloro failed to make any of the advances under the Memorandum, PQE had the option to repurchase the royalty interests owned by Deloro within twelve months from the date of the failure to make the advance. In addition, the Memorandum provided that if Deloro fails to make all the advances by June 1, 2018, the advances made as of such date would convert to a loan payable, with interest at 5% per annum, by June 1, 2019. On May 23, 2018 the Memorandum was terminated and all further payment obligations of the parties were terminated, including our obligation to provide Deloro with an equity interest in PQE Oil and TMC. As consideration for the amount paid to us from Deloro, Deloro received 6,000,000 units, each unit comprised of one share and a three-year warrant to purchase one share of common stock at $0.91 per share.

 

On August 31, 2017, we issued a convertible secured note to an arm’s length lender for an aggregate principal amount of $565,000, including a 10% original issue discount of $56,500. The note bears interest at a rate of 5% per annum, which is payable and matures on October 31, 2018. At the option of the lender, the proceeds received on the note of $508,500, excluding the original issue discount of $56,500 is convertible into our units at a conversion price of US$0.29 (CAD$0.38) per unit. Each unit consists of one common share in our capital and one common share purchase warrant. Each warrant would entitle the lender to acquire one of our common shares at an exercise price of US$0.315 per common share until August 31, 2022. We have granted a security interest to the holder under a general security agreement covering all of our assets. The net proceeds will be used by us for working capital requirements. Concurrent with the closing, we repaid the outstanding principal of $400,000 plus accrued and unpaid interest thereon issued by us to the lender on April 8, 2016.

 

We continue to work on several other financing options to secure additional financing on reasonable terms. However, should we not be able to secure such funding its liquidity may not be sufficient to fund its operations, debt obligations and the capital needed to complete development of its Extraction Technology.

 

We have not paid any dividends on our common shares. We have no present intention of paying dividends on our common shares as we anticipate that all available funds will be reinvested to finance the growth of our business.

 

C. Research and Development, Patents and Licenses, etc.

 

We did not engage in any research and development activities during the last three financial years. 

 

D. Trend Information.

 

For a discussion of trends in revenue, please see Item 5. Operating and Financial Review and Prospects.”

 

E. Off-Balance Sheet Arrangements.

 

We have not had any off balance sheet arrangements.

 

F. Tabular Disclosure of Contractual Obligations.

 

In addition to commitments otherwise reported in this MD&A, our contractual obligations as at May 31, 2018, include:

 

Contractual Obligations  Total
($ millions)
   Up to 1 Year
($ millions)
   2 – 5 Years
($ millions)
   After 5 Years
($ millions)
 
Convertible Debentures [1]   2.48    2.48    -        - 
Long-Term Debt [2]   1.82    0.50    1.32    - 
Total Contractual Obligations   4.30    2.98    1.32    - 

 

1.Amount includes estimated interest payments. The recorded amount as at May 31, 2018 was approximately $2,480,000.
2.Amount includes estimated interest payments. The recorded amount as at May 31, 2018 was approximately $1,500,000

 

Subsequent to May 31, 2018, the convertible debenture holders converted all of the convertible debt into 4,240,712 shares of common stock at a conversion price of $0.59 per common share.

 

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G. Safe Harbor

 

See “Cautionary Note Regrading Forward Looking Statements” on page 1

 

H. Critical Accounting Policies and Significant Judgments and Estimates

 

Our consolidated financial statements are prepared in accordance with IFRS. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are described in more detail in our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

 

The following is a summary of new standards, amendments and interpretations that are effective for annual periods beginning on or after January 1, 2016:

 

IFRS 11, Joint Arrangements (“IFRS 11”) – amendments

 

The amendments to IFRS 11 provide guidance on the accounting for acquisition of interests in joint operations constituting a business. The amendments require all such transactions to be accounted for using the principles on business combination accounting in IFRS 3, Business Combinations and other IFRS standards except where those principles conflict with IFRS 11.

 

IAS 1, Presentation of Financial Statements (“IAS 1”) - amendments

 

The amendments to IAS 1 enhance financial statement disclosures and presentation.

 

IAS 16, Property, Plant and Equipment (“IAS 16”) – amendment

 

The amendment to IAS 16 provides clarification of acceptable methods of depreciation and amortization.

 

IAS 38, Intangible Assets (“IAS 38”) - amendment

 

The amendment to IAS 38 provides clarification of acceptable methods of depreciation and amortization.

 

The application of the above amendments did not have any material impact on the consolidated financial statements presented.

 

The following is a summary of new standards, amendments and interpretations that have been issued but not yet adopted in these consolidated financial statements:

 

IFRS 9, Financial Instruments (“IFRS 9”)

 

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification options in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. We are currently evaluating the impact of the adoption of the amendments on its financial statements; however, the impact, if any, is not expected to be significant.

 

IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

 

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

 

IFRS 16 Leases (IFRS 16”)

 

IFRS 16 provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor IAS 17 Leases. IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC -15 Operating Leases – Incentives, and SIC – 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 Revenue from Contracts with Customers is also applied.

 

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IFRS 2 Share-based Payment (“IFRS 2”) – amendments

 

The amendments to IFRS 2 provide clarification and guidance on the treatment of vesting and non-vesting conditions related to cash-settled share-based payment transactions, on share-based payment transactions with a net settlement feature for withholding tax obligations, and on accounting for modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled. The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.

 

We are currently assessing the impact that these new and amended standards will have on the condensed consolidated financial statements.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The following table sets forth certain information about our executive officers, key employees and directors as of September 14, 2018.

 

Name   Age   Positions and Offices with the Registrant
         
Aleksandr Blyumkin   46   Executive Chairman and Chairman of the Board of Directors
David Sealock   58   Chief Executive Officer
Mark Korb   51   Chief Financial Officer
Gerald Bailey   77   Director and President
Vladimir Podlipskiy   55   Chief Technology Officer
Robert Dennewald   54   Director
Travis Schneider   45   Director

 

Biographies

 

The following are brief biographies of our officers and directors:

 

Aleksander Blyumkin, Executive Chairman and Chairman of the Board of Directors

 

Mr. Blyumkin has been our Executive Chairman since March 26, 2018 and the Chairman of our Board of Directors of our company and MCW Fuels, Inc. (formerly McWhirter Distributing Co. Inc.) since November 2006. He also has served as our Executive Chairman from December 12, 2012 to July 18, 2017 and as our Chief Executive Officer from July 2017 to March 26, 2018. Mr. Blyumkin has vast experience in the oil and fuel industry. He has owned and managed several ventures in the oil and fuel industry and has developed oil properties in Eastern Europe, Central Asia and, most recently, in the United States. Since 2011, Mr. Blyumkin has been the Chief Executive Officer of Dalex Industries, Inc., a developer and operator of gasoline service stations in California. Mr. Blyumkin studied Economics and International Relations at Odessa State University, Ukraine.

 

We selected Mr. Blyumkin to serve on our board because he vast experience in the oil and fuel industry.

 

David Sealock, Chief Executive Officer

 

Mr. Sealock has served as our Chief Executive Officer since March 26,2018. From January 2015 until joining our company, Mr. Sealock served as President of Autus Ventures, Inc. where he established equity financing processes for startup and intermediate oil and gas companies and managed strategic planning and portfolio optimization. Prior to that, from January 2017 until August 2017, he was Vice President of Research & Development at Petroleum Technology Alliance Canada (PTAC), a Canadian hydrocarbon industry association that serves as a neutral non-profit facilitator of collaborative R&D and technology development. There he managed the coordination and services to facilitate the implementation of specific methane related projects. From August 2014 until December 2015, Mr. Sealock served as President and Chief Operating Officer of Sulvaris. Inc. During his tenure at Sulvaris, he collaborated to deliver equity financing and JV financing to recommence project construction. From 2008 to 2014, Mr. Sealock was the Executive Vice President of Sunshine Oilsands, Ltd., and was promoted to President and Chief Executive Officer (Interim) from 2013 to 2014, where he managed daily operations for engineering, construction, technology, operations, regulatory, human resources, investor relations, health, safety & environment, marketing, supply chain management, IT & systems, and corporate governance. From 2007-2008 he was Vice President of MegaWest Energy Corp. (now Gravis Energy) and from 2006-2007 he was Senior Manager of Total E&P (formerly Deer Creek Energy, Ltd.), where he was charged with leading a large-scale business & digital transformation to integrate Deer Creek Energy’s technology infrastructure into Total’s enterprise-wide global infrastructure. Mr. Sealock holds a Bachelor’s Degree, Business Management and is a Registered Engineering Technologist with ASET.

 

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Mark Korb, Chief Financial Officer

 

Mark Korb has served as our Chief Financial Officer since August 2014. Mr. Korb has over 20-years’ experience with high-growth companies and experience taking startup operations to the next level. Since July 2011, First South Africa Management, a company for which Mr. Korb has served as the Chief Financial Officer since January 2010 has been providing consulting services to us, including the financial expertise required of public companies. First South Africa Management provides financial management and strategic management services to various companies.

 

From 2007 to 2009 Mr. Korb was the group chief financial officer and director of Foodcorp (Proprietary) Limited (“Foodcorp”), a multimillion dollar consumer goods company based in South Africa. In his role as chief financial officer, Mr. Korb delivered operational and strategic leadership for the full group financial function during a period of change including mergers, acquisitions and organic growth. As a board director he cultivated relationships with shareholders, bond holders, financial institutions, rating agencies, and auditors. Mr. Korb was also responsible for leading the group IT strategy and implementation and supervised 16 direct reports including 10 divisional financial directors. From 2001 to 2007 Mr. Korb was the group Chief Financial Officer of First Lifestyle, initially a publicly traded company on the Johannesburg Stock Exchange in South Africa which was then purchased by management which included Mr. Korb. He anchored the full group financial function with responsibility for mergers and acquisitions activity, successfully leading the process whereby the company was sold to Foodcorp mentioned above. Upon completion of the merger, Mr. Korb was appointed as the group Chief Financial Officer of Foodcorp. Mr. Korb is also the Chief Financial Officer to several other companies including, Icagen, Inc., a Delaware corporation engaged in pharmaceutical industry.

 

Gerald Bailey, President and Director

 

Dr. Bailey has over 50 years of experience in the international petroleum industry in all aspects, both upstream and downstream with specific Middle East skills and U.S. onshore/offshore sectors.  Dr. Bailey currently serves as our President, a position he has held since July 2017 when he resigned as our Chief Executive Officer. He previously served as our Chief Executive Officer from 2014 until July 2017 and has been a member of our Board of Directors since 2011. Dr. Bailey is currently the Chairman of Bailey Petroleum, LLC, a consulting firm for major oil and gas exploration/development corporations, a position he has held since 1997. In addition, Dr. Bailey is Chief Operating Officer of Indoklanicsa, Nicaragua (since 2012), and Vice Chairman, Trinity Energy Group, Inc. (since 2012) Dr. Bailey is retired from Exxon, lastly as President, Arabian Gulf.  During his Exxon career, he also served as the Assistant General Manager, Administration & Commercial, Abu Dhabi Onshore Oil Company; Operations Manager, Qatar General Petroleum Corp., Dukhan Operations and the Operations Manager, Qatar General Petroleum Corp., Umm Said Operations.  He was also the Operations Superintendent, Exxon Lago Oil, Aruba and has spent time in Libya as Operations Superintendent for Esso Standard, Libya, Brega, with experience in LNG and oil field production.  His earlier career included service with Texaco where he gained skills in oil additives and petrochemicals manufacturing.

 

Dr. Bailey holds a BS Degree in Chemical Engineering from the University of Houston, an MS Degree in Chemical Engineering from the New Jersey Institute of Technology, Newark, New Jersey, a PhD Degree from Columbia Pacific University, San Rafael, California and is a graduate of Engineering Doctoral Studies from Lamar University, Beaumont, TX.  He has written many articles, papers and studies on the oil industry, and has been a keynote speaker of many international industry conferences including the Money Show conference with his address, “The Future of Oil & Gas Developments,” and FreedomFest Conference, “Investing in Oil,” and also has appeared recently on national Chinese television discussing the “World Energy Outlook.” He is a member of the Middle East Policy Council, Society of Petroleum Engineers and the American Institute of Chemical Engineers.

 

We selected Dr. Bailey to serve on our board because he brings a strong business background to our Company and adds significant strategic, business and financial experience. Dr. Bailey’s business background provides him with a broad understanding of the issues facing our Company, the financial markets and the financing opportunities available to us.

 

Vladimir Podlipskiy, Chief Technology Officer

 

Mr. Podlipskiy has served as our Chief Technology Officer since May 2011. He has extensive experience as a researcher in many senior science disciplines, involved in oil extraction technologies, automobile care, household consumer and cosmetic products and research into mold remediation products, all with a focus on the utilization of benign solvents/solutions. Previously, he held research appointments in new product development for EMD Biosciences, Inc., (Merck KgaA, Darnstadt, Germany), and worked as Chief Chemist in Research & Development for Nanotech, Inc., Los Angeles, California, and as Chief Chemist for Premier Chemical, Compton, California. He is a former Premier Chemical Scientist at UCLA’s Department of Chemistry. Mr. Podlipskiy owns patents for innovative fuel additives and car care products and has authored several papers involving fuel re-formulator products and mold remediation. He is currently involved in research and development of new petroleum industry products, systems and technologies.

 

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Mr. Podlipskiy is the principal research scientist responsible for the development of Petroteq Energy Inc.’s technologies used in its various oil extraction programs in Utah, and has recently finalized all fabrication/assembly details for the company’s first oil sands extraction plant to be installed at Asphalt Ridge, Utah. He has worked extensively with a variety of suppliers from the U.S. and Eastern Europe in the planning and design stages of the extraction unit’s systems. He holds a PhD Degree in Bio-Organic Chemistry from the Institute of Bio-Organic Chemistry & Petroleum Chemistry, Kiev, Ukraine, and a Degree in MS-Organic Chemistry from the Department of Chemistry, Kiev State University, Kiev, Ukraine.

 

Robert Dennewald, Director

 

Mr. Dennewald has served as a member of our board since April 2015. He has been the Chairman of Business Federation Luxembourg (FEDIL) since 2006 and is a Vice President of the Luxembourg Chamber of Commerce. He is also a member of our Board of Directors of the Jean-Pierre Pescatore Charity Foundation. He is a director of ING Luxembourg S.A. and of Redline Capital Partners S.A., the president of investment fund EUREFI S.A. and the angel investor of Cleantech Company APATEQ and IT company e-Kenz. In 2006 he initiated, together with four financial partners, a MBO/LBO takeover of the Eurobeton Group. In 2010, through a secondary buy-out, he took a controlling interest in Eurobeton, which is a main supplier of building materials in Luxembourg with its subsidiary Chaux de Contern. Mr. Dennewald obtained a degree in civil engineering at the University of Liège (B).

 

We selected Mr. Dennewald to serve on our board because he brings a strong business background to our Company and adds significant strategic, business and financial experience. Mr. Dennewald’s business background provides him with a broad understanding of the issues facing us, the financial markets and the financing opportunities available to us.

 

Travis Schneider, Director

 

Mr. Schneider has served as a member of our board since December 2011. He has also served as Manager of Corporate Affairs for AgriMarine Holdings Inc. (“AgriMarine”) from October 2008 to present. AgriMarine was a publicly traded company on the TSXV and later on the Canadian Securities Exchange from 2009 until its acquisition by Dundee Corporation in 2015.

 

We selected Mr. Schneider to serve on our board because he brings a strong business background to our company and adds significant strategic, business and financial experience. Mr. Schneider’s business background provides him with a broad understanding of the issues facing us, the financial markets and the financing opportunities available to us.

 

Family Relationships

 

There are no family relationships between any of our directors or executive officers.

 

B. Compensation

 

Executive Compensation

 

The following table sets forth for the two years ended August 31, 2018 and August 31, 2017 the compensation awarded to, paid to, or earned by, our Chief Executive Officer and our other most highly compensated executive officer whose total compensation during such years exceeded $100,000. We refer to these officers as our “named executive officers.” Certain columns were excluded as the information was not applicable.

 

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Summary Compensation Table

  

Name and
Principal Position(1)
  Year  Salary
($)
   Bonus
($)
   All Other
Compensation(2)
   Stock Awards
($)
   Option
Awards
($)(7)
   Total
$
 
                            
Aleksander Blyumkin  2018   240,000            -    18,000                      258,000 
Executive Chairman and former CEO(3)  2017   240,000    -    18,000              258,000 
                                  
David Sealock  2018   50,670    -    -         765,231    815,901 
Chief Executive Officer  2017   -    -    -         -    - 
                                  
Gerald Bailey(4)  2018   -    -    -         1,600,447(5)   - 
Director, President and former CEO  2017   100,000    -    18,000              118,000 
                                  
Mark Korb  2018   -    -    -              - 
Chief Financial Officer  2017   90,000    -    -              90,000 
                                  
Vladimir Podlipsky  2018   -    -    -         765,231(6)   - 
Chief Technology Officer  2017   -    -         74,380(6)   -    74,380 

 

(1) The business address for each officer listed above is: Petroteq Energy Inc., 15165 Ventura Blvd., #200, Sherman Oaks, California 91403.

 

(2) Mr. Blyumkin and Dr. Bailey have each earned $18,000 of director’s fees for the financial years ended August 31, 2018 and 2017. These fees have been accrued but have not been paid by us.

 

(3) Mr. Blyumkin was appointed as our Chief Executive Officer on July 26, 2017, replacing Gerald Bailey.

 

(4) Gerald Bailey resigned as Chief Executive Officer on July 26, 2017. He currently serves as our President and maintains a position on our Board of Directors. Mr. Blyumkin assumed the office of Chief Executive Officer upon Mr. Bailey’s resignation.

  

(5) On November 30, 2017, Gerald Bailey was awarded ten year options exercisable for 475,000 shares of common stock at an exercise price of CDN2,27 per share. These options are immediately exercisable. On June 6, 2018, Gerald Bailey was awarded ten year options exercisable over 1,000,000 shares of Common stock at an exercise price of CDN$1.00 per share, these options vest annually over a four year period.

 

(6) On June 6, 2018, Mr. Podlipsky was awarded ten year options exercisable for 1,000,000 shares of Common stock at an exercise price of CDN$1.00 per share, these options vest annually over a four year period. In 2017, Mr. Podlipsky was awarded 16,667 shares valued at $74,380 on the date of issue as compensation based on the success of the Extraction Technology.
   
(7)

The options issued to directors and officers on November 30, 2017 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$2.27, exercise price CDN$2.27, term of option: 10 years, risk free interest rate of 1.81% and computed volatility of the underlying stock of 196.9% and expected dividend yield of 0%.

 

The options issued to directors and officers on June 3, 2018 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$1.00, exercise price CDN$1.00, term of option: 10 years, risk free interest rate of 2.97% and computed volatility of the underlying stock of 190.2% and expected dividend yield of 0%.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The table below reflects all outstanding equity awards made to each of the named executive officers that are outstanding at August 31, 2018.

 

Name   Number of securities underlying unexercised options (#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Option exercise price     Option expiration date
                       
Aleksander Blyumkin,
Executive Chairman and former CEO(1)
    33,334       -     $ 4.80     12/31/2018
                             
Gerald Bailey,     475,000       -     $ 2.27     11/30/2027
Director, President and former CEO     -       1,000,000     $ 1.00     6/6/2028
                             
Vladimir Podlipsky,                            
Chief Technology Officer     -       1,000,000     $ 1.00     6/6/2028

 

(1)These common share purchase are warrants required by the TSXV to be included by us when calculating available room under our 2015 Option Plan. Mr. Blyumkin is the registered and beneficial holder of common share purchase warrants exercisable for 16,667 common shares, and he indirectly controls common share purchase warrants exercisable for 16,667 common shares through the Alex and Polina Blyumkin Family Trust, none of which are included in the chart above.

 

Narrative to Compensation Tables

 

Overview

 

During the financial years ended August 31, 2018 and 2017, our executive compensation program was administered by our Board of Directors. Our executive compensation program has the objective of attracting and retaining a qualified and cohesive group of executives, motivating team performance and aligning the interests of executives with the interests of our shareholders through a package of compensation that is simple and easy to understand and implement. Compensation under the program was designed to achieve both current and our long-term goals of and to optimize returns to shareholders. In addition, in order to further align the interests of executives with the interests of our shareholders, we have implemented share ownership incentives through incentive stock options. Our overall compensation objectives are in line with its peer group of oil sands technology companies with opportunities to participate in equity.

 

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In determining the total compensation of any member of senior management, our directors consider all elements of compensation in total rather than one element in isolation. Our directors also examine the competitive positioning of total compensation and the mix of fixed, incentive and share-based compensation.

 

Base Salary

 

While there is no official set of benchmarks that we rely on and there is no a defined list of issuers that we use as a benchmark, we make ourselves aware of, and are cognizant of, how comparable issuers in our business compensate their executives. Our peer group in connection with salary compensation consists of a sampling of other oil sands technology companies both private and public. The Executive Chairman and Chief Executive Officer review and update our directors on the peer group and other informal channels and compares the salaries offered by us against those of the peer group generally to ensure our salary compensation is within the range of expected annual base salary for the group.

 

Bonus Framework

 

While our directors believe that a well-balanced executive compensation program must simultaneously motivate and reward participants to deliver financial results while maintaining focus on long-term goals that track financial progress and value creation, during the fiscal years ended August 31, 2018 and 2017, we did not have in place an annual team bonus or discretionary individual bonus plan and we did not pay any bonuses.

 

Group Benefits

 

We do not offer a group benefits plan of any kind.

 

Perquisites and Personal Benefits

 

While we reimburse our executive officers for expenses incurred in the course of performing their duties as executive officers of our company, we did not provide any compensation that would be considered a perquisite or personal benefit to executive officers.

 

Equity Compensation

 

2018 Option Plan

 

Incentive stock options are currently granted under the 2018 Option Plan, a fixed number stock option plan approved by shareholders on May 29, 2018, which amended and replaced our 2017 Option Plan. Pursuant to the 2018 Option Plan our Board of Directors may from time to time, in its discretion and in accordance with the TSX requirements, grant to directors, officers and employees, as well as management company employees and consultants (as such terms are defined in Policy 4.4 as amended from time to time), non-transferable options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed 12,048,153, exercisable for a period of up to ten (10) years from the date of the grant. The number of common shares reserved for issuance to any individual director or officer of our company will not exceed 5% of the issued and outstanding common shares (2% in the case of optionees providing investor relations services to us) unless disinterested shareholder approval is obtained. The exercise price of any option granted pursuant to the 2018 Option Plan shall be determined by our Board of Directors when granted, but shall not be less than the Discounted Market Price (as such term is defined in Policy 4.4 as amended from time to time). Options granted pursuant to the 2018 Option Plan are non-assignable, except by means of a will or pursuant to the laws of descent and distribution.

 

The options may be exercised no later than 12 months following the date the optionee ceases to be a director, officer or consultant of our company, subject to the expiry date of such option. However, if the employment of an employee or consultant is terminated for cause no option held by such optionee may be exercised following the date upon which termination occurred.

 

Employment Agreements

 

We do not have any written employment agreements with any of our executive officers or other employees other than David Sealock, our Chief Executive Officer. On March 26, 2018, we entered into an employment agreement with David Sealock to serve as our Chief Executive Officer. For his services, Mr. Sealock is to receive a salary of $120,000 per annum. The employment agreement term continues indefinitely until terminated in accordance with its provisions. The employment agreement also includes confidentiality obligations, inventions assignments by Mr. Sealock as well as change in control, non-solicitation and post-termination restrictions regarding corporate opportunities.

 

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We may terminate the employment agreement and Mr. Sealock’s employment for Just Cause (as defined in the employment agreement) with 30 days’ notice to Mr. Sealock and without payment to him of any compensation or severance in lieu of notice past the 30 day notice period. Upon termination of employment for Just Cause, Mr. Sealock would only be entitled to any base salary due and owing up to the date of termination, all expenses properly incurred up to the date of termination in the carrying out of his duties and any accrued but unused vacation pay due and outstanding. We may also terminate the employment agreement and Mr. Sealock’s employment without Just Cause upon 15 business days’ notice to Mr. Sealock. Upon termination of employment without Just Cause, Mr. Sealock would receive any base salary due and owing up to the date of termination, a lump sum amount equal to $12,000, all expenses properly incurred up to the date of termination in the carrying out of his duties and any accrued but unused vacation pay due and outstanding. Mr. Sealock may terminate the employment agreement for Good Reason (as defined in the employment agreement) in the event of a Change of Control (as defined in the employment agreement) upon 15 business days’ notice to us. Upon termination of employment for Just Cause (as defined in the employment agreement), Mr. Sealock would be entitled to any base salary due and owing up to the date of termination, all expenses properly incurred up to the date of termination in the carrying out of his duties and any accrued but unused vacation pay due and outstanding.

 

For the purposes of the employment agreement with Mr. Sealock, the term “Just Cause” is defined as: (i) any matter that would constitute lawful just cause for dismissal from employment at common law; (ii) conviction of the executive of a criminal offence involving dishonesty or fraud or which is likely to injure our business or reputation; (iii) misappropriation of any of our property or assets; (iv) any breach by the executive of any term of his employment or the employment agreement which has not been cured within ten days of notice to the executive of such breach; (v) any information, reports, documents or certificates being intentionally furnished by the executive to our Board or any committee thereof which the executive knows to be either false or misleading either because they include or fail to include material facts; or (vi) failure to perform his duties in a diligent and reasonable manner.

 

The term “Good Reason” (which only applies to Change of Control event) is defined as: (i) a significant change (other than a change that is clearly consistent with a promotion) in his position or duties, responsibilities, title or office held by him with us; (ii) a material reduction of his salary, benefits or any other form of remuneration or any change in the basis upon which the executive’s salary, benefits or any other form of remuneration payable by us is determined or any failure by us to increase his salary, benefits or any other forms of remuneration payable by us in a manner consistent with practices in effect from time to time with respect to our senior executives, whichever is more favorable to him; (iii) any failure by us to continue in effect any benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership or purchase plan, pension plan or retirement plan in which Mr. Sealock is participating or entitled to participate from time to time, or our taking any action or failing to take any action that would adversely affect his participation in or reduce his rights or benefits under or pursuant to any such plan, or our failing to increase or improve such rights or benefits on a basis consistent with practices with respect to our senior executives, whichever is more favorable to him; (iv) any breach by us of any material provision of the employment agreement; (v) the failure by us to obtain, in a form satisfactory to Mr. Sealock, an effective assumption of our obligations under the employment agreement by any successor to us; or (vi) the good faith determination by Mr. Sealock that we have requested he misrepresent information to external parties, vendors, shareholders or any other party.

 

The term “Change of Control” is defined as: (i) the sale to a person or acquisition by a person not affiliated with us of net assets from us having a value greater than 50% of the fair market value of our net assets determined on a consolidated basis prior to such sale; (ii) any change in the holding, direct or indirect, of our shares by a person not affiliated with us as a result of which such person, or a group of persons, or persons acting in concert, or persons associated or affiliated with any such person or group, are in a position to exercise effective control over us; (iii) any reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, merger, transfer, sale or other transaction involving us where all of our shareholders immediately prior to such transaction hold greater than 50% of the shares of the Corporation or of the continuing corporation following completion of the transaction; or (iv) any event or transaction which our Board, in its discretion, deems to be a Change of Control.

 

Pursuant to a Technology Transfer Agreement, effective November 7, 2011, whereby we acquired from Vladimir Podlipskiy certain intellectual property rights relating to extracting bitumen from oil sands (the “Acquired Technology”), we also agreed to employ Mr. Podlipskiy to oversee and operate the Acquired Technology with the compensation of $120,000.00 per year for as long as the Acquired Technology is utilized by us. In consideration for the Acquired Technology, we issued to Mr. Podlipskiy’s designee 100,000 shares of our common shares and agreed to issue an additional 1,900,000 shares of our common shares on the date when our extraction facility at the TMC Mineral Lease in Vernal, Utah is assembled and tested. We further agreed to pay Mr. Podlipskiy upon the construction of a second plant utilizing the Acquired Technology and any plants thereafter using the Acquired Technology a royalty fee of 2% of gross sales if the price of heavy oil is below $60.00 per barrel; 3% of gross sales if the price of heavy oil is between $60.00 and $69.99 per barrel; 3.5% of gross sales if the price of heavy oil is between $70.00 and $79.99 and 4% of gross sales if the price of heavy oil is greater than $80.00.

 

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Director Compensation

 

The following table sets forth information for the fiscal year ended August 31, 2018 regarding the compensation of our directors who at August 31, 2018 were not also named executive officers.

  

Name  Fees
Earned or
Paid in Cash
$
   Option
Awards
$(3)
   Other
Compensation
$
   Total
$
 
Robert Dennewald(1)   18,000    1,600,447              -    1,618,447 
Travis Schneider(1)   18,000    1,600,447    -    1,618,447 

 

1. Mr. Schneider and Mr. Dennewald have each earned $18,000 of director’s fees for the financial year ended August 31, 2018. These fees have been accrued but have not been paid by us.
   
2. On November 30, 2017, Mr. Schneider and Mr. Dennewald, were each awarded ten year options exercisable over 475,000 shares of common stock at an exercise price of CDN2,27 per share. These options are immediately exercisable. On June 6, 2018, Mr. Schneider and Mr. Dennewald were each  awarded ten year options exercisable over 1,000,000 shares of Common stock at an exercise price of CDN$1.00 per share, these options vest annually over a four year period.
   
3.

The options issued to directors on November 30, 2017 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$2.27, exercise price CDN$2.27, term of option: 10 years, risk free interest rate of 1.81% and computed volatility of the underlying stock of 196.9% and expected dividend yield of 0%.

 

The options issued to directors on June 3, 2018 were valued at grant date using a Black Scholes valuation model. The assumptions used in the valuation were as follows: Weighted average exercise price of CDN$1.00, exercise price CDN$1.00, term of option: 10 years, risk free interest rate of 2.97% and computed volatility of the underlying stock of 190.2% and expected dividend yield of 0%.

 

Subsequent to August 31, 2017, options granted to purchase 29,998 common shares expired on November 11, 2017. On November 30, 2017, additional options to purchase 1,425,000 common shares were granted equally (475,000 each) to three of our directors, Gerald Bailey, Robert Dennewald and Travis Schneider. On June 6, 2018 additional options to purchase 3,000,000 common shares (1,000,000 each) were granted to our three directors, Gerald Bailey, Robert Dennewald and Travis Schneider.

 

C. Board Practices

 

Introduction

 

Our Board is elected by and accountable to our shareholders. The Board is responsible for setting our strategic direction and providing effective governance over our affairs in conjunction with overall supervision of our business with the view of maintaining shareholder value.

 

Corporate Governance Practices

 

We are a “foreign private issuer,” as defined by the SEC. As a result, we may rely on home country governance requirements and certain exemptions thereunder rather than complying with any U.S. exchange corporate governance standards. While we voluntarily follow most NASDAQ corporate governance rules, we may choose to take advantage of the following limited exemptions:

 

  Exemption from filing quarterly reports on Form 10-Q containing unaudited financial and other specified information or current reports on Form 8-K upon the occurrence of specified significant events.

 

  Exemption from Section 16 rules requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades in a short period of time, which will provide less data in this regard than shareholders of U.S. companies that are subject to the Exchange Act.

