UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended November 30, 2021

 

or

 

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

 

Commission File Number: 000-55991

 

PETROTEQ ENERGY INC.

(Exact name of registrant as specified in its charter)

 

Ontario   None
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
15315 W. Magnolia Blvd, Suite 120
Sherman Oaks, California
  91403
(Address of principal executive offices)   (Zip code)

 

(866) 571-9613

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the act: None

 

Title of each class:   Trading Symbol(s):   Name of each exchange on which
registered:
N/A   N/A   N/A

 

Securities registered pursuant to section 12(g) of the Act:

 

Common Shares, without par value
(Title of Class)

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

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

 

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

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐   No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Number of shares of common stock outstanding as of January 18, 2022 was 646,053,821.

 

Documents incorporated by reference: None. 

 

 

 

 

 

 

PETROTEQ ENERGY INC.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities, and our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward-looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “Petroteq Energy Inc,” “Petroteq,” the “Company,” “we,” “us” and “our” refer to Petroteq Energy Inc. and, if the context requires, its consolidated subsidiaries.

 

PETROTEQ ENERGY INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Condensed Consolidated Financial Statements (unaudited) F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risks 11
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Mine Safety Disclosures 15
Item 5. Other Information 16
Item 6. Exhibits 16

 

i

 

 

Item 1.

 

PETROTEQ ENERGY INC.

 

TABLE OF CONTENTS

 

November 30, 2021

 

Condensed Consolidated Balance Sheets as of November 30, 2021 (unaudited) and August 31, 2021 F-2
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months ended November 30, 2021 and 2020 (unaudited) F-3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended November 30, 2021 and 2020 (unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2021 and 2020 (unaudited) F-5
Notes to the Unaudited Condensed Consolidated Financial Statements F-6 – F-49

  

F-1

 

 

PETROTEQ ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

As at November 30, 2021 and August 31, 2021

Expressed in US dollars

 

   Notes   November 30,
2021
   August 31,
2021
 
             
ASSETS            
Current assets            
Cash       $68,662   $1,012,929 
Trade and other receivables        17,303    17,303 
Ore inventory        16,800    16,800 
Other inventory        90,176    90,176 
Notes receivable – related party   4    93,907    92,959 
Notes receivable    4    
-
    

430,000

 
Prepaid expenses and other current assets   1,5    2,694,120    2,539,120 
Total Current Assets        2,980,968    4,199,287 
                
Non-Current assets               
Mineral leases   6    34,911,143    34,911,143 
Property, plant and equipment   7    41,038,035    41,049,417 
Right of use asset   8    155,402    167,048 
Intangible assets   9    707,671    707,671 
Total Non-Current Assets        76,812,251    76,835,279 
Total Assets       $79,793,219   $81,034,566 
                
LIABILITIES               
Current liabilities               
Accounts payable   10   $2,374,380   $2,105,449 
Accrued expenses   10    1,579,460    1,564,616 
Ore Sale advances        283,976    283,976 
Promissory notes payable   11    23,298    23,298 
Current portion of convertible debentures, net of discount of $498,203 and $529,372, respectively   12    1,023,371    5,255,874 
Current portion of Federal relief loans   13    161,404    291,332 
Finance lease liabilities   8    28,210    75,058 
Current portion of operating lease liabilities   8    50,071    48,376 
Related party payables   20    436,203    493,549 
Derivative liability   14    
-
    322,186 
Total Current Liabilities        5,960,373    10,463,714 
                
Non-Current liabilities               
Convertible debentures, net of discount of $3,105,453 and $3,449,338, respectively   12    1,199,219    891,662 
Federal relief loans   13    435,988    437,096 
Operating lease liabilities   8    105,331    118,672 
Reclamation and restoration provision   15    2,970,497    2,970,497 
Total Non-Current Liabilities        4,711,035    4,417,927 
Total Liabilities        10,671,408    14,881,641 
                
Commitments and contingencies   24    
 
    
 
 
SHAREHOLDERS’ EQUITY               
Share capital   16,17,18    171,805,651    166,291,517 
Deficit        (102,683,840)   (100,138,592)
Total Shareholders’ Equity        69,121,811    66,152,925 
Total Liabilities and Shareholders’ Equity       $79,793,219   $81,034,566 

     

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

 

F-2

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

   Notes   Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
       (Unaudited)   (Unaudited) 
             
Revenue from Licensing fees       $
-
   $2,000,000 
Production and maintenance costs        (284,953)   (345,286)
Gross (Loss) Profit        (284,953)   1,654,714 
Expenses               
Depreciation, depletion and amortization   7    11,382    11,523 
Selling, general and administrative expenses        1,393,754    1,044,857 
Financing costs   20    626,018    621,387 
Mark to market of derivative liability   14    (52,420)   (156,998)
Other expense (income), net   21    281,561    544,459 
Total Expenses, net        2,260,295    2,065,228 
                
Net loss before income taxes        2,545,248    410,514 
Income tax expense        
-
    
-
 
Net loss and Comprehensive loss       $2,545,248   $410,514 
Weighted Average Number of Shares Outstanding   19    595,287,088    302,133,325 
Basic and Diluted Loss per Share       $0.00   $0.00 

 

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

 

F-3

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended November 30,2021 and 2020

(Unaudited)

Expressed in US dollars

 

    Number of
Shares
    Share           Shareholders’  
    Outstanding     Capital     Deficit     Equity  
Balance at August 31, 2021     564,159,881     $ 166,291,517     $ (100,138,592 )   $ 66,152,925  
Conversion of convertible debt     81,893,940       4,300,000      
-
      4,300,000  
Beneficial conversion feature on debt extinguishment     -       714,164      
-
      714,164  
Restitution for conversion of convertible debt not in compliance with TSX Venture regulations     -       499,970       -       499,970  
Net loss     -      
-
      (2,545,248 )     (2,545,248 )
Balance at November 30, 2021     646,053,821     $ 171,805,651     $ (102,683,840 )   $ 69,121,811  

 

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

 

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

 

F-4

 

 

PETROTEQ ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

    Three months
ended
November 30,
2021
    Three months
ended
November 30,
2020
 
    (Unaudited)     (Unaudited)  
Cash flow used for operating activities:            
Net loss   $ (2,545,248 )   $ (410,514 )
Adjustments to reconcile net loss to net cash (used in) generated by operating activities                
Depreciation, depletion and amortization     11,382       11,523  
Amortization of debt discount     375,054       333,748  
Loss on debt extinguishment     444,398       330,256  
Forgiveness of federal relief loans     (133,890 )    
-
 
Loss on conversion of debt    
-
      134,490  
Loss (Gain) on settlement of liabilities    
-
      80,661  
Share-based compensation    
-
      199,632  
Mark to market of derivative liabilities     (52,420 )     (156,998 )
Other     (20,946 )     (951 )
Changes in operating assets and liabilities:                
Accounts payable     268,930       (22,623 )
Accounts receivable    
-
      (304,473 )
Accrued expenses     17,697       102,570  
Prepaid expenses and deposits     (155,000 )     2,021  
Inventory    
-
     
-
 
Net cash (used in) generated by operating activities     (1,790,043 )     299,342  
                 
Cash flows used for investing activities:                
Purchase and construction of property and equipment    
-
      (1,673,448 )
Proceeds from notes receivable     450,000      
-
 
Net cash provided by (used in) investing activities     450,000       (1,673,448 )
                 
Cash flows from financing activities:                
Repayments to related parties     (57,346 )     (28,311 )
Proceeds on private equity placements    
-
      410,000  
Repayment of long-term debt    
-
      (10,000 )
Proceeds from promissory notes    
-
      20,000  
Repayment of promissory notes    
-
      (28,000 )
Restitution for conversion of convertible debt not in compliance with TSX Venture regulations     499,970      
-
 
Repayment of finance lease liability     (46,848 )     (41,022 )
Proceeds from warrants exercised    
-
      68,045  
Proceeds from convertible debt    
-
      1,069,500  
Repayments of convertible debt    
-
      (50,000 )
Net cash provided by financing activities     395,776       1,410,212  
                 
(Decrease) increase in cash     (944,267 )     36,106  
Cash, beginning of the period     1,012,929       62,404  
Cash, end of the period   $ 68,662     $ 98,510  
                 
Supplemental disclosure of cash flow information                
Cash paid for interest   $
-
    $ 140,481  

 

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

 

F-5

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

1. GENERAL INFORMATION

 

Petroteq Energy Inc. (the “Company” or “Petroteq”) is a holding company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and gas industry. Our primary focus is on the development and implementation of our proprietary oil sands mining and processing technology to recover oil from surface mined bitumen deposits. Our wholly-owned subsidiary, Petroteq Energy CA, Inc., a California corporation (“PCA”), conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company (“POR”), and TMC Capital, LLC, a Utah limited liability company (“TMC Capital”).