 

  Exemption from the NASDAQ requirement requiring disclosure of any waivers of the code of business conduct and ethics for directors and officers.

 

  Exemption from the requirement that our board have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

  Exemption from the requirement to have independent director oversight of director nominations.

 

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We intend to follow Canadian. corporate governance practices in lieu of NASDAQ corporate governance requirements as follows:

 

  We do not intend to follow NASDAQ Rule 5620(c) regarding quorum requirements applicable to meetings of shareholders. Such quorum requirements are not required under Canadian law. In accordance with generally accepted business practice, our Articles of Association will provide alternative quorum requirements that are generally applicable to meetings of shareholders.

 

  We do not intend to follow NASDAQ Rule 5605(b)(2), which requires that independent directors regularly meet in executive sessions where only independent directors are present. Our independent directors may choose to meet in executive sessions at their discretion.

 

Although we may rely on certain home country corporate governance practices, if our common shares are listed on NASDAQ we will be required to comply with NASDAQ’s Notification of Noncompliance requirement (NASDAQ Rule 5625) and the Voting Rights requirement (NASDAQ Rule 5640). Further, we must have an audit committee that satisfies NASDAQ Rule 5605(c)(3), which addresses audit committee responsibilities and authority and requires that the audit committee consist of members who meet the independence requirements of NASDAQ Rule 5605(c)(2)(A)(ii).

 

We intend to take all actions necessary for us to maintain compliance as a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act, the rules adopted by the SEC and NASDAQ listing rules. Accordingly, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

 

Board Structure and Composition

 

The Board currently consists of four directors, including two non-executive directors. The Executive Chairman of our Board is responsible for the management of the Board and its functions. Our by-laws stipulates that at least 25% of our directors must be residents of Canada unless the Board is comprised of less than four members and then one member must be a resident of Canada.

 

In a general meeting we may increase or reduce the maximum or minimum number of directors by ordinary resolution, but the minimum cannot be less than three. The directors may appoint any person as a director either to fill a casual vacancy or as an addition to the directors, but the total number of directors can never exceed the maximum number of 10. A newly appointed director must retire at the next meeting following our annual general meeting and, may submit himself or herself for and will be eligible for re-election at that meeting. At every annual general meeting one-third of the directors or, if their number is not a multiple of three then the next lowest whole number of directors divisible by three, but at minimum one will retire from office and be eligible for re-election. Notwithstanding the preceding sentences, each director will retire from office no later than at the third annual general meeting following his or her last election.

 

Remuneration Policy

 

All key executives are eligible to receive a base salary, post-employment benefits (including superannuation), fringe benefits (including provision of a motor vehicle or the payment of a car allowance where necessary), options and performance incentives. Performance incentives are generally only paid once predetermined key performance indicators have been met. Our executives and members of our Board based in Canada receive a superannuation guarantee contribution required by the government, which is currently 9% of base salary, and do not receive any other retirement benefits. Some individuals, however, have chosen to allocate part of their annual compensation to increase payments towards superannuation.

 

The employment terms and conditions for all of our executives and directors are formalized in contracts of employment or service contracts. For employees, terms of employment require that an executive contracted person be provided with a minimum of 3 months’ notice prior to termination of an employment or service contract. A contracted person deemed employed on a permanent basis may terminate their employment by providing at least 3 months’ notice. Termination payments are not payable on resignation or under the circumstances of unsatisfactory performance.

 

The remuneration of directors and key executives is determined by the Remuneration Committee on an annual basis. The Board’s policy is to remunerate non-executive directors at market rates for time, commitment and responsibilities. All remuneration paid to key management personnel is valued at the cost to us and expensed.

 

Code of Business Conduct and Ethics

 

In connection with the filing of this registration statement, we will adopt a Code of Business Conduct and Ethics applicable to our employees, executive officers and directors.

 

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Service Agreements

 

TSX Venture Corporate Governance

 

Non-Executive and Independent Directors

 

Canadian law does not require a company to appoint a certain number of independent directors to its board of directors or audit committee. However, under the TSX Guide, the TSX recommends, but does not require, that a TSX-listed company have a majority of independent directors on its board of directors and that the audit committee be comprised of independent directors, within the meaning of the rules of the TSX. Our Board currently has four members of which only two are a non-executive directors and we are deemed independent within the meaning of the TSX Guide and applicable Canadian regulations. Our Audit Committee consists of three directors, only two of which is a non-executive director. Accordingly, we currently do not comply with the recommendations with respect to Board or Audit Committee composition. Upon the effectiveness of this registration statement it is our intention to add one or more non-executive directors who will replace the executive director on our Audit Committee and following which we expect to comply with the Recommendations regarding Board composition.

 

Our Board does not have regularly scheduled meetings at which only independent directors are present. The Board does, however, meet regularly and independent directors are expected to attend all such meetings. Our practices are consistent with the Recommendations, in that the Recommendations do not provide that independent directors should meet separately from the Board.

 

Committees of the Board of Directors

 

Our Board has appointed only one standing committee.

 

Audit Committee.

 

Our Board has established an Audit Committee, which operates under a charter approved by the Board. It is the Board’s responsibility to ensure that an effective internal control framework exists within our company and its subsidiaries. This includes internal controls to deal with the effectiveness executive team limit risk of fraud and ensure integrity of financial reporting. The Committee’s primary functions are to make recommendations to the Board on the efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records, and the reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. Our Board has delegated responsibility for establishing and maintaining a framework of internal control and ethical standards to the Audit Committee. The Audit Committee also provides our Board with additional assurance regarding the reliability of financial information for inclusion in the financial reports.

 

The Board members comprising our Audit Committee are Alex Blyumkin, Travis S. Schneider and Robert Dennewald, only two of whom we deemed independent. The audit committee meets at least two times per year.

 

Corporate Governance Requirements Arising from Our U.S. Listing — the Sarbanes-Oxley Act of 2002, SEC Rules and the NASDAQ Capital Market Rules.

 

The Sarbanes-Oxley Act of 2002, as well as related new rules subsequently implemented by the SEC, require all reporting companies, including foreign private issuers such as us, to comply with various corporate governance practices. In addition, if and when our common shares are listed on NASDAQ, we will be subject to the corporate governance requirements contained in the listing rules of NASDAQ, many of which are more stringent than those of The Sarbanes-Oxley Act of 2002. Upon effectiveness of this registration statement, we intend to comply fully with the Sarbanes-Oxley Act of 2002 and such rules adopted by the SEC, and, even if not yet required, the applicable listing standards of NASDAQ as are necessary in connection with our application to qualify for listing on NASDAQ. The status of our NASDAQ listing application is described in Item 9.C under the heading “Markets.” We further intend to take all actions necessary to maintain our compliance with such corporate governance requirements.

 

The NASDAQ Marketplace Rules include certain accommodations in the corporate governance requirements for foreign private issuers, such as us, that allow such companies to follow “home country” (in our case Canadian) corporate governance practices in lieu of the otherwise applicable NASDAQ corporate governance standards. The availability of such exceptions requires compliance with the NASDAQ Marketplace Rules, including Rule 5625, that we disclose each such NASDAQ Marketplace Rule that we do not follow and describe the home country practice we do follow in lieu of the relevant NASDAQ corporate governance standard. If and when our common shares are listed on the NASDAQ, we intend to continue to follow Canadian corporate governance practices in lieu of the corporate governance requirements of the NASDAQ Marketplace Rules in respect of the following:

 

  Quorum at Shareholder Meetings.  NASDAQ requires under Rule 5620(c) that a quorum consist of holders of 33 1/3% of the outstanding common shares. Applicable Canadian Corporations laws and the TSX Listing Rules do not have an express requirement that each issuer listed on TSX have a quorum of any particular number of the outstanding common shares, but instead allow a listed issuer to establish its own quorum requirements. Our quorum is currently two persons who are entitled to vote and together hold 5% of our outstanding stock. We believe this quorum requirement is consistent with the requirements of the TSX and is appropriate and typical of generally accepted business practices in the United States.

 

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  Independent Director Majority on Board/Meetings.  The NASDAQ Marketplace Rules generally, and Rules 5605(b)(1) and (2) specifically, require that a majority of the board of directors must be comprised of independent directors and that independent directors must have regularly scheduled meetings at which only independent directors are present. Applicable TSX and other Canadian regulations do not require that a majority of corporate board members be independent as long as a company discloses this fact, nor do they require that independent directors meet separately from the board. Accordingly, even though we intend to add independent members to our Board in the future, they may not at all times constitute a majority of our directors and we do not intend to require our independent directors to meet separately from the full Board on a regular basis or at all. We believe that current practice in this regard is appropriate and typical of generally accepted business practices in the United States.

 

  Director Independence.  The definitions of what constitutes an independent director under Canadian law or TSX regulations are not identical with requirements relating to the roles and obligations of independent directors for all purposes under the NASDAQ Marketplace Rules or under SEC Rule 10(A)3 that defines independence for Audit Committee members. The TSX, unlike NASDAQ and the SEC, permits an issuer to establish its own materiality threshold for determining whether a transaction between a director and an issuer affects the director’s status. Subject to provisions intended to maintain continuity of Audit Committee oversight by allowing existing members to remain on the Audit Committee temporarily if they do not meet the independence requirements, SEC Rule 10A-3 requires that all Audit Committee be independent as defined therein. NASDAQ Rule 5605(c) further defines director independence for purposes of establishing director qualifications to serve on a NASDAQ-listed company’s Audit and Compensation Committees. However, if foreign private issuers, such as us, comply with applicable home-country rules and regulations, including those related to director independence, and if directors serving on such a company’s Audit Committee meet the requirements of SEC Rule 10A-3, then the NASDAQ Marketplace Rules grant exceptions to its own more stringent rules related to director independence. We intend to rely on the permitted exceptions to the NASDAQ Marketplace Rules related director independence for purposes of qualifying directors to serve on our Audit Committee and Compensation Committee.

 

  Audit Committee Composition. The NASDAQ requirements under Rule 5605(c)(2) stipulate that to qualify for listing on NASDAQ Capital Market, the audit committee must be comprised of three members, each of whom meets the independence requirements of NASDAQ Marketplace Rule 5605(a)(2). The NASDAQ and TSX audit committee requirements are not identical because the Canadian home-country rules do not require a minimum of three members to serve on the audit committee, nor do they require that all such directors be independent. Moreover, differences in the requirements of NASDAQ and TSX also arise because of the differences in the definitions of an independent director, as discussed above. We have an Audit Committee that is consistent with the requirements of the TSX Listing Rules; however, it is not typical of generally accepted business practices in the United States for NASDAQ listed companies. Although, our Audit Committee membership will, as of the effective date or this registration statement meet the requirements of SEC Rule 10A-3 and SEC Rule 10A-3(b)(2) in particular (which allow for an exemption for one director from the independence requirements for a period of 90 days from the date of effectiveness of this registration statement) . Other than our undertaking to continue to meet the requirements of regulations applicable in the United States and SEC Rule 10A-3, we intend to avail ourselves of the exemptions to the NASDAQ Marketplace Rules regarding audit committee composition.

 

  Compensation Committee Composition.  NASDAQ Marketplace Rule 5605(d)(2) stipulates that compensation of an issuer’s officers must be determined by, or recommended to the Board for determination, either by a majority of the independent directors, or a compensation committee comprised solely of independent directors. As noted above, we intend to rely on an exception to the NASDAQ Marketplace Rules that permits us to define director independence consistent with home-country practice rather than in accordance with NASDAQ Marketplace Rule 5605(a)(2). In addition, the NASDAQ compensation committee requirements are not identical to the TSX remuneration committee requirements because, while the applicable TSX listing standards recommend that listed companies establish a remuneration committee consisting of a majority of independent directors and an independent chairperson, they do not require that a company comply with this recommendation if it publicly discloses that it has not done so. We do not currently have a Compensation Committee and expect that future executive compensation will be determined by the full Board.

 

  Director Nominations/Nominating Committee.  NASDAQ Marketplace Rule 5605(e) requires that director nominees be selected to the board, or recommended for selection, either by a majority of the independent directors or a nominations committee comprised solely of independent directors. Applicable Canadian and TSX regulations do not impose such a requirement. We expect that future director nominations and selection will continue to be determined by our full Board, consistent with past practice and applicable rules in our home country.

 

Directors’ Service Contracts

 

We have not entered into any director or service agreements.

 

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Indemnification of Directors and Officers

 

In accordance with our by-laws, to the extent permitted by Canadian law, each member of our Board is indemnified by us against any liability incurred to another person (other than us or a related body corporate) except where the liability arises out of conduct involving a lack of good faith. Accordingly each director is indemnified against any liability for costs and expenses incurred by the director in defending proceedings, whether civil or criminal, in which judgment is given in favor of the director or in which the director is acquitted, or in connection with an application in relation to such proceedings in which a court grants relief to the officer under the Business Corporations Act (Ontario). We have entered into indemnification agreements with each of our directors. We also maintain insurance coverage for the benefit of our officers and directors. For the three fiscal years ended August 31, 2017, 2016 and 2015, respectively, and subsequently through the date hereof, we have not paid or become obligated to pay any indemnity claim related to any director and we there have been no claims against our directors and officers insurance policy.

 

D. Employees

 

As of August 31, 2018, we had 1 individual that performs services for us in Utah that qualifies as full-time employee. We currently also employ two contractors. We believe that our success will depend, in part, on our ability to attract and retain qualified personnel. We have never experienced a work stoppage due to labor difficulties and believe that our relations with our employees are good. None of our employees are represented by labor unions.

 

E. Share Ownership

 

Beneficial Ownership of Senior Management and Directors

 

The following table sets forth as of September 30, 2018, the number and percentage of the outstanding shares of common shares which, according to the information supplied to us, were beneficially owned by: (i) each person who is currently a director; (ii) each executive officer; (iii) all current directors and executive officers as a group; and (iv) each person who, to our knowledge, is the beneficial owner of more than 5% of the outstanding common shares. All shares reflect a 30-for-1 stock split that was effected on May 19, 2017.

 

Name and Address (1)  Number of Shares
Beneficially Owned
   Percentage of Outstanding shares owned (2) 
Aleksandr Blyumkin, Director (Chairman) and Executive Chairman   5,204,332(3)   5.9%
David Sealock, Chief Executive Officer   -     %
Gerald Bailey, Director and President   483,859(4)   0.5%
Mark Korb, Chief Financial Officer   7,079(5)   *
Vladimir Podlipskiy, Chief Technology Officer   16,667(6)   *%
Robert Dennewald, Director   585,178(7)   0.7%
Travis Schneider, Director   477,548(8)   0.5%
All executive officers and directors as a group (7 persons)   6,774,663    7.6%
           
5% shareholders          
Deloro Energy, LLC   12,000,000(9)   12.7%
Bay Private Equity, Inc   4,700,000(10)   5.1%

  

* Less than 1%

 

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(1)The business address for each officer and director listed above is: Petroteq Energy Inc., 15165 Ventura Blvd., #200, Sherman Oaks, California 91403.

 

(2)Based on 88,215,263 common shares outstanding as of September 30, 2018.

 

(3)Mr. Blyumkin’s shareholding includes 3,932,463 common shares and a further 1,238,535 common shares held by seven entities in which Mr. Blyumkin has a controlling interest. Also includes 16,667 warrants held by Mr. Blyumkin and 16,667 warrants held by his family trust.

 

(4) Includes 8,859 common shares and options exercisable for 1,475,000 common shares, of which 475,000 are vested and none vest within the next 60 days.

 

(5) Is comprised of 7,079 common shares.

 

(6) Is comprised of 16,667 common shares and options exercisable for 1,000,000 common shares, of which none are vested and none vest within the next 60 days.

 

(7) Includes 110,178 common shares and options exercisable for 1,475,000 common shares, of which 475,000 are vested and none vest within the next 60 days.

 

(8) Includes 2,548 common shares and options exercisable for 1,475,000 common shares, of which 475,000 are vested and none vest within the next 60 days.

 

(9) Includes 6,000,000 common shares and 6,000,000 warrants exercisable for common shares, all of which are exercisable immediately. The beneficial owner is Deloro Energy, LLC whose registered address is 10497 Town & Country Way, Suite 700, Houston, Texas 77024.

 

(10) Includes 950,000 common shares, warrants exercisable for 250,000 common shares and a convertible note, convertible into 3,000,000 common shares at a conversion price of $1.00 per share. The beneficial owner is Bay Private Equity, Inc whose registered address is 7250 Keele Street, Suite 410, -09Concord, Ontario L4K 1Z8.

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

One shareholder known to us Aleksandr Blyumkin, our Executive Chairman, owned beneficially more than 5% of our outstanding common shares as of August 31, 2018. See Item 6.E under the heading “Directors, Senior Management and Employees – Share Ownership.”

 

As of August 31, 2018, 47,364,038 shares of our common stock representing 55.6% of our outstanding common shares were held in the United States by 188 holders of record.

 

None of the holders of our common shares has different rights from other shareholders.

 

B. Related Party Transactions

 

During April 2018, our Executive Chairman converted $774,387 of long term debt into 60- month convertible debentures, earning interest at 10% per annum and convertible into units at a conversion price of $1.09 per unit, each unit consisting of one share of common stock and a share purchase warrant convertible into one share of common stock at a conversion price of $1.30 per share. The warrants expire the earlier of 24 months from issue date or the date of maturity of the convertible debenture.

 

We granted an aggregate of 8,350,000 stock options to officers, directors and consultants of our company at an exercise price of $1.00 per common share expiring on June 5, 2028 pursuant to our newly amended stock option plan, approved by our shareholders at the May 29, 2018 shareholder’s meeting.

 

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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:

 

   Nine months ended 
  

May 31,

2018

  

May 31,

2017

 
Salaries, fees and other benefits  $484,800   $306,000 
Share based compensation   2,505,647    15,992 
   $2,990,447   $321,992 

 

At May 31, 2018, $1,398,392 is due to members of key management and directors for unpaid salaries, expenses and directors’ fees (August 31, 2017 – $1,137,392).

 

Due to Director

 

During the nine months ended May 31, 2018 and the year ended August 31, 2018 and 2017, the Company received additional advances of $1,145,440 and $421,250 from various private companies controlled by the Chairman of the Board of Directors of the Company.

 

As of May 31, 2018, and August 31, 2017, the Company owed the Chairman of the Board the aggregate sum of $1,632,080 and $242,250, respectively.

 

The following table sets forth information for the fiscal year ended August 31, 2018 regarding the compensation of our directors who at August 31, 2018 were not also named executive officers.

 

Name 

Fees Earned or

Paid in Cash

$

  

Option

Awards

$

  

Other
Compensation

$

  

Total

$

 
Robert Dennewald(1)   18,000    1,600,447           -    1,618,447 
Travis Schneider(1)   18,000    1,600,447    -    1,618,447 

 

(1)Mr. Schneider and Mr. Dennewald have each earned $18,000 of director’s fees for the financial year ended August 31, 2018. These fees have been accrued but have not been paid by us.

 

On November 30, 2017, additional options to purchase 1,425,000 common shares were granted to each of our three directors, Gerald Bailey, Robert Dennewald and Travis Schneider. On June 6, 2018, additional options to purchase 3,000,000 common shares were granted to each of our three directors, Gerald Bailey. Robert Dennewald and Travis Schneider.

 

Outstanding Share-Based Awards and Option-Based Awards

 

The following table sets forth all awards outstanding for each of the directors of the Corporation (other than the Named Executive Officers, whose disclosure with respect to incentive plan awards is set out above) as of August 31, 2018, (expressed in Canadian dollars):

 

Option-Based Awards Share-Based Awards

 

   Option-Based Awards   Share-Based Awards 
Name 

Number of

securities

underlying

unexercised

options
(#)

  

Option

exercise

price
($)

  

Option

expiration

date

  

Value of

unexercised

in-the-money

options(1)
($)

  

Number of

shares or units

of shares that

have not vested

(#)

  

Market or

payout value of

share based

awards that

have not vested

($)

 
Travis Schneider   3,333    33.00    November, 11, 2017    Nil    N/A    N/A 
Robert Dennewald   N/A    N/A    N/A    Nil    N/A    N/A 

 

Incentive Plan Awards – Value Vested or Earned During the Year

 

No incentive plan awards vested or were earned by the directors of the Corporation (other than the Named Executive Officers,

 

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Outstanding Share Data

 

As at September 30, 2018, we had the following common shares, share purchase options, warrants and convertible securities outstanding:

 

Total common shares outstanding   88,215,263 
Total common share purchase options*   9,858,333 
Total common share purchase warrants   11,834,291 
Total other securities reserved for issuance   3,603,579 
Fully diluted shares outstanding   113,511,466 

 

*Includes 50,000 common share purchase warrants required by the TSXV to be included by the Corporation when calculating available room under the Corporation’s stock option plan.

 

Share Purchase Options

 

We have a 20% fixed number share option plan, most recently approved by the shareholders on May 29, 2018. Pursuant to this plan, we may grant up to 13,492,146 share purchase options to directors, officers, employees, and consultants. Such options are non-transferable, will have a maximum term of ten years and terminate 12 months (or other such shorter time as determined by the directors) following cessation of the optionee’s position with us, subject to the expiry date of such option. As at August 31, 2018, an aggregate of 9,858,333 share purchase options (including 50,000 warrants treated as incentive stock options by the TSXV) were outstanding:

 

Option Expiry Date  Option Exercise Price
(CDN$)
   Number of Options Outstanding 
December 31, 2018   4.80    50,000 
February 1, 2026   5.85    33,333 
November 30, 2027   2.27    1,425,000 
June 5, 2028   1.00    8,350,000 
Total        9,858,333 

 

The following table provides information as of August 31, 2018 regarding the number of Common Shares to be issued pursuant to equity compensation plans of the Corporation and the weighted-average exercise price of said securities:

 

Plan Category 

Number of Securities to be

issued upon exercise of

outstanding options,

warrants and rights

(a)

  

Weighted-average exercise

price of outstanding options,

warrants and rights

(b)

(CAD$)

  

Number of securities

remaining available for

future issuance under equity

compensation plans

(excluding securities

reflected in column (a))

(c)

 
Equity compensation plans approved by securityholders   10,158,366(1)  $10.95    3,633,813 
Equity compensation plans not approved by securityholders               
Total   10,158,366   $10.95    3,633,813 

 

Notes:

 

(1)Includes 50,000 common share purchase warrants required by the TSXV to be included by the Corporation when calculating available room under the Corporation’s stock option plan.

 

The securities (other than 50,000 common share purchase warrants noted above) referred to in the table above were granted under the 2018 Option Plan (or its predecessors plans).

 

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Share Purchase Warrants

 

As at August 31, 2018, an aggregate of 9,921,009 common share purchase warrants were outstanding, inclusive of the 50,000 common share purchase warrants required by the TSXV as noted above, as follows:

 

Expiry Date  Exercise Price  No. of Shares
underlying Warrants
 
April 12, 2019  CDN$4.95   16,667 
August 19, 2019  US$7.50   66,665 
September 4, 2019  US$0.87   287,356 
September 17, 2019  US$1.10   750,000 
November 5, 2019  CDN$28.35   25,327 
March 9, 2020  US$1.50   114,678 
June 14, 2020  US$1.50   329,080 
July 26, 2020  US$1.50   1,637,160 
August 28, 2020  US$0.94   1,341,049 
August 28, 2020 US$1.00   246,913 
August 28, 2020  US$1.50   35,714 
April 8, 2021  CDN$4.725   57,756 
May 22, 2021  US$0.91   6,000,000 
       11,834,290 

 

Weighted average remaining contractual life 2.2 years
Weighted average exercise price US$1.14

 

Other Securities Reserved for Issuance

 

We entered into an agreement with two debenture holders whereby they have agreed to convert a total of CDN$335,198 into 316,223 common shares at a conversion price of CDN$1.06.

 

On September 4, 2018, we entered into a convertible debt agreement for gross proceeds of $250,000 with one investor, the debt is convertible into 287,356 common shares at a conversion price of $0.87 per common share.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

See “Item 18. Financial Statements” for a list of all financial statements filed as part of this registration statement.

 

Legal Proceedings

 

From time to time, we are the subject of litigation arising out of our normal course of operations. While we assess the merits of each lawsuit and defends itself accordingly, we may be required to incur significant expenses or devote significant resources to defend ourselves against such litigation. Accruals are made in instances where it is probable that liabilities may be incurred and where such liabilities can be reasonably estimated. Except as disclosed in this paragraph, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which we are aware), which may have, or have had during the 12 months prior to the date of this registration statement, a significant effect on our and/or our financial position or profitability. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, management has no reason to believe that the ultimate outcome of these matters would have a significant impact on our consolidated financial position.

 

Dividend Distribution Policy

 

We have never paid cash dividends to our shareholders. Except as permitted by the Corporations Act, under our by-laws dividends may only be paid out of our profits. Any future dividend policy will be determined by the Board and will be based upon various factors, including our results of operations, financial condition, current and anticipated cash needs, future prospects, contractual restrictions and other factors as the Board may deem relevant.

 

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B. Significant Changes

 

On June 1, 2018 and July 11, 2018, an investor exercised warrants for 753,447 common shares at an exercise price of $0.315 per share for gross proceeds of $237,336.

 

Between June 11, 2018 and August 28, 2018, we issued an additional 14,544,709 common shares to investors for gross proceeds of $9,731,838 at prices ranging from $0.47 to $0.81.

 

Between June 25, 2018 and September 4, 2018, we issued an additional 2,821,809 common shares to settle outstanding debt of $1,866,709.

 

On July 5, July 31, and September 1, 2018, pursuant to the terms of an agreement entered into with a service provider, we issued 75,000 (25,000 at each date) common shares valued at $68,936.

 

On July 31, 2018, pursuant to the terms of an agreement entered into with an advisory board member, we issued 50,000 common shares valued at $38,420.

 

On September 4, 2018, we issued a convertible debt note amounting to $250,000 maturing on September 4, 2019 with a coupon of 10% per annum. The convertible debt is convertible into common shares at a conversion price of $0.87 per share. In conjunction with the issuance of the convertible debt note, we issued to the investor a one year warrant, expiring on September 4, 2019, to purchase 287,356 common shares at an exercise price of $0.87 per share. For information on any significant changes that may have occurred since the date of our annual financial statements, see “Item 5. Operating and Financial Review and Prospects.”

 

On September 6, 2018, we issued 1,234,567 common shares and warrants exercisable for 925,925 common shares at $1.01 until September 6, 2020 for gross proceeds of $1,000,000.

 

On September 20, 2018, we issued a convertible debt note amounting to $3,300,000 (including an original issue discount of $300,000) maturing on September 20, 2019 with a coupon of 5% per annum to one lender. We also entered into an unconvertible, unsecured line of credit of $9,500,000, bearing interest at 10% per annum and repayable on September 20, 2019. In connection with the unsecured line of credit, we issued the investor 950,000 shares of common stock as a commitment fee for the letter of credit. The initial draw down of the letter of credit by us was $100,000. In connection with the $3,300,000 convertible note, we issued a finder fee of 300,000 shares of common stock to a third party broker.

 

ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing Details

 

Quotations for our common shares are included in the Toronto Ventures Exchange Market TSQV under the symbol “PQE.V” The following table sets forth for the respective periods indicated the prices of the common shares in the market, as reported and summarized on the TSQV Market. Such prices are based on inter-dealer bid and ask prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

 

   High  Low
             
Fiscal Year 2018            
First Quarter  CDN$2.40  USD$1.84  CDN$0.37  USD$0.28
Second Quarter  CDN$2.38  USD$1.82  CDN$1.13  USD$0.87
Third Quarter  CDN$2.08  USD$1.59  CDN$0.66  USD$0.51
Fourth Quarter  CDN$1.84  USD$1.41  CDN$0.91  USD$0.70
             
Fiscal Year 2017            
First Quarter  CDN$0.39  USD$.31  CDN$0.115  USD$.091
Second Quarter  CDN$0.23  USD$.18  CDN$0.06  USD$.047
Third Quarter  CDN$1.00  USD$.79  CDN$0.025  USD$.020
Fourth Quarter  CDN$1.71  USD$1.35  CDN$0.345  USD$.027
             
Fiscal Year 2016            
First Quarter  CDN$1.03  USD$.82  CDN$0.46  USD$.36
Second Quarter  CDN$0.67  USD$.53  CDN$0.145  USD$.11
Third Quarter  CDN$0.23  USD$.18  CDN$0.13  USD$.10
Fourth Quarter  CDN$0.19  USD$.15  CDN$0.12  USD$.095

 

At August 31, 2018, there were approximately 146 holders of record of our common shares.

 

Since inception, no dividends have been paid on the common shares. We intend to retain any earnings for use in its business activities, so it is not expected that any dividends on the common shares will be declared and paid in the foreseeable future.

 

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B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

Our common shares are listed and traded on the TSX Venture Exchange, or TSX. Our common shares are also traded on the Frankfurt Exchange and OTC Pink. We have applied to NASDAQ to have our common shares traded on NASDAQ, but it is unlikely that our application will be approved prior to the effective date of this Registration Statement. NASDAQ is continuing to review our application and qualifications and has advised us that at least the following conditions must be met in order to meet the applicable NASDAQ listing requirements, only some of which are within our control:

 

-effecting the share consolidation (reverse stock split) that results in the trading price of our shares exceeding US$4.00;

 

-achieving a market capitalization of our common shares of at least US$15 million (as calculated in accordance with the applicable NASDAQ Rules);

 

-achieving a value of our shareholders’ equity of at least US$5 million;

 

-appointment of at least one additional independent director; and

 

-agreement of at least three NASDAQ-qualified broker-dealers to serve as market makers for our common shares.

 

In addition to the above conditions, NASDAQ may require that we meet additional conditions about which we are not yet aware.

 

As we do not expect to meet the requirements of NASDAQ prior to the time of effectiveness of this registration statement, we are seeking to have our common shares trade over the counter in the FINRA-administered OTCQX market. Upon effectiveness of this registration statement, we believe we will meet all of the requirements for our common shares to be traded by market-maker participants in the OTCBB market. We will continue our efforts to qualify for NASDAQ listing as soon as practicable.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Authorized/Issued Capital

 

Our authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of preferred shares without nominal or par value. There are currently no preferred shares outstanding.

 

Common Shares

 

The holders of common shares are entitled to vote at all meetings of our shareholders except meetings at which only holders of another specified class or series of shares are entitled to vote. The holders of common shares are entitled to receive dividends as and when declared by the Board, subject to the dividend entitlements of the holders of preferred shares, if any. After payment to the holders of preferred shares of the amount to which they may be entitled, and after payment of all outstanding debts, the holders of common shares are entitled to receive our remaining property upon the liquidation, dissolution or winding-up thereof.

 

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No shares have been issued subject to call or assessment. There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds. The common shares must be issued as fully-paid and non-assessable, and are not subject to further capital calls by us. All of the common shares rank equally as to voting rights, participation in a distribution of our assets on a liquidation, dissolution or winding-up of our company and entitlement to dividends.

 

Common shares are transferable at the offices of our transfer agent and registrar, Computershare Investor Services Inc., 500 Burrard Street, 3rd Floor, Vancouver, British Columbia V6C 3B9.

 

There are no restrictions in our charter documents on the free transferability of the common shares.

 

Preferred Shares

 

We do not currently have any preferred shares outstanding. We are authorized to issue an unlimited number of preferred shares, issuable in one or more series. For each series of preferred shares the Board has the authority to fix the number of shares of such series and to determine the designation, rights, privileges, restrictions, and conditions attaching to such series, including: the rate or amount of or method of calculating preferential dividends, whether dividends will be cumulative or non-cumulative, the payment dates, whether the shares will be redeemable, and if so, the redemption price and terms and conditions of redemption, any voting rights, any conversion rights, any sinking fund, any purchase fund or other provisions and the amount payable on return of capital in the event of the liquidation, dissolution or winding-up of our company.

 

Shares Not Representing Capital

 

None.

 

Shares Held by Company

 

None.

 

History of Share Capital

 

As at August 31, 2018, there were 85,163,631 common shares issued and outstanding, which are listed for trading on the TSXV, and 9,858,333 stock options were outstanding under the 2018 Option Plan (or its predecessors plans). See Item 6.B “Compensation – Stock Plan” for additional information regarding the 2018 Option Plan (or its predecessors plans).

 

The number of outstanding common shares at the end of Fiscal 2018 (August 31, 2018), Fiscal 2017 (August 31, 2017), and Fiscal 2016 (August 31, 2016) were as follows: 85,163,631 shares: 54,220,699 shares, and 6,723,167 shares, respectively. There were 54,220,699 common shares outstanding at the beginning of Fiscal 2018 and 85,163,631 common shares outstanding at the end of Fiscal 2018. There were 6,723,167 common shares outstanding at the beginning of Fiscal 2017 and 54,220,699 common shares outstanding at the end of Fiscal 2017. There were 2,020,765 common shares outstanding at the beginning of Fiscal 2016 and 6,723,167 common shares outstanding at the end of Fiscal 2016.

 

As at the end of Fiscal 2018, 113,331 stock options were outstanding under the 2017 Stock Plan (or its predecessors plans).

 

The following sets forth information regarding our share capital issuances during the last three years. We have not issued any preferred shares. None of these transactions involved any underwriters, underwriting discounts or commissions, or any public offering. On May 5, 2017, we consolidated our common shares on 1-for-30 basis. The number of common shares issued and outstanding set forth below have been retroactively adjusted for this consolidation.

 

1.On September 2, 2015, we issued 28,069 common shares in satisfaction of $365,449 of indebtedness owed to arm’s length service providers and officers/directors for sitting fees.
2.On September 22, 2015, we issued 9,562 common shares in satisfaction of $259,893 of indebtedness owed to an arm’s length service provider.
3.On September 25, 2015, we issued 6,331 common shares pursuant to the conversion of $150,000 of a note originally issued on November 5, 2014.
4.On October 9, 2015, we issued 6,331 common shares pursuant to the conversion of $105,556 of a note originally issued on November 5, 2014 and the conversion of $44,444 of a note originally issued on November 24, 2014.
5.On October 22, 2015, we issued 3,333 common shares in satisfaction of $84,000 of indebtedness owed to an arm’s length service provider.
6.On October 23, 2015, we issued 1,690 common shares in satisfaction of $40,000 of indebtedness owed to an arm’s length service provider.

 

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7.On October 30, 2015, we issued 33,143 common shares in satisfaction of $552,987 of indebtedness owed to an arm’s length lender pursuant to a note originally issued on November 24, 2014.
8.On November 25, 2015, we issued 3,333 common shares in satisfaction of $60,000 of indebtedness owed to an arm’s length service provider.
9.On January 19, 2016, we issued 190,971 common shares to Mr. Blyumkin in consideration for him personally guaranteeing three loans to us in an aggregate amount of $16,500,000.
10.On February 1, 2016, we issued 3,745 common shares in satisfaction of $35,000 of indebtedness owed to Mark Korb.
11.On February 19, 2016, we issued 31,124 common shares to Robert Dennewald for gross proceeds of $100,000.
12.On February 24, 2016, we issued 62,080 common shares in satisfaction of $160,000 of indebtedness owed to two arm’s length service providers.
13.On February 25, 2016, we issued 200,754 common shares to a lender in consideration for agreeing to extend the maturity of a $3,500,000 loan.
14.On March 7, 2016, we issued 12,976 common shares pursuant to a private offering for gross proceeds of $35,000.
15.On March 23, 2016, we issued 882,454 common shares in satisfaction of $2,447,478 of indebtedness owed pursuant to two arm’s length loans.
16.On March 24, 2016, we issued 85,160 common shares in satisfaction of $236,411 of indebtedness owed pursuant to two loans with Mr. Blyumkin.
17.On March 28, 2016, we issued 9,268 common shares pursuant to a private offering for gross proceeds of $25,000.
18.On April 1, 2016, we issued 31,386 common shares pursuant to a private offering for gross proceeds of $85,000.
19.On April 4, 2016, we issued 22,524 common shares pursuant to a private offering for gross proceeds of $61,000.
20.On April 5, 2016, we issued 33,333 common shares pursuant to a private offering for gross proceeds of $110,000.
21.On April 13, 2016, we issued 34,659 common shares in satisfaction of $129,298 of indebtedness owed to an arm’s length service provider.
22.On April 25, 2016, we issued 22,991 common shares in satisfaction of $55,556 of indebtedness owed pursuant to pursuant to a secured note issued pursuant to a securities purchase agreement dated December 15, 2016.
23.On April 25, 2016, we issued 43,847 common shares in satisfaction of $150,000 of indebtedness owed to an arm’s length service provider.
24.On May 11, 2016, we issued 36,666 common shares in satisfaction of $185,000 of indebtedness owed to two arm’s length service providers.
25.On May 16, 2016, we issued 7,560 common shares in satisfaction of $20,000 of indebtedness owed to an arm’s length service provider.
26.On May 25, 2016, we issued 10,000 common shares in satisfaction of $90,000 of indebtedness owed to an arm’s length service provider.
27.On May 30, 2016 and June 8, 2016, we issued 666,666 common shares in satisfaction of $2,500,000 of indebtedness owed to an arm’s length lender pursuant to a promissory note dated September 8, 2015.
28.On June 3, 2016, we issued 23,809 common shares pursuant to a private offering for gross proceeds of $75,000.
29.On June 10, 2016, we issued 64,411 common shares in satisfaction of CDN$217,289 of indebtedness owed to two arm’s length service providers.
30.On June 24, 2016, we issued 16,666 common shares pursuant to a private offering for gross proceeds of $50,000.
31.On August 19, 2016, we issued 1,989,943 common shares (and warrants to purchase 66,666 common shares at $7.50 per share for three years) pursuant to our acquisition of 57.3% of all issued and outstanding shares of Accord.
32.On August 23, 2016, we issued 123,897 common shares in satisfaction of $396,748 of indebtedness owed pursuant to two loans ($130,602) with Mr. Blyumkin and one ($266,146) with an arm’s length lender.
33.On September 15, 2016, we issued 31,776 common shares in satisfaction of $110,000 of indebtedness owed to two arm’s length service providers.
34.On October 21, 2016, we issued 14,439 common shares (and warrants to purchase 14,439 common shares at CDN$4.725 per share until April 8, 2021) pursuant to the conversion of $50,000 of a note originally issued on April 8, 2016.
35.On November 8, 2016, we issued 43,317 common shares (and warrants to purchase 43,317 common shares at CDN$4.725 per share until April 8, 2021) pursuant to the conversion of $150,000 of a note originally issued on April 8, 2016.
36.On November 17, 2016, we issued 12,491 common shares pursuant to a private offering for gross proceeds of $65,000.
37.On November 17, 2016, we issued 24,697 common shares in satisfaction of $157,205 of indebtedness owed to three arm’s length service providers and lenders.
38.On January 17, 2017, we issued 16,666 common shares to Vladimir Podlipsky, our Chief Technology Officer, in pursuant to Restricted Stock Agreement dated April 13, 2012 executed pursuant to a Technology Transfer Agreement, wherein we agreed to issue Mr. Podlipsky 16,666 common shares upon the successful installation and testing of our oil sands extraction technology to our satisfaction.
39.On February 3, 2017, we issued 63,332 common shares in satisfaction of CDN$135,373 of indebtedness owed to an arm’s length service provider.
40.On February 24, 2017, we issued 669,760 common shares to an arm’s length lender pursuant to the conversion of $2,300,000 of a $3,500,000 loan contemplated in a loan agreement dated February 9, 2015, as amended.

 

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41.On April 21, 2017, we issued 33,333 common shares in satisfaction of $37,500 of indebtedness owed to an arm’s length service provider.
42.On April 21, 2017, we issued 336,341 common shares pursuant to a private offering for gross proceeds of $441,464 (including $315,000 from Mr. Blyumkin).
43.On April 24, 2017, we issued 24,027 common shares pursuant to a private offering for gross proceeds of $35,000.
44.On June 12, 2017, we issued 83,333 common shares to Recruiter.com, Inc. in exchange for a 25% equity interest in the joint venture entity formed pursuant to a joint venture agreement made as of November 11, 2016, between us, Recruiter.com, Inc. and Advance Media Solutions-Venture Company.
45.On July 10, 2017, we issued 220,588 common shares pursuant to a private offering for gross proceeds of $75,000.
46.On July 11, 2017, we issued 31,083,281 common shares in satisfaction of $12,189,956 of indebtedness owed to several lenders (including 1,746,824 common shares in satisfaction of $620,277 of indebtedness owed to Mr. Blyumkin).
47.On August 10, 2017, we issued 58,593 common shares to Robert Dennewald for gross proceeds of $15,000.
48.On August 14, 2017, we issued 60,000 common shares in satisfaction of $50,000 of indebtedness owed to an arm’s length service provider.
49.On August 22, 2017, we issued 14,391,330 common shares in satisfaction of $3,215,625 of indebtedness owed to three arm’s length lenders pursuant to the assignment of a promissory note dated March 18, 2016.
50.On August 23, 2017, we issued 320,000 common shares in satisfaction of $99,840 of indebtedness owed to an arm’s length service provider.
51.On August 30, 2017, we issued 42,000 common shares pursuant to a private offering for gross proceeds of $10,080.
52.On September 27, 2017, we issued 334,615 common shares pursuant to a private offering for gross proceeds of $87,000.
53.On October 20, 2017, we issued 100,000 common shares pursuant to a private offering for gross proceeds of $26,000.
54.On November 8, 2017, we issued 754,461 common shares pursuant to a private offering for gross proceeds of $203,704.
55.On December 19, 2017 and January 22, 2018, we issued an aggregate of 517,241 common shares (and warrants to purchase 517,241 common shares at $0.315 per share until August 31, 2022) pursuant to the conversion of $150,000 of a note originally issued on August 31, 2017.
56.On January 10, 2018 and January 22, 2018, we issued an aggregate of 517,241 common shares (and warrants to purchase 517,241 common shares at $0.315 per share until August 31, 2022) pursuant to the conversion of $150,000 of a note originally issued on August 31, 2017.
57.On January 25, 2018, we issued 253,802 common shares pursuant to a private offering for gross proceeds of $180,200.
58.On January 29, 2018, we issued 870,369 common shares pursuant to a private offering for gross proceeds of $922,591.
59.On February 9, 2018, we issued an aggregate of 517,241 common shares (and warrants to purchase 517,241 common shares at $0.315 per share until August 31, 2022) pursuant to the conversion of $150,000 of a note originally issued on August 31, 2017.
60.On March 9, 2018, we issued 222,203 common shares (and warrants to purchase 114,678 common shares at $1.50 per share for 24 months) pursuant to a private offering for gross proceeds of $225,000.
61.On March 13, 2018, we issued 932,893 common shares (592,385 common shares in satisfaction of $613,750 of indebtedness and 340,508 common shares in satisfaction of CAD340,508 of indebtedness) to five arm’s length service providers.
62.On March 16, 2018, we issued 250,000 common shares pursuant to the partial exercise, at $0.315 per share, of a warrant issued on December 19, 2017.
63.On April 11, 2018, we issued 250,000 common shares pursuant to the partial exercise, at $0.315 per share, of a warrant issued on December 19, 2017.
64.On April 19, 2018, we issued 500,000 common shares pursuant to the exercise, at $0.315 per share, of a warrant issued on January 10, 2018.
65.On May 8, 2018, we issued 493,242 common shares in satisfaction of $365,000 of indebtedness owed to two arm’s length lenders pursuant to debentures originally issued on October 10, 2014, as amended.
66.On May 8, 2018, we issued 500,000 common shares in satisfaction of $795,000 of indebtedness to an arm’s length service provider.
67.On May 22, 2018, we issued an aggregate of 201,724 common shares (and warrants to purchase 201,724 common shares at $0.315 per share until August 31, 2022) pursuant to the conversion of $58,500 of a note originally issued on August 31, 2017.
68.On May 2, 2018, we issued 6,000,000 common shares (and warrants to purchase 6,000,000 common shares at $0.91 per share for three years) pursuant to a private offering for gross proceeds of $3,600,000.
69.On May 24, 2018, we issued 25,000 common shares in satisfaction of $17,500 of indebtedness owed to an arm’s length service provider.
70.On May 30, 2018, we issued 25,000 common shares in satisfaction of $17,500 of indebtedness owed to an arm’s length service provider.
71.On May 30, 2018, we issued 25,000 common shares to a member of our advisory board pursuant to an advisory board agreement entitling the holder to 100,000 common shares in three installments from May to September.
72.On June 1, 2018, we issued 517,241 common shares pursuant to the exercise, at $0.315 per share, of a warrant issued on February 9, 2018.

 

61

 

 

73.On June 11, 2018, we issued 4,799,799 common shares pursuant to a private offering for gross proceeds of $2,807,022.
74.On June 14, 2018, we issued 764,740 common shares (and warrants to purchase 329,080 common shares at $1.50 per share for two years) pursuant to a private offering for gross proceeds of $472,200.
75.On June 25, 2018, we issued 1,992,244 common shares to Mr. Blyumkin in satisfaction of $1,175,424 of indebtedness owed to Mr. Blyumkin for reimbursement of company expenses.
76.On June 28, 2018, we issued 292,893 common shares pursuant to a private offering for gross proceeds of $202,100.
77.On July 5, 2018, we issued 25,000 common shares to a consultant pursuant to an independent contractor agreement entitling the holder to 25,000 common shares in three installments at the end of each month commencing in June.
78.On July 11, 2018, we issued 236,206 common shares pursuant to the exercise, at $0.315 per share, of a warrant issued on January 22, 2018 and a warrant issued on May 22, 2018.
79.On July 26, 2018, we issued 2,765,115 common shares (and warrants to purchase 1,637,160 common shares at $1.50 per share for two years) pursuant to a private offering for gross proceeds of $1,832,600.
80.On July 31, 2018, we issued 50,000 common shares to a member of our advisory board pursuant to an advisory board agreement entitling the holder to 100,000 common shares in three installments from May to September.
81.On July 31, 2018, we issued 25,000 common shares to a consultant pursuant to an independent contractor agreement entitling the holder to 25,000 common shares in three installments at the end of each month commencing in June.
82.On August 2, 2018, we issued 287,500 common shares in satisfaction of $230,000 of indebtedness owed to an arm’s length service provider.
83.On August 28, 2018, we issued 5,922,162 common shares (and warrants to purchase 1,623,676 common shares at exercise prices ranging from US$0.94 to US$1.50 per share for two years) pursuant to a private offering for gross proceeds of $4,417,916.
84.On September 1, 2018, we issued 25,000 common shares to a consultant pursuant to an independent contractor agreement entitling the holder to 25,000 common shares in three installments at the end of each month commencing in June.
85.On September 4, 2018, we issued 542,065 common shares in satisfaction of $411,285 of indebtedness owed to two arm’s length service providers (205,194 shares for $162,000) and Mr. Blyumkin (336,871 for $249,285).
86.On September 4, 2018, we issued a convertible unsecured debenture of the Company for principal amount of $250,000 and warrants to purchase 287,356 common shares at an exercise price of $0.87 per share for one year, to an arm’s length lender. The debenture has a term of one year and bears interest at a rate of 10% per annum and at the option of the holder the principal amount of the debenture is convertible at $0.87 per share into up to 287,356 common shares.
87.On September 6, 2018, we issued 1,234,567 common shares (and warrants to purchase 925,925 common shares at an exercise price of $1.01 per share for two years) pursuant to a private offering for gross proceeds of $1,000,000.
88. On  September 20, 2018, we issued secured convertible debentures with a face value of $3,300,000 (including an original issue discount of $300,000) to a third party investor for gross proceeds of $3,000,000, the Convertible debenture bears interest at 10% per annum and has a maturity date, twelve months from the date of issuance. In conjunction with the issuance we issued 950,000 shares of common stock to the investor and a further 300,000 shares to a third party broker. We also issued 1 year warrants exercisable over 750,000 shares of common stock at an exercise price of $1.10 per share.

 

Transfer Agent and Registrar

 

Our transfer agent and registrar is Computershare Investor Services Inc., 500 Burrard Street, 3rd Floor, Vancouver, British Columbia V6C 3B9.

 

B. Articles

 

We were incorporated as “AXEA Capital Corp.” on January 4, 2008 pursuant to the Business Corporations Act (British Columbia). On October 15, 2012, MCW Energy Group Limited (“MCW NB”), a corporation incorporated in the Province of New Brunswick, completed a reverse acquisition of AXEA Capital Corp. (the “RTO”) and as a result MCW NB became a wholly owned subsidiary of AXEA Capital Corp. which also changed its name from “AXEA Capital Corp.” to “MCW Enterprises Ltd.” Pursuant to articles of continuance filed on December 7, 2012, MCW NB changed its jurisdiction of governance by continuing from the Province of New Brunswick into the Province of Ontario. Pursuant to articles of continuance filed on December 12, 2012, MCW Enterprises Ltd. changed its jurisdiction of governance by continuing from the Province of British Columbia into the Province of Ontario and changed its name to MCW Enterprises Continuance Ltd. Pursuant to a certificate of amalgamation dated December 12, 2012, MCW Enterprises Continuance Ltd. and MCW NB amalgamated in the Province of Ontario and continued under the name “MCW Energy Group Limited”. Pursuant to articles of amendment filed on May 5, 2017, we changed our name from “MCW Energy Group Limited” to “Petroteq Energy Inc.”.

 

By-Laws

 

The by-laws are subject to the Articles and the Business Corporations Act (Ontario). The by-laws cannot override many of the key provisions contained in the Business Corporations Act (Ontario).

 

Purposes and Objects

 

As a corporation we have all the rights, powers and privileges of a natural person. Our Articles and by-laws do not provide for or prescribe any specific objects or purposes.

 

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The Powers of the Directors

 

Under the provision of our by-laws our directors may exercise all the powers of our company in relation to:

 

Management of Company

 

The business is managed by the directors who may exercise all the powers of our company that are not by the Business Corporations Act (Ontario) or by this constitution required to be exercised by shareholders in general meeting subject nevertheless to any provision of this constitution and to the provisions of the Business Corporations Act (Ontario).

 

Approval to Significant Changes

 

Material acquisitions and dispositions are subject to the approval of the TSXV and may be subject to the approval of our shareholders. In addition, pursuant to the Business Corporations Act (Ontario) a shareholder vote is required with respect to certain decisions that are seen as fundamental to the corporation’s purpose or existence, including the requirement that a sale of “all or substantially all” of the corporation’s assets must be approved by a special resolution of shareholders, being approval of two-thirds of the votes cast in person or by proxy.

 

Rights attached to our common shares

 

All shares on issue by us are common shares and as such the rights pertaining to these common shares are the same. There are no common shares which have superior or inferior rights. We do not currently have any preferred shares outstanding.

 

All our outstanding common shares are validly issued, fully paid and non-assessable. The rights attached to our common shares are as follows:

 

Dividend Rights. The directors may declare that a dividend be paid to the members according to the shareholders’ pro rata shareholdings and the directors may fix the amount, the time for payment and the method of payment. No dividend is payable except in accordance with the Business Corporations Act (Ontario) as amended from time to time and no dividend carries interest as against us.

 

Voting Rights. Holders of common shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.

 

The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person, or by proxy, attorney or representative appointed pursuant to our by-laws. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place. At the reconvened meeting, the required quorum consists of any two members holding 5% of the shares entitled to vote at the meeting present in person, or by represented by proxy. The meeting is dissolved if a quorum is not present within a reasonable time, provided the shareholders present may adjourn the meeting to a fixed time and place.

 

To be adopted, a resolution requires approval by the holders of a majority of the voting rights represented at the meeting, in person, by proxy, or by written ballot and voting thereon

 

Rights in the Event of Liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, and the passing of a special resolution giving effect to the following, our assets will be distributed to the holders of common shares in proportion to the capital at the commencement of the liquidation paid up or which ought to have been paid up on the shares held by them, respectively. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights, such as the right in winding up to payment in cash of the amount then paid up on the share, and any arrears of dividend in respect of that share, in priority to any other class of shares.

 

Changing rights attached to common shares

 

In order to change the rights of our shareholders with respect to certain fundamental changes as described in Section 168 of the Business Corporations Act (Ontario), we would need to amend our Articles to effect the change. Such an amendment would require the approval of holders of two-thirds of the votes of our common shares, and any other shares carrying the right to vote at any general meeting of our shareholders, cast at a duly called special meeting. The Business Corporations Act (Ontario) also provides that a sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of business of the corporation likewise requires the approval of the shareholders at a duly called special meeting. For such fundamental changes and sale, lease and exchange, a shareholder is entitled under the Business Corporations Act (Ontario) to dissent in respect of such a resolution amending the Articles and, if the resolution is adopted and we implements such changes, demand payment of the fair value of the shareholder’s common shares.

 

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Annual and Special Meetings

 

The Business Corporations Act (Ontario) provides that the directors of a corporation shall call an annual meeting of shareholders not later than 15 months after holding the last preceding annual meeting. The Business Corporations Act (Ontario) also provides that, in the case of an offering corporation, the directors shall place before each annual meeting of shareholders, the financial statements required to be filed under the Securities Act (Ontario) and the regulations thereunder relating to the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual meeting and the immediately preceding financial year, if any.

 

The Board has the power to call a special meeting of shareholders at any time.

 

Notice of the date, time and location of each meeting of shareholders must be given not less than 21 days or more than 50 days before the date of each meeting to each director, to the our auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting.

 

Notice of a meeting of shareholders called for any other purpose other than consideration of the minutes of an earlier meeting, financial statements, reports of the directors or auditor, setting or changing the number of directors, the election of directors and reappointment of the incumbent auditor, must state the general nature of the special business in sufficient detail to permit the shareholder to form a reasoned judgment on such business, must state the text of any special resolution to be submitted to the meeting, and must, if the special business includes considering, approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached to it, a copy of the document or state that a copy of the document will be available for inspection by shareholders at our records office or another accessible location.

 

The only persons entitled to be present at a meeting of shareholders are those entitled to vote, our directors and our auditor. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. In circumstances where a court orders a meeting of shareholders, the court may direct how the meeting may be held, including who may attend the meeting.

 

Limitations on the Rights to Own Securities in Our Company

 

No share may be issued until it is fully paid.

 

Neither Canadian law nor our Articles or by-laws limit the right of a non-resident to hold or vote our common shares, other than as provided in the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”). The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian (other than a “WTO Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of our company, and the value of our assets were CDN$5.0 million or more (provided that immediately prior to the implementation of the investment our company was not controlled by WTO Investors). An investment in our common shares by a WTO Investor (or by a non-Canadian other than a WTO Investor if, immediately prior to the implementation of the investment our company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire direct control of our company and the value of our assets equaled or exceeded certain threshold amounts determined on an annual basis.

 

The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the WTO; (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the Investment Act. A different threshold also applies if the Canadian business carries on a cultural business.

 

The 2018 threshold for WTO investors that are SOEs will be CDN$398 million based on the book value of the Canadian business’ assets, up from CDN$379 million in 2017.

 

The 2018 thresholds for review for direct acquisitions of control of Canadian businesses by private sector investor WTO investors (CDN$1 billion) and private sector trade-agreement investors (CDN$1.5 billion) remain the same and are both based on the “enterprise value” of the Canadian business being acquired.

 

A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of our company for purposes of the Investment Act if he or she acquired a majority of our common shares. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of our company, unless it could be established that we are not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a “national” of a country (other than Canada) that is a member of the WTO (“WTO Member”) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO Investor-controlled entity,” pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions involving our common shares would be exempt from the Investment Act, including: an acquisition of the shares if the acquisition were made in the ordinary course of that person’s business as a trader or dealer in securities; an acquisition of control of our company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and an acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of us, through the ownership of voting interests, remains unchanged.

 

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Impediments to Change of Control

 

In 2016, the Canadian Securities Administrators (the “CSA”) enacted amendments (the “Bid Amendments”) to the Take-Over Bid Regime. The Bid Amendments, which are very significant, are contained in National Instrument (NI) 62-104.

 

The Bid Amendments were intended to enhance the quality and integrity of the take-over bid regime and rebalance the current dynamics among offerors, offeree issuer boards of directors (“Offeree Boards”), and offeree issuer security holders by (i) facilitating the ability of offeree issuer security holders to make voluntary, informed and coordinated tender decisions, and (ii) providing the Offeree Board with additional time and discretion when responding to a take-over bid.

 

Specifically, the Bid Amendments require that all non-exempt take-over bids:

 

(1) receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the offeror or by any person acting jointly or in concert with the offeror (the “Minimum Tender Requirement”);

 

(2) be extended by the offeror for an additional 10 days after the Minimum Tender Requirement has been achieved and all other terms and conditions of the bid have been complied with or waived (the “10 Day Extension Requirement” ); and

 

(3) remain open for a minimum deposit period of 105 days (the “Minimum 105 Day Bid Period”) unless

 

(a) the offeree board states in a news release a shorter deposit period for the bid of not less than 35 days, in which case all contemporaneous take-over bids must remain open for at least the stated shorter deposit period, or

 

(b) the issuer issues a news release that it intends to effect, pursuant to an agreement or otherwise, a specified alternative transaction, in which case all contemporaneous take-over bids must remain open for a deposit period of at least 35 days.

 

The Bid Amendments involved fundamental changes to the bid regime to establish a majority acceptance standard for all non-exempt take-over bids, a mandatory extension period to alleviate offeree security holder coercion concerns, and a 105 day minimum deposit period to address concerns that offeree boards did not have enough time to respond to an unsolicited take-over bid. The CSA determined not to amend National Policy 62-202 Defensive Tactics (“NP 62-202”) in connection with these amendments. They reminded participants in the capital markets of the continued applicability of NP 62-202, which means that securities regulators will be prepared to examine the actions of offeree boards in specific cases, and in light of the amended bid regime, to determine whether they are abusive of security holder rights.

 

Stockholder Ownership Disclosure Threshold in Bylaws

 

Neither our Articles nor by-laws contain a provision governing the ownership threshold above which shareholder ownership must be disclosed. Pursuant to Canadian securities legislation, an “early warning report”, news release and an “insider report” must be filed if a shareholder obtains ownership on a partially diluted basis of 10% or greater of our company.

 

Changes in Our Capital

 

The conditions imposed by our Articles are not more stringent than required under the Business Corporations Act (Ontario). 

 

C. Material Contracts

 

Please see Item 4.B under the heading “Business Overview.

 

D. Exchange Controls

 

The Canadian dollar is freely convertible into U.S. dollars or other currencies. In addition, there are currently no specific rules or limitations regarding the export from Canada of profits, dividends, capital or similar funds belonging to foreign investors, except that certain payments to non-residents must be reported to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which monitors such transaction, and amounts on account of potential Canadian tax liabilities may be required to be withheld unless a relevant taxation treaty can be shown to apply and under such there are either exemptions or limitations on the level of tax to be withheld.

 

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E. Taxation

 

The following is a discussion of Canadian and United States tax consequences material to our shareholders. To the extent that the discussion is based on tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question or by court. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.

 

Holders of our common shares should consult their own tax advisors as to the United States, Canadian or other tax consequences of the purchase, ownership and disposition of common shares, including, in particular, the effect of any foreign, state or local taxes.

 

E.1. CANADIAN TAX CONSEQUENCES

 

In this section we discuss the material Canadian tax considerations that apply to non-Canadian tax residents with respect to the acquisition, ownership and disposal of the absolute beneficial ownership of common shares. This discussion is based upon existing Canadian tax law as of the date of this registration statement, which is subject to change, possibly retrospectively. This discussion does not address all aspects of Canadian income tax law which may be important to particular investors in light of their individual investment circumstances, such as shares held by investors subject to special tax rules (for example, financial institutions, insurance companies or tax exempt organizations). In addition, this summary does not discuss any foreign or state tax considerations, other than stamp duty. Prospective investors are urged to consult their tax advisors regarding the Canadian and foreign income and other tax considerations of the purchase, ownership and disposition of shares.

 

Taxation of Dividends

 

Dividends paid on our common shares to a non-resident holder will be subject under the Income Tax Act (Canada) to withholding tax at a rate of 25% subject to a reduction under the provisions of an applicable tax treaty, which tax is deducted at source by our company. The Treaty provides that the Income Tax Act (Canada) standard 25% withholding tax rate is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as our company) to residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation resident in the United States that owns at least 10% of the voting shares of the corporation paying the dividend.

 

Tax on Sales or other Dispositions of Shares - Capital Gains Tax

 

A non-resident holder is not subject to tax under the Income Tax Act (Canada) in respect of a capital gain realized upon the disposition of a common share of our company unless such share represents “taxable Canadian property”, as defined in the Income Tax Act (Canada), to the holder thereof. Our common shares generally will be considered taxable Canadian property to a non-resident holder if:

 

  the non-resident holder;
  persons with whom the non-resident holder did not deal at arm’s length; or
  the non-resident holder and persons with whom such non-resident holder did not deal at arm’s length,

 

owned, or had an interest in an option in respect of, not less than 25% of the issued shares of any class of our capital stock at any time during the 60-month period immediately preceding the disposition of such shares. In the case of a non-resident holder to whom shares of our company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will generally be payable on a capital gain realized on such shares by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada. 

 

Dual Residency

 

If a shareholder were a resident of both Canada and the United States under those countries’ domestic taxation laws, that shareholder may be subject to tax as a Canadian resident. If, however, the shareholder is determined to be a U.S. resident for the purposes of the Double Taxation Convention between the United States and Canada, the Canadian tax applicable would be limited by the Double Taxation Convention. Shareholders should obtain specialist taxation advice in these circumstances.

 

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Stamp Duty

 

No transfer duty is payable by Canadian residents or foreign residents on the trading of shares that are quoted on the TSX or NASDAQ/OTC.

 

Canadian Death Duty

 

Canada does not have estate or death duties. As a general matter, no capital gains tax liability is realized upon the inheritance of a deceased person’s shares. The disposal of inherited shares by beneficiaries, may, however, give rise to a capital gains tax liability if the gain falls within the scope of Canada’s jurisdiction to tax (as discussed above).

 

Goods and Services Tax

 

The issue or transfer of shares will not incur Canadian goods and services tax.