 

The Company’s registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2, Canada and its principal operating office is located at 15315 W. Magnolia Blvd, Suite 120, Sherman Oaks, California 91403, USA.

 

Through PCA, our wholly owned subsidiary, and PCA’s two subsidiaries POR and TMC Capital, the Company is in the business of exploring for, extracting and producing oil and hydrocarbon products from oil sands deposits and sediments located in the Asphalt Ridge Are of Uintah County, Utah, utilizing our proprietary extraction technology (the “Petroteq Clean Oil Recovery Technology” or “Extraction Technology”). Our primary oil sands extraction and processing operations are conducted at our Asphalt Ridge processing facility (herein the “Asphalt Ridge Plant” or “Plant”), which is owned by POR.

 

Petroteq owns the intellectual property rights to the Petroteq Clean Oil Recovery Technology which is used at our Asphalt Ridge Plant to extract and produce crude oil from oil sands utilizing a closed-loop solvent based extraction system.

 

Mineral Rights

 

Through its acquisition of TMC Capital in June 2015, Petroteq indirectly acquired certain mineral rights under the TMC Mineral Lease, which encompassed approximately 1,229.82 acres of land in the Temple Mountain area of Asphalt Ridge in Uintah County, Utah. On or about August 10, 2020, the TMC Mineral Lease in its original form was terminated and a new Short-Term Mining Lease, dated the same date, was entered into between Asphalt Ridge, Inc., as lessor, and Valkor, LLC, (“Valkor”) as lessee. Valkor and TMC Capital thereafter entered into a Short-Term Mining and Mineral Sublease dated August 20, 2020, in which all of Valkor’s rights and interests under the Short-Term Mining Lease were subleased to TMC Capital.

 

In June 2018, Petroteq, acting through POR, acquired the record lease title and all of the operating rights to produce oil from oil sands resources under two mineral leases entitled “Utah State Mineral Lease for Bituminous-Asphaltic Sands”, each dated June 1, 2018, between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and POR, as lessee, covering lands consisting of approximately 1,351.91 acres that largely adjoin the lands covered by the TMC Mineral Lease. In March 2019, a third SITLA Lease was acquired by Petroteq that added 39.97 acres to the mix in the Temple Mountain area of Asphalt Ridge.

 

On January 18, 2019, the Company paid $10,800,000 for the acquisition of 50% of the operating rights under U.S. federal oil and gas leases, administered by the U.S. Department of Interior’s Bureau of Land Management (“BLM”), covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah. The total consideration of $10,800,000 was settled by the payment of $1,800,000 and by the issuance of 15,000,000 shares at an issue price of $0.60 per share.

 

On July 22, 2019, the Company acquired the remaining 50% of the operating rights under U.S. federal oil and gas leases, administered by the BLM, covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah for a total consideration of $13,000,000 settled by the issuance of 30,000,000 shares at an issue price of $0.40 per share, and cash of $1,000,000, of which $900,000 has been paid to date.

 

Between March 14, 2019 and November 30, 2021, the Company made cash deposits of $1,907,000 (acting through TMC Capital), included in prepaid expenses and other current assets on the consolidated balance sheets for the acquisition of 100% of the operating rights under U.S. federal oil and gas leases in Garfield and Wayne Counties, Utah, covering approximately 8,480 gross acres in P.R. Springs and the Tar Sands Triangle within the State of Utah. The total consideration of $3,000,000 has been partially settled by a cash payment of $1,907,000, with the balance of $1,093,000 still outstanding.

 

F-6

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

1.GENERAL INFORMATION (continued)

 

Mineral Rights (continued)

 

In a letter agreement dated April 17, 2020 between the transferor of the oil and gas leases and TMC Capital, as transferee, the parties, due to uncertainty as to whether all of the 10 leases for which the Company had initially paid deposits would be considered active by BLM and included in new Combined Hydrocarbon Leases (CHLs) under the Combined Hydrocarbon Act of 1981 - agreed to adjust the purchase price as follows: (a) should all 10 of the leases be available and included in CHL’s, the Company will pay the additional $1,093,000 for the rights under the leases; (b) if only a portion of the leases ranging from 4 to 9 of the leases are available and included in CHL’s, the final purchase price of the leases will be between $1.5 million and $2.5 million; and (c) notwithstanding the above, if after a period of 7 years from April 17, 2020, at least six of the leases are not determined to be active and are not included in CHLs the Company shall be entitled to demand a refund of $1.2 million or instruct the Seller to acquire other leases in the same area for up to $1.2 million.

 

TMC Capital, POR and Valkor have entered into an Agreement Governing Reciprocal Assignment of mineral Leases dated October 15, 2021 (the “Exchange Agreement”), under which (a) TMC and POR agreed to assign to Valkor all of their respective rights and interests in the TMC Mineral Lease (and the Short-Term Mining Lease dated August 10, 2020 held by Valkor) and in the Temple Mountain SITLA Leases, and (b) Valkor agreed to assign to TMC Capital all of its rights and interests (including the record lease title and operating rights) in the Asphalt Ridge NW Leases consisting of three Utah state mineral leases located in the Asphalt Ridge Northwest area of Uintah County, Utah. Under this agreement, once the exchange of SITLA Leases is approved by SITLA, Petroteq (acting through TMC Capital) will hold three new SITLA Leases encompassing approximately 3,458.22 acres in an area called “Asphalt Ridge Northwest”.

 

In addition, under other agreements entered into between or among TMC Capital, POR and Valkor in October 2021, (a) Valkor granted to TMC Capital the right to participate, up to a 50% working interest, in all exploratory, mining and production operations conducted by Valkor under its Short-Term Mining Lease encompassing the acreage that is subject to the TMC Mineral Sublease, and (b) TMC Capital granted to Valkor the operating rights in at or below 500 feet below the surface under the Asphalt Ridge NW Leases, with TMC Capital reserving the right to participate, at up to a 50% working interest, in all exploratory and production operations conducted by Valkor in deeper (below 500 feet subsurface or more) oil sands deposits and reservoirs.

 

Following completion of the exchange of mineral leases contemplated by the Exchange Agreement, TMC Capital, POR and Valkor, Petroteq (through POR) will continue to own the Asphalt Ridge Plant in the Temple Mountain area of Asphalt Ridge. It is anticipated that Petroteq (acting through TMC Capital) and Valkor will, during the ensuing year, determine whether a new 5,000 BPD oil sands processing plant utilizing Petroteq’s Clean Oil Recovery Technology should be constructed and operated on lands covered by the Asphalt Ridge NW Leases.

 

The assignment of the Temple Mountain SITLA leases by Petroteq’s subsidiaries to Valkor and Valkor’s assignment of the Asphalt Ridge NW Leases to TMC Capital are subject to approval by SITLA before the transactions are considered final.

 

Management and Operations

 

Under the terms of a Management and Operations Services Agreement (“Management Agreement”) entered into between the Company and Valkor dated November 22, 2020, effective May 1, 2020, Valkor will provide overall management and operations services at the oil sands recovery plant based in Utah. The agreement is for a period of one year and is renewable automatically for an additional four years unless either party provides the other party with written notice of non-renewal at least 90 days prior to the expiration of the original or renewal term. The company will reimburse Valkor for all costs and expenses incurred, as defined in the agreement, plus a Personnel Management Fee of 12% of the personnel costs and expenses and an operations Management Fee of 5% of the operations costs and expenses.

 

F-7

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

1.GENERAL INFORMATION (continued)

 

Management and Operations (continued)

 

Valkor will provide the Company with quarterly production reports, including the following; (i) the quantity of oil bearing ore and sediments mined, extracted and produced from each of the leases and delivered to the plant; (ii) the quantity of oil products produced, saved and sold at the plant; (iii) the quantity of consumables purchased and used or consumed in operations and (iv) the gross proceeds derived from the sale of the oil products including applicable taxes and transportation costs incurred by Valkor.

 

Valkor will also provide quarterly operating reports detailing; (i) revenue received by Valkor from oil products sold; (ii) a detailed accounting of all costs and expenses; (iii) the operations Management fee and the Personnel Management fee earned during the quarter.

 

Valkor will also prepare quarterly Royalty Reports to be delivered to a third party to calculate royalties payable to the holders of royalty interests under various mineral rights leases.