 

E.2 UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

 

In this section, we discuss material U.S. federal income tax considerations applicable to an investment in common shares by a U.S. holder, as defined below, that will hold the common shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing U.S. federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the IRS with respect to any U.S. federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. We do not discuss the tax consequences to any particular holder nor any tax considerations that may apply to holders subject to special tax rules, such as banks, insurance companies, individual retirement and other tax-deferred accounts, regulated investment companies, individuals who are former U.S. citizens or former long-term U.S. residents, dealers in securities or currencies, tax-exempt entities, persons subject to the alternative minimum tax, persons that hold common shares as a position in a straddle or as part of a hedging, constructive sale or conversion transaction for U.S. federal income tax purposes, persons that have a functional currency other than the U.S. dollar, persons that own (directly, indirectly or constructively) 10% or more of our equity or persons that are not U.S. holders.

 

In this section, a “U.S. holder” means a beneficial owner of common shares that is, for U.S. federal income tax purposes:

 

  an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;
  
  a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;
  
  an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
  
  a trust (i) the administration of which is subject to the primary supervision of a court in the United States and for which one or more U.S. persons have the authority to control all substantial decisions or (ii) that has an election in effect under applicable income tax regulations to be treated as a U.S. person.

 

As used in this section, a “non-U.S. holder” is a beneficial owner of common shares that is not a U.S. holder or an entity or arrangement treated as a partnership for U.S. federal income tax purposes.

 

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds common shares, the U.S. federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships that will hold common shares should consult their tax advisors.

 

You are urged to consult your own tax advisor with respect to the U.S. federal, as well as state, local and non-U.S., tax consequences to you of acquiring, owning and disposing of common shares in light of your particular circumstances, including the possible effects of changes in U.S. federal and other tax laws.

 

Dividends

 

Subject to the passive foreign investment company rules, discussed below, U.S. holders will include as dividend income the U.S. dollar value of the gross amount of any distributions of cash or property (without deduction for any withholding tax), other than certain pro rata distributions of common shares, with respect to common shares to the extent the distributions are made from our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. A U.S. holder will include the dividend income at the time of receipt. To the extent, if any, that the amount of any distribution by us exceeds our current and accumulated earnings and profits, as so determined, the excess will be treated first as a tax-free return of the U.S. holder’s tax basis in the common shares and thereafter as capital gain. Notwithstanding the foregoing, we do not intend to maintain calculations of earnings and profits, as determined for U.S. federal income tax purposes. Consequently, any distributions generally will be reported as dividend income for U.S. information reporting purposes. See “Backup Withholding Tax and Information Reporting” below. Dividends paid by us will not be eligible for the dividends-received deduction generally allowed to U.S. corporate shareholders.

 

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A non-corporate recipient of dividend income generally will be subject to tax on dividend income from a “qualified foreign corporation” at a reduced capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that a certain holding period requirement is met (more than 60 days of ownership, without protection from the risk of loss, during the 121-day period beginning 60 days before the ex-dividend date). Each U.S. holder is advised to consult its tax advisors regarding the availability of the reduced tax rate on dividends to its particular circumstances. A non-U.S. corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (a) if (it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information provision or (b) with respect to any dividend it pays on common shares which are readily tradable on an established securities market in the United States. We expect to be considered a qualified foreign corporation with respect to our common shares because we believe we are eligible for the benefits under the Double Taxation Convention between Canada and the United States. Accordingly, dividends we pay generally should be eligible for the reduced income tax rate. However, the determination of whether a dividend qualifies for the preferential tax rates must be made at the time the dividend is paid. U.S. holders should consult their own tax advisers.

 

Includible distributions paid in Canadian dollars, including any Canadian withholding taxes, will be included in the gross income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of whether the Canadian dollars are converted into U.S. dollars at that time. If Canadian dollars are converted into U.S. dollars on the date of actual or constructive receipt, the tax basis of the U.S. holder in those Canadian dollars will be equal to their U.S. dollar value on that date and, as a result, a U.S. holder generally should not be required to recognize any foreign exchange gain or loss.

 

If Canadian dollars so received are not converted into U.S. dollars on the date of receipt, the U.S. holder will have a basis in the Canadian dollars equal to their U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the Canadian dollars generally will be treated as ordinary income or loss to such U.S. holder and generally such gain or loss will be income or loss from sources within the United States for foreign tax credit limitation purposes.

 

Dividends received by a U.S. holder with respect to common shares will be treated as foreign source income, which may be relevant in calculating the holder’s foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For these purposes, dividends will be categorized as “passive” or “general” income depending on a U.S. holder’s circumstance.

 

Subject to certain complex limitations, a U.S. holder generally will be entitled, at its option, to claim either a credit against its U.S. federal income tax liability or a deduction in computing its U.S. federal taxable income in respect of any Canadian taxes withheld by us. If a U.S. holder elects to claim a deduction, rather than a foreign tax credit, for Canadian taxes withheld by us for a particular taxable year, the election will apply to all foreign taxes paid or accrued by or on behalf of the U.S. holder in the particular taxable year.

 

The availability of the foreign tax credit and the application of the limitations on its availability are fact specific. You are urged to consult your own tax advisor as to the consequences of Canadian withholding taxes and the availability of a foreign tax credit or deduction. See “Canadian Tax Consequences — Taxation of Dividends.”

 

Sale or Exchange of common shares

 

Subject to the passive foreign investment company rules, discussed below, a U.S. holder generally will, for U.S. federal income tax purposes, recognize capital gain or loss on a sale, exchange or other disposition of common shares equal to the difference between the amount realized on the disposition and the U.S. holder’s adjusted tax basis in the common shares. Any gain or loss recognized on a sale, exchange or other disposition of common shares will generally be long-term capital gain or loss if the U.S. holder has held the common shares for more than one year. Generally, for U.S. holders who are individuals (as well as certain trusts and estates), long-term capital gains are subject to U.S. federal income tax at preferential rates. For foreign tax credit limitation purposes, gain or loss recognized upon a disposition generally will be treated as from sources within the United States. The deductibility of capital losses is subject to limitations for U.S. federal income tax purposes.

 

You should consult your own tax advisor regarding the availability of a foreign tax credit or deduction in respect of any Canadian tax imposed on a sale or other disposition of common shares. See “Canadian Tax Consequences — Tax on Sales or other Dispositions of Shares.”

 

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Passive Foreign Investment Company Considerations

 

A non-U.S. corporation will be treated as a passive foreign investment company (a “PFIC”) for any taxable year if either (a) at least 75% of its gross income for such taxable year consists of certain types of passive income or (b) at least 50% of gross assets during the taxable year, based on a quarterly average and generally by value, produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and out unbooked intangibles associated with active business activities may generally be classified as active assets. Passive income for this purpose generally includes, among other things, dividends, interest, rents, royalties, gains from commodities and securities transactions and gains from assets that produce passive income. In determining whether a foreign corporation is a PFIC, a pro-rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.

 

The determination of whether or not we are a PFIC is a factual determination that must be determined annually at the close of each taxable year. Based on our business results for the last fiscal year and composition of our assets, we do not believe that we were a PFIC for U.S. federal income tax purposes for the taxable year ended August 31, 2012. Similarly, based on our business projections and the anticipated composition of our assets for the current and future years, we do not expect that we will be a PFIC for the taxable year ended August 31, 2013. If our actual business results do not match our projections, it is possible that we may become a PFIC in the current or any future taxable year.

 

If we are a PFIC for any taxable year during which a U.S. holder holds common shares, any “excess distribution” that the holder receives and any gain realized from a sale or other disposition (including a pledge) of such common shares will be subject to special tax rules, unless the holder makes a mark-to-market election or qualified electing fund election as discussed below. Any distribution in a taxable year that is greater than 125% of the average annual distribution received by a U.S. holder during the shorter of the three preceding taxable years or such holder’s holding period for the common shares will be treated as an excess distribution. Under these special tax rules:

 

  the excess distribution or gain will be allocated ratably over the U.S. holder’s holding period for the common shares;
  the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were classified as a PFIC, will be treated as ordinary income; and
  the amount allocated to each other year, other than a pre-PFIC year, will be subject to income tax at the highest rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year (other than a pre-PFIC year).

 

The tax liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any net operating loss, and gains (but not losses) realized on the transfer of the common shares cannot be treated as capital gains, even if the common shares are held as capital assets. In addition, non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.

 

If we are a PFIC for any taxable year during which any of our non-U.S. subsidiaries is also a PFIC (i.e., a lower-tier PFIC), a U.S. holder of common shares during such year would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such U.S. holder would not receive the proceeds of those distributions or dispositions. You should consult your tax advisors regarding the tax consequences if the PFIC rules apply to any of our subsidiaries.

 

Under recently enacted legislation, unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. Prior to such legislation, a U.S. shareholder of a PFIC was required to file U.S. Internal Revenue Service Form 8621 only for each taxable year in which such shareholder received distributions from the PFIC, recognized gain on a disposition of the PFIC stock, or made a “reportable election.” If we are or become a PFIC, you should consult your tax advisors regarding any reporting requirements that may apply to you as a result of our status as a PFIC.

 

A U.S. holder may avoid some of the adverse tax consequences of owning shares in a PFIC by making a “qualified electing fund” election. The availability of this election with respect to our common shares requires that we provide information to shareholders making the election. We do not intend to provide you with the information you would need to make or maintain a qualified electing fund election and you will, therefore, not be able to make such an election with respect to your common shares.

 

Alternatively, a U.S. holder owning marketable stock in a PFIC may make a mark-to-market election to elect out of the tax treatment discussed above. If a valid mark-to-market election for the common shares is made, the electing U.S. holder will include in income each taxable year that we are a PFIC, an amount equal to the excess, if any, of the fair market value of the common shares as of the close of the holder’s taxable year over the adjusted basis in such common shares. The U.S. holder is allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the holder’s taxable year. Deductions are allowable, however, only to the extent of any net mark-to-market gains on the common shares included in the U.S. holder’s income for prior taxable years. Amounts included in the U.S. holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. The tax basis in the common shares will be adjusted to reflect any such income or loss amounts. A mark-to-market election will be effective for the taxable year for which the election is made and all subsequent taxable years unless the common shares are no longer regularly traded on an applicable exchange or the IRS consents to the revocation of the election.

 

69

 

 

The mark-to-market election is available only for stock which is regularly traded on (i) a national securities exchange that is registered with the U.S. Securities and Exchange Commission, (ii) NASDAQ, or (iii) an exchange or market that the U.S. Secretary of the Treasury determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Our common shares are listed on the TSX and, consequently, we expect that, assuming the common shares are so listed and are regularly traded, the mark-to-market election would be available to you were we to be or become a PFIC.

 

U.S. holders are urged to contact their own tax advisors regarding the determination of whether we are a PFIC and the tax consequences of such status.

 

Recent Legislation

 

Recently enacted legislation requires certain U.S. Holders who are individuals, estates, or trusts to pay a 3.8% tax on, among other things, dividends and capital gains from the sale or other disposition of shares of common shares for taxable years beginning after December 31, 2012. In addition, for taxable years beginning after March 18, 2010, recent legislation requires certain U.S. Holders who are individuals to report information relating to an interest in our common shares, subject to certain exceptions. U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this tax legislation on their ownership and disposition of our common shares.

 

Backup Withholding Tax and Information Reporting Requirements

 

Dividend payments with respect to common shares and proceeds from the sale, exchange or redemption of common shares may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding and establishes such exempt status. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. holder’s U.S. federal income tax liability. A U.S. holder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS in a timely manner and furnishing any required information. U.S. holders are urged to contact their own tax advisors as to their qualification for an exemption from backup withholding tax and the procedure for obtaining this exemption.

 

In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by certain financial institutions, if the aggregate value of all such assets exceeds U.S.$50,000. U.S. holders are encouraged to consult their own tax advisors regarding the application of the information reporting rules to common shares and the application of these additional reporting requirements for foreign financial assets to their particular situations.

 

The discussion above is not intended to constitute a complete analysis of all tax considerations applicable to an investment in common shares. You should consult with your own tax advisor concerning the tax consequences to you in your particular situation.

 

F. Dividends and Paying Agents

 

Not applicable.

 

G. Statement by Experts

 

The financial statements of PQE as of August 31, 2017, 2016 and 2015 included in this registration statement have been so included in reliance on the reports of Hay & Watson, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. Hay & Watson is registered with the Canadian Public Accountability Board, the Public Company Accounting Oversight Board and Chartered Professional Accountants of British Columbia.

 

H. Documents on Display

 

We will be subject to the reporting requirements of the United States Securities and Exchange Act of 1934, as amended, or the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act and applicable Canadian securities legislation and, in accordance therewith, will file certain reports with, and furnish other information to, each of the SEC and certain securities commissions or similar regulatory authorities of Canada. Under the multijurisdictional disclosure system adopted by the United States and Canada, such reports and other information may be prepared in accordance with the disclosure requirements of the securities regulatory authorities in the applicable provinces of Canada, which requirements are different from those of the United States. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of regulation 14A under the Exchange Act, transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will file with the SEC an annual report on Form 20-F containing financial statements that have been examined and reported on, with and opinion expressed by an independent registered public accounting firm, and we will submit reports to the SEC on Form 6-K containing (among other things) press releases and unaudited financial information for the first six months of each fiscal year. We post our annual report on Form 20-F on our website promptly following the filing of our annual report with the U.S. Securities and Exchange Commission. The information on our website is not incorporated by reference into this annual report.

 

70

 

 

This document and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330.

 

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system. Our Canadian filings are available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.

 

The documents concerning our company that are referred to in this document may also be inspected at the offices of our legal counsel located at DLA Piper (Canada) LLP located in Canada at 1 First Canadian Place, Suite 6000, 100 King Street West, Ontario M5X 1E2. 

 

Subsidiary Information

 

For information on our subsidiaries, see “Item 4C. Organizational Structure.”

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A. Debt Securities

 

For information on outstanding convertible debentures, see “Item 7.”

 

B. Warrants and Rights

 

Share Purchase Warrants

 

For information on outstanding warrants, see “Item 7.”

 

C. Other Securities

 

For information on outstanding securities, see “Item 7.”

 

D. American Depositary Shares

 

Not applicable.

 

71

 

 

PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

Not applicable.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 15. CONTROLS AND PROCEDURES

 

Not applicable.

 

ITEM 16. RESERVED

 

Not applicable.

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

Not applicable.

 

ITEM 16B. CODE OF ETHICS

 

Not applicable.

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Not applicable.

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not applicable.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable

 

ITEM 16G. CORPORATE GOVERNANCE

 

Not applicable.

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

 

72

 

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

Our audited financial statements as of and for fiscal years ending August 31, 2017, 2016 and 2015 are included herein as Section F-1 and our unaudited financial statements as of and for the nine months ended May 31, 2018 and 2017 are included herein as Section F-2.

 

ITEM 18. FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 19. EXHIBITS

 

The following documents are included as exhibits to this report.

 

Exhibit No.   Title of Document
     
3.1   Articles of Amalgamation filed December 12, 2012*
     
3.2   Bylaws*
     
3.3   Articles of Amendment filed May 5, 2017*
     
4.1   Specimen of Stock Certificate evidencing the Common Shares*
     
4.2   Convertible Debenture between MCW Energy Group Limited and Aleksandr Blyumkin dated April 9, 2014*
     
4.3   Secured Convertible Note Due May 5, 2016 between MCW Energy Group Limited and Alpha Capital Anstalt dated November 5, 2014*
     
4.4   Secured Convertible Note Due May 20, 2016 between MCW Energy Group Limited and Alpha Capital Anstalt dated November 24, 2014*
     
4.5   Secured Convertible Note Due June 15, 2017 between MCW Energy Group Limited and Alpha Capital Anstalt dated December 15, 2015*
     
4.6   Secured Convertible Note Due October 8, 2017 between MCW Energy Group Limited and Alpha Capital Anstalt dated April 8, 2016*
     
4.7   2018 Stock Option Plan*
     
10.1   Technology Transfer Agreement, between the Company and Vladimir Podlipskiy, effective as of November 7, 2011*
     
10.2   Mining and Mineral Lease Agreement between Asphalt Ridge, Inc. and TMC Capital, LLC dated July 1, 2013*
     
10.3   Securities Purchase Agreement between MCW Energy Group Limited and Alpha Capital Anstalt dated November 5, 2014*
     
10.4   Securities Purchase Agreement between MCW Energy Group Limited and Alpha Capital Anstalt dated November 24, 2014*
     
10.5   Loan Agreement between Atlands Overseas Corp. and MCW Energy CA, Inc. dated February 9, 2015*
     
10.6   Amendment No. 1 to Loan Agreement between MCW Energy CA, Inc. and Atlands Overseas Corp. dated July 21, 2015*
     
10.7   First Amendment to Mining and Mineral Lease Agreement between Asphalt Ridge, Inc. and TMC Capital, LLC dated as of October 1, 2015*
     
10.8   Securities Purchase Agreement between MCW Energy Group and Alpha Capital Anstalt dated December 15, 2015*

 

73

 

 

Exhibit No.   Title of Document
     
10.9   Amendment No. 2 to Loan Agreement between MCW Energy CA, Inc. and Atlands Overseas Corp. dated February 1, 2016*
     
10.10   Reinstatement of and Second Amendment to Mining and Mineral Lease Agreement between Asphalt Ridge, Inc. and TMC Capital, LLC dated as of March 1, 2016*
     
10.11   Securities Purchase Agreement between MCW Energy CA, Inc. and Alpha Capital Anstalt dated April 8, 2016*
     
10.12   Amendment No. 3 to Loan Agreement between MCW Energy CA, Inc. and Atlands Overseas Corp. dated July 26, 2016*
     
10.13   Debt Conversion Agreement between Petroteq Energy Inc. and Aleksandr Blyumkin dated May 18, 2017*
     
10.14   Debt Conversion Agreement between Petroteq Energy Inc. and Palmira Associates, Inc. dated May 18, 2017*
     
10.15   Debt Conversion Agreement between Petroteq Energy Inc. and Express Consulting, LLC dated May 18, 2017*
     
10.16   Debt Conversion Agreement between Petroteq Energy Inc. and Aleksandr Blyumkin dated May 18, 2017*
     
10.17   Form of Director and Officer Indemnification Agreement*
     
10.18   Office Lease, between Camp Granada LLC, as Lessor, and PetroBloq LLC, as Leasee, dated January 17, 2018*
     
10.19   Third Amendment to Mining and Mineral Lease Agreement between Asphalt Ridge, Inc. and TMC Capital, LLC dated as of February 21, 2018*
     
10.20   Employment Agreement between the Company and David Sealock dated as of March 15, 2018*
     
10.21   Debt Conversion Agreement between Petroteq Energy Inc. and Aleksandr Blyumkin dated August 3, 2018*
     
15.1   Consent of Hay & Watson*
     
21.1   Subsidiaries of the Registrant*
     
99.1   Consent of Chapman Petroleum Engineering Ltd.*

 

*Filed herewith

 

74

 

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PETROTEQ ENERGY INC.
  (Registrant)
     
Dated: October 11, 2018 By: /s/ David Sealock 
    David Sealock
Chief Executive Officer

 

75

 

 

 

 

 

 

 

 

 

 

Petroteq Energy Inc.

(Formerly MCW Energy Group Limited)

 

Consolidated Financial Statements

 

Years ended August 31, 2017 and 2016

 

(Expressed in US dollars)

 

 

 

 

 

 

 

 

 

 

 

 

F-1

 

 

Petroteq Energy Inc.

(formerly MCW Energy Group Limited)

 

Table of Contents

 

  Page(s)
   
Independent Auditor’s Report -
   
Consolidated Statements of Financial Position F-3
   
Consolidated Statements of Loss and Comprehensive Loss F-4
   
Consolidated Statements of Changes in Shareholders’ Equity F-5
 
Consolidated Statements of Cash Flows F-6
   
Notes to Consolidated Financial Statements F-7 – F-38

 

F-2

 

 

PETROTEQ ENERGY INC.

(formerly MCW ENERGY GROUP LIMITED)

Consolidated Statements of Financial Position

August 31, 2017 and 2016

Expressed in US dollars

 

   Notes  2017   2016 
            
ASSETS           
Current assets           
Cash  4  $55,420   $6,129 
Trade and other receivables  5   306,909    215,113 
Current portion of advance royalty payments  7(a)   258,333    540,000 
Prepaid expenses      92,819    141,829 
       713,481    903,071 
Advance royalty payments  7(a)   244,790    94,167 
Notes receivable      76,000    - 
Mineral lease  8   11,091,388    12,143,738 
Investment in joint venture  20   68,331    - 
Investment in Accord GR Energy  3(a)   1,141,561    - 
Property, plant and equipment  9   14,906,953    15,852,484 
Intangible assets  10   707,671    2,242,455 
              
      $28,950,175   $31,235,915 
LIABILITIES             
Current liabilities             
Accounts payable  11  $1,121,327   $1,454,583 
Accrued expenses  11   1,980,304    2,329,151 
Unearned revenue      283,976    133,550 
Current portion of long-term debt  12   1,159,104    3,958,522 
Current portion of convertible debentures  13   -    3,704,000 
Payable to director      419,322    10,068 
       4,964,033    11,589,874 
Unearned advance royalties received  7(c)   170,000    170,000 
Long-term debt  12   717,276    8,855,326 
Convertible debentures  13   508,500    555,876 
Reclamation and restoration provisions  14   572,220    561,000 
       6,932,029    21,732,076 
SHAREHOLDERS’ EQUITY             
Share capital  15   60,827,494    39,416,380 
Shares to be issued      56,800    100,000 
Share option reserve  16   7,371,552    7,355,559 
Share warrant reserve  17   618,667    512,934 
Accumulated deficit      (46,856,367)   (38,916,724)
       22,018,146    8,468,149 
Non-controlling interest      -    1,035,690 
       22,018,146    9,503,839 
      $28,950,175   $31,235,915 

 

Approved by the Board of Directors   ___________________   __________________
    Aleksandr Blyumkin, Director   Travis Schneider, Director

 

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

  

F-3

 

 

PETROTEQ ENERGY INC.

(formerly MCW ENERGY GROUP LIMITED)

Consolidated Statements of Loss (Income) and Comprehensive Loss (Income)

Years ended August 31, 2017, 2016 and 2015

Expressed in US dollars

 

   Notes  2017   2016   2015 
Revenues     $-   $204,735   $- 
Cost of Goods Sold  7(b)   426,641    1,399,239    - 
Gross Loss      426,641    1,194,504    - 
Operating Expenses                  
Amortization      1,165,830    1,212,674    14,430 
General and administrative      348,487    577,389    153,290 
Interest expense      1,106,808    1,501,460    294,607 
Professional fees      617,615    1,789,381    1,178,422 
Plant relocation costs      437,800    -    - 
Salaries and wages      702,782    865,211    800,943 
Share-based compensation  16(a)   15,993    3,013,965    - 
Share-based payments      -    -    138,852 
Travel and promotion      553,066    434,614    749,105 
       4,948,381    9,394,694    3,329,649 
                   
Net operating Loss from continuing operations      5,375,022    10,589,198    3,329,649 
Loss (gain) on settlement of liabilities      2,366,587    1,502,628    (47,884)
Equity income from investment of Accord GR Energy, net of tax      198,034    -    - 
                   
Net loss from continuing operations      7,939,643    12,091,826    3,281,765 
Discontinued operations      -    -    (3,750,969)
                   
Net loss (income) and Comprehensive loss (income)     $7,939,643   $12,091,826   $(469,204)
                   
Net Loss and Comprehensive Loss from continuing operations attributable to:                  
Shareholders of the company     $7,939,643   $12,074,530   $3,281,765 
Non-controlling interest      -    17,296    - 
      $7,939,643   $12,091,826   $3,281,765 
Net loss (income) and comprehensive loss (income) attributable to:                  
Shareholders of the company     $7,939,643   $12,074,530   $(469,204)
Non-controlling interest      -    17,296    - 
      $7,939,643   $12,091,826   $(469,204)
                   
Weighted Average Number of Shares Outstanding  18   12,096,101    2,835,138    1,727,901 
                   
Basic and diluted loss per share from continuing operations      0.66    4.26    1.90 
Basic and diluted income per share from discontinued operations      -    -    (2.17)
Basic and Diluted Loss (income) Per Share     $0.66   $4.26   $(0.27)

 

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

  

F-4

 

 

PETROTEQ ENERGY INC.

(formerly MCW ENERGY GROUP LIMITED)

Consolidated Statements of Changes in Shareholders’ Equity
Years ended August 31, 2017, 2016 and 2015

Expressed in US dollars

 

   Notes  Number of Shares Outstanding   Share
Capital
   Share to be issued   Option Reserve   Warrant Reserve   Deficit  

Shareholder’s

Equity

   Non-
Controlling Interest
   Total
Equity
 
                                        
Balance at  August 31, 2014         1,548,287     $ 15,993,551     $ -     $ 7,063,773     $ 157,733     $ (27,311,398 )   $ (4,096,341 )     -     $ (4,096,341  
                                                                             
Settlement of loan         306,667       5,685,057       -       -       -       -       5,685,057       -       5,685,057  
Conversion of debentures         110,121       2,897,326       -       -       22,674       -       2,920,000       -       2,920,000  
Settlement of liabilities         44,632       730,001       -       -       -       -       730,001       -       730,001  
Private placement of shares         3,562       80,000       -       -       -       -       80,000       -       80,000  
Shares issued for services         7,496       138,852       -       -       -       -       138,852       -       138,852  
Warrants issued         -       -       -       -       156,876       -       156,876       -       156,876  
Net income         -       -       -       -       -       469,204       469,204       -       469,204  
                                                                             
Balance at August 31, 2015      2,020,765   $25,524,787   $-   $7,063,773   $337,283   $(26,842,194)  $6,083,649   $-   $6,083,649 
                                                 
Settlement of loans      2,015,068    7,695,179    100,000    -    56,660    -    7,851,839    -    7,851,839 
Conversion of debentures  13(c)   12,663    253,402    -    -    46,598    -    300,000    -    300,000 
Settlement of liabilities      312,667    1,319,290    -    -    34,847    -    1,354,137    -    1,354,137 
Private placement of shares  15   181,090    526,643    -    -    -    -    526,643    -    526,643 
Share based compensation  16(a)   190,971    2,722,179    -    291,786    -    -    3,013,965    -    3,013,965 
Acquisition of Accord GR Energy, Inc.  1, 3(a)   1,989,943    1,374,900    -    -    37,546    -    1,412,446    1,052,986    2,465,432 
Net loss      -    -    -    -    -    (12,074,530)   (12,074,530)   (17,296)   (12,091,826)
                                                 
Balance at August 31, 2016      6,723,167    39,416,380    100,000    7,355,559    512,934    (38,916,724)   8,468,149    1,035,690    9,503,839 
                                                 
Settlement of loans      46,144,371    20,235,451    (100,000)   -    -    -    20,135,451    -    20,135,451 
Conversion of debentures  13(c)   57,756    94,267    -    -    105,733    -    200,000    -    200,000 
Settlement of liabilities      501,363    297,157    -    -    -    -    297,157    -    297,157 
Private placement of shares  15   694,042    641,528    56,800    -    -    -    698,328    -    698,328 
Share based compensation  16(a)   -    -    -    15,993    -    -    15,993    -    15,993 
Shares issued for technology      16,667    74,380    -         -    -    74,380    -    74,380 
Shares issued for investment in joint venture  20   83,333    68,331    -    -    -    -    68,331    -    68,331 
Deconsolidation of subsidiary  1, 3(a)   -    -    -    -    -    -    -    (1,035,690)   (1,035,690)
Net loss      -    -    -    -    -    (7,939,643)   (7,939,643)   -    (7,939,643)
                                                 
Balance at August 31, 2017      54,220,699   $60,827,494   $56,800   $7,371,552   $618,667   $(46,856,367)  $22,018,146   $-   $22,018,146 

  

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

  

F-5

 

  

PETROTEQ ENERGY INC.

(formerly MCW ENERGY GROUP LIMITED)

Consolidated Statements of Cash Flows

Years ended August 31, 2017, 2016 and 2015

Expressed in US dollars

 

   2017   2016   2015 
Cash flow (used for) from operating activities:            
Net loss  $(7,939,643)  $(12,091,826)  $(3,281,765)
Adjustments for non-cash, investing and financing items               
Amortization   1,165,830    1,212,674    14,430 
Loss on conversion of debt   2,515,498    1,743,477    - 
Gain on settlement of liabilities   (71,316)   (240,849)   (47,884)
Share-based compensation   15,993    3,013,965    - 
Shares issued for services   -    -    138,852 
Equity income from investment of Accord GR Energy   198,034    -    - 
Other   1,039,503    710,688    303,964 
Changes in operating assets and liabilities:               
Accounts payable   251,241    1,792,345    1,023,079 
Accounts receivable   (99,808)   (40,721)   (41,833)
Accrued expenses   942,229    1,092,660    (1,552,399)
Prepaid expenses   44,164    15,723    (152,576)
Unearned revenue   150,426    133,550    - 
Net cash used for operating activities of continuing operations   (1,787,849)   (2,658,314)   (3,596,132)
Net cash from operating activities of discontinued operations   -    -    570,048 
                
Cash flows used for investing activities:               
Purchase and construction of property and equipment   (68,483)   (432,596)   (3,947,201)
Advance royalty payments - net   (294,790)   (180,000)   (328,912)
Net cash used for investing activities of continuing operations   (363,273)   (612,596)   (4,276,113)
Net cash used for investing activities of discontinued operations   -    -    (193,075)
                
Cash flows from (used for) financing activities:               
Receipts (payments to) from director   409,254    10,068    (14,848)
Private placements   698,328    526,644    80,000 
Payment of long-term debt   (26,800)   (3,655,277)   - 
Proceeds from long-term debt   1,119,631    4,993,965    3,845,765 
Payment of convertible debt   -    (500,000)   (230,000)
Proceeds from convertible debt   -    1,040,000    4,500,000 
Net cash from financing activities of continuing operations   2,200,413    2,415,400    8,180,917 
Net cash from financing activities of discontinued operations   -    -    (762,654)
                
Increase (decrease) in cash   49,291    (855,510)   (77,009)
Cash, beginning of the year   6,129    861,639    938,648 
                
Cash, end of the year  $55,420   $6,129   $861,639 
                
Supplemental disclosure of cash flow information               
Cash paid for interest  $33,131   $309,612   $592,719 

  

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

  

F-6

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

1.NATURE OF OPERATIONS

 

Petroteq Energy Inc. (formerly MCW Energy Group Limited) (the “Company”) is an Ontario corporation with one active business segment located in the USA. It operates through its indirectly wholly owned subsidiary company, Petroteq Oil Sands 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 4400, 181 Bay Street, Toronto, Ontario, M5J 2T3, Canada and its principal operating office is located at 4370 Tujunga Avenue, Suite 320, Studio City, California 91604, 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 the first phase of an oil processing plant in the Asphalt Ridge area of Uintah, Utah. The Company is currently relocating the oil processing facility to its mineral lease in Uintah, Utah in order to improve the viability of the plant by eliminating unnecessary transportation costs of raw materials. The Company also intends to expand the existing plant to increase the production capacity to at least 1000 barrels per day.

 

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 year ended August 31, 2017 and was consolidated for the year ended August 31, 2016 (Note 3(a)).

 

On May 5, 2017 the shareholders of the Company approved the consolidated its shares on a 30 for one basis (Note 15). The number of shares issued and outstanding have been retroactively adjusted for this consolidation in these financial statements.