 

On November 24, 2020, the Company entered into a Technology License Agreement (“License Agreement”) with Greenfield Energy, LLC (“Greenfield”), whereby the Company grants to Greenfield a non-exclusive, non-transferable license under the patent rights and know-how for use in the design, construction and operation of any and all future oil sands plants in the US. Greenfield agrees to pay a license fee of $2,000,000 for oil sands plants designed, developed and constructed by Greenfield. The parties recognize that $1,500,000 has been invested in the Petroteq Oil Sands plant based in Utah and another $500,000 in further plant development and improvements. Greenfield will pay to the Company a 5% royalty based on net revenue received from production and disposition of licensed products unless the licensed product is not covered by a valid claim (in which case the royalty is reduced to 3%).

 

The Company has agreed to utilize Valkor as the exclusive provider of engineering, planning and construction for all oil sands plants built by Petroteq or Greenfield under this agreement, provided the fees charged by Valkor are reasonable and competitive.

 

The agreement between the Company and Valkor will remain in effect from November 14, 2020 until the expiration of the last valid patent claim, unless terminated by default or bankruptcy.

 

Suspension of trading on the TSX Venture Exchange

 

On August 6, 2021, the Ontario Securities Commission issued a cease trade order (the “CTO”) against the Company, as a result of its failure to file its quarterly report on Form 10-Q (and related certifications) for the period ended May 31, 2021 (the “2021 Q3 Filings”) on or before July 30, 2021, as required under Canadian National Instrument 51-102 – Continuous Disclosure Obligations.

 

The Company filed the 2021 Q3 Filings on SEDAR and with the Canadian Securities Administration on SEDAR, and with the United States Securities and Exchange Commission (the “SEC”) on EDGAR on August 19, 2021. As a result, the Ontario securities Commission revoked the CTO effective August 24,2021. In addition, on August 19, 2021, the Company’s amended financial statements and management’s discussion and analysis ‎for the eight quarters from May 31, 2019 to February 28, 2021 were filed on SEDAR and with the SEC, as set forth in the Company’s amended annual reports on Form 10-K/A for the financial years ended August 31, 2019 and August 31, 2020, and in the Company’s amended quarterly reports on Form 10-Q/A for the periods ended May 31, 2019, November 30, 2019, February 29, 2020, May 31, 2020, November 30, 2020 and February 28, 2021. The Company’s amended financial statements and management discussion and analysis for the period ended February 28, 2019 were filed on SEDAR on August 23, 2021, and with the SEC on August 25, 2021, as exhibits to the Company’s current report on Form 8-K.

 

As a result of the issuance of the CTO on August 6, 2021, the TSX Venture Exchange (the “TSXV”) suspended trading of the Company’s Common Shares. As part of the TSXV’s review of the Company’s reinstatement application, the TSXV reviewed the Company’s financial statements for the three and nine months ended May 31, 2021 and raised concerns that certain transactions may not have been submitted to the TSXV for approval, as required under the TSXV’s policies. As a result of an internal investigation the Company identified several transactions (the “Transactions”) which although disclosed in the Company’s public filings on SEDAR and EDGAR, had not been submitted for approval by the TSXV.

 

F-8

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

1.GENERAL INFORMATION (continued)

 

Suspension of trading on the TSX Venture Exchange (continued)

 

Based on the Company’s initial review of the Transactions, it is estimated that a total of 54,370,814 Common Shares were issued as a result of the Transactions.‎ While some of the issued Common Shares, namely, 4,336,972, are estimated to have been issued at prices above what the TSXV ‎would have otherwise approved, 50,033,842 are estimated to have been issued at share prices below what the TSXV ‎generally approves for convertible securities.‎ While the Company is now making the necessary submissions with the TSXV for the Transactions, they may not all be accepted for approval by the TSXV and as a condition of reinstatement to trading on the TSXV the Company may need to take remedial action to bring the Transactions into compliance.

 

The Transactions, described below, were all disclosed in the Company’s financial statements (all dollar amounts are expressed in U.S. currency unless otherwise indicated):

 

  On May 7, 2020, the Company issued to an arm’s length lender a $64,300 convertible note (including a 10% original issue discount) for a purchase price of $58,000, bearing interest at 12% per annum, maturing on May 7, 2021, and convertible into Common Shares. The note was ultimately converted on November 12, 2020 ($25,000 at $0.0308 for 811,688 Common Shares), November 13, 2020 ($20,000 at $0.0296 for 675,676 Common Shares) and November 13, 2020 ($22,780, including $3,480 of accrued and unpaid interest, at $0.0296 for 769,595 Common Shares). There is currently no principal or interest remaining on the note.

 

  On June 4, 2020, the Company issued to an arm’s length lender a $69,900 convertible note (including a 10% original ‎issue discount) for a purchase price of $63,000, bearing interest at 12% per annum, maturing ‎on June 4, 2021, and convertible into Common Shares.‎ The note was ultimately converted on December 15, 2020 ($18,000 at $0.0282 for 638,298 Common Shares), December 22, 2020 ($18,000 at $0.0338 for 532,544 Common Shares‎), December 28, 2020 ($20,000 at $0.0338 for 591,716 Common Shares), and January 4, 2021 ($17,680, including $3,780 of accrued and unpaid interest, at ‎$0.0325 for 544,000 Common Shares). There is currently no principal or interest remaining on the note.‎

 

  On June 19, 2020, the Company issued to an arm’s length lender a $82,500 convertible note (including a 10% original ‎issue discount) for a purchase price of $75,000, bearing interest at 12% per annum, maturing ‎on June 19, 2021, and convertible into Common Shares.‎ The note was ultimately converted on ‎January 7, 2021 ($20,000 at $0.0326 for 613,497 common shares), January 11, 2021 ($27,000 at $0.0326 for 828,221 Common Shares), January 13, 2021 ($22,000 at $0.0326 for 674,847 Common Shares) and January 20, 2021 ($18,000, including $4,500 of accrued and unpaid interest, at ‎$0.0326 for 552,147 Common Shares). There is currently no principal or interest remaining on the note.‎

 

  On July 22, 2020, the Company issued to an arm’s length lender a $150,000 convertible note (including ‎a 15% original issue discount) for a purchase price of $135,000, bearing interest at 8% per ‎annum, maturing on April 22, 2021, and convertible into Common Shares based on a discount to the market price of the Common Shares upon conversion.‎ The note was ultimately converted on January 25, 2021 ($21,805 at $0.03115 for 700,000 Common Shares), January 28, 2021 ($46,725 at $0.03115 for 1,500,000 Common Shares), February 5, 2021 ($30,957.50 at $0.0309575 for 1,000,000 Common Shares), February 22, 2021 ($33,381.25 at $0.03338125 for 1,000,000 Common Shares) and March 2, 2021 ($34,011.25 at $0.03401125 for 1,000,000 Common Shares). There is currently $3,120 in principal remaining on the note.

 

  On August 26, 2020, a convertible debenture (which was originally approved by the TSXV), bearing interest at 10% per annum owing to an arm’s length lender, which had matured on April 29, 2019, was acquired by another an arm’s length lender pursuant to a Debt Assignment and Purchase Agreement. On August 26, 2020, pursuant to a Securities Exchange Agreement, the convertible promissory note was exchanged for a convertible ‎redeemable note with an aggregate principal amount of $192,862, bearing interest at 10% ‎per annum, maturing on August 26, 2021, and convertible into Common Shares.‎ On October 1, 2020, the $192,862 convertible ‎redeemable note was converted into ‎‎10,285,991 Common Shares at $0.01875 per share.‎ There is currently no principal or interest remaining on the note.‎

 

F-9

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

1.GENERAL INFORMATION (continued)

  

Suspension of trading on the TSX Venture Exchange (continued)

 

  On November 6, 2020, the Company issued to an arm’s length lender a $140,800 convertible note (including a 10% ‎original issue discount) for a purchase price of $128,000, bearing interest at 12% per annum, ‎maturing on November 6, 2021, and convertible into Common Shares. The note was ultimately converted on May 10, 2021 ($50,000 at $0.036 for 1,388,889 Common Shares), May 14, 2021 ($50,000 at $0.0326 for 1,533,742 Common Shares), May 19, 2021 ($48,480, including $7,680 of accrued and unpaid interest, at ‎$0.0312 for 1,553,846‎ Common Shares). There is currently no principal or interest remaining on the note.‎

 

  Between August 2019 and March 2020, a director of the Company (Robert Dennewald), loaned $125,000 to the Company to assist the Company in meeting its financial obligations. Subsequently, on February 12, 2021, in exchange for the three non-convertible promissory notes issued to Mr. Dennewald, the Company issued a convertible promissory note with an aggregate principal amount of $125,000, bearing interest at 8% per annum, maturing on February 12, 2022, and convertible into Common Shares. On June 10, 2021, pursuant to an Assignment and Purchase of Debt Agreement, the $125,000 convertible promissory note was purchased and assigned by Mr. Dennewald to an arm’s length lender. On June 15, 2021, the arm’s length lender converted the $125,000 principal amount of the convertible promissory note into 3,048,780 Common Shares at $0.041 per share.

 

  On January 12, 2021, the Company issued an arm’s length lender a $86,350 ‎‎convertible note (including a 10% original issue discount) for a purchase price of $78,500, ‎‎bearing interest at 12% per annum, maturing on January 12, 2022, and convertible into Common ‎‎Shares.‎ The note was ultimately converted on July 13, 2021 ($50,000 at $0.0871 for 574,053 Common Shares) and July 14, 2021 ($41,060, including $4,710 of accrued and unpaid interest, at ‎‎$0.0863 ‎for 475,782 Common Shares. There is currently no principal or interest remaining on the note.‎

 

  On February 25, 2021, the Company issued an arm’s length lender a $86,350 convertible promissory note ‎‎(including a 10% original issue discount) for a purchase price of $78,500, bearing interest at ‎‎12% per annum, maturing on February 24, 2022, and convertible into Common Shares.‎ The Company has since repaid the convertible promissory note in full (including principal and interest) in ‎cash.‎

 

  On March 22, 2021, the Company and an arm’s length lender entered into an amending agreement extending the maturity date of a convertible debenture originally issued on September 17, 2018 from March 31, 2021 to October 31, ‎‎2021. The original issuance of the convertible debenture, including a prior amendment to the debenture, ‎was approved by the TSXV. The ‎current unpaid purchase price of the debenture ($2,900,000) is convertible at $0.055 per ‎share.‎‎

 

  On April 21, 2021, the Company issued an arm’s length lender a $92,125 convertible promissory note (including a ‎‎10% original issue discount) for a purchase price of $83,750, bearing interest at 12% per ‎annum, maturing on April 21, 2022, and convertible into Common Shares based on a discount to the market price of the Common Shares upon conversion.‎ No Common Shares have been issued in connection with this convertible promissory note, which remains outstanding.‎

 

  On May 20, 2021, the Company issued an arm’s length lender a $141,625 convertible promissory note (including a ‎‎10% original issue discount) for a purchase price of $128,750, bearing interest at 12% per ‎annum, maturing on May 20, 2022, and convertible into Common Shares based on a discount to the market price of the Common Shares upon conversion.‎ No Common Shares have been issued in connection with this convertible promissory note, which remains outstanding.‎

 

  On October 30, 2018, an arm’s length lender loaned ‎$350,000 to the Company. Subsequently, on June 16, 2021, pursuant to an Exchange ‎Agreement, the non-convertible promissory note was exchanged for a convertible redeemable note with an ‎aggregate principal amount of $191,779 bearing interest at 10% per annum, maturing on June ‎‎16, 2022, and convertible into Common Shares.‎ On June 16, 2021, pursuant to an Assignment and Purchase of Debt Agreement, the $191,779 convertible redeemable note was ‎purchased and assigned to another arm’s length lender and on the same day it was converted into 4,677,532 Common Shares at $0.04100004 per ‎share.‎

 

F-10

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

1.GENERAL INFORMATION (continued)

   

Suspension of trading on the TSX Venture Exchange (continued)

 

  On June 24, 2021, a non-convertible secured debenture, bearing interest at 12% per annum owing to ‎ an arm’s length lender with an aggregate amount outstanding of CAD$962,085 (including interest and ‎penalty), which had matured, was acquired by another arm’s length lender pursuant to an Assignment and ‎Purchase of Corporate Debt Agreement. On June 30, 2021, pursuant to a Securities ‎Exchange Agreement dated June 28, 2021, the debenture ‎was exchanged for a convertible redeemable note with an aggregate principal amount of ‎$771,610, bearing interest at 8% per annum, maturing on June 30, 2022, and convertible into ‎Common Shares at $0.041 per share.‎ On July 1, 2021, the convertible redeemable note was converted into 18,819,756 ‎Common Shares at $0.041 per share.‎

 

  On June 24, 2021, a non-convertible secured debenture, bearing interest at 12% per annum and owing to‎ an arm’s length lender, with an aggregate amount outstanding of CAD$38,217 (including interest and ‎penalty), which had matured, was acquired by another arm’s length lender pursuant to an Assignment and ‎Purchase of Corporate Debt Agreement. On June 30, 2021, pursuant to a Securities ‎Exchange Agreement dated June 28, 2021, the debenture ‎was exchanged for a convertible redeemable note with an aggregate principal amount of ‎$30,652, bearing interest at 8% per annum, maturing on June 30, 2022 and convertible into Common Shares at $0.041 per share.‎ On July 1, 2021, the convertible redeemable note was converted into ‎747,616 ‎Common Shares at $0.041 per share.‎

 

  On July 2, 2021, the Company issued to an arm’s length lender a $114,125 convertible promissory note (including a ‎‎10% original issue discount) for a purchase price of $103,750, bearing interest at 12% per ‎annum, maturing on July 2, 2022 and principal and interest convertible into Common Shares based on a discount to the market price of the Common Shares upon conversion.‎ No Common Shares have been issued in connection with this convertible promissory note.‎

 

The net proceeds of the Transactions that resulted in new funds to the Company were used for expansion of the Company’s extraction plant and working capital.‎

 

The Company continues to work with the TSXV on a reinstatement of trading and will update the market as things progress. However, the TSXV has indicated that these matters and their review of the Transactions may take some time to resolve and that a reinstatement to trading is not expected in the near term.

 

Unsolicited takeover bid by Viston United swiss AG

 

On October 27, 2021, 2869889 Ontario Inc., an indirect, wholly-owned subsidiary of Viston United Swiss AG commenced a conditional, unsolicited takeover bid (the “Offer”) to acquire all of the issued and outstanding Common Shares of the Company. Viston filed a Tender Offer Statement with the SEC relating to the Offer on Schedule TO under section 14(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on October 25, 2021, and an amendment to the Tender Offer Statement on October 27, 2021. As set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 under section 14(d)(4) of the Exchange Act filed with the SEC on November 9, 2021, shareholders were advised that the Board of Directors was then not yet in a position to make a recommendation to shareholders to accept or reject the Offer, and that the Company had retained Haywood Securities Inc. as financial advisor to the Company and the Board of Directors.

 

As set forth in the amendment to the Solicitation/Recommendation Statement on Schedule 14D-9, as filed with the SEC on January 4, 2022, on December 29, 2021, after thorough consideration of all aspects of the Viston Offer, the advice provided by Haywood and consulting with its other advisors, the Board unanimously determined to recommend that Shareholders accept the Viston Offer and tender their Common Shares, for reasons that include the following:

 

Results of Strategic Review

 

Based on the results of the strategic review presented by Haywood, the Board believes that the ‎immediate cash value offered to Shareholders under the Viston Offer is more favorable to Shareholders ‎than the potential value that might otherwise result from other alternatives reasonably available to ‎Petroteq, including remaining as a stand-alone entity and pursuing Petroteq’s existing strategy, in each case ‎taking into consideration the potential rewards, risks, timelines and uncertainties associated with those ‎other alternatives.

 

F-11

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

1.GENERAL INFORMATION (continued)

   

Unsolicited takeover bid by Viston United swiss AG (continued)

 

Premium Over Market Price

 

The consideration of ‎C$0.74 ‎in cash per Common Share (the “Cash Consideration”) under the Viston Offer represents a premium of ‎approximately 279% over the closing price of the Common Shares on the TSXV on August 6, 2021, being the last trading day that the Common Shares were traded on the T‎SXV.

 

Unlikelihood of Superior Proposal

 

The Board, with ‎the assistance of Haywood, has taken active steps to assess and solicit strategic ‎alternatives and has attempted to secure a proposal that would be superior to the Viston Offer. However, no superior ‎alternative to the Viston Offer has emerged and Petroteq does not expect a superior alternative to emerge ‎in the near term.

 

Common Shares Remain Relatively Illiquid

 

Trading in the Common Shares on the TSXV remains suspended, and there is no certainty as to when ‎‎the TSXV will resume trading in the Common Shares.

 

Certainty of Outcome

 

The Viston Offer provides 100% cash consideration for the Common Shares and offers Shareholders certainty ‎‎of value and immediate liquidity‎.‎

 

Possible Decline in Market Price

 

If the Viston Offer is not successful and another alternative offer with superior financial terms does not emerge, the market price of the Common Shares in the public markets may decline significantly.

 

Reduces Inherent Business Risk

 

Based on the strategic review conducted with Haywood, the Viston Offer appears to provide Shareholders ‎with the value inherent in Petroteq’s portfolio of projects, assuming they are fully realized, without the ‎long-term risks associated with the development and execution of those projects. Given the relatively early ‎stage of Petroteq’s projects, it will be several years before the projects in Petroteq’s portfolio reach ‎commercial production, if at all‎.