 

The Company has incurred losses for several years and, at August 31, 2017, has an accumulated deficit of $46,856,367 (August 31, 2016 - $38,916,724) and a working capital deficiency of $4,250,552 (August 31, 2016 - $10,686,803). These consolidated financial statements have been prepared on the basis that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent on obtaining additional financing, which it is currently in the process of obtaining. There is a risk that the additional financing will not be available on a timely basis or on terms acceptable to the Company. These consolidated financial statements do not reflect the adjustments or reclassifications that would be necessary if the Company were unable to continue operations in the normal course of business.

 

2.BASIS OF PREPARATION

 

(a)Statement of compliance

 

The consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 1 Presentation of Financial Statements, using accounting policies which are consistent with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). The consolidated financial statements were authorized for issue by the Board of Directors on December 29, 2017.

 

F-7

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

2.BASIS OF PREPARATION (continued)

 

(b)Basis of measurement

 

The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value. The Company’s reporting currency and the functional currency of all of its operations is the U.S. dollar, as it is the principal currency of the primary economic environment in which the Company operates.

 

(c)Significant accounting judgments and estimates

 

The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting judgments and estimates included in these consolidated financial statements are:

 

Useful lives and depreciation rates for intangible assets and property, plant and equipment

 

Depreciation expense is recorded on the basis of the estimated useful lives of intangible assets and property, plant and equipment. Changes in the useful life of assets from the initial estimate could impact the carrying value of intangible assets and property, plant and equipment and an adjustment would be recognized in profit or loss.

 

Review of carrying value of assets and impairment charges

 

When determining possible impairment of the carrying values of assets, management of the Company reviews the recoverable amount (the higher of the fair value less costs to sell or the value in use) of non-financial assets and objective evidence indicating impairment in the case of financial assets. These determinations and their individual assumptions require that management make a decision based on the best available information at each reporting period. Changes in these assumptions may alter the results of the impairment evaluation, the impairment charges recognized in profit or loss and the resulting carrying amounts of assets.

 

Fair value of share purchase options and warrants

 

Share purchase options and warrants granted by the Company are valued at the fair value of the goods or services received unless the fair value cannot be reliably measured. Share purchase options and warrants granted to employees and others providing similar services are valued using the Black-Scholes option pricing model. Estimates and assumptions for inputs to the model, including the expected volatility of the Company’s shares and the expected life of options granted, are subject to significant uncertainties and judgment.

 

Provisions

 

Provisions are recorded on the basis of the best estimate of the likelihood, timing, and magnitude of a future outflow of economic resources. Where the effect of the time value of money is material, the present value of the provision is recognized using a discount rate that reflects current market assessments of the time value of money.

 

F-8

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

2.BASIS OF PREPARATION (continued)

 

(c)Significant accounting judgments and estimates (continued)

 

Income taxes and recoverability of deferred tax assets

 

Actual amounts of income tax expense are not final until tax returns are filed and accepted by taxation authorities. Therefore, profit or loss in future reporting periods may be affected by the difference between the income tax expense estimates and the final tax assessments.

 

Judgment is required in determining whether deferred tax assets are recognized on the consolidated statement of financial position. Deferred tax assets, including those arising from unutilized tax losses, require management of the Company to assess the likelihood that the Company will generate sufficient taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable profit are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable profit differ from estimates, the ability of the Company to realize the deferred tax assets recorded on the consolidated statement of financial position could be impacted. The Company has not recognized any deferred tax assets as at August 31, 2017 and August 31, 2016.

 

3.SIGNIFICANT ACCOUNTING POLICIES

 

(a)Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company and the entities controlled by the Company (its “subsidiaries”). Control is achieved where the Company has the power to govern the financial and operating policies of an entity and obtain the economic benefits from its activities. The consolidated entities are:

 

  Entity  % of Ownership   Jurisdiction
  Petroteq Energy Inc.       
  (formerly MCW Energy Group Limited)   Parent   Canada
  Petroteq Energy CA, Inc.
(formerly MCW Energy CA Inc.)
   100%  USA
  MCW OSR Inc.   100%  USA
  MCW Oil Sands, Inc.   100%  USA
  MCW Fuels Transportation, Inc.   100%  USA
  Petroteq Oil Sands Recovery, LLC
(formerly MCW Oil Sands Recovery, LLC)
   100%  USA
  TMC Capital, LLC   100%  USA

 

The Company has accounted for its investment in Accord GR Energy, Inc. (“Accord”) on the equity basis from 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.

 

All intercompany transactions, balances, income and expenses are eliminated in full on consolidation.

 

F-9

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(b)Business combinations

 

The Company accounts for business combinations using the acquisition method, under which the acquirer measures the cost of the business combination as the total of the fair values, at the date of exchange, of the assets obtained, liabilities incurred and equity instruments issued by the acquirer in exchange for control of the acquiree. Goodwill is measured as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally the fair value) of the identifiable assets and liabilities assumed, measured as at the acquisition date.

 

Transaction costs, other than those associated with issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

 

(c)Income recognition

 

The Company sells hydrocarbon products (bitumen or crude oil) produced by its oil extraction facility at prevailing market prices. The Company also expects to enter into short term supply agreements with customers. Revenues are recognized when the hydrocarbon products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, when prices are fixed or determinable and when collectability is reasonably assured.

 

(d)Investment in 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 consolidated financial statements using the equity method of accounting. Under the equity method, investment in associate is carried in the consolidated statement of financial position at cost as adjusted for changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payment on behalf of the associate.

 

(e)Property, plant and equipment

 

Property, plant and equipment is recorded at cost and amortized over their useful lives. Maintenance and repairs are expensed as incurred. Major renewals, betterments and start-up costs are capitalized. When items of property, plant or equipment are sold, impaired, or retired, the related costs and accumulated amortization are removed and any gain or loss is included in net income. Amortization is determined on a straight-line method with the following expected useful lives:

 

  Machinery and equipment 5-7 years
  Furniture and fixtures 7 years
  Leasehold improvements Lease term
  Oil extraction facility 15 years

 

F-10

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(f)Oil and gas properties

 

Oil and gas property interests

 

Assets owned are recorded at cost less accumulated depreciations and accumulated impairment losses. The Company initially capitalizes the costs of acquiring these properties, directly and indirectly, and thereafter expenses exploration activities, pending the evaluation of commercially recoverable reserves. The results of exploratory programs can take considerable time to analyze and the determination that commercial reserves have been discovered requires both judgment and industry experience. All development costs are capitalized after it has been determined that a property has recoverable reserves. On the commencement of commercial production, net capitalized costs are charged to operations on a unit-of-production basis, by property, using estimated proven and probable recoverable reserves as the depletion base.

 

Oil and gas reserves

 

Oil and gas reserves are evaluated by independent qualified reserves evaluators. The estimation of reserves is a subjective process. Estimates are based on projected future rates of production, estimated commodity prices, engineering data and the timing of future expenditures, all of which are subject to uncertainty and interpretation. Reserves estimates can be revised either upwards or downwards based on updated information such as future drilling, testing and production levels. Reserves estimates, although not reported as part of the Company’s consolidated financial statements, can have a significant effect on net earnings as a result of their impact on depreciation and depletion rates, asset impairment and goodwill impairment.

 

(g)Intangible assets

 

Intangible assets are recorded at cost less accumulated depreciation and accumulated impairment losses. Amortization of intangible assets is recorded on a straight-line basis over a life determined by the maximum length of the benefits expected from acquired intellectual property, technology and technology licenses. Intangible assets with indefinite useful lives are not amortized and are tested for impairment at least annually. The useful life for the Oil Extraction Technologies has been established as 15 years in these consolidated financial statements as at August 31, 2017:

 

(h)Impairment of assets

 

At the end of each reporting period, the Company’s property and equipment, oil and gas properties, and intangible assets are reviewed for indications that the carrying amount may not be recoverable. If any such indication is present, the recoverable amount of the asset is estimated in order to determine whether impairments exist. Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

The recoverable amount of an asset is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which estimates of future cash flows have not been adjusted. The cash flows used in the impairment assessment require management to make assumptions and estimates about recoverable resources, production quantities, future commodity prices, operating costs and future development costs. Changes in any of the assumptions, such as a downward revision in reserves, a decrease in future commodity prices or an increase in operating costs, could result in an impairment of carrying values.

 

F-11

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(h)Impairment of assets (continued)

 

If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount is reduced to the recoverable amount. Impairment is recognized immediately in the consolidated statement of (income) loss and comprehensive (income) loss. Where an impairment subsequently reverses, the carrying amount is increased to the revised estimate of the recoverable amount but only to the carrying value that would have been recorded if no impairment had previously been recognized. A reversal is recognized as a reduction in the impairment charge for the period.

 

(i)Financial instruments

 

Financial instruments consist of financial assets and financial liabilities and are initially recognized at fair value, net of transaction costs if applicable. Measurement in subsequent periods depends on whether the financial instrument is classified as held-to-maturity, loans and receivables, fair value through profit or loss (“FVTPL”), available-for-sale, or other financial liabilities.

 

Held-to-maturity investments and loans and receivables are measured at amortized cost, with amortization of premiums or discounts, losses and impairment included in current period interest income or expense. Financial assets and liabilities are classified as FVTPL when the financial instrument is held for trading or are designated as FVTPL. Financial instruments at FVTPL are measured at fair market value with all gains and losses included in operations in the period in which they arise. Available-for-sale financial assets are measured at fair market value with revaluation gains and losses included in other comprehensive income until the asset is removed from the consolidated statement of financial position, and losses due to impairment are included in operations. All other financial assets and liabilities, except for cash and cash equivalents, are carried at amortized cost.

 

The Company’s financial instruments are:

 

Cash, classified as FVTPL and measured at fair value
Trade and other receivables and notes receivable, classified as loans and receivables and measured at amortized cost
Accounts payable, accrued expenses, payable to director, convertible debentures and long-term debt, classified as other financial liabilities and measured at amortized cost

 

The recorded values of cash, trade and other receivables, notes receivable, accounts payable, accrued expenses and due to director approximate their fair values based on their short term nature. The recorded values of convertible debentures and long-term debt approximate their fair values when the interest rates of the debt approximate market rates.

 

In accordance with industry practice, the Company includes amounts in current assets and current liabilities for current maturities receivable or payable under contracts which may extend beyond one year.

 

The Company classifies and discloses fair value measurements based on a three-level hierarchy:

 

Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices in Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – inputs for the asset or liability that are not based on observable market data.

 

F-12

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(j)Provisions

 

Provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

 

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the consolidated statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable can be measured reliably. Over time, the discounted provision is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognized in the consolidated statement of loss (income) as part of interest expense.

 

When the provision liability is initially recognized, the present value of the estimated costs is capitalized by increasing the carrying amount of the related asset to the extent that it was incurred as a result of the development or construction of the asset. Additional provisions which arise due to further development or construction of assets are recognized as additions or charges to the corresponding asset and provisions when they occur.

 

Changes in the estimated timing of provisions or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the provision and a corresponding adjustment to the asset to which it relates. Any reduction in the provision and, therefore, any deduction from the asset to which it relates may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is recognized immediately in consolidated statement of loss (income).

 

(k)Income taxes

 

Provisions for income taxes consist of current and deferred tax expense and are recorded in operations.

 

Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the end of the period, adjusted for amendments to tax payable for previous years.

 

Deferred tax assets and liabilities are computed using the asset and liability method on temporary differences between the carrying amounts of assets and liabilities on the consolidated statement of financial position and their corresponding tax values, using the enacted or substantially enacted, income tax rates at each consolidated statement of financial position date. Deferred tax assets also result from unused losses and other deductions carried forward. The valuation of deferred tax assets is reviewed on a regular basis and adjusted to the extent that it is not probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized by use of a valuation allowance to reflect the estimated realizable amount.

 

F-13

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(l)Comprehensive income or loss

 

Other comprehensive income or loss is the change in net assets arising from transactions and other events and circumstances from non-owner sources. Comprehensive income comprises net income or loss and other comprehensive income or loss. Financial assets that are classified as available-for-sale will have revaluation gains and losses included in other comprehensive income or loss until the asset is removed from the consolidated statement of financial position. At present, the Company has no other comprehensive income or loss.

 

(m)Earnings per share

 

Basic earnings per share is computed by dividing net income or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period.

 

Diluted earnings per share is determined by adjusting net income or loss attributable to common shareholders of the Company and the weighted average number of common shares outstanding by the effects of potentially dilutive instruments, if such conversion would decrease earnings per share.

 

(n)Share-based payments

 

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 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.

 

(o)Reclamation and restoration obligations

 

Liabilities related to environmental protection and reclamation costs are recognized when the obligation is incurred and the fair value of the related costs can be reasonably estimated. This includes future site restoration and other costs as required due to environmental law or contracts. Reclamation and restoration obligations are determined by discounting the expected future cash outflows for reclamation and restoration at a pre-tax rate that reflects current market assessments of the time value of money

 

(p)Comparative amounts

 

The comparative amounts presented in these consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year.

 

F-14

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(q)New accounting standards and interpretations

 

The following is a summary of new standards, amendments and interpretations that are effective for annual periods beginning on or after January 1, 2016:

 

(a)IFRS 11, Joint Arrangements (“IFRS 11”) – amendments

 

The amendments to IFRS 11 provide guidance on the accounting for acquisition of interests in joint operations constituting a business. The amendments require all such transactions to be accounted for using the principles on business combination accounting in IFRS 3, Business Combinations and other IFRS standards except where those principles conflict with IFRS 11.

 

(b)IAS 1, Presentation of Financial Statements (“IAS 1”) - amendments

 

The amendments to IAS 1 enhance financial statement disclosures and presentation.

 

(c)IAS 16, Property, Plant and Equipment (“IAS 16”) – amendment

 

The amendment to IAS 16 provides clarification of acceptable methods of depreciation and amortization.

 

(d)IAS 38, Intangible Assets (“IAS 38”) - amendment

 

The amendment to IAS 38 provides clarification of acceptable methods of depreciation and amortization.

 

The application of the above amendments did not have any material impact on the consolidated financial statements presented.

 

The following is a summary of new standards, amendments and interpretations that have been issued but not yet adopted in these consolidated financial statements:

 

(a)IFRS 9, Financial Instruments (“IFRS 9”)

 

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification options in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is currently evaluating the impact of the adoption of the amendments on its financial statements; however, the impact, if any, is not expected to be significant.

 

(b)IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

 

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

 

F-15

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(q)New accounting standards and interpretations (continued)

 

(c)IFRS 16 Leases (IFRS 16”)

 

IFRS 16 provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor IAS 17 Leases. IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC -15 Operating Leases – Incentives, and SIC – 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 Revenue from Contracts with Customers is also applied.

 

(d)IFRS 2 Share-based Payment (“IFRS 2”) – amendments

 

The amendments to IFRS 2 provide clarification and guidance on the treatment of vesting and non-vesting conditions related to cash-settled share-based payment transactions, on share-based payment transactions with a net settlement feature for withholding tax obligations, and on accounting for modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled. The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.

 

The Company is currently assessing the impact that these new and amended standards will have on the consolidated financial statements.

 

4.CASH

 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

 

5.TRADE AND OTHER RECEIVABLES

 

The Company’s trade and other receivables consist of:

 

    

August 31,

2017

  

August 31,

2016

 
           
  Goods and services tax receivable  $181,881   $123,085 
  Other receivables   125,028    92,028 
     $306,909   $215,113 

 

Information about the Company’s exposure to credit risks for trade and other receivables is included in Note 24(a)(i).

 

F-16

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

6.CRUSHED ORE INVENTORY

 

On May 23, 2012, the Company entered into a five-year agreement with TME Asphalt Ridge, LLC (“TME”) for the purchase of crushed ore as feedstock for the Company’s oil extraction facility. The agreement requires the Company to purchase 100,000 tons of crushed ore for $16.00 per ton during the first calendar year and a minimum of 100,000 tons per year at a rate of approximately 8,333 tons per month for $20.60 per ton, subject to certain price adjustment provisions, after the first year.

 

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 and had granted TME a limited right to mine the bituminous sands in the deposit. As the Company obtained the direct right to the Asphalt Ridge deposit and TME was having financial difficulty, the Company allowed the contract with TME to lapse.

 

During the year ended August 31, 2016, crushed ore with a cost of $186,080 was used in the production of hydrocarbon products at the plant.

 

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. (Note 8(b)). The mining and mineral lease with Asphalt Ridge, Inc. required the Company to make minimum advance royalty payments, subsequently amended, 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 mining and mineral lease agreement. 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.

 

Effective March 12, 2016, a second amendment was made to the mining and mineral lease agreement between the Company and Asphalt Ridge, Inc. 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.

 

(b)Advance royalty payments to Asphalt Ridge, Inc.

 

As at August 31, 2017, the Company has paid advance royalties of $1,356,040 (2016 - $1,061,250) to the lease holder, of which a total of $852,917 have been used to pay royalties as they have come due under the terms of the mineral lease agreement. During the year ended August 31, 2017, $294,790 in advance royalties were paid and $426,641 have been used to pay royalties which have come due. The royalties expensed have been recognized in cost of goods sold on the consolidated statement of loss and comprehensive loss.

 

As at August 31, 2017, the Company expects to record minimum royalties paid of $258,333 from these advance royalties either against production royalties or for the royalties due within a one year period.

 

F-17

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

7.ADVANCED ROYALTY PAYMENTS (continued)

 

(c)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(b)). 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.

 

8.MINERAL LEASES

 

     TMC
Mineral
Lease
   Accord Oil & Gas Lease   Total 
  Cost            
  August 31, 2015  $11,091,388   $-   $11,091,388 
  Additions   -    1,052,350    1,052,350 
  August 31, 2016   11,091,388    1,052,350    12,143,738 
  Additions   -    237,813    237,813 
  Deconsolidation of Accord (Note 3(a))   -    (1,290,163)   (1,290,163)
  August 31, 2017  $11,091,388   $-   $11,091,388 
                  
  Accumulated Amortization               
  August 31, 2015, 2016 and 2017  $-   $-   $- 
                  
  Carrying Amounts               
  August 31, 2015  $11,091,388   $-   $11,091,388 
  August 31, 2016  $11,091,388   $1,052,350   $12,143,738 
  August 31, 2017  $11,091,388   $-   $11,091,388 

 

(a)MCW mineral lease

 

On December 29, 2010, the Company acquired a mineral lease (the “MCW Mineral Lease”), covering 1,138 acres in Uintah County, Utah, for the extraction of bituminous or asphaltic sands (tar sands). The MCW Mineral Lease is valid until August 11, 2018 and has rights for extensions based on reasonable production. This lease was cancelled by the State of Utah on December 30, 2016.

 

F-18

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

8.MINERAL LEASES (continued)

 

(b)TMC mineral lease

 

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 is from July 1, 2013 to July 1, 2018. During the primary term, the Company must meet certain requirements for oil production. After July 1, 2018, the TMC Mineral Lease will remain in effect as long as certain requirements for oil production continue to be met by the Company. If the Company fails to meet these requirements, the lease will automatically terminate 90 days after the calendar year in which the requirements are not met. In addition, the Company is 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.

 

On October 1, 2015, the Company amended the TMC Mineral Lease to defer the requirements for oil extraction until July 1, 2016 and to include the oil extraction from the MCW Mineral Lease as well. The advance royalty payments required under the TMC Mineral Lease were also amended (Note 7(a)). Production royalties were amended to 7% until June 30, 2020 and a varying percentage thereafter, based on the price of oil. Minimum expenditures were amended to $1,000,000 per year until June 30, 2020 and $2,000,000 thereafter if certain operational requirements for oil extraction are not met.

 

On March 1, 2016, a second amendment to the TMC Mineral Lease amended the termination clause in the lease to:

 

(i)Termination will be automatic if there is a lack of a written financial commitment to fund the proposed 3,000 barrel per day production facility prior to March 1, 2018.

(ii)Cessation of operations or inadequate production due to increased operating costs or decreased marketability and production is not restored to 80% of capacity within six months of such cessation.

(iii)The proposed 3,000 barrel per day plant fails to produce a minimum of 80% of its rated capacity for at least 180 calendar days during the lease year commencing July 1, 2020 plus any extension periods.

(iv)The lessee may surrender the lease with 30 days written notice.

(v)Breach of material terms of the lease, the lessor will inform the lessee in writing and the lessee will have 30 days to cure financial breaches and 150 days to cure any other non-monetary breach.

 

F-19

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

8.MINERAL LEASES (continued)

 

(b)TMC mineral lease (continued)

 

The term of the lease was extended by the termination clause, providing a written commitment is obtained to fund the 3,000 barrel per day proposed plant. The Company is required to produce a minimum average daily quantity of bitumen, crude oil and/or bitumen products, for a minimum of 180 days during each lease year and 600 days in three consecutive lease years, of:

 

(i)By July 1, 2016 plus any extension periods, 80% of 100 barrels per day.

(ii)By July 1, 2018 plus any extension periods, 80% of 1,500 barrels per day.

(iii)By July 1, 2020, plus any extension periods, 80% of 3,000 barrels per day.

 

Advance royalties required are:

 

(i)From October 1, 2015 to February 28, 2018, minimum payments of $60,000 per quarter.

(ii)From March 1, 2018 to December 31, 2020, minimum payments of $100,000 per quarter.

(iii)From January 1, 2021, minimum payments of $150,000 per quarter.

(iv)Minimum payments commencing on July 1, 2020 will be adjusted for CPI inflation.

 

Production royalties payable are amended to 7% 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 7% to 15% of gross sales revenues, subject to certain adjustments.

 

Minimum expenditures to be incurred on the properties are $1,000,000 per year up to June 30, 2020 and $2,000,000 per year after that if a minimum daily production of 3,000 barrels per day during a 180 day period is not achieved.

 

(c)Oil and gas leases

 

On July 4, 2016, the Company acquired 57.3% of the common shares of Accord (Note 1) and accounted for this investment on a consolidated basis.

 

Accord holds three oil and gas leases in Edwards County, Texas and certain oil extraction technologies (Note 10(a)). The oil and gas leases are subject to an overriding royalty interest of 5%, which will be reduced to 1% after the Company has incurred and paid $1,000,000 in royalties to the underlying royalty holder. No royalties are payable until defined revenue thresholds have been achieved from existing and new oil wells developed on the leases.

 

The Company’s interest in Accord, due to additional cash contributions made to Accord by other shareholders and parties, was reduced to 44.7% as of March 1, 2017 and the assets, liabilities and results of operations of Accord were deconsolidated from that date. The Company has accounted for its investment in Accord using the equity method from March 1, 2017.

 

F-20

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

9.PROPERTY, PLANT AND EQUIPMENT

 

     Oil Extraction Plant   Other Property and Equipment   Total 
  Cost            
  August 31, 2015  $16,122,362   $336,629   $16,458,991 
  Additions   555,655    16,225    571,880 
  August 31, 2016   16,678,017    352,854    17,030,871 
  Additions   290,120    -    290,120 
  Deconsolidation of Accord (Note 3(a))        (1,887)   (1,887)
  Disposals and scrapping   (121,637)   (35,000)   (156,637)
  August 31, 2017  $16,846,500   $315,967   $17,162,467 
                  
  Accumulated Amortization               
  August 31, 2015  $-   $14,430   $14,430 
  Additions   1,082,273    81,684    1,163,957 
  August 31, 2016   1,082,273    96,114    1,178,387 
  Additions   1,082,159    46,814    1,128,973 
  Deconsolidation of Accord (Note 3(a))        (628)   (628)
  Disposals and scrapping   (16,218)   (35,000)   (51,218)
  August 31, 2017  $2,148,214   $107,300   $2,255,514 
                  
  Carrying Amount               
  August 31, 2015  $16,122,362   $322,199   $16,444,561 
  August 31, 2016  $15,595,744   $256,740   $15,852,484 
  August 31, 2017  $14,698,286   $208,667   $14,906,953 

 

(a)Oil Extraction Plant

 

In June 2011, the Company commenced the development of an oil extraction facility on its mineral lease in Uintah, 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 quarter 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 cost of construction includes capitalized borrowing costs for the year ended August 31, 2017 of $100,000 (2016 - $137,500) and total capitalized borrowing costs as at August 31, 2017 of $2,212,080 (2016 - $2,112,080).

 

F-21

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

10.INTANGIBLE ASSETS

 

     Oil Extraction Technologies 
  Cost    
  August 31, 2015  $735,488 
  Additions   1,556,000 
  August 31, 2016   2,291,488 
  Additions   333,998 
  Deconsolidation of Accord (Note 3(a))   (1,815,617)
  August 31, 2017  $809,869 
        
  Accumulated Amortization     
  August 31, 2015  $- 
  Additions   49,033 
  August 31, 2016   49,033 
  Additions   53,165 
  August 31, 2017  $102,198 
        
  Carrying Amounts     
  August 31, 2015  $735,488 
  August 31, 2016  $2,242,455 
  August 31, 2017  $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 on this technology in the USA and Canada and has employed it in its oil extraction plant. The Company commenced production from its oil extraction plant on September 1, 2015 and is amortizing the cost of the technology over fifteen years, the expected life of the oil extraction plant.

 

On July 4, 2016, the Company acquired 57.3% of the total issued and outstanding shares of Accord (Note 1). Accord holds the rights to use proprietary technology which may improve the efficiency of oil extraction from certain oil fields and from depth at the Company’s bituminous sands lease. Once the proprietary technology is fully operational the Company intends to utilize the technology to extract oil from its oil and gas leases (Note 8(c)) and to amortize the cost over fifteen years, the expected life useful life of the oil and gas leases.

 

The Company’s interest in Accord, due to additional cash contributions made to Accord by other shareholders and parties, was reduced to 44.7% as of March 1, 2017 and the assets, liabilities and results of operations of Accord were deconsolidated from that date. The Company has accounted for its investment in Accord GR Energy, Inc. (“Accord”) using the equity method from March 1, 2017.

 

F-22

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable as at August 31, 2017 and 2016 consist primarily of amounts outstanding for construction and expansion of the oil extraction plant and other operating expenses that are due on demand.

 

Accrued expenses as at August 31, 2017 and 2016 consist primarily of other operating expenses and interest accruals on long-term debt (Note 12) and convertible debentures (Note 13).

 

Information about the Company’s exposure to liquidity risk is included in Note 24(c).

 

12.LONG-TERM DEBT

 

  Lender  Maturity Date  Interest Rate   Principal due August 31, 2017   Principal due August 31, 2016 
  Director  March 18, 2017   5.00%  $-   $3,000,000 
  Private lender  May 1, 2017   15.00%   100,000    126,800 
  Private lender  July 31, 2017   15.00%   1,001,905    802,747 
  Private lender  July 28, 2020   10.00%   33,305    176,466 
  Private lender  September 10, 2017   6.00%   -    750,000 
  Private lender  May 19, 2020 - August 31, 2020   5.00%   336,080    57,237 
  Equipment loans  April 20, 2020   4.30% - 4.90%   160,343    215,392 
  Promissory notes  May 30, 2020   5.00%   -    7,500,000 
  Director  August 4, 2020 - August 18, 2020   5.00%   242,250    140,000 
  Total loans           1,873,883    12,768,642 
  Accrued interest           2,497    - 
  Total          $1,876,380   $12,768,642 

 

The maturity of long -term debt is as follows:

 

     August 31,   August 31, 
     2017   2016 
  Principal classified as repayable within one year  $1,159,104   $3,958,522 
  Principal classified as repayable later than one year   717,276    8,855,326 
     $1,876,380   $12,813,848 

  

(a)Director

 

On March 18, 2016, the Company issued a promissory note for $3,000,000 to the Chair of the Board of Directors of the Company. The proceeds from the issuance of the promissory note were used to settle the total outstanding amount of the B&N Bank credit facility.

 

On August 15, 2017 the promissory note, including accrued interest of $215,625, was assigned by the Chair of the Board to three related entities and were subsequently converted into 14,391,330 shares of the Company.

 

F-23

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

12.LONG-TERM DEBT (continued)

 

(b)Private lenders

 

(i)On December 16, 2013, the Company obtained an on-demand loan from private investors for a total of $430,000, bearing interest at 15% per annum. The loan is personally guaranteed by the Chair of the Board of Directors. The loan was amended on November 1, 2016 to extend the maturity date to May 1, 2017, and a further extension of this loan is currently being negotiated. During the current year, interest previously overpaid amounting to $16,800 was offset against the principal and a further principal payment of $10,000 was made, resulting in a principal balance outstanding of $100,000. Principal repaid during the year ended August 31, 2016 amounted to $73,200.

 

(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. The loans are currently being renegotiated to allow for further extension of the maturity dates.

 

(iii)The Company received advances from various private lenders during the year ended August 31, 2017 and 2016 in the form of unsecured promissory notes. These promissory notes mature at various dates, between demand and August 6, 2018, and bear interest at 10% per annum. Various promissory notes, including interest thereon, were converted into common shares on May 19, 2017, under the terms of various Securities Purchase Agreements entered into with the lenders (Note 12(b)(vii)).

 

(iv)During the year ended August 31, 2016, the Company obtained a loan from Altlands Overseas Corp. for $750,000, bearing interest at a rate of 6% per annum and maturing on September 10, 2017. This loan, including all interest thereon was converted into common shares on May 19, 2017 under the terms of a Securities Purchase Agreement entered into with the lender (Note 12(b)(vii)).

 

(v)The Company received advances from various private lenders during the year ended August 31, 2017 and 2016 in the form of unsecured promissory notes. These promissory notes mature at various dates, between May 19, 2020 and August 31, 2020 and bear interest at 5% per annum. Various promissory notes, including interest thereon, were converted into common shares on May 19, 2017, under terms of various Securities Purchase Agreements entered into with the lenders (Note 12(b)(vii)).

 

(vi)The Company received advances from various private lenders during the year ended August 31, 2016 and 2015 in the form of unsecured promissory notes. On January 20, 2016, the Company issued an aggregate of 882,455 common shares in satisfaction of $2,447,478 of indebtedness. On July 25, 2016, the Company issued an aggregate of 86,316 common shares in satisfaction of a further $266,146 of indebtedness.

 

F-24

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

12.LONG-TERM DEBT (continued)

 

(vii)On May 19, 2017, under the terms of Securities Purchase Agreements entered into with various lenders, including the promissory notes in Notes 12(c) and (d), the Company issued 31,083,281 common shares at conversion prices ranging from $0.353 per share to $0.397 per share in exchange for promissory notes, including interest thereon, amounting to $12,185,904. These common shares were issued on July 11, 2017.

 

(c)Equipment loans

 

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 a rate between 4.3% and 4.9% per annum. Principal and interest were paid in monthly installments. These loans were secured by the acquired assets.

 

(d)Promissory notes

 

On June 1, 2015, the Company issued two promissory notes for $5,000,000 each for the acquisition of TMC Capital, LLC (“TMC”) (Note 1). These promissory notes have a five-year term, bear interest at a rate of 5% per annum and are unsecured. The Company may make annual principal payments at its option, provided that annual interest payments are made on June 1st of each year. These promissory notes are guaranteed by the Chair of the Board of Directors.

 

During the year ended August 31, 2016, the Company issued 666,667 common shares as repayment of $2,500,000 of this indebtedness.

 

The remaining promissory notes were converted into common shares on May 19, 2017 (Note 12(b)(viii)), under the terms of Securities Purchase Agreements entered into with the lenders, at a conversion price of $0.397 per share.