 

Significant Growth Funding Required

 

Petroteq’s projects have significant funding requirements to prove and scale its technology. Petroteq currently has limited cash to fund its necessary capital projects and near-term debt maturities, which will be a further drain on cash. Equity financing sufficient to repay debt and fund the progress of Petroteq’s business plan, if available, may be significantly dilutive to Shareholders.

 

Ability to Respond to Superior Proposals

 

Petroteq has not entered into a support or similar agreement with Viston in respect to the Viston Offer. The Board has reserved the ability to seek out or respond to proposals that may deliver greater value to Shareholders than the Viston Offer. There is nothing to prevent a third party from proposing or making a superior proposal or preclude Petroteq from changing its recommendation.

 

F-12

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  

(a)Basis of preparation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the three months ended November 30, 2021 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year.

 

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

 

The Company is an “SEC Issuer” as defined under National Instrument 52-107 “Accounting Principles and Audit Standards” as adopted by the Canadian Securities Administrators and is relying on the exemptions of Section 3.7 of NI 52-107 and of Section 1.4(8) of the Companion Policy to National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102CP”) which permits the Company to prepare its financial statements in accordance with U.S. GAAP for Canadian securities law reporting purposes.

 

The unaudited condensed consolidated financial statements were authorized for issue by the Board of Directors on January 19, 2022.

 

(b)Consolidation

 

The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries in which it has at least a majority voting interest. All significant inter-company accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements. The entities included in these unaudited condensed consolidated financial statements are as follows:

  

Entity  % of
Ownership
   Jurisdiction 
Petroteq Energy Inc.   Parent    Canada 
Petroteq Energy CA, Inc.   100%   USA 
Petroteq Oil Recovery, LLC    100%   USA 
TMC Capital, LLC   100%   USA 
Petrobloq, LLC   100%   USA 

  

F-13

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

(c)Estimates

 

The preparation of these unaudited condensed consolidated financial statements in accordance with US GAAP requires the Company to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates its estimates, including those related to recovery of long-lived assets. The Company bases its estimates on historical experience and on other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to the Company’s reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the unaudited condensed consolidated financial statements. Significant estimates include the following;

 

the useful lives and depreciation rates for intangible assets and property, plant and equipment;

 

the carrying and fair value of oil and gas properties and product and equipment inventories;

 

all provisions;

 

the fair value of reporting units and the related assessment of goodwill for impairment, if applicable;

 

the fair value of intangibles other than goodwill;
  
income taxes and the recoverability of deferred tax assets
  
legal and environmental risks and exposures; and
  
general credit risks associated with receivables, if any.

 

(d)Foreign currency translation adjustments

  

The Company’s reporting currency and the functional currency of all its operations is the U.S. dollar. Assets and liabilities of the Canadian parent company are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Income, expenses and cash flows are translated using an average exchange rate during the reporting period. Since the reporting currency as well as the functional currency of all entities is the U.S. Dollar there is no translation difference recorded.

   

(e)Revenue recognition

  

The Company recognizes revenue in terms of ASC 606 – Revenue from Contracts with Customers (ASC 606).

 

Revenue transactions are assessed using a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The five steps are as follows:

 

i.identify the contract with a customer;

 

ii.identify the performance obligations in the contract;

 

iii.determine the transaction price;
  
iv.allocate the transaction price to performance obligations in the contract; and

 

v.recognize revenue as the performance obligation is satisfied.

 

F-14

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

(e)Revenue recognition (continued)

  

Revenue from hydrocarbon sales

  

Revenue from hydrocarbon sales include the sale of hydrocarbon products and are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. The Company’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, upon delivery based on volumes at contractually based rates with payment typically received within 30 days after invoice date. Taxes assessed by governmental authorities on hydrocarbon sales, if any, are not included in such revenues, but are presented separately in the consolidated comprehensive statements of loss and comprehensive loss.

 

Transaction price allocated to remaining performance obligations

 

The Company does not anticipate entering into long-term supply contracts, rather it expects all contracts to be short-term in nature with a contract term of one year or less. The Company intends applying the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, the Company will apply the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if there is any variable consideration to be allocated entirely to a wholly unsatisfied performance obligation. The Company anticipates that with respect to the contracts it will enter into, each unit of product will typically represent a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

  

Contract balances

  

The Company does not anticipate that it will receive cash relating to future performance obligations. However if such cash is received, the revenue will be deferred and recognized when all revenue recognition criteria are met.

  

Disaggregation of revenue

 

The Company has limited revenues to date. Disaggregation of revenue disclosures can be found in Note 23. 

  

Customers

  

The Company anticipates that it will have a limited number of customers which will make up the bulk of its revenues due to the nature of the oil and gas industry.

 

(f)General and administrative expenses

  

General and administrative expenses will be presented net of any working interest owners, if any, of the oil and gas properties owned or leased by the Company. 

  

F-15

 

  

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

(g)Share-based payments

 

The Company may grant stock options to directors, officers, employees and others providing similar services. The fair value of these stock options is measured at grant date using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. Share-based compensation expense is recognized on a straight-line basis over the period during which the options vest, with a corresponding increase in equity.

 

The Company may also grant equity instruments to consultants and other parties in exchange for goods and services. Such instruments are measured at the fair value of the goods and services received on the date they are received and are recorded as share-based compensation expense with a corresponding increase in equity. If the fair value of the goods and services received are not reliably determinable, their fair value is measured by reference to the fair value of the equity instruments granted.

  

  (h) Income taxes

  

The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

  

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes”. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

  

The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax expense.

  

  (i) Net income (loss) per share

 

Basic net income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during the period.

  

Diluted net income (loss) per share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.

 

Dilution is computed by applying the treasury stock method for stock options and share purchase warrants. Under this method, “in-the-money” stock options and share purchase warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common shares at the average market price during the period.

  

F-16

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

  (j) Cash and cash equivalents

  

The Company considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.

  

  (k) Accounts receivable

  

The Company had minimal sales during the period of which all proceeds were collected therefore there are no accounts receivable balances.

  

  (l) Oil and gas property and equipment

  

The Company follows the successful efforts method of accounting for its oil and gas properties. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with delay rentals and exploration overhead are charged against earnings as incurred. Costs of successful exploratory efforts along with acquisition costs and the costs of development of surface mining sites are capitalized. 

 

Site development costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, site development costs remain capitalized as proved properties. Costs of unsuccessful site developments are charged to exploration expense. For site development costs that find reserves that cannot be classified as proved when development is completed, costs continue to be capitalized as suspended exploratory site development costs if there have been sufficient reserves found to justify completion as a producing site and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future appraisal development activities are unlikely to occur, associated suspended exploratory development costs are expensed. In some instances, this determination may take longer than one year. The Company reviews the status of all suspended exploratory site development costs quarterly.

  

Capitalized costs of proved oil and gas properties are depleted by an equivalent unit-of-production method. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves. Capitalized costs of related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated over proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the DD&A rate (amortizable base divided by beginning of period proved reserves) to current period production.

  

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable.

  

Proved properties will be assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating location. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. 

 

F-17

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

  (l) Oil and gas property and equipment (continued)

 

Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of loss and comprehensive loss. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.

 

The Company capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development projects of oil and gas properties.

  

  (m) Other property and equipment

  

Depreciation and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to ten years. Interest costs incurred and attributable to major corporate construction projects are also capitalized.

 

  (n) Asset retirement obligations and environmental liabilities

  

The Company recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The Company’s asset retirement obligations also include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

  

  (o) Commitments and contingencies

  

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with the Company’s accounting policy for property and equipment.

  

  (p) Fair value measurements

  

Certain of the Company’s assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:

 

Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, the Company measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

 

Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active.

 

Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model.

  

F-18

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

    

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

(q)Comparative amounts

  

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

  

(r)Recent accounting standards

  

Issued accounting standards not yet adopted

 

The Company will evaluate the applicability of the following issued accounting standards and intends to adopt those which are applicable to its activities.

 

In August 2020, the FASB issued ASU No. 2020-06, debt with Conversion and Other Options (subtopic 470-20): and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). Certain accounting models for convertible debt instruments with beneficial conversion features or cash conversion features are removed from the guidance and for equity instruments the contracts affected are free standing instruments and embedded features that are accounted for as derivatives, the settlement assessment was simplified by removing certain settlement requirements.

 

This ASU is effective for fiscal years and interim periods beginning after December 15, 2021.

 

The effects of this ASU on the Company’s condensed consolidated financial statements is currently being assessed and is expected to have an immaterial impact on the financial statements.

  

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

  

3.GOING CONCERN

 

The Company has incurred losses for several years and, at November 30, 2021, has an accumulated deficit of $102,683,840 (August 31, 2021 - $100,138,592) and working capital (deficiency) of $2,979,405 (August 31, 2021 - $6,264,427). These unaudited condensed consolidated financial statements have been prepared on the basis that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent on obtaining additional financing, which it is currently in the process of obtaining. There is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company. These unaudited condensed consolidated financial statements do not reflect the adjustments or reclassifications that would be necessary if the Company were unable to continue operations in the normal course of business.

 

4.NOTES RECEIVABLE

  

The Company’s notes receivables consist of:

  

          Principal due   Principal due 
   Maturity Date  Interest
Rate
   November 30,
2021
   August 31, 
2021
 
Notes Receivable – Related Party               
Manhatten Enterprises  March 16, 2020   5%  $76,000   $76,000 
Interest accrued           17,907    16,959 
           $93,907   $92,959 
Notes Receivable                  
Deweast Limited  January 31, 2022   
-
   $
-
   $200,000 
Unhide Inc  September 30, 2021   
-
    
-
    230,000 
                   
           $
-
   $430,000 

 

F-19

 

  

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

4.NOTES RECEIVABLE (continued)

  

Manhatten Enterprises – Related Party

 

The Company advanced Manhatten Enterprises the sum of $76,000 pursuant to a promissory note on March 16, 2017. The note, which bears interest at 5% per annum, matured on March 16, 2020. The Note has reached its maturity date, management has undertaken to enter into a new agreement or extend the terms of the existing agreement, there have been no successful negotiations to date.

 

Manhatten Enterprises is controlled by a director of the Company, Dr. Vladimir Podlipsky.

 

Deweast Limited

 

On August 31, 2021, in terms of an unsecured loan agreement entered into with Deweast Limited (“Deweast”) the Company advanced the sum of $200,000 to Deweast, maturing on January 31, 2022. On or before the maturity date Deweast agreed to repay the Company $220,000. In the event that Deweast fails to repay the amount due on maturity date the full balance owing at maturity will accrue interest at 10% per annum until paid in full.

 

The principal sum of $200,000 plus accrued interest of $20,000 was repaid during the current quarter.

 

Unhide, Inc.

 

On August 31, 2021, in terms of an unsecured loan agreement entered into with Unhide Inc. (“Unhide”) the Company advanced the sum of $230,000 to Unhid, maturing on September 30, 2021. On or before the maturity date Unhide agreed to repay the Company $238,000. In the event that Unhide fails to repay the amount due on maturity date the full balance owing at maturity will accrue interest at 10% per annum until paid in full.

 

The principal sum of $230,000 plus accrued interest thereon of $8,000 was repaid during the current quarter.

 

5.PREPAYMENTS AND OTHER CURRENT ASSETS

  

Included in prepayments and other current assets are cash deposits of $1,907,000 (acting through its wholly owned subsidiary, TMC Capital LLC (“TMC”), for the acquisition of 100% of the operating rights under U.S. federal oil and gas leases, administered by the U.S. department of Interiors’ Bureau of Land Management in Garfield and Wayne Counties covering approximately 8,480 gross acres in P.R. Springs and the Tar Sands Triangle within the State of Utah. The total consideration of $3,000,000 has been partially settled by a cash payment of $1,907,000, with the balance of $1,093,000 still outstanding.

  

In terms of a letter agreement dated April 17, 2020 between the transferor of the oil and gas leases and TMC, as transferee, due to uncertainty as to whether all of the 10 leases which the Company had initially paid deposits for are available, an adjustment to the purchase price has been agreed upon as follows: (i) should all 10 of the leases be available, the Company will pay the additional $1,093,000 for the rights under the leases; (ii) if only a portion of the leases ranging from 4 to 9 of the leases are available, the Company will adjust the final purchase price of the leases to between $1.5 million and $2.5 million; and (iii) notwithstanding the above, if after a period of 7 years from April 17, 2020, if at least six of the leases are not available to the Company, then the Company may demand a refund of $1.2 million or instruct the Seller to acquire other leases in the same area for up to $1.2 million.

 

In addition, included in prepayments and other current assets is an amount of $500,000 paid during the period July 8, 2021 and August 11, 2021, in terms of the agreements governing reciprocal assignment of mineral leases dated as of October 15, 2021 under which TMC and POR agreed to; (i) assign all of its interest in the TMC mineral leases and the short term mining lease dated August 10, 2020 as amended on July 1, 2021, sub-leased from Valkor and two mineral leases entered into between SITLA, as lessor, and POR, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease, and Valkor agreed to assign to TMC Capital LLC, the record lease title and all of its rights and interest under three SITLA Utah state oil sands leases located in an area referred to as “Asphalt Ridge Northwest” in Uintah County Utah.

 

The assignment of the SITLA leases are subject to approval by SITLA before the agreement comes into effect.

 

As of November 30, 2021, the Company has paid retainers to lawyers of $155,000 for administrative matters it is currently defending.

 

F-20

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

6.MINERAL LEASES

 

   TMC   SITLA   BLM     
   Mineral   Mineral   Mineral     
   Lease   Lease   Lease   Total 
Cost                    
August 31, 2020  $11,091,388   $19,755   $23,800,000   $34,911,143 
Additions   
-
    
-
    
-
    
-
 
August 31, 2021   11,091,388    19,755    23,800,000    34,911,143 
Additions   
-
    
-
    
-
    
-
 
November 30, 2021  $11,091,388   $19,755   $23,800,000   $34,911,143 
                     
Accumulated Amortization                    
August 31, 2020, 2021 and November 30, 2021  $
-
   $
-
   $
-
   $
-
 
                     
Carrying Amounts                    
August 31, 2020  $11,091,388   $19,755   $23,800.000   $34,911,143 
August 31, 2021  $11,091,388   $19,755   $23,800,000   $34,911,143 
November 30, 2021  $11,091,388   $19,755   $23,800,000   $34,911,143 

 

During October 2021, the Company, acting through its indirect wholly owned subsidiaries TMC and POR, and Valkor, have entered into the Exchange Agreement governing reciprocal assignment of mineral leases dated as of October 15, 2021 under which TMC and POR agreed to assign all of their respective interests in the TMC mineral leases and the short term mining lease dated August 10, 2020 as amended on July 1, 2021, sub-leased from Valkor and two mineral leases entered into between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and POR, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease and Valkor agreed to assign to TMC Capital LLC, the record lease title and all of its rights and interest under three SITLA Utah state oil sands leases located in an area referred to as “Asphalt Ridge Northwest” in Uintah County Utah.

 

In addition, the Corporation, acting through TMC, and Valkor entered into an Agreement and Assignment of Participation Rights in Mineral Leases and Properties, dated as of October 15, 2021, in which Valkor agreed to grant to TMC a right to participate in any oil sands development operations conducted by Valkor in the future on or within the privately owned Temple Mountain Lease; and the Company, acting through TMC and Valkor entered into an Agreement Governing Assignment of Operating Rights Under Utah State Mineral Leases, dated as of October 15, 2021, in under which TMC agreed to assign to Valkor all of the operating rights under the Asphalt Ridge North West Leases at depths and intervals located 500 feet or more below the surface, with TMC reserving the right to participate in (a) any exploratory or production operation conducted by Valkor at the deeper depths or intervals (below 500 feet from the surface) at and with up to a 50% working interest, and (b) in any oil sands processing plant proposed by either party at up to a 50% ownership interest in any such plant.

 

The assignment of the SITLA leases are subject to approval by SITLA before the agreement comes into effect.

 

F-21

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

6.MINERAL LEASES (continued)

 

(a)TMC Mineral Lease

 

Effective August 10, 2020, the TMC mineral lease was terminated and a new Short-Term Mining Lease agreement between Valkor and Asphalt Ridge, Inc was entered into with a back to back Short-Term Mining and Mineral sub-lease entered into between Valkor and TMC, whereby all of the rights and obligations of the lease were sub-let to TMC.

 

The salient terms of the lease were as follows:

 

1.The exclusive right and privilege during the term of this Sublease to explore for and mine by any methods now known or hereafter developed, extract and sell or otherwise dispose of, any and all asphalt, bitumen, maltha, tar sands, oil sands (“Tar Sands”) and any and all other minerals of whatever kind or nature which are associated with or contained in any Tar Sands deposit, whether hydrocarbon, metalliferous, non-metalliferous or otherwise, including, but not limited to, gold, silver, platinum, sand and clays on and in the Property, and whether heretofore known or hereafter discovered (collectively, “Minerals”), from the ground surface to a depth of 3,000 feet above Mean Sea level (MSL), together with the products and byproducts of the processing of the Minerals, and together with the right to use so much of the surface of the Property as may be necessary in the exercise of said rights and in furtherance of the purposes expressed herein, including ingress and egress, and together with the right to construct on the Property such improvements as may be reasonably necessary to the exploration for and the mining, extraction, removal, processing, beneficiating, sale or other disposition of the Minerals, but not including the construction of any new roads without the prior written consent of Sublessor; and

 

  2. The right to use any or all of the Water Rights at any time during the term of this Sublease in conducting its activities as provided for herein; provided that approval of change applications may need to be obtained in order to allow use of the Water Rights on the Property for mining purposes.