 

(e)Director

 

During the years ended August 31, 2017 and 2016, the Company issued unsecured promissory notes to private companies controlled by the Chair of the Board of Directors of the Company (Note 19).

 

F-25

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

13.CONVERTIBLE DEBENTURES

 

            Principal due   Principal due 
  Lender  Maturity Date  Interest Rate   August 31, 2017   August 31, 2016 
  Director  25-Jun-17   10.00%  $-   $204,000 
  Alpha Capital Anstalt  30-Oct-18   5.00%   508,500    555,876 
  Altlands Overseas Corp.  Current   12.00%   -    3,500,000 
             $508,500   $4,259,876 

 

The maturity of convertible debt is as follows:

 

     August 31,   August 31, 
     2017   2016 
  Principal classified as repayable within one year  $-   $3,704,000 
  Principal classified as repayable later than one year   508,500    555,876 
     $508,500   $4,259,876 

  

(a)Director

 

On June 25, 2014, the Company issued a convertible debenture for up to a maximum aggregate principal amount of $2,000,000 to the Chair of the Board of Directors, which bore interest at a rate of 10% per annum and matured on June 25, 2017. On September 22, 2014, $1,796,000 of the principal was converted into 64,183 common shares of the Company. The balance of $204,000 was convertible at a deemed price of CAD $30.00 per share at any time at the option of the holder and is secured by all of the assets of the Company.

 

The remaining principal and accrued interest outstanding on this note was converted into common shares on May 19, 2017 at a conversion price of $0.353 per share (Note 12(b)(vii)).

 

(b)Altlands Overseas Corp.

 

On February 9, 2015, the Company received a loan for an aggregate principal amount of $2,000,000, which was increased to $3,500,000 on July 21, 2015. The loan bore interest at a rate of 6% per annum and matured on February 9, 2016. On February 1, 2016, the loan was modified to extend the maturity date to February 9, 2017 and increase the rate of interest to 10% per annum between February 10, 2016 and February 9, 2017. The loan is guaranteed by the Chair of the Board of Directors. In addition, the lender has the option, subject to director, shareholder and regulatory approvals, to convert the loan into a 49.9% ownership interest in POSR.

 

On February 23, 2017, Altlands converted of $2,300,000 of the principal outstanding on the Altlands debt, into 669,760 common shares at a conversion price of $3.434 per share.

 

The remaining principal and accrued interest outstanding on this note was converted into common shares on May 19, 2017 at a conversion price of $0.397 per share (Note 12 (b)(vii)).

 

F-26

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

13.CONVERTIBLE DEBENTURES (continued)

 

(c)Alpha Capital Anstalt

 

On December 15, 2015, the Company issued a convertible secured note for $555,556 to Alpha Capital Anstalt. The convertible secured note bears interest at a rate of 5% per annum, matures on June 15, 2017 and is convertible into units, consisting of one common share of the Company and one common share purchase warrant of the Company.

 

On April 5, 2016, $55,556 of the principal of the convertible secured note was settled by the issuance of 22,991 common shares of the Company. The remaining $500,000 of the principal and $12,577 of accrued interest of the convertible secured note was settled on April 8, 2016 using the proceeds from the issuance of an additional convertible secured note to Alpha Capital Anstalt.

 

On April 8, 2016, the Company issued an additional convertible secured note for $600,000 to Alpha Capital Anstalt. The convertible secured note bears interest at a rate of 5% per annum and matures on October 8, 2017. 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 $3.469 per unit. Each warrant would entitle the holder to acquire one additional common share at an exercise price of CAD $4.725 per share until April 8, 2021. The convertible secured note is secured by all of the assets of the Company.

 

Between October 14, 2016 and October 31, 2016, $200,000 of the principal of the convertible secured notes was converted into 57,756 units.

 

(d)Alpha Capital Anstalt

 

On August 31, 2017, the Company issued a new convertible secured note for $565,000 to Alpha Capital Anstalt. The remaining convertible loan principal at $400,000 and interest at $33,473 was settled by the proceeds of the newly issued convertible secured note. 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. The convertible secured note is secured by all of the assets of the Company.

 

14.RECLAMATION AND RESTORATION PROVISIONS

 

     Oil         
     Extraction   Site     
     Facility   Restoration   Total 
               
  Balance at August 31, 2015  $350,000   $200,000   $550,000 
  Accretion expense   7,000    4,000    11,000 
  Balance at August 31, 2016   357,000    204,000    561,000 
  Accretion expense   7,140    4,080    11,220 
  Balance at August 31, 2017  $364,140   $208,080   $572,220 

 

F-27

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

14.RECLAMATION AND RESTORATION PROVISIONS (continued)

 

(a)Oil Extraction Plant

 

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 August 31, 2017 and 2016 is 2.0%.

 

(b)Site restoration

 

In accordance with environmental laws in the United States, the Company’s environmental permits and the lease agreement, 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 August 31, 2017 and 2016 is 2.0%.

 

15.COMMON SHARES

 

  Authorized unlimited common shares without par value
  Issued and Outstanding 54,220,699 common shares as at August 31, 2017.

 

On May 19, 2017 the shareholders of the Company approved the consolidated its shares on a 30 for one basis. The number of shares issued and outstanding have been retroactively adjusted for this consolidation in these financial statements.

 

During the period from October 21, 2016 to November 8, 2016, the Company issued 57,756 common shares on the conversion of $200,000 of convertible debt to Alpha Capital Anstalt.

 

On November 17, 2016, the Company issued 21,496 common shares to two private lenders on modification of the debt terms and extension of the repayment date of the debt.

 

During the period from November 17, 2016 to August 23, 2017, the Company issued 479,867 common shares of common stock to settle outstanding liabilities with third parties amounting to $311,442.

 

During the period from November 17, 2016 to August 30, 2017, the Company issued 694,042 common shares for net proceeds of $641,528.

 

F-28

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

15.COMMON SHARES (continued)

 

On January 17, 2017, the Company issued 16,667 common shares to its Chief Technical Officer and the inventor of a key component of the Company’s oil extraction technology.

 

During the period from February 23, 2017 and August 22, 2017, the Company issued a total of 46,144,371 common shares upon the conversion of several notes and convertible notes totaling $17,852,548, including interest thereon, and a further $115,000 of directors’ loans (Note 13 (a)).

 

On June 12, 2017, the Company issued 83,333 common shares as an investment into a joint venture with two unrelated parties (Note 20).

 

16.SHARE PURCHASE OPTIONS

 

(a)Stock option plan

 

The Company has a stock option plan which allows the Board of Directors of the Company to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of the Toronto Stock Exchange. The stock option plan is a 20% fixed number plan with a maximum of 1,513,574 common shares reserved for issuance.

 

During the year ended August 31, 2017, the Company did not grant any options. During the year ended August 31, 2016, the Company granted 33,333 share options to an officer and a director of the Company. The weighted average fair value of the options granted was estimated at $4.03 per share at the grant date using the Black-Scholes option pricing model.

 

The weighted average assumptions used for the Black-Scholes option pricing model were:

 

    

Year ended

August 31,
2016

 
  Share price  $0.34 
  Exercise price  $0.18 
  Expected share price volatility (1)   113%
  Risk-free interest rate   0.69%
  Expected term   7.78 

 

(1)Expected volatility has been calculated based on the Company’s historical volatility.

 

During the year ended August 31, 2017 the share-based compensation expense of $15,993 relates to the vesting of options granted during the year ended August 31, 2016.

 

F-29

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

16.SHARE PURCHASE OPTIONS (continued)

 

(b)Share purchase options

 

Share purchase option transactions under the stock option plan were:

 

    

Year ended

August 31,

2017

  

Year ended

August 31,

2016

 
     Number of Options   Weighted average exercise price   Number of options   Weighted average exercise price 
  Balance, beginning of period   126,666   $14.70    93,333   $18.00 
  Options granted   -    -    50,000    5.40 
  Options cancelled   -    -    (16,667)   4.80 
  Options expired   (13,333)  $33.00    -    - 
  Balance, end of period   113,333   $12.57    126,666   $14.70 

 

Share purchase options outstanding and exercisable as at August 31, 2017 are:

 

  Expiry Date  Exercise Price   Options Outstanding  

Options

Exercisable

 
  November 11, 2017  CAD $33.00    30,000    30,000 
  December 31, 2018  USD $4.80    50,000    50,000 
  February 1, 2026  CAD $5.85    33,333    33,333 
           113,333    113,333 
  Weighted average remaining contractual life        3.1 years    3.1 years 

 

17.SHARE PURCHASE WARRANTS

 

Share purchase warrants outstanding as at August 31, 2017 are:

 

  Expiry Date  Exercise Price   Warrants Outstanding 
  November 5, 2019  CAD $28.35    25,327 
  April 12, 2019  CAD $5.10    16,667 
  August 19, 2019  CAD $7.50    66,666 
  April 8, 2021  CAD $4.74    57,756 
           166,416 
  Weighted average remaining contractual life        2.50 years 
  Weighted average exercise price  CAD $9.45      

 

Between April 30, 2015 and October 9, 2015, the Company issued 4,221, 8,442, 6,332 and 6,332 share purchase warrants in connection with the conversion of $100,000, $200,000, $150,000 and $150,000, respectively, of the convertible secured notes (Note 13(c)) into units composed of one common share of the Company and one share purchase warrant of the Company. The fair value of the warrants granted was estimated, using the residual method, of $0.60, $2.40, $4.50 and $2.70 per warrant, respectively.

 

F-30

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

17.SHARE PURCHASE WARRANTS (continued)

 

On May 9, 2016, the Company issued 16,667 share purchase warrants to settle an outstanding liability of $75,000. The fair value of the warrants granted was estimated at $2.10 per warrant at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used for the Black-Scholes option pricing model were a share price of CAD $4.20, exercise price of CAD $4.95, expected share price volatility of 114%, risk-free interest rate of 0.68% and expected term of three years. The expected volatility was calculated based on the Company’s historical volatility.

 

On June 1, 2016, 16,667 share purchase warrants issued to debt holder were cancelled (Note 12(b)(ii)).

 

On August 19, 2016, the Company issued 66,666 share purchase warrants in connection with the acquisition of 57.3% of the common shares of Accord (Note 1). The fair value of the warrants granted was estimated at $2.70 per warrant at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used for the Black-Scholes option pricing model were a share price of CAD $5.70, exercise price of CAD $7.50, expected share price volatility of 116%, risk-free interest rate of 0.68% and expected term of three years. The expected volatility was calculated based on the Company’s historical volatility.

 

On October 14, 2016 and October 31, 2016, the Company issued 14,439 and 43,317 share purchase warrants in connection with the conversion of $50,000 and $150,000, respectively, of the convertible secured notes (Note 13(c)) into units composed of one common share of the Company and one share purchase warrant of the Company. The fair value of the warrants granted was estimated, using the relative fair value method, at $1.80 per warrant.

 

18.DILUTED LOSS PER SHARE

 

The Company’s potentially dilutive instruments are convertible debentures and share purchase options and 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.

 

19.RELATED PARTY TRANSACTIONS

 

Related party transactions not otherwise separately disclosed in these 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:

 

     2017   2016 
           
  Salaries, fees and other benefits  $508,000    505,040 
  Share based compensation   15,992    3,013,965 
     $523,992   $3,519,005 

 

F-31

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

19.RELATED PARTY TRANSACTIONS (continued)

 

(a)Key management personnel and director compensation (continued)

 

At August 31, 2017 $1,137,392 is due to members of key management and directors for unpaid salaries, expenses and directors’ fees (August 31, 2016 – 674,610).

 

The Chair of the Board and the Chief Technology Officer were each granted, respectively, 280,497 and 16,667 common shares.

 

(b)Due to director

 

During the years ended August 31, 2017 and 2016, the Company received additional advances of $421,250 and $265,000 from various private companies controlled by the Chair of the Board of Directors of the Company (Notes 12(b)(vi) and 12(e)).

 

On January 20, 2016 and July 25, 2016, the Company entered into an agreement to settle a portion of the principal and accrued and unpaid interest of these advances by issuing 85,160 and 37,581 common shares of the Company, respectively, to the lenders.

 

On May 18, 2017, the Company entered into an agreement to settle a portion of the principal and accrued interest of these advances by issuing 586,475 common shares of the Company to the lenders.

 

As of August 31, 2017 and 2016, the Company owed the Chair of the Board the aggregate sum of $242,250 and $140,000, respectively. These loans bear interest at 5% per annum and mature at dates ranging from on demand to September 1, 2019.

 

On May 18, 2017, the Company entered into a Securities Purchase Agreement whereby it agreed to convert an aggregate principal debt of $264,841, including interest thereon, owing to the Chair of the Board or companies controlled by him into 751,681 of common share at a conversion price of $0.353 per share.

 

On May 18, 2017, the Company entered into a Securities Purchase Agreements whereby it agreed to convert an aggregate principal debt of $115,000, including interest thereon, owing to the Chair of the Board or companies controlled by him into 325,779 common shares at a conversion price of $0.353 per share.

 

On August 9, 2017, the promissory note of $3,000,000, owing to the Chair of the Board, including accrued interest thereon up to August 18, 2017 of $215,625, was assigned to three different entities and in terms of debt conversion agreements entered into on August 18, 2017, was subsequently converted into 14,391,330 common shares at a conversion price of $0.223 per share,

 

As at August 31, 2017 and 2016, the Company owed the Chair of the Board of Directors principal in the aggregate sum of $nil and $204,000 respectively in convertible debentures which bore interest at rates 10% per annum and which was due to mature in June 2017.

 

As at August 31, 2017 the Company has received loans of $419,322 from the Chair of the Board of Directors.

 

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 site 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 August 31, 2017.

 

F-32

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

21.INCOME TAXES

 

The Company’s deferred tax assets (liabilities), resulting from temporary differences that will change taxable incomes of future years, are:

 

     2017   2016   2015 
  Property, plant and equipment and intangible assets  $(1,258,439)  $(431,536)   (3,354)
  Long-term debt   -    (9,520)   (32,789)
  Convertible debentures   -    (11,693)   (9,884)
  Non-capital tax loss carry-forwards   10,419,975    7,717,360    5,326,908 
  Other tax-related balances and credits   379,036    79,093    143,515 
  Valuation allowance   (9,540,572)   (7,343,704)   (5,424,396)
  Net deferred tax assets (liabilities)  $-   $-   $- 

 

A reconciliation of the provision for income taxes is:

 

     2017   2016   2015 
  Net loss before income taxes  $7,939,643   $12,091,826   $(469,204)
  Combined federal and provincial statutory income tax rate   26.5%   26.5%   26.5% 
  Tax recovery using the Company’s domestic tax rate   2,104,005    3,204,334    (124,339)
  Effect of tax rates in foreign jurisdictions   416,160    678,179    (358,571)
  Net effect of (non-deductible) deductible items   (1,091,260)   (1,458,049)   463,907 
  Change in valuation allowance   -    -    (13,451)
  Current year deductible amounts   1,137,670    913,834    708,107 
  Change in unrecognized deferred tax assets and liabilities   -    -    13,451 
  Current period losses not recognized   (2,566,575)   (3,338,298)   (689,104)
  Provision for income taxes  $-   $-   $- 

 

As at August 31, 2017, the Company has, on a consolidated basis, non-capital losses of approximately $31.5 million for income tax purposes which may be used to reduce taxable income of future years. If unused, these losses will expire between 2028 and 2037.

 

F-33

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

22.SEGMENT INFORMATION

 

The Company operated in two reportable segments within the USA during the year ended August 31, 2017 and 2016, oil extraction and processing operations and mining operations.

 

Once more favourable market conditions exist, 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 Company’s mining operations have not commenced and are expected to generate revenues once the Company begins extracting oil from the tar sands.

 

The presentation of the consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There were no operations in the mining operations segment during the years ended August 31, 2017 and 2016. Other information about reportable segments is:

 

 

     August 31, 2017 
  (in ’000s of dollars)  Oil   Mining     
     Extraction   Operations   Consolidated 
  Additions to non-current assets  $(2,402)  $295   $(2,107)
  Reportable segment assets   28,441    509    28,950 
  Reportable segment liabilities  $6,763   $169   $6,932 

 

     August 31, 2016 
     Oil   Mining     
  (in ’000s of dollars)  Extraction   Operations   Consolidated 
  Additions to non-current assets  $3,180   $180   $3,360 
  Reportable segment assets   19,498    11,738    31,236 
  Reportable segment liabilities  $(14,043)  $(7,689)  $(21,732)

 

     August 31, 2015 
     Oil   Mining   Fuel     
  (in ’000s of dollars)  Extraction   Operations   Distribution   Consolidated 
  Additions to non-current assets  $5,023   $11,781   $193   $16,996 
  Reportable segment assets   18,471    11,974    -    30,444 
  Reportable segment liabilities  $(24,191)  $(170)  $-   $(24,361)

 

F-34

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

22.SEGMENT INFORMATION (continued)

 

     August 31, 2017 
  (in ’000s of dollars) 

Oil

Extraction

  

Mining

Operations

   Consolidated 
  External Revenue   -    -    - 
  Cost of Goods Sold   1    426    427 
  Gross Loss   1    426    427 
  Amortization   1,166    -    1,166 
  Loss on deconsolidation   24    -    24 
  General and administrative   345    3    348 
  Interest expense   1,106    -    1,106 
  Loss on settlement of liabilities   2,367    -    2,367 
  Professional fees   612    6    618 
  Relocation costs   438    -    438 
  Salaries and wages   703    -    703 
  Share based compensation   16    -    16 
  Equity income from investment in Accord GR Energy   174    -    174 
  Travel and promotion   553    -    553 
  Net Loss   7,505    435    7,940 

 

     August 31, 2016 
     Oil   Mining     
  (in ’000s of dollars)  Extraction   Operations   Consolidated 
  External Revenue   205    -    205 
  Cost of Goods Sold   1,399    -    1,399 
  Gross Loss   1,195    -    1,195 
  Amortization   1,213    -    1,213 
  General and administrative   576    4    580 
  Interest expense   1,031    470    1,501 
  Loss (gain) on settlement of liabilities   1,638    (135)   1,503 
  Professional fees   1,783    6    1,789 
  Share based compensation   3,014    -    3,014 
  Travel and promotion   435    -    435 
  Net Loss   11,746    346    12,092 

 

Segment information for discontinued operations is as follows:

 

     September 1,
2014 to May 31,
2015
 
     Fuel 
  (in ’000s of dollars)  Distribution 
  Fuel purchases   114,382 
  Fuel Delivery   1,720 
  Amortization   18 
  Customer station maintenance   464 
  Impairment   610 
  Allowance for doubtful receivable   892 
  Interest expense   379 
  Other income   (537)
  Net Loss   11,746 

 

F-35

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

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:

 

(a)Credit risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations. The Company is exposed to credit risk through its cash held at financial institutions, trade receivables from customers and notes receivable.

 

The Company has cash balances at various financial institutions. The Company has not experienced any loss on these accounts, although balances in the accounts may exceed the insurable limits. The Company considers credit risk from cash to be minimal.

 

Credit extension, monitoring and collection are performed for each of the Company’s business segments. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of the customer’s credit information.

 

Accounts receivable, collections and payments from customers are monitored and the Company maintains an allowance for estimated credit losses based upon historical experience with customers, current market and industry conditions and specific customer collection issues.

 

At August 31, 2017 and 2016, the Company had no trade receivables. The Company considers it maximum exposure to credit risk to be its trade and other receivables and notes receivable.

 

(b)Interest rate risk

 

Interest rate risk is the risk that changes in interest rates will affect the fair value or future cash flows of the Company’s financial instruments. The Company is exposed to interest rate risk as a result of holding fixed rate investments of varying maturities as well as through certain floating rate instruments. The Company considers its exposure to interest rate risk to be minimal.

 

F-36

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

24.MANAGEMENT OF FINANCIAL RISKS (continued)

 

(c)Liquidity risk

 

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities as they become due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses.

 

The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. The Company has included both the interest and principal cash flows in the analysis as it believes this best represents the Company’s liquidity risk.

  

At August 31, 2017

         Contractual cash flows 
  (in ’000s of dollars)  Carrying
amount
   Total   1 year
or less
  

2 - 5 years

 

  

More than 5

years

 
  Accounts payable  $1,121   $1,121   $1,121   $-   $- 
  Accrued liabilities   1,980    1,980    1,980    -    - 
  Convertible debenture   509    600    21    579    - 
  Long-term debt   1,876    2,072    1,278    794    - 
     $5,486   $5,773   $4,400   $1,373   $- 

  

At August 31, 2016 

         Contractual cash flows 
     Carrying       1 year       More than 5 
  (in ’000s of dollars)  amount   Total   or less   2 - 5 years   years 
  Accounts payable  $1,455   $1,455   $1,455   $-   $- 
  Accrued liabilities   2,329    2,329    2,329    -    - 
  Convertible debenture   4,260    4,882    4,282    600    - 
  Long-term debt   12,814    13,797    4,732    9,065    - 
     $20,858   $22,463   $12,798   $9,665   $- 

 

F-37

 

 

PETROTEQ ENERGY INC.

(FORMERLY MCW ENERGY GROUP LIMITED)

Notes to the Consolidated Financial Statements

August 31, 2017, 2016 and 2015

Expressed in US dollars

 

25.EVENTS AFTER THE REPORTING DATE

 

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

 

(a)Common shares

 

Under the terms of various subscription agreements entered into with third parties between September 27, 2017 and November 17, 2017, the Company issued a total of 1,681,668 common shares at prices ranging from $0.26 to $0.27 per share for gross proceeds of $445,180, the proceeds of which were used for general working capital purposes and relocation of the plant to the TMC Mineral Lease.

 

(b)Non-convertible loan

 

On November 2, 2017, the Company entered into agreement with the Chair of the Board of Directors to receive an interest free unsecured non-convertible loan for up to $2,000,000, of which $1,200,000 has been advanced to date, to fund the Company’s operations and expansion plans.

 

(c)Financing

 

On November 23, 2017, the Company announced the execution of a memorandum of understanding with Deloro Energy LLC (“Deloro”), pursuant to which Deloro may loan the Company $10,000,000 which will subject to terms and conditions to be negotiated and may be convertible for up to 49% of Petroteq Energy CA.

 

(d)Stock Options

 

On December 1, 2017 the Board of Directors approved, subject to regulatory approval, the grant of options to purchase 1,425,000 common shares to directors which have an exercise price of $2.27 per common share and which expire in ten years from the date of grant.

 

(e)Other:

 

On November 6, 2017, the Company entered into a co-development agreement with First Bitcoin Capital Corp. to develop a new supply chain management platform based on advanced block chain technology to be used in the oil and gas industry.

 

F-38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Petroteq Energy Inc.

 

Condensed Consolidated Interim Financial Statements

 

For the three and nine months ended May 31, 2018 and 2017

(Expressed in US dollars)

 

(Unaudited)

 

  

 

 

 

 

 

 

 

 

 

 

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

 

Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of interim financial statements they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The Company’s independent auditor has not performed a review of these condensed consolidated interim financial statements in accordance with standards established by Chartered Professional Accountants of Canada for a review of interim financial statements by an entity’s auditor.

  

F-39

 

 

Petroteq Energy Inc.

 

Table of Contents

  

  Page(s)
   
Condensed Consolidated Interim Statements of Financial Position F-41
   
Condensed Consolidated Interim Statements of Loss and Comprehensive Loss F-42
   
Condensed Consolidated Interim Statements of Shareholders’ Equity F-43
   
Condensed Consolidated Interim Statements of Cash Flows F-44
   
Notes to Condensed Consolidated Interim Financial Statements F-45 – F-78

  

F-40

 

 

PETROTEQ ENERGY, INC.

Condensed Consolidated Interim Statements of Financial Position

As at May 31, 2018 and August 31, 2017

Expressed in US dollars

 

       May 31,
2018
   August 31,
2017
 
   Notes   (Unaudited)   (Audited) 
             
ASSETS            
Current assets            
Cash  4   $245,242   $55,420 
Trade and other receivables  5    226,881    306,909 
Current portion of advanced royalty payments  7(a)   211,702    258,333 
Prepaid expenses and other current assets       661,616    92,819 
        1,345,441    713,481 
Advanced royalty payments  7(a)   555,633    244,790 
Notes receivable       76,000    76,000 
Mineral lease  8(b)   11,091,388    11,091,388 
Investments       168,331    68,331 
Investment in Accord GR Energy       1,020,430    1,141,561 
Property, plant and equipment  9    17,082,104    14,906,953 
Intangible assets  10    666,764    707,671 
       $32,006,091   $28,950,175 
               
LIABILITIES              
Current liabilities              
Accounts payable  11   $774,434   $1,121,327 
Accrued expenses  11    1,748,587    1,980,304 
Unearned revenue       283,976    283,976 
Current portion of long-term debt  12    424,246    1,159,104 
Current portion of convertible debentures  13    2,336,594    - 
Payable to director  19(c)   428,518    419,322 
        5,996,355    4,964,033 
Unearned advance royalties received  7(b)   170,000    170,000 
Long-term debt  12    1,243,132    717,276 
Convertible debentures  13    -    508,500 
Reclamation and Restoration provision  14    580,803    572,220 
        7,990,290    6,932,029 
SHAREHOLDERS’ EQUITY              
Share capital  15    66,817,217    60,827,494 
Shares to be issued       442,300    56,800 
Share option reserve  16    9,877,199    7,371,552 
Share warrant reserve  17    2,292,534    618,667 
Deficit       (55,413,449)   (46,856,367)
        24,015,801    22,018,146 
               
       $32,006,091   $28,950,175 

 

Approved by the Board of Directors  Aleksandr Blyumkin”   “Travis Schneider” 
   Alexsandr Blyumkin   Travis Schneider 
   Director   Director 

 

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

 

F-41

 

 

PETROTEQ ENERGY, INC.

Condensed Consolidated Interim Statements of Loss and Comprehensive Loss

For the nine months ended May 31, 2018 and 2017

Expressed in US dollars

(Unaudited)

 

       Three months ended   Nine months ended 
   Notes   May 31,
2018
   May 31,
2017
   May 31,
2018
   May 31,
2017
 
                     
Revenues      $-   $-   $-   $- 
Cost of Goods Sold       46,712    111,250    234,120    315,184 
Gross Loss       (46,712)   (111,250)   (234,120)   (315,184)
Operating Expenses                        
General and administrative       117,297    123,615    411,917    330,684 
Travel and promotion       1,743,444    101,868    2,086,914    420,304 
Professional fees       889,862    91,501    1,715,757    475,345 
Salaries and wages       252,555    152,000    638,645    451,000 
Share-based compensation  16(a) 19(b)    17,834    -    2,523,481    15,993 
(Gain) loss on settlement of liabilities  13(a) (b)   (216,297)   2,253,385    (216,297)   907,415 
Interest expense       81,656    500,555    323,254    1,079,606 
Depreciation and amortization       296,758    298,118    890,273    893,187 
Other income       (50,982)   -    (50,982)   - 
Gain on deconsolidation of subsidiary       -    (48,506)   -    (48,506)
        3,132,127    3,472,536    8,322,962    4,525,028 
Loss before Income Taxes       3,178,839    3,583,786    8,557,082    4,840,212 
Provision for income taxes       -    -    -    - 
Loss and Comprehensive loss       3,178,839    3,583,786    8,557,082    4,840,212 
Net Loss and Comprehensive Loss attributable to:                        
Shareholders of the Company      $3,178,839   $3,620,790   $8,557,082   $4,840,212 
Non-Controlling Interest       -    (37,004)   -    (37,004)
       $3,178,839   $3,583,786   $8,557,082   $4,803,208 
Weighted Average Number of Shares Outstanding  18    60,729,106    7,745,832    57,359,309    7,124,003 
Basic and Diluted Loss per Share      $0.05   $0.47   $0.15   $0.68 

 

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

 

F-42

 

 

PETROTEQ ENERGY, INC.

Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

For the nine months ended May 31, 2018 and 2017

Expressed in US dollars

(Unaudited)

 

      Number of Shares   Share   Shares to be   Option   Warrant       Shareholders’   Non-
Controlling
   Total 
   Notes   Outstanding*   Capital   Issued   Reserve   Reserve   Deficit   Equity   Interest   Equity 
                                         
Balance at August 31, 2016       6,723,167   $39,416,380   $100,000   $7,355,559   $512,934   $(38,916,724)  $8,468,149   $1,035,690   $9,503,839 
                                                  
Conversion of debentures  13(c)   57,756    94,267    -    -    105,733    -    200,000    -    200,000 
Conversion of loans  13(b)   669,760    919,969    14,458,407    -    -    -    15,378,376    -    15,378,376 
Settlement of liabilities       121,363    324,276    (100,000)   -    -    -    224,276    -    224,276 
Share-based compensation  19(a)   -    -    -    15,992    -    -    15,992    -    15,992 
Shares issued for technology  19(a)   16,667    74,380    -    -    -    -    74,380    -    74,380 
Shares subscribed for       372,861    541,464    56,800    -    -    -    598,264    -    598,264 
Deconsolidation of subsidiary       -    -    -   $-   $-   $-    -   $(1,035,690)   (1,035,690)
Net loss       -    -    -    -    -    (4,840,211)   (4,840,211)        (4,840,211)
                                                  
Balance at May 31, 2017       7,961,574   $41,370,736   $14,515,207   $7,371,551   $618,667   $(43,756,935)  $20,119,226   $-   $20,119,226 
                                                  
Balance at August 31, 2017       54,220,699   $60,827,494   $56,800   $7,371,552   $618,667   $(46,856,367)  $22,018,146   $-   $22,018,146 
                                                  
Share-based compensation  16(a) 19(a)   $25,000   $17,834    -    2,505,647    -    -    2,523,481    -    2,523,481 
Shares subscribed for  15    2,313,647    1,364,956    385,500    -   $66,399    -    1,816,855    -    1,816,855 
Warrants exercised       1,000,000    479,040             $(164,025)        315,015    -    315,015 
Conversion of loans       8,246,689    2,682,012              1,771,493         4,453,505    -    4,453,505 
Settlement of liabilities       1,457,893    1,445,881                        1,445,881    -    1,445,881 
Net loss       -    -    -    -    -    (8,557,082)   (8,557,082)   -    (8,557,082)
                                                  
Balance at May 31, 2018       67,263,928   $66,817,217   $442,300   $9,877,199   $2,292,534   $(55,413,449)  $24,015,801   $-   $24,015,801 

 

*Number of shares outstanding has been adjusted retroactively for a 30 to 1 reverse stock split on May 5, 2017

 

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

 

F-43

 

 

PETROTEQ ENERGY, INC.