 

  3. The term of the sub-lease is for the period ending June 30, 2021 unless the Short Term Mining Lease between Valkor and Asphalt Ridge is terminated earlier.

 

  4. During the Term and subject to the Lessor Reserved Rights, Sublessee shall have the right to explore, develop, mine, drill, pump, process, produce and market the Minerals in, on, or under the Property, including any existing stockpiles or dumps, whether by drilling, surface, strip, contour, quarry, bench, underground, solution, in situ or other mining methods, and in connection therewith, Sublessee shall have the right to conduct the following activities and operations (“Operations”) on the Property in accordance with the terms of this Sublease and applicable laws and regulations:

 

  a. To mine, process, mill, beneficiate, treat, concentrate, extract, refine, leach, convert, upgrade, prepare for market, any and all Minerals mined or otherwise extracted from the Property;

 

  b. To temporarily store or permanently dispose on the Property Minerals, water, waste or other materials resulting from Operations on the Property;

 

  c. to use and develop any and all ditches, flumes, water and Water Rights and appurtenant to the Property; and

 

  d. to use so much of the surface and surface resources of the Property as may be reasonably necessary in the exercise of said rights, or which Sublessee may deem desirable or convenient, including rights of ingress and egress in connection with its operations on the Property. During the term of the lease the sub-lessee has the right to use any or all of the Water Rights at any time during the term of this Sublease in conducting its activities as provided for herein; provided that approval of change applications may need to be obtained in order to allow use of the Water Rights on the Property for mining purposes.

  

F-22

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

6.MINERAL LEASES (continued)

  

(a)TMC Mineral Lease (continued)

 

5.TMC will pay Valkor the sum of $25,000 on lease commencement, and thereafter $15,000 per month until expiration of the lease

 

6.TMC will pay a production royalty as follows:

 

a.For “Bitumen Product” produced from Tar Sands mined or otherwise extracted from the Property shall be eight percent (8%) of the gross sales revenue received by Sublessee from the sale of such Bitumen Product at the Property. As used herein, the term “Bitumen Product” means naturally occurring oil in the Tar Sands that is sold in whatever form, including run-of-mine, screened, processed, or after the addition of any additives and/or upgrading of the Bitumen Product

 

  b. The Production Royalty on all other Minerals produced from Bitumen Product mined or otherwise extracted from the Property and sold shall be eight percent (8%) of the gross sales revenue received by Sublessee. Subject to the provisions of Paragraph 1, wherein sales of products and byproducts are wholly accounted for, should sales occur to a third party purchaser that is engaged in marketing a variety of products or by-products made from such materials, payments to Sublessor may vary. If Sublessee’s receipts are measurably greater than comparable sales by others of similar products or byproducts which may be due to the nature of high end by-products such as frac sands produced and sold by the third party, the Production Royalty to Sublessor shall be the greater of a 5% royalty on the gross value of the product and by-products sold by the third party or 50% of the gross revenue received by Sublessee from the sale of such products or byproducts, as the case may be.

 

  c. The Production Royalty on oil and gas, and associated hydrocarbons produced by Sublessee using standard oil and gas drilling recovery techniques above 3000 feet MSL and sold shall be 1/6 of the gross market value.

 

  d. Any sales of Minerals to third parties shall be of such a nature that the sales price adequately represents the market value of all potential products or by-products.

 

  e. Minerals shall be deemed sold at the time they leave the Property or at the time the Minerals are transferred by Sublessee to an Affiliate. As used herein, “Affiliate” means any business entity which, directly or indirectly, is owned or controlled by Sublessee or owns or controls Sublessee, or any entity or firm acquiring Minerals from Sublessee otherwise than at arm’s-length.

 

  7. Prior to commencing any Operations, Sublessee shall have obtained final approval of all necessary mining and reclamation plans from the Utah Division of Oil, Gas and Mining, or its successor agency (the “Division”) authorizing Sublessee’s Operations and shall have posted with and obtained approval from the Division of a surety bond or other financial guarantee (“Reclamation Surety”) in the amount and form acceptable to the Division and sufficient to guarantee Sublessee’s performance of reclamation in accordance with Utah laws and regulations. The amount of the surety bond or financial guarantee shall be periodically reviewed in accordance with Division’s regulations and, if the Division directs, increased or otherwise modified as directed by the Division. Sublessee shall keep Sublessor fully informed as to reclamation costs and bonding requirements and Sublessor’s approval of the bond amount shall be required. Sublessor will not unreasonably withhold such approval.

 

  8. Under the terms of the Lease, Asphalt Ridge , Inc. has reserved the right at any time during the term of the Lease to convey all or part of the Property or the Water Rights, or rights therein, subject to the Lease and shall give Sublessor Notice of any such conveyance. This Sublease shall be subject to the right reserved by the Lessor as described herein. Upon Sublessor’s receipt of any sale or conveyance of the Property by Lessor, Sublessor shall promptly notify Sublessee in writing of any such conveyance.

  

F-23

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

6.MINERAL LEASES (continued)

 

(b)SITLA Mineral Lease (Petroteq Oil Recovery, LLC mineral lease)

 

On June 1, 2018, the Company acquired mineral rights under two mineral leases entered into between SITLA, as lessor, and POR, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease (collectively, the “SITLA Mineral Leases”). The SITLA Mineral Leases are valid until May 30, 2028 and have rights for extensions based on reasonable production. The leases remain in effect beyond the original lease term so long as mining and sale of the tar sands are continued and sufficient to cover operating costs of the Company.

 

Advanced royalty of $10 per acre are due annually each year the lease remains in effect and can be applied against actual production royalties. The advanced royalty is subject to price adjustment by the lessor after the tenth year of the lease and then at the end of each period of five years thereafter.

 

Production royalties payable are 8% of the market price of marketable product or products produced from the tar sands and sold under arm’s length contract of sale. Production royalties have a minimum of $3 per barrel of produced substance and may be increased by the lessor after the first ten years of production at a maximum rate of 1% per year and up to 12.5%.

 

  (c) BLM Mineral Lease

 

On January 18, 2019, the Company paid $10,800,000 for the acquisition of 50% of the operating rights under U.S. federal oil and gas leases, administered by the U.S. Department of Interior’s Bureau of Land Management (“BLM”) covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah. The total consideration of $10,800,000 was settled by a cash payment of $1,800,000 and by the issuance of 15,000,000 shares at an issue price of $0.60 per share, amounting to $9,000,000.

 

On July 22, 2019, the Company acquired the remaining 50% of the operating rights under U.S. federal oil and gas leases, administered by the BLM covering approximately 5,960 gross acres (2,980 net acres) within the State of Utah, for a total consideration of $13,000,000 settled by the issuance of 30,000,000 shares at an issue price of $0.40 per share, amounting to $12,000,000 and cash of $1,000,000, of which $100,000 has not been paid to date.

 

7.PROPERTY, PLANT AND EQUIPMENT

  

   Oil
Extraction
Plant
   Other
Property and
Equipment
   Total 
Cost            
August 31, 2020  $37,627,885   $438,860   $38,066,745 
Additions   5,512,715    
-
    5,512,715 
August 31, 2021   43,140,600    438,860    43,579,460 
Additions   
-
    
-
    
-
 
November 30, 2021  $43,140,600   $438,860   $43,579,460 
                
Accumulated Amortization               
August 31, 2020  $2,148,214   $336,019   $2,484,233 
Additions   
-
    45,810    45,810 
August 31, 2021   2,148,214    381,829    2,530,043 
Additions   
-
    11,382    11,382 
November 30, 2021  $2,148,214   $393,211   $2,541,425 
                
Carrying Amount               
August 31, 2020  $35,479,671   $102,841   $35,582,512 
August 31, 2021  $40,992,386   $57,031   $41,049,417 
November 30, 2021  $40,992,386   $45,649   $41,038,035 

 

F-24

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

7.PROPERTY, PLANT AND EQUIPMENT (continued)

 

Oil Extraction Plant

 

In June 2011, the Company commenced the development of an oil extraction facility on its mineral lease in Maeser, Utah and entered into construction and equipment fabrication contracts for this purpose. On September 1, 2015, the first phase of the plant was completed and was ready for production of hydrocarbon products for resale to third parties. During the year ended August 31, 2017 the Company began the dismantling and relocating the oil extraction facility to its TMC Mineral Lease facility to improve production and logistical efficiencies while continuing its project to increase production capacity to a minimum capacity of 400-500 barrels per day. The plant has been substantially relocated to the TMC mining site and expansion of the plant to production of 400-500 barrels per day has been substantially completed.