Condensed Consolidated Interim Statements of Cash Flows

For the nine months ended May 31, 2018 and 2017

Expressed in US dollars

(Unaudited)

 

   Nine months ended 
   May 31,
2018
   May 31,
2017
 
         
Cash flow used for operating activities:        
Net loss  $(8,557,082)  $(4,840,211)
Adjustments for non-cash, investing and financing items          
Depreciation and amortization   890,273    893,187 
Loss on settlement of liabilities and debt conversions   (216,297)   907,415 
Share-based compensation   2,523,481    15,992 
Equity share of losses in Accord GR Energy   121,130    - 
Loss on equity investments, net of cash   -    (94,723)
Other   195,407    433,766 
Changes in operating assets and liabilities:          
Accounts payable   1,315,285    204,966 
Accounts receivable   80,028    (154)
Accrued expenses   216,798    1,990,167 
Prepaid expenses and deposits   (568,797)   31,906 
Unearned revenues   0    70,000 
Net cash used for operating activities   (3,999,773)   (387,689)
           
Cash flows used for investing activities:          
Purchase and construction of property and equipment   (3,024,517)   (500,120)
Investment in First Bitcoin   (100,000)   - 
Additions to intangibles   -    (259,618)
Additions to mineral lease   -    (237,813)
Advance royalty payments   (468,796)   (261,000)
Net cash used for investing activities   (3,593,313)   (1,258,551)
           
Cash flows from financing activities:          
Advances from executive officers   9,196    212,050 
Proceeds on private equity placements   1,878,189    598,264 
Proceeds from warrants exercised   315,015      
Payments of long-term debt   (947,720)   (189,771)
Proceeds from long-term debt   1,178,056    1,093,408 
Proceeds from convertible debt   5,200,171    - 
Net cash from financing activities   7,632,908    1,713,951 
           
Increase in cash   39,821    67,711 
Cash, beginning of the period   55,420    6,129 
Cash, end of the period  $95,241   $73,840 
           
Cash composed of:          
Cash  $95,241   $73,840 
Bank overdraft   -    - 
   $95,241   $73,840 
Supplemental disclosure of cash flow information          
Cash paid for interest  $21,066   $9,130 

 

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

 

F-44

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

1.NATURE OF OPERATIONS

 

Petroteq Energy Inc. (the “Company”) is an Ontario corporation with one active business segment located in the USA. It operates through its indirectly wholly owned subsidiary company, Petroteq Oil Sands Recovery, LLC (“POSR”), which is engaged in mining and oil extraction from oil 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 4400, 181 Bay Street, Toronto, Ontario, M5J 2T3, Canada and its principal operating office is located at 15165 Ventura Blvd, Suite 200, Sherman Oaks, California 91403, USA.

 

POSR is engaged in an oil 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 the first phase of an oil processing plant in the Asphalt Ridge area of Uintah, Utah. The Company has relocated the oil processing facility to its mineral lease in Uintah, Utah in order to improve the viability of the plant by eliminating unnecessary transportation costs of raw materials. The Company has also expanded the existing plant’s production capacity to approximately 1,000 barrels per day.

 

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 May 31, 2018. The investment in Accord has therefore been recorded using the equity method for the six months ended May 31, 2018 and the year ended August 31, 2017 (Note 3(a)).

 

On May 5, 2017 the shareholders of the Company approved the consolidated its shares on a 30 for one basis (Note 15). The number of shares issued and outstanding have been retroactively adjusted for this consolidation in these financial statements.

 

On June 7, 20178 the Company finalized the acquisition at auction of a 100% interest in two leases for 1,312 acres of land within the Asphalt Ridge, Utah area. The lease contains approximately 7.331 million barrels of contingent resource expanding Petroteq’s total Contingent Resources by 8.5% to 93.4 million barrels.

 

The Company has incurred losses for several years and, at May 31, 2018, has an accumulated deficit of $55,413,449 (August 31, 2017 - $46,856,367) and a working capital deficiency of $4,650,914 (August 31, 2017 - $4,250,552). These 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 the additional financing will not be available on a timely basis or on terms acceptable to the Company. These consolidated financial statements do not reflect the adjustments or reclassifications that would be necessary if the Company were unable to continue operations in the normal course of business.

  

F-45

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

2.BASIS OF PREPARATION

 

(a)Statement of compliance

 

The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”), Interim Financial Reporting. They do not include all of the information required for full annual financial statements in compliance with IAS 1 Presentation of Financial Statements. The accounting policies used in these condensed consolidated interim financial statements are in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and the interpretations of the IFRS Interpretations Committee (“IFRIC”) as at July 30, 2018, the date the condensed consolidated interim financial statements were authorized for issue by the Board of Directors. Except as noted below, they follow the same accounting policies and methods of application as the most recent annual audited consolidated financial statements for the year ended August 31, 2017 and should be read in conjunction with those audited consolidated financial statements.

 

(b)Basis of measurement

 

The condensed consolidated interim financial statements have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value.

 

The Company’s reporting currency and the functional currency of all of its operations is the U.S. dollar, as it is the principal currency of the primary economic environment in which the Company operates.

 

(c)Significant accounting judgments and estimates

 

The preparation of the condensed consolidated interim financial statements in accordance with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting judgments and estimates included in these condensed consolidated interim financial statements are:

 

Useful lives and depreciation rates for intangible assets and property, plant and equipment

 

Depreciation expense is recorded on the basis of the estimated useful lives of intangible assets and property, plant and equipment. Changes in the useful life of assets from the initial estimate could impact the carrying value of intangible assets and property, plant and equipment and an adjustment would be recognized in profit or loss.

 

Review of carrying value of assets and impairment charges

 

When determining possible impairment of the carrying values of assets, management of the Company reviews the recoverable amount (the higher of the fair value less costs to sell or the value in use) of non-financial assets and objective evidence indicating impairment in the case of financial assets. These determinations and their individual assumptions require that management make a decision based on the best available information at each reporting period. Changes in these assumptions may alter the results of the impairment evaluation, the impairment charges recognized in profit or loss and the resulting carrying amounts of assets.

 

F-46

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

2.BASIS OF PREPARATION (continued)

 

(c)Significant accounting judgments and estimates (continued)

 

Fair value of share purchase options and warrants

 

Share purchase options and warrants granted by the Company are valued at the fair value of the goods or services received unless the fair value cannot be reliably measured. Share purchase options and warrants granted to employees and others providing similar services are valued using the Black-Scholes option pricing model. Estimates and assumptions for inputs to the model, including the expected volatility of the Company’s shares and the expected life of options granted, are subject to significant uncertainties and judgment.

 

Provisions

 

Provisions are recorded on the basis of the best estimate of the likelihood, timing, and magnitude of a future outflow of economic resources. Where the effect of the time value of money is material, the present value of the provision is recognized using a discount rate that reflects current market assessments of the time value of money.

 

Income taxes and recoverability of deferred tax assets

 

Actual amounts of income tax expense are not final until tax returns are filed and accepted by taxation authorities. Therefore, profit or loss in future reporting periods may be affected by the difference between the income tax expense estimates and the final tax assessments.

 

Judgment is required in determining whether deferred tax assets are recognized on the condensed consolidated statement of financial position. Deferred tax assets, including those arising from unutilized tax losses, require management of the Company to assess the likelihood that the Company will generate sufficient taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable profit are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable profit differ from estimates, the ability of the Company to realize the deferred tax assets recorded on the consolidated statement of financial position could be impacted. The Company has not recognized any deferred tax assets as at May 31, 2018 and August 31, 2017.

  

F-47

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES

 

(a)Basis of consolidation

 

The condensed consolidated financial statements include the financial statements of the Company and the entities controlled by the Company (its “subsidiaries”). Control is achieved where the Company has the power to govern the financial and operating policies of an entity and obtain the economic benefits from its activities. The consolidated entities are:

 

  Entity  % of Ownership   Jurisdiction 
  Petroteq Energy Inc.  Parent   Canada 
  Petroteq Energy CA, Inc.   100%   USA 
  MCW OSR Inc.   100%   USA 
  MCW Oil Sands, Inc.   100%   USA 
  MCW Fuels Transportation, Inc.   100%   USA 
  Petroteq Oil Sands Recovery, LLC   100%   USA 
  TMC Capital, LLC   100%   USA 

 

The Company has accounted for its investment in Accord on the equity basis from 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.

 

All intercompany transactions, balances, income and expenses are eliminated in full on consolidation.

 

(b)Business combinations

 

The Company accounts for business combinations using the acquisition method, under which the acquirer measures the cost of the business combination as the total of the fair values, at the date of exchange, of the assets obtained, liabilities incurred and equity instruments issued by the acquirer in exchange for control of the acquiree. Goodwill is measured as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally the fair value) of the identifiable assets and liabilities assumed, measured as at the acquisition date.

 

Transaction costs, other than those associated with issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

 

(c)Income recognition

 

The Company sells hydrocarbon products (bitumen or crude oil) produced by its oil extraction facility at prevailing market prices. The Company also expects to enter into short term supply agreements with customers. Revenues are recognized when the hydrocarbon products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, when prices are fixed or determinable and when collectability is reasonably assured.

 

F-48

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(d)Investment in 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 consolidated financial statements using the equity method of accounting. Under the equity method, investment in associate is carried in the consolidated statement of financial position at cost as adjusted for changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payment on behalf of the associate.

 

(e)Property, plant and equipment

 

Property, plant and equipment is recorded at cost and amortized over their useful lives. Maintenance and repairs are expensed as incurred. Major renewals, betterments and start-up costs are capitalized. When items of property, plant or equipment are sold, impaired, or retired, the related costs and accumulated amortization are removed and any gain or loss is included in net income. Amortization is determined on a straight-line method with the following expected useful lives:

 

  Machinery and equipment  5-7 years
  Furniture and fixtures  7 years
  Leasehold improvements  Lease term
  Oil extraction facility  15 years

 

(f)Oil and gas properties

 

Oil and gas property interests

 

Assets owned are recorded at cost less accumulated depreciations and accumulated impairment losses. The Company initially capitalizes the costs of acquiring these properties, directly and indirectly, and thereafter expenses exploration activities, pending the evaluation of commercially recoverable reserves. The results of exploratory programs can take considerable time to analyze and the determination that commercial reserves have been discovered requires both judgment and industry experience. All development costs are capitalized after it has been determined that a property has recoverable reserves. On the commencement of commercial production, net capitalized costs are charged to operations on a unit-of-production basis, by property, using estimated proven and probable recoverable reserves as the depletion base.

 

Oil and gas reserves

 

Oil and gas reserves are evaluated by independent qualified reserves evaluators. The estimation of reserves is a subjective process. Estimates are based on projected future rates of production, estimated commodity prices, engineering data and the timing of future expenditures, all of which are subject to uncertainty and interpretation. Reserves estimates can be revised either upwards or downwards based on updated information such as future drilling, testing and production levels. Reserves estimates, although not reported as part of the Company’s condensed consolidated financial statements, can have a significant effect on net earnings as a result of their impact on depreciation and depletion rates, asset impairment and goodwill impairment.

 

F-49

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(g)Intangible assets

 

Intangible assets are recorded at cost less accumulated depreciation and accumulated impairment losses. Amortization of intangible assets is recorded on a straight-line basis over a life determined by the maximum length of the benefits expected from acquired intellectual property, technology and technology licenses. Intangible assets with indefinite useful lives are not amortized and are tested for impairment at least annually. The useful life for the Oil Extraction Technologies has been established as 15 years in these condensed consolidated financial statements as at May 31, 2018:

 

(h)Impairment of assets

 

At the end of each reporting period, the Company’s property and equipment, oil and gas properties, and intangible assets are reviewed for indications that the carrying amount may not be recoverable. If any such indication is present, the recoverable amount of the asset is estimated in order to determine whether impairments exist. Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

The recoverable amount of an asset is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which estimates of future cash flows have not been adjusted. The cash flows used in the impairment assessment require management to make assumptions and estimates about recoverable resources, production quantities, future commodity prices, operating costs and future development costs. Changes in any of the assumptions, such as a downward revision in reserves, a decrease in future commodity prices or an increase in operating costs, could result in an impairment of carrying values.

 

If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount is reduced to the recoverable amount. Impairment is recognized immediately in the consolidated statement of (income) loss and comprehensive (income) loss. Where an impairment subsequently reverses, the carrying amount is increased to the revised estimate of the recoverable amount but only to the carrying value that would have been recorded if no impairment had previously been recognized. A reversal is recognized as a reduction in the impairment charge for the period.

 

(i)Financial instruments

 

Financial instruments consist of financial assets and financial liabilities and are initially recognized at fair value, net of transaction costs if applicable. Measurement in subsequent periods depends on whether the financial instrument is classified as held-to-maturity, loans and receivables, fair value through profit or loss (“FVTPL”), available-for-sale, or other financial liabilities.

 

Held-to-maturity investments and loans and receivables are measured at amortized cost, with amortization of premiums or discounts, losses and impairment included in current period interest income or expense. Financial assets and liabilities are classified as FVTPL when the financial instrument is held for trading or are designated as FVTPL. Financial instruments at FVTPL are measured at fair market value with all gains and losses included in operations in the period in which they arise. Available-for-sale financial assets are measured at fair market value with revaluation gains and losses included in other comprehensive income until the asset is removed from the consolidated statement of financial position, and losses due to impairment are included in operations. All other financial assets and liabilities, except for cash and cash equivalents, are carried at amortized cost.

 

F-50

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(i)Financial instruments (continued)

 

The Company’s financial instruments are:

 

Cash, classified as FVTPL and measured at fair value
Trade and other receivables and notes receivable, classified as loans and receivables and measured at amortized cost
Accounts payable, accrued expenses, payable to director, convertible debentures and long-term debt, classified as other financial liabilities and measured at amortized cost

 

The recorded values of cash, trade and other receivables, notes receivable, accounts payable, accrued expenses and due to director approximate their fair values based on their short term nature. The recorded values of convertible debentures and long-term debt approximate their fair values when the interest rates of the debt approximate market rates.

 

In accordance with industry practice, the Company includes amounts in current assets and current liabilities for current maturities receivable or payable under contracts which may extend beyond one year.

 

The Company classifies and discloses fair value measurements based on a three-level hierarchy:

 

Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices in Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – inputs for the asset or liability that are not based on observable market data.

 

(j)Provisions

 

Provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

 

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the consolidated statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable can be measured reliably. Over time, the discounted provision is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognized in the consolidated statement of loss (income) as part of interest expense.

 

When the provision liability is initially recognized, the present value of the estimated costs is capitalized by increasing the carrying amount of the related asset to the extent that it was incurred as a result of the development or construction of the asset. Additional provisions which arise due to further development or construction of assets are recognized as additions or charges to the corresponding asset and provisions when they occur. Changes in the estimated timing of provisions or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the provision and a corresponding adjustment to the asset to which it relates. Any reduction in the provision and, therefore, any deduction from the asset to which it relates may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is recognized immediately in consolidated statement of loss (income).

 

F-51

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)Income taxes

 

Provisions for income taxes consist of current and deferred tax expense and are recorded in operations.

 

Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the end of the period, adjusted for amendments to tax payable for previous years.

 

Deferred tax assets and liabilities are computed using the asset and liability method on temporary differences between the carrying amounts of assets and liabilities on the consolidated statement of financial position and their corresponding tax values, using the enacted or substantially enacted, income tax rates at each consolidated statement of financial position date. Deferred tax assets also result from unused losses and other deductions carried forward. The valuation of deferred tax assets is reviewed on a regular basis and adjusted to the extent that it is not probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized by use of a valuation allowance to reflect the estimated realizable amount.

 

(l)Comprehensive income or loss

 

Other comprehensive income or loss is the change in net assets arising from transactions and other events and circumstances from non-owner sources. Comprehensive income comprises net income or loss and other comprehensive income or loss. Financial assets that are classified as available-for-sale will have revaluation gains and losses included in other comprehensive income or loss until the asset is removed from the consolidated statement of financial position. At present, the Company has no other comprehensive income or loss.

 

(m)Earnings per share

 

Basic earnings per share is computed by dividing net income or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period.

 

Diluted earnings per share is determined by adjusting net income or loss attributable to common shareholders of the Company and the weighted average number of common shares outstanding by the effects of potentially dilutive instruments, if such conversion would decrease earnings per share.

 

(n)Share-based payments

 

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 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.

 

F-52

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(o)Reclamation and restoration obligations

 

Liabilities related to environmental protection and reclamation costs are recognized when the obligation is incurred and the fair value of the related costs can be reasonably estimated. This includes future site restoration and other costs as required due to environmental law or contracts. Reclamation and restoration obligations are determined by discounting the expected future cash outflows for reclamation and restoration at a pre-tax rate that reflects current market assessments of the time value of money

 

(p)Comparative amounts

 

The comparative amounts presented in these condensed consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year.

 

(q)New accounting standards and interpretations

 

The following is a summary of new standards, amendments and interpretations that are effective for annual periods beginning on or after January 1, 2016:

 

(a)IFRS 11, Joint Arrangements (“IFRS 11”) – amendments

 

The amendments to IFRS 11 provide guidance on the accounting for acquisition of interests in joint operations constituting a business. The amendments require all such transactions to be accounted for using the principles on business combination accounting in IFRS 3, Business Combinations and other IFRS standards except where those principles conflict with IFRS 11.

 

(b)IAS 1, Presentation of Financial Statements (“IAS 1”) - amendments

 

The amendments to IAS 1 enhance financial statement disclosures and presentation.

 

(c)IAS 16, Property, Plant and Equipment (“IAS 16”) – amendment

 

The amendment to IAS 16 provides clarification of acceptable methods of depreciation and amortization.

 

(d)IAS 38, Intangible Assets (“IAS 38”) - amendment

 

The amendment to IAS 38 provides clarification of acceptable methods of depreciation and amortization.

 

The application of the above amendments did not have any material impact on the consolidated financial statements presented.

  

F-53

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(q)New accounting standards and interpretations (continued)

 

The following is a summary of new standards, amendments and interpretations that have been issued but not yet adopted in these consolidated financial statements:

 

(a)IFRS 9, Financial Instruments (“IFRS 9”)

 

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification options in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is currently evaluating the impact of the adoption of the amendments on its financial statements; however, the impact, if any, is not expected to be significant.

 

(b)IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

 

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

 

(c)IFRS 16 Leases (IFRS 16”)

 

IFRS 16 provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor IAS 17 Leases. IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC -15 Operating Leases – Incentives, and SIC – 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 Revenue from Contracts with Customers is also applied.

 

(d)IFRS 2 Share-based Payment (“IFRS 2”) – amendments

 

The amendments to IFRS 2 provide clarification and guidance on the treatment of vesting and non-vesting conditions related to cash-settled share-based payment transactions, on share-based payment transactions with a net settlement feature for withholding tax obligations, and on accounting for modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled. The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.

 

The Company is currently assessing the impact that these new and amended standards will have on the condensed consolidated financial statements.

 

F-54

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

4.CASH

 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

 

5.TRADE AND OTHER RECEIVABLES

 

The Company’s trade and other receivables consist of:

 

     May 31,   August 31, 
     2018   2017 
           
  Goods and services tax receivable  $181,881   $181,881 
  Other receivables   45,000    125,028 
     $226,881   $306,909 

 

Information about the Company’s exposure to credit risks for trade and other receivables is included in Note 23(a)(i).

 

6.CRUSHED ORE INVENTORY

 

On May 23, 2012, the Company entered into a five-year agreement with TME Asphalt Ridge, LLC (“TME”) for the purchase of crushed ore as feedstock for the Company’s oil extraction facility. The agreement requires the Company to purchase 100,000 tons of crushed ore for $16.00 per ton during the first calendar year and a minimum of 100,000 tons per year at a rate of approximately 8,333 tons per month for $20.60 per ton, subject to certain price adjustment provisions, after the first year.

 

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 and had granted TME a limited right to mine the bituminous sands in the deposit. As the Company obtained the direct right to the Asphalt Ridge deposit and TME was having financial difficulty, the Company allowed the contract with TME to lapse.

 

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. (Note 8(b)). The mining and mineral lease with Asphalt Ridge, Inc. required the Company to make minimum advance royalty payments, subsequently amended, 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 mining and mineral lease agreement. 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.

 

Effective March 12, 2016, a second amendment was made to the mining and mineral lease agreement between the Company and Asphalt Ridge, Inc. 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.

 

F-55

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

7.ADVANCED ROYALTY PAYMENTS (continued)

 

(b)Advance royalty payments to Asphalt Ridge, Inc.

 

As at May 31, 2018, the Company has paid advance royalties of $1,824,86 (August 31, 2017 - $1,356,040) to the lease holder, of which a total of $1,057,500 have been used to pay royalties as they have come due under the terms of the mineral lease agreement. During the nine months ended May 31, 2018, $468,796 in advance royalties were paid and $204,583 have been used to pay royalties which have come due. The royalties expensed have been recognized in cost of goods sold on the consolidated statement of loss and comprehensive loss.

 

As at May 31, 2018, the Company expects to record minimum royalties paid of $211,702 from these advance royalties either against production royalties or for the royalties due within a one year period.

 

(c)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(b)). 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.

 

8.MINERAL LEASES

 

     TMC Mineral Lease   Accord Oil and Gas Lease   Total 
  Cost            
  August 31, 2016  $11,091,388   $1,052,350   $12,143,738 
  Additions   -    237,813    237,813 
  Deconsolidation of Accord (Note 3(a))   -    (1,290,163)   (1,290,163)
  August 31, 2017   11,091,388    -    11,091,388 
  Additions   -    -    - 
  May 31, 2018  $11,091,388   $-   $11,091,388 
                  
  Accumulated Amortization               
  August 31, 2016  $-   $-   $- 
  Additions   -    -    - 
  August 31, 2017   -    -    - 
  Additions   -    -    - 
  Deconsolidation of Accord (Note 3(a))               
  May 31, 2018  $-   $-   $- 
                  
  Carrying Amount               
  August 31, 2016  $11,091,388   $1,052,350   $12,143,738 
  August 31, 2017  $11,091,388   $-   $11,091,388 
  May 31, 2018  $11,091,388   $-   $11,091,388 

 

F-56

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

8.MINERAL LEASES (continued)

 

(a)MCW mineral lease

 

On December 29, 2010, the Company acquired a mineral lease (the “MCW Mineral Lease”), covering 1,138 acres in Uintah County, Utah, for the extraction of bituminous or asphaltic sands (oil sands). The MCW Mineral Lease is valid until August 11, 2018 and has rights for extensions based on reasonable production. This lease was cancelled by the State of Utah on December 30, 2016.

 

(b)TMC mineral lease

 

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 is from July 1, 2013 to July 1, 2018. During the primary term, the Company must meet certain requirements for oil production. After July 1, 2018, the TMC Mineral Lease will remain in effect as long as certain requirements for oil production continue to be met by the Company. If the Company fails to meet these requirements, the lease will automatically terminate 90 days after the calendar year in which the requirements are not met. In addition, the Company is 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.

 

On October 1, 2015, the Company amended the TMC Mineral Lease to defer the requirements for oil extraction until July 1, 2016 and to include the oil extraction from the MCW Mineral Lease as well. The advance royalty payments required under the TMC Mineral Lease were also amended (Note 7(a)). Production royalties were amended to 7% until June 30, 2020 and a varying percentage thereafter, based on the price of oil. Minimum expenditures were amended to $1,000,000 per year until June 30, 2020 and $2,000,000 thereafter if certain operational requirements for oil extraction are not met.

 

On March 1, 2016, a second amendment to the TMC Mineral Lease amended the termination clause in the lease to:

 

(i)Termination will be automatic if there is a lack of a written financial commitment to fund the proposed 3,000 barrel per day production facility prior to March 1, 2018.
(ii)Cessation of operations or inadequate production due to increased operating costs or decreased marketability and production is not restored to 80% of capacity within six months of such cessation.
(iii)The proposed 3,000 barrel per day plant fails to produce a minimum of 80% of its rated capacity for at least 180 calendar days during the lease year commencing July 1, 2020 plus any extension periods.
(iv)The lessee may surrender the lease with 30 days written notice.
(v)Breach of material terms of the lease, the lessor will inform the lessee in writing and the lessee will have 30 days to cure financial breaches and 150 days to cure any other non-monetary breach.

 

 

F-57

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

8.MINERAL LEASES (continued)

 

(b)TMC mineral lease (continued)

 

The term of the lease was extended by the termination clause, providing a written commitment is obtained to fund the 3,000 barrel per day proposed plant. The Company is required to produce a minimum average daily quantity of bitumen, crude oil and/or bitumen products, for a minimum of 180 days during each lease year and 600 days in three consecutive lease years, of:

 

(i)By July 1, 2016 plus any extension periods, 80% of 100 barrels per day.
(ii)By July 1, 2018 plus any extension periods, 80% of 1,500 barrels per day.
(iii)By July 1, 2020, plus any extension periods, 80% of 3,000 barrels per day.

 

Advance royalties required are:

 

(i)From October 1, 2015 to February 28, 2018, minimum payments of $60,000 per quarter.
(ii)From March 1, 2018 to December 31, 2020, minimum payments of $100,000 per quarter.
(iii)From January 1, 2021, minimum payments of $150,000 per quarter.
(iv)Minimum payments commencing on July 1, 2020 will be adjusted for CPI inflation.

 

Production royalties payable are amended to 7% 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 7% to 15% of gross sales revenues, subject to certain adjustments.

 

Minimum expenditures to be incurred on the properties are $1,000,000 per year up to June 30, 2020 and $2,000,000 per year after that if a minimum daily production of 3,000 barrels per day during a 180 day period is not achieved.

 

(c)Oil and gas leases

 

On July 4, 2016, the Company acquired 57.3% of the common shares of Accord (Note 1) and accounted for this investment on a consolidated basis.

 

Accord holds three oil and gas leases in Edwards County, Texas and certain oil extraction technologies (Note 10(a)). The oil and gas leases are subject to an overriding royalty interest of 5%, which will be reduced to 1% after the Company has incurred and paid $1,000,000 in royalties to the underlying royalty holder. No royalties are payable until defined revenue thresholds have been achieved from existing and new oil wells developed on the leases.

 

The Company’s interest in Accord, due to additional cash contributions made to Accord by other shareholders and parties, was reduced to 44.7% as of March 1, 2017 and the assets, liabilities and results of operations of Accord were deconsolidated from that date. The Company has accounted for its investment in Accord using the equity method from March 1, 2017.

  

F-58

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

9.PROPERTY, PLANT AND EQUIPMENT

 

     Oil Extraction Plant   Other Property and Equipment   Total 
  Cost            
  August 31, 2016  $16,678,017   $352,854   $17,030,871 
  Additions   290,120    -    290,120 
  Deconsolidation of Accord (Note 3(a))   -    (1,887)   (1,887)
  Disposals and scrapping   (121,637)   (35,000)   (156,637)
  August 31, 2017   16,846,500    315,967    17,162,467 
  Additions   3,024,517    -    3,024,517 
  May 31, 2018  $19,871,017   $315,967   $20,186,984 
                  
  Accumulated Amortization               
  August 31, 2016  $1,082,273   $96,114   $1,178,387 
  Additions   1,082,159    46,814    1,128,973 
  Deconsolidation of Accord (Note 3(a))   -    (628)   (628)
  Disposals and scrapping   (16,218)   (35,000)   (51,218)
  August 31, 2017   2,148,214    107,300    2,255,514 
  Additions   706,809    142,557    849,366 
  May 31, 2018  $2,855,023   $249,857   $3,104,880 
                  
  Carrying Amount               
  August 31, 2016  $15,595,744   $256,740   $15,852,484 
  August 31, 2017  $14,698,286   $208,667   $14,906,953 
  May 31, 2018  $17,015,994   $66,110   $17,082,104 

 

(a)Oil Extraction Plant

 

In June 2011, the Company commenced the development of an oil extraction facility on its mineral lease in Uintah, 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 quarter 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 Company has relocated its oil extraction plant to the Asphalt Ridge site, where it holds a mineral lease, together with this relocation, the Company embarked on an expansion project to expand the production output of the facility. The Company spent $3,024,517 on the expansion at May 31, 2018. The cost of construction includes capitalized borrowing costs for the year ended August 31, 2017 of $100,000 (2016 - $137,500) and total capitalized borrowing costs as at May 31, 2018 of $2,212,080 (August 31, 2017 - $2,212,080).

 

F-59

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

10.INTANGIBLE ASSETS

 

     Oil Extraction Technology 
  Cost    
  August 31, 2016   2,291,488 
  Additions   333,998 
  Deconsolidation of Accord (Note 3(a))   (1,815,617)
  August 31, 2017   809,869 
  Additions   - 
  May 31, 2018  $809,869 
        
  Accumulated Amortization     
  August 31, 2016   49,033 
  Additions   53,165 
  August 31, 2017   102,198 
  Additions   40,907 
  Deconsolidation of Accord (Note 3(a))   - 
  May 31, 2018  $143,105 
        
  Carrying Amounts     
  August 31, 2016  $2,242,455 
  August 31, 2017  $707,671 
  May 31, 2018  $666,764 

 

(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 on this technology in the USA and Canada and has employed it in its oil extraction plant. The Company commenced production from its oil extraction plant on September 1, 2015 and is amortizing the cost of the technology over fifteen years, the expected life of the oil extraction plant.

 

On July 4, 2016, the Company acquired 57.3% of the total issued and outstanding shares of Accord (Note 1). Accord holds the rights to use proprietary technology which may improve the efficiency of oil extraction from certain oil fields and from depth at the Company’s bituminous sands lease. Once the proprietary technology is fully operational the Company intends to utilize the technology to extract oil from its oil and gas leases (Note 8(c)) and to amortize the cost over fifteen years, the expected life useful life of the oil and gas leases.

 

The Company’s interest in Accord, due to additional cash contributions made to Accord by other shareholders and parties, was reduced to 44.7% as of March 1, 2017 and the assets, liabilities and results of operations of Accord were deconsolidated from that date. The Company has accounted for its investment in Accord using the equity method from March 1, 2017.

  

F-60

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

  

11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable as at May 31, 2018 and August 31, 2017 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, 2018 and August 31, 2017 consist primarily of other operating expenses and interest accruals on long-term debt (Note 12) and convertible debentures (Note 13).

 

Information about the Company’s exposure to liquidity risk is included in Note 23(c).

 

12.LONG-TERM DEBT

 

           Principal due   Principal due 
  Lender  Maturity Date  Interest Rate   May 31,
2018
   August 31,
2017
 
                  
  Private lenders  May 1, 2017   15.00%   -    100,000 
  Private lenders  May 1, 2019   5.00%   637,739    1,001,905 
  Private lenders  July 28, 2020   10.00%   -    33,305 
  Private lenders  August 31, 2020   5.00%   485,296    336,080 
  Equipment loans  April 17, 2020 – April 20, 2020   4.30 - 4.90%   115,167    160,343 
  Director  August 18, 2020   5.00%   429,176    242,250 
                     
  Total loans          $1,667,378   $1,873,883 
  Accrued interest           -    2,497 
             $1,667,378   $1,876,380 

 

The maturity of the long-term debt is as follows:

 

    

May 31,

2018

  

August 31,

2017

 
           
  Principal classified as repayable within one year  $424,246   $1,159,104 
  Principal classified as repayable later than one year   1,243,132    717,276 
             
     $1,667,378   $1,876,380 

 

(a)Director

 

On March 18, 2016, the Company issued a promissory note for $3,000,000 to the Chair of the Board of Directors of the Company. The proceeds from the issuance of the promissory note were used to settle the total outstanding amount of the B&N Bank credit facility.

 

On August 15, 2017 the promissory note, including accrued interest of $215,625, was assigned by the Chair of the Board to three related entities and were subsequently converted into 14,391,330 shares of the Company.

  

F-61

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

12.LONG-TERM DEBT (continued)

 

(b)Private lenders

 

(i)On December 16, 2013, the Company obtained an on-demand loan from private investors for a total of $430,000, bearing interest at 15% per annum. The loan is personally guaranteed by the Chair of the Board of Directors. The loan was amended on November 1, 2016 to extend the maturity date to May 1, 2017, and a further extension of this loan is currently being negotiated. During the current year, interest previously overpaid amounting to $16,800 was offset against the principal and a further principal payment of $10,000 was made, resulting in a principal balance outstanding of $100,000. Principal repaid during the year ended August 31, 2016 amounted to $73,200.

 

(ii)On October 10, 2014, the Company issued two secured debentures for an aggregate principal amount of CDN $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 CDN $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.

 

The debentures were renegotiated on February 9, 2018, whereby the maturity date of the debentures was extended to May 1, 2019. Each of the debentures was amended to allow for a portion of the debenture, amounting to CDN$628,585 to be convertible into shares of common stock. On May 1, 2018, a total of CDN$365,000 was converted into equity, the remaining convertible portion of the debentures does not attract interest and is convertible into equity as follows;

 

CDN$66,000 on August 1, 2018
CDN$66,000 on November 1, 2018
CDN$131,585 on January 1, 2019.

 

The conversion price will be at the maximum discount allowable at the lower of the average 20 day weighted average share price of the market closing price, as may be permitted by applicable securities legislation or stock exchange rules.

 

The remaining balance of the debentures amounting to CDN825,745 is payable in cash. The original payment terms are currently being renegotiated, the loan attracts interest at 5% per annum, interest accrual beginning on April 2, 2018.

 

F-62

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

12.LONG-TERM DEBT (continued)

 

(b)Private lenders (continued)

 

(iii)The Company received advances from various private lenders during the nine months ended May 31, 2018 and the year ended August 31, 2017 in the form of unsecured promissory notes. These promissory notes mature at various dates, between on demand and July 28, 2020, and bear interest at 10% per annum. Various promissory notes, including interest thereon, were converted into common shares on May 19, 2017, under the terms of various Securities Purchase Agreements entered into with the lenders (Note 12(b)(vii)).

 

(iv)During the year ended August 31, 2016, the Company obtained a loan from Altlands Overseas Corp. for $750,000, bearing interest at a rate of 6% per annum and maturing on September 10, 2017. This loan, including all interest thereon was converted into common shares on May 19, 2017 under the terms of a Securities Purchase Agreement entered into with the lender (Note 12(b)(vii)).

 

(v)The Company received advances from various private lenders during the nine months ended May 31, 2018 and the year ended August 31, 2017 in the form of unsecured promissory notes. These promissory notes mature at various dates, between May 19, 2020 and August 31, 2020 and bear interest at 5% per annum. Various promissory notes, including interest thereon, were converted into common shares on May 19, 2017, under terms of various Securities Purchase Agreements entered into with the lenders (Note 12(b)(vii)).

 

(vi)The Company received advances from various private lenders during the year ended August 31, 2016 and 2015 in the form of unsecured promissory notes. On January 20, 2016, the Company issued an aggregate of 882,455 common shares in satisfaction of $2,447,478 of indebtedness. On July 25, 2016, the Company issued an aggregate of 86,316 common shares in satisfaction of a further $266,146 of indebtedness.

 

(vii)On May 19, 2017, under the terms of Securities Purchase Agreements entered into with various lenders, including the promissory notes in Notes 12(d) and 13(b), the Company issued 31,083,281 common shares at conversion prices ranging from $0.353 per share to $0.397 per share in exchange for promissory notes, including interest thereon, amounting to $12,185,904. These common shares were issued on July 11, 2017.

 

(viii)During April 2018, the Company converted $1,420,246 of the principal balance outstanding on the unsecured promissory notes into convertible debentures with a term of 60 months, bearing interest at 10% per annum. These units are convertible into units at a conversion price of $1.09 per share, each unit consisting of one common share and one common share purchase warrant convertible into common shares at a conversion price of $1.30 per share.

 

(c)Equipment loans

 

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 a rate between 4.3% and 4.9% per annum. Principal and interest were paid in monthly installments. These loans were secured by the acquired assets.

  

F-63

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

12.LONG-TERM DEBT (continued)

 

(d)Promissory notes

 

On June 1, 2015, the Company issued two promissory notes for $5,000,000 each for the acquisition of TMC (Note 1). These promissory notes had a five-year term, bore interest at a rate of 5% per annum and were unsecured. These promissory notes were guaranteed by the Chair of the Board of Directors.

 

During the year ended August 31, 2016, the Company issued 666,667 common shares as repayment of $2,500,000 of this indebtedness.

 

The remaining promissory notes were converted into common shares on May 19, 2017 (Note 12(b)(vii)), under the terms of Securities Purchase Agreements entered into with the lenders, at a conversion price of $0.397 per share.

 

(e)Director

 

During the years ended August 31, 2017 and 2016, the Company issued unsecured promissory notes to private companies controlled by the Chair of the Board of Directors of the Company (Note 19).

 

13.CONVERTIBLE DEBENTURES

 

            Principal due   Principal due 
  Lender  Maturity Date  Interest Rate  

May 31,

2018

  

August 31,

2017

 
                  
  Alpha Capital Anstalt  October 31, 2018   5.00%   56,500    508,500 
  Deloro Energy LLC  June 1, 2018   0.00%   -    - 
  Private lenders  January 1, 2019   0.00%   203,572    - 
  Private lender debentures  April 30, 2023   10.00%   2,076,522    - 
                     
  Total loans          $2,336,594   $508,500 

 

The maturity of the convertible debt is as follows:

 

    

May 31,

2018

  

August 31,

2017

 
           
  Principal classified as repayable within one year  $2,336,594   $- 
  Principal classified as repayable later than one year   -    508,500 
             
     $2,336,594   $508,500 

 

F-64

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

13.CONVERTIBLE DEBENTURES (continued)

 

(a)Director

 

On June 25, 2014, the Company issued a convertible debenture for up to a maximum aggregate principal amount of $2,000,000 to the Chair of the Board of Directors, which bore interest at a rate of 10% per annum and matured on June 25, 2017. On September 22, 2014, $1,796,000 of the principal was converted into 64,183 common shares of the Company. The balance of $204,000 was convertible at a deemed price of CDN $30.00 per share at any time at the option of the holder and is secured by all of the assets of the Company.

 

The remaining principal and accrued interest outstanding on this note was converted into common shares on May 19, 2017 at a conversion price of $0.353 per share (Note 12(b)(vii)).

 

(b)Altlands Overseas Corp.

 

On February 9, 2015, the Company received a loan for an aggregate principal amount of $2,000,000, which was increased to $3,500,000 on July 21, 2015. The loan bore interest at a rate of 6% per annum and matured on February 9, 2016. On February 1, 2016, the loan was modified to extend the maturity date to February 9, 2017 and increase the rate of interest to 10% per annum between February 10, 2016 and February 9, 2017. The loan was guaranteed by the Chair of the Board of Directors. In addition, the lender held the option, subject to director, shareholder and regulatory approvals, to convert the loan into a 49.9% ownership interest in POSR.

 

On February 23, 2017, Altlands converted $2,300,000 of the principal outstanding on the Altlands debt, into 669,760 common shares at a conversion price of $3.434 per share.

 

The remaining principal and accrued interest outstanding on the Altlands debt was converted into common shares on May 19, 2017 at a conversion price of $0.397 per share (Note 12 (b)(vii)).

 

(c)Alpha Capital Anstalt

 

On December 15, 2015, the Company issued a convertible secured note for $555,556 to Alpha Capital Anstalt. The convertible secured note bore interest at a rate of 5% per annum, matured on June 15, 2017 and was convertible into units, each unit consisting of one common share of the Company and one common share purchase warrant of the Company, at a conversion price of $0.34794 per unit. Each warrant would entitle the holder to acquire one additional common share at an exercise price of CDN $0,4935● per share until ●.

 

On April 5, 2016, $55,556 of the principal of the convertible secured note was settled by the issuance of 22,991 common shares of the Company. The remaining $500,000 of the principal and $12,577 of accrued interest of the convertible secured note was settled on April 8, 2016 using the proceeds from the issuance of an additional convertible secured note to Alpha Capital Anstalt.

 

On April 8, 2016, the Company issued an additional convertible secured note for $600,000 to Alpha Capital Anstalt. The convertible secured note bore interest at a rate of 5% per annum and matured on October 8, 2017. The convertible secured note was 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 $3.469 per unit. Each warrant would entitle the holder to acquire one additional common share at an exercise price of CAD $4.725 per share until April 8, 2021. The convertible secured note was secured by all of the assets of the Company.

 

Between October 14, 2016 and October 31, 2016, $200,000 of the principal of the convertible secured notes was converted into 57,756 units.

 

F-65

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

13.CONVERTIBLE DEBENTURES (continued)

 

(c)Alpha Capital Anstalt (continued)

 

On August 31, 2017, the Company issued a new convertible secured note for $565,000 to Alpha Capital Anstalt. The remaining convertible loan principal at $400,000 and interest and early settlement interest at $59,014 was settled by the proceeds of the newly issued convertible secured note. 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. The convertible secured note is secured by all of the assets of the Company.

 

On December 19, 2017, January 10, 2018, February 9, 2018 and May 22,2108, Alpha Capital converted a total of $508,500 of the convertible units into 1,753,447 shares of common stock at a conversion price of $0,29 per share; and warrants exercisable over 1,753,447 share of common stock at an exercise price of $0,315 per share.

 

(d)Deloro Energy LLC

 

On September 11, 2017, Petroteq Energy CA, Inc. (“PQE CA”) entered into an agreement (“Agreement”) with Deloro Energy LLC, (“Deloro”). Under the Agreement, Deloro will provide financing of $10,000,000 to the Company, in tranches of $2,500,000, $3,500,000 and $4,000,000, to be used primarily for the expansion of the production capacity of the Company’s oil extraction plant to 1,000 barrels per day. On the completion of the loan advance of $10,000,000, Deloro will be entitled to convert its loan into a 49% equity interest in each of POSR”) and TMC.

 

On the signing of the Agreement on September 11, 2017, Deloro paid a non-refundable deposit of $50,000 to PQE CA, and credited towards the first tranche. On October 20, 2017, a further $1,205,000 was received by PQE CA for the planned expansion of the of the oil extraction plant processing capacity. At the time the oil extraction plant achieves commercial production of at least 1,000 barrels per day, Deloro will receive a 25% economic royalty interest from PQE Oil and TMC. A further $1,295,982 was received during the three months ended February 2018 and a further $1,100,000 during the three months ended May 31, 2018.

 

Deloro was to advance a second tranche of $3,500,000 which was to take place prior to February 28, 2018 for a further economic royalty interest of 10% (a total of 35%) from PQE Oil and TMC, commencing and calculated from when the oil extraction plant achieves commercial production of at least 1,000 barrels per day.

 

Deloro was to advance a third and final tranche of $3,950,000 on or before June 1, 2018 which will entitle Deloro to receive an additional economic royalty interest of 14% (a total of 49%) from PQE Oil and TMC, commencing and calculated from when the oil extraction plant achieves commercial production of at least 1,000 barrels per day.

 

If Deloro fails to make any of the advances under the Agreement, PQE CA will have the option to repurchase the royalty interests owned by Deloro within twelve months from the date of the failure to make the advance. If Deloro fails to make all the advances by June 1, 2018, the advances made to date will convert to a loan payable, with interest at 5% per annum, by June 1, 2019.

 

Deloro failed to make advances as per the agreed upon schedule and during May 2018, the agreement with Deloro was terminated and the outstanding principal debt of $3,600,000, less the non-refundable deposit of $50,982 was converted into units at a conversion price of $0.60 per share. Each unit consisting of one common share and one three year common share purchase warrant exercisable at $0.91 per share.

 

F-66

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

13.CONVERTIBLE DEBENTURES (continued)

 

(e)Private lenders

 

In terms of an agreement entered into with two debenture holders, a portion of their debentures is convertible into shares of common stock, refer note 12(b)(ii) above.

 

(f)Private lender debentures

 

During April 2018, several private lenders converted unsecured promissory notes amounting to $1,420,247 into 60 month convertible debentures, each debenture is convertible into units at a conversion price of $1.09 per unit, each unit consisting of one common share and one common share purchase warrant exercisable at $1.30 per share. The warrants are exercisable for a period, the earlier of 24 months from issuance date or the maturity date of the debenture.

 

14.RECLAMATION AND RESTORATION PROVISIONS

 

     Oil Extraction Facility   Site Restoration   Total 
               
  Balance at August 31, 2016   357,000    204,000    561,000 
  Accretion expense   7,140    4,080    11,220 
  Balance at August 31, 2017   364,140    208,080    572,220 
  Accretion expense   5,462    3,121    8,583 
  Balance at May 31, 2018  $369,602   $211,201   $580,803 

 

(a)Oil Extraction Plant

 

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, 2018 and August 31, 2017 is 2.0%.

 

(b)Site restoration

 

In accordance with environmental laws in the United States, the Company’s environmental permits and the lease agreement, 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, 2018 and August 31, 2017 is 2.0%.

 

F-67

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

15.COMMON SHARES

 

  Authorized    unlimited common shares without par value 
  Issued and Outstanding   67,486,731 common shares as at May 31, 2018. 

 

On May 19, 2017 the shareholders of the Company approved the consolidated its shares on a 30 for one basis. The number of shares issued and outstanding have been retroactively adjusted for this consolidation in these financial statements.

 

During the period from October 21, 2016 to November 8, 2016, the Company issued 57,756 common shares on the conversion of $200,000 of convertible debt to Alpha Capital Anstalt.

 

On November 17, 2016, the Company issued 21,496 common shares to two private lenders on modification of the debt terms and extension of the repayment date of the debt.

 

During the period from November 17, 2016 to August 23, 2017, the Company issued 479,867 common shares of common stock to settle outstanding liabilities with third parties amounting to $311,442.

 

During the period from November 17, 2016 to August 30, 2017, the Company issued 694,042 common shares for net proceeds of $641,528.

 

On January 17, 2017, the Company issued 16,667 common shares to its Chief Technical Officer and the inventor of a key component of the Company’s oil extraction technology.

 

During the period from February 23, 2017 and August 22, 2017, the Company issued a total of 46,144,371 common shares upon the conversion of several notes and convertible notes totaling $17,852,548, including interest thereon, and a further $115,000 of directors’ loans (Note 13 (a)).

 

On June 12, 2017, the Company issued 83,333 common shares as an investment into a joint venture with two unrelated parties (Note 20).

 

During the period from September 27, 2017 to March 9, 2018, the company issued an additional 2,535,450 shares for net proceeds of $1,431,356

 

During the period December 19, 2017 to May 22, 2018, the Company issued 8,246,689 shares upon the conversion of $4,392,171 of convertible notes, including 6,000,000 common shares of the conversion of the Deloro Energy convertible note of $3,600,000 and 1,753,447 common shares on the conversion of $508,500 of the Alpha Capital convertible note.

 

During the period March 1, 2018 and May 14, 2018, the Company issued 1,457,893 shares of common stock to settle outstanding liabilities with third parties amounting to $1,723,115.

 

During the period March 5, 2018 and April 19, 2018, warrant holders exercised warrants over $1,000,000 shares of common stock at an exercise price of $0.315 per share for gross proceeds of $315,015.

 

On May 30, 2018, the Company issued 25,000 shares of common stock to an advisory board member in terms of an agreement entered into whereby the advisory board member will be issued a total of 100,000 shares of common stock. An additional 50,000 shares will be issued on July 31, 2018 and a further 25,000 on September 30, 2018. The 25,000 shares of common stock issued on May 30, 2018 were valued at $17,834.

 

F-68

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

16.SHARE PURCHASE OPTIONS

 

(a)Stock option plan

 

The Company has a stock option plan which allows the Board of Directors of the Company to grant options to acquire common shares of the Company to directors, officers, key employees and consultants. The option price, term and vesting are determined at the discretion of the Board of Directors, subject to certain restrictions as required by the policies of the TMX Venture Exchange. The stock option plan is a 20% fixed number plan with a maximum of 1,513,574 common shares reserved for issuance.

 

On November 30, 2017, the Company granted 1,425,000 ten year options to three directors at an exercise price of CDN$2.27 per share. The weighted average fair value of the options granted was estimated at $2.27 per share at the grant date using the Black-Scholes option pricing model. For the year ended August 31, 2017, the Company did not grant any options.

 

The weighted average assumptions used for the Black-Scholes option pricing model were:

 

    

Nine months
ended

May 31,

2018

 
  Share price  CDN $2.27 
  Exercise price  CDN $2.27 
  Expected share price volatility (1)   197%
  Risk-free interest rate   1.81%
  Expected term   10 years 

 

(1)Expected volatility has been calculated based on the Company’s historical volatility.

 

During the nine months ended May 31, 2018 the share-based compensation expense of $2,505,647 relates to the 1,425,000 options granted to the directors.

 

(b)Share purchase options

 

Share purchase option transactions under the stock option plan were:

 

    

Nine months ended

May 31, 2018

  

Year ended

August 31, 2017

 
     Number of Options   Weighted average exercise price*   Number of options   Weighted average exercise price* 
  Balance, beginning of period   113,333   $12.57    126,666   $14.70 
  Options granted   1,425,000   $1.76    -    - 
  Options cancelled   -    -    -    - 
  Options expired   (30,000)  $33.00    (13,333)  $33.00 
  Balance, end of period   1,508,333   $1.89    113,333   $12.57 

 

*All option exercise prices are converted to US $ at period end for purposes of determining the weighted average exercise price.

 

F-69

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

16.SHARE PURCHASE OPTIONS (continued)

 

(b)Share purchase options (continued)

 

Share purchase options outstanding and exercisable as at May 31, 2018 are:

 

 

 

Expiry Date

 

 

Exercise Price

   Options Outstanding  

Options

Exercisable

 
  December 31, 2018  USD $4.80    50,000    50,000 
  February 1, 2026  CDN $5.85    33,333    33,333 
  November 30, 2027  CDN $2.27    1,425,000    1,425,000 
                  
           1,508,333    1,508,333 

 

  Weighted average remaining contractual life   9.2 years    9.4 years 

  

17.SHARE PURCHASE WARRANTS

 

Share purchase warrants outstanding as at May 31, 2018 are:

 

 

 

Expiry Date

 

 

Exercise Price

   Warrants Outstanding 
  November 5, 2019  CDN $28.35    25,327 
  April 12, 2019  CDN $5.10    16,667 
  August 19, 2019  CDN $7.50    66,666 
  March 9, 2020  $1.50    114,678 
  April 8, 2021  CDN$4.74    57,756 
  May 22, 2021  $0.91    6,000,000 
  August 31,2022  $0.315    753,447 
           7,034,541 
             
  Weighted average remaining contractual life        3.10 years 
  Weighted average exercise price       $1.06 

 

Between April 30, 2015 and October 9, 2015, the Company issued 4,221, 8,442, 6,332 and 6,332 share purchase warrants in connection with the conversion of $100,000, $200,000, $150,000 and $150,000, respectively, of the convertible secured notes (Note 13(c)) into units composed of one common share of the Company and one share purchase warrant of the Company. The fair value of the warrants granted was estimated, using the residual method, of $0.60, $2.40, $4.50 and $2.70 per warrant, respectively.

 

On May 9, 2016, the Company issued 16,667 share purchase warrants to settle an outstanding liability of $75,000. The fair value of the warrants granted was estimated at $2.10 per warrant at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used for the Black-Scholes option pricing model were a share price of CDN $4.20, exercise price of CDN $4.95, expected share price volatility of 114%, risk-free interest rate of 0.68% and expected term of three years. The expected volatility was calculated based on the Company’s historical volatility.

 

On June 1, 2016, 16,667 share purchase warrants issued to debt holder were cancelled (Note 12(b)(ii)).

 

On August 19, 2016, the Company issued 66,666 share purchase warrants in connection with the acquisition of 57.3% of the common shares of Accord (Note 1). The fair value of the warrants granted was estimated at $2.70 per warrant at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used for the Black-Scholes option pricing model were a share price of CDN $5.70, exercise price of CDN $7.50, expected share price volatility of 116%, risk-free interest rate of 0.68% and expected term of three years. The expected volatility was calculated based on the Company’s historical volatility.

 

F-70

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

17.SHARE PURCHASE WARRANTS (continued)

 

On October 14, 2016 and October 31, 2016, the Company issued 14,439 and 43,317 share purchase warrants in connection with the conversion of $50,000 and $150,000, respectively, of the convertible secured notes (Note 13(c)) into units composed of one common share of the Company and one share purchase warrant of the Company. The fair value of the warrants granted was estimated, using the relative fair value method, at $1.80 per warrant.

 

On December 19, 2017, January 10, 2018, February 9, 2018, and May 22, 2018, the Company issued a total of 1,753,447 share purchase warrants in connection with the conversion of $508,500 of the convertible notes (Note 13(c) into units composed of one common share of the Company’s common stock and one share purchase warrant of the Company’s common stock. The fair value of the warrants granted was estimated, using the relative fair value method, at $0.15 per warrant.

 

On March 9, 2018, the Company issued a total of 114,678 share purchase warrants in connection with a subscription agreement entered into with a private investor for gross proceeds of $125,000 for 114,678 units, each unit consisting of one share of common stock and one share purchase warrant for one share of common stock exercisable at $1.50 per share. The fair value of the warrants granted were estimated using the relative fair value method at $0.58 per share.

 

Between March 5, 2018 and April 19, 2018, the holders of share purchase warrants exercised warrants over 1,000,000 shares of common stock at an exercise price of $0.315 per share for gross proceeds of $315,015.

 

On May 22, 2018, the Company issued a total of 6,000,000 share purchase warrants in connection with the conversion of $3,600,000 of the Deloro Energy LLC convertible note (Note 13d) into 6,000,000 units, each unit consisting of one share of common stock and one share purchase warrant for one share of common stock exercisable at $0.91 per share. The fair value of the warrants granted were estimated using the relative fair value method at $0.25 per share.

 

18.DILUTED LOSS PER SHARE

 

The Company’s potentially dilutive instruments are convertible debentures and share purchase options and 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.

 

F-71

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

19.RELATED PARTY TRANSACTIONS

 

Related party transactions not otherwise separately disclosed in these 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,

2018

  

May 31,

2017

 
           
  Salaries, fees and other benefits  $195,300   $102,000 
  Share based compensation   -    - 
     $195,300   $102,000 

 

     Nine months ended 
    

May 31,

2018

  

May 31,

2017

 
           
  Salaries, fees and other benefits  $484,800   $306,000 
  Share based compensation   2,505,647    15,992 
     $2,990,447   $321,992 

 

At May 31, 2018 $1,398,392 is due to members of key management and directors for unpaid salaries, expenses and directors’ fees (August 31, 2017 – $1,137,392).

 

(b)Due to director

 

During the nine months ended May 31, 2018 and the year ended August 31, 2017 and 2016, the Company received additional advances of $1,145,440 and $421,250 from various private companies controlled by the Chair of the Board of Directors of the Company (Notes 12(b)(v) and 12(e)).

 

On January 20, 2016 and July 25, 2016, the Company entered into an agreement to settle a portion of the principal and accrued and unpaid interest of these advances by issuing 85,160 and 37,581 common shares of the Company, respectively, to the lenders.

 

As of May 31, 2018 and August 31, 2017, the Company owed the Chair of the Board the aggregate sum of $429,176 and $242,250 of long term debt, respectively. These loans bear interest at 5% per annum and mature during August 2020.

 

During April 2018, the Chair of the Board converted $774,387 of long term debt into 60 month convertible debentures, earning interest at 10% per annum and convertible into units at a conversion price of $1.09 per unit, each unit consisting of one share of common stock and a share purchase warrant convertible into one share of common stock at a conversion price of $1.30 per share. The warrants expire the earlier of 24 months from issue date or the date of maturity of the convertible debenture.

 

F-72

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

19.RELATED PARTY TRANSACTIONS (continued)

 

(b)Due to director (continued)

 

On May 18, 2017, the Company entered into a securities purchase agreement whereby it agreed to convert an aggregate principal debt of $264,841, including interest thereon, owing to the Chair of the Board or companies controlled by him into 751,681 of common share at a conversion price of $0.353 per share.

 

On May 18, 2017, the Company entered into a securities purchase agreement whereby it agreed to convert an aggregate principal debt of $115,000, including interest thereon, owing to the Chair of the Board or companies controlled by him into 325,779 common shares at a conversion price of $0.353 per share.

 

On August 15, 2017, the promissory note of $3,000,000, owing to the Chair of the Board, including accrued interest thereon up to August 18, 2017 of $215,625, was assigned to three different entities and in terms of debt conversion agreements entered into on August 18, 2017, was subsequently converted into 14,391,330 common shares at a conversion price of $0.223 per share,

 

20.INVESTMENTS

 

(a)Investment in joint venture

 

On November 11, 2016, the Company and three other parties entered into a joint venture for the operation of a site 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 May 31, 2018. The joint venture has not commenced operations as of May 31, 2018.

 

(b)Investment in First Bitcoin

 

PQE CA formed a new subsidiary Petrobloq, LLC. (“Petrobloq”) The Company advanced $100,000 to Petrobloq which, in terms of an agreement entered into with First Bitcoin Capital Corp. (“FBCC”), a global developer of blockchain-based applications, a further $400,000 will be advanced to FBCC to design and develop a BlockChain-powered supply chain management platform for the oil and gas industry. The platform will be designed as a “one-stop shop” that will provide both small and large oil and gas producers and operators with the ability to customize their own distributed ledger modules that will permit each company, in a secure “closed” environment, to document, track, and account for the supply of equipment, materials and services in project, field, and lease development.

 

F-73

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

21.SEGMENT INFORMATION

 

The Company operated in two reportable segments within the USA during the nine months ended May 31, 2018 and the year ended August 31, 2017 and 2016, oil extraction and processing operations and mining operations.

 

The Company has completed its expansion of the plant and plans to commence commercial production in the 4th quarter of the current year. The Company’s mining operations have not commenced and are expected to generate revenues once the Company begins extracting oil from the oil sands.

 

The presentation of the consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There were no operations in the mining operations segment during the nine months ended May 31, 2018 and 2017. 

 

     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)

 

     May 31, 2017 
  (in ’000s of dollars)  Oil Extraction   Mining operations   Consolidated 
  Additions to non-current assets  $998        $998 
  Reportable segment assets   17,911    11,680    29,591 
  Reportable segment liabilities  $(9,303)  $(169)  $(9,472)

 

F-74

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

21.SEGMENT INFORMATION (continued)

 

Other information about reportable segments is:

  

     May 31, 2018 
  (in ’000s of dollars)  Oil Extraction   Mining operations   Consolidated 
               
  External Revenues  $-   $-   $- 
  Cost of Goods Sold   29    205    234 
  Gross Loss   -    (205)   (234)
  Operating Expenses               
  General and administrative   401    11    412 
  Travel and promotion   2,087    -    2,087 
  Professional fees   1,716    -    1,716 
  Salaries and wages   639    -    639 
  Share-based compensation   2,524    -    2,524 
  Gain on settlement of liabilities   (217)   -    (217)
  Interest expense   323    -    323 
  Equity loss   51    -    51 
  Depreciation and amortization   890    -    890 

 

     May 31, 2017 
  (in ’000s of dollars)  Oil Extraction   Mining operations   Consolidated 
               
  External Revenues  $        -   $-   $            - 
  Cost of Goods Sold   -    315    315 
  Gross Loss   -    (315)   (315)
  Operating Expenses               
  General and administrative   247    8    255 
  Travel and promotion   420    -    420 
  Professional fees   469    6    475 
  Salaries and wages   451    -    451 
  Share-based compensation   16    -    16 
  Gain on settlement of liabilities   907    -    907 
  Interest expense   811    269    1,080 
  Other   28         28 
  Depreciation and amortization   893    -    893 

 

F-75

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

22.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.

 

23.MANAGEMENT OF FINANCIAL RISKS

 

The risks to which the Company’s financial instruments are exposed to are:

 

(a)Credit risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet contractual obligations. The Company is exposed to credit risk through its cash held at financial institutions, trade receivables from customers and notes receivable.

 

The Company has cash balances at various financial institutions. The Company has not experienced any loss on these accounts, although balances in the accounts may exceed the insurable limits. The Company considers credit risk from cash to be minimal.

 

Credit extension, monitoring and collection are performed for each of the Company’s business segments. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of the customer’s credit information.

 

Accounts receivable, collections and payments from customers are monitored and the Company maintains an allowance for estimated credit losses based upon historical experience with customers, current market and industry conditions and specific customer collection issues.

 

At May 31, 2018 and August 31, 2017, the Company had no trade receivables. The Company considers it maximum exposure to credit risk to be its trade and other receivables and notes receivable.

 

(b)Interest rate risk

 

Interest rate risk is the risk that changes in interest rates will affect the fair value or future cash flows of the Company’s financial instruments. The Company is exposed to interest rate risk as a result of holding fixed rate borrowings of varying maturities as well as through certain floating rate instruments. The Company considers its exposure to interest rate risk to be minimal.

 

F-76

 

  

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

23.MANAGEMENT OF FINANCIAL RISKS (continued)

 

(c)Liquidity risk

 

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities as they become due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses.

 

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, 2018 

         Contractual cash flows 
  (in ’000s of dollars)  Carrying amount   Total   1 year
or less
   2 - 5 years   More than 5 years 
  Accounts payable  $774   $774   $774   $-   $    - 
  Accrued liabilities   1,749    1,749    1,749    -    - 
  Convertible debenture   2,487    2,487    2,487    -    - 
  Long-term debt   1,517    1,816    502    1,314    - 
     $6,527   $6,825   $5,512   $1,314   $- 

 

At August 31, 2017 

         Contractual cash flows 
  (in ’000s of dollars)  Carrying amount   Total   1 year
or less
   2 - 5 years   More than 5 years 
  Accounts payable  $1,121   $1,121   $1,121   $-   $   - 
  Accrued liabilities   1,980    1,980    1,980    -    - 
  Convertible debenture   509    600    21    579    - 
  Long-term debt   1,876    2,072    1,278    794    - 
     $5,486   $5,773   $4,400   $1,373   $- 

  

F-77

 

 

PETROTEQ ENERGY INC.

Notes to the Condensed Consolidated Interim Financial Statements

May 31, 2018 and 2017

Expressed in US dollars

 

24.EVENTS AFTER THE REPORTING DATE

 

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

 

(a)Common shares

 

Subsequent to May 31, 2018, the Chair of the Board converted a total of $1,175,424 of loans and amounts owing to him into 1,992,244 shares of common stock at a conversion price of $0.59 per share.

 

On June 11, 2018, several convertible debenture holders converted a total of $2,502,020 into shares of common stock at a conversion price of $0.59 per common share.

 

Subsequent to May 31, 2018 up to June 28, 2018, in terms of various subscription agreements entered into with third parties, the Company had received an additional $232,000 in subscription receipts.

 

On July 26, 2018, the Company announced the issuance of an aggregate of 2,765,115 common shares, and 1,232,150 common share purchase warrants, to 15 arm’s length parties, for gross proceeds of an aggregate US$1,832,600. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of US$1.50 per common share for 24 months from the date of issuance. The net proceeds will be used by the Company for use on its extraction technology in Asphalt Ridge, Utah, and for working capital.

 

(b)Warrants

 

On June 1, 2018, warrants over 517,241 shares were exercised by Alpha Capital Anstalt for gross proceeds of $162,931.

 

F-78