  

Included in the cost of construction is capitalized borrowing costs as at November 30, 2021 and August 31, 2021 of $4,421,055. No borrowing costs were capitalized for the three months ended November 30, 2021 and the year ended August 31, 2021.

 

As a result of the relocation of the plant and the planned expansion of the plant’s production capacity to 400-500 barrels per day, and subsequently to an additional 3,000 barrels per day, the Company re-evaluated the depreciation policy of the oil extraction plant and the oil extraction technologies (Note 9) and determined that depreciation should be recorded on the basis of the expected production of the completed plant at various capacities. No amortization has been recorded during the three months ended November 30, 2021 and for the year ended August 31, 2021 as there has only been test production during these years.

 

8.LEASES

 

The Company entered into a real property lease for office space located at 15315 Magnolia Blvd., Sherman Oaks, California. The lease commenced on September 1, 2019 and expires on August 31, 2024, monthly rental expense is $4,941 per month with annual 3% escalations during the term of the lease.

 

The initial value of the right-of-use asset was $245,482 and the operating lease liability was $245,482. The Company monitors for events or changes in circumstances that require a reassessment of our lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right-of-use asset unless doing so would reduce the carrying amount of the right-of-use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right-of-use asset balance is recorded as a loss in the statement of operations and comprehensive loss.

 

During April 2015, the Company entered into two equipment loan agreements in the aggregate amount of $282,384, with financial institutions to acquire equipment for the oil extraction facility. The loans had a term of 60 months and bore interest at rates between 4.3% and 4.9% per annum. Principal and interest were paid in monthly installments. These loans were secured by the acquired assets.

 

On May 7, 2018, the Company entered into a negotiable promissory note and security agreement with Commercial Credit Group to acquire a crusher from Power Equipment Company for $660,959. An implied interest rate was calculated as 12.36% based on the timing of the initial repayment of $132,200 and subsequent 42 monthly instalments of $15,571. The terms of the note were renegotiated during June 2020, and the instalments were amended to $16,140 per month due to payments not being made during the pandemic. The promissory note is secured by the crusher.

 

Discount Rate

 

To determine the present value of minimum future lease payments for operating leases at September 1, 2019, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”).

 

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the 5 year ARM (adjustable-rate mortgage) interest rate at the time of entering into the agreement and compared that rate to the Company’s weighted average cost of funding at the time of entering into the operating lease. The Company determined that 10.00% was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

  

F-25

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

8.LEASES (continued)

  

Right of use assets

 

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

 

   November 30,
2021
   August 31,
2021
 
Non-current assets          
Right of use assets – operating leases, net of amortization  $155,402   $167,048 
Right of use assets – finance leases, net of depreciation – included in property, plant and equipment   667,768    677,853 

 

Lease costs consist of the following:

 

   Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
         
Finance lease cost:  $11,657   $17,483 
Depreciation of right of use assets   10,085    10,085 
Interest expense on lease liabilities   1,572    7,398 
           
Operating lease expense   15,268    15,268 
           
Total lease cost  $26,925   $32,751 

 

Other lease information:

 

   Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
Cash paid for amounts included in the measurement of lease liabilities        
Operating cash flows from finance leases  $(1,572)  $(7,398)
Operating cash flows from operating leases   (15,268)   (15,268)
Financing cash flows from finance leases  $(46,848)  $(41,022)
           
Weighted average remaining lease term – finance leases   2 months    1.11 years 
Weighted average remaining lease term – operating leases   2.75 years    3.75 years 
Weighted average discount rate – finance leases   13.52%   13.52%
Weighted average discount rate – operating leases   10.00%   10.00%

 

F-26

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

8.LEASES (continued)

 

Maturity of Leases

 

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

 

   November 30,
2021
   August 31,
2021
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year  $32,280   $80,700 
    32,280    80,700 
Imputed interest   (4,070)   (5,642)
Total finance lease liability  $28,210   $75,058 
           
Disclosed as:          
Current portion  $28,210   $75,058 

 

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

 

   November 30,
2021
   August 31,
2021
 
Undiscounted minimum future lease payments        
Total instalments due:        
Within 1 year  $63,375   $62,903 
1 to 2 years   65,276    64,790 
2 to 3 years   50,050    66,734 
    178,701    194,427 
Imputed interest   (23,299)   (27,379)
Total operating lease liability  $155,402   $167,048 
           
Disclosed as:          
Current portion  $50,071   $48,376 
Non-current portion   105,331    118,672 
   $155,402   $167,048 

 

F-27

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

9.INTANGIBLE ASSETS

 

   Oil
Extraction
 
   Technologies 
Cost     
August 31, 2020  $809,869 
Additions   
-
 
August 31, 2021   809,869 
Additions   
-
 
November 30, 2021  $809,869 
      
Accumulated Amortization     
August 31, 2020  $102,198 
Additions   
-
 
August 31, 2021   102,198 
Additions   
-
 
November 30, 2021  $102,198 
      
Carrying Amounts     
August 31, 2020  $707,671 
August 31, 2021  $707,671 
November 30, 2021  $707,671 

  

Oil Extraction Technologies

 

During the year ended August 31, 2012, the Company acquired a closed-loop solvent based oil extraction technology which facilitates the extraction of oil from a wide range of bituminous sands and other hydrocarbon sediments. The Company has filed patents for this technology in the USA and Canada and has employed it in its oil extraction plant. The Company commenced partial production from its oil extraction plant on September 1, 2015 and was amortizing the cost of the technology over fifteen years, the expected life of the oil extraction plant. Since the company has increased the capacity of the plant to 400 to 500 barrels daily during 2018, and expects to further expand the capacity to an additional 3,000 barrels daily, it determined that a more appropriate basis for the amortization of the technology is the units of production at the plant after commercial production begins again.

 

No amortization of the technology was recorded during the three months ended November 30, 2021 and the year ended august 31, 2021.

 

10.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

  

Accounts payable as at November 30, 2021 and August 31, 2021 consist primarily of amounts outstanding for construction and expansion of the oil extraction plant and other operating expenses that are due on demand.

  

Accrued expenses as at November 30, 2021 and August 31, 2021 consist primarily of other operating expenses and interest accruals on promissory notes (Note 11) and convertible debentures (Note 12).

  

F-28

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

11.PROMISSORY NOTES PAYABLE

  

          Principal
due
   Principal
due
 
Lender  Maturity
Date
  Interest
Rate
   November 30,
2021
   August 31,
2021
 
Promissory notes                  
Private lender  April 29, 2022   10.00%  $23,298   $23,298 

 

On April 29,2021 the Company issued a promissory note to a private lender in the aggregate sum of $500,000. The promissory note bears interest at 10% per annum and is repayable on April 29, 2022. The Company repaid $476,702 of the outstanding balance as at November 30, 2021. The balance remaining at November 30, 2021 is $23,298.

 

12.CONVERTIBLE DEBENTURES

  

          Principal
due
   Principal
due
 
Lender  Maturity Date  Interest
Rate
   November 30,
2021
   August 31,
2021
 
Calvary Fund I LP  July 31, 2021   12.00%  $80,000   $80,000 
   August 7, 2021   0%   25,000    25,000 
Cantone Asset Management LLC  December 17, 2021   7.00%   240,000    240,000 
   December 30, 2021   18.00%   50,000    50,000 
   July 1, 2023   8.00%   300,000    300,000 
Private lender  October 29, 2020   10.00%   200,000    200,000 
Petroleum Capital Funding LP.  November 26, 2023   10.00%   318,000    318,000 
   December 4, 2023   10.00%   432,000    432,000 
   March 30, 2024   10.00%   471,000    471,000 
   July 21, 2025   10.00%   3,000,000    3,000,000 
Power Up Lending Group LTD  April 21, 2022   12.00%   
-
    92,125 
   May 20, 2022   12.00%   
-
    141,625 
   July 2, 2022   12.00%   
-
    114,125 
EMA Financial, LLC  April 22, 2021   8.00%   3,120    3,120 
Morison Management S.A  October 15, 2020   10.00%   184,251    184,251 
   January 16, 2021   10.00%   55,000    55,000 
   April 21, 2022   12.00%   92,125    
-
 
   May 20, 2022   12.00%   141,625    
-
 
   July 2, 2022   12.00%   114,125    
-
 
Bellridge Capital LP.  March 31, 2021   15.00%   
-
    2,900,000 
   September 30, 2021   5.00%   
-
    1,400,000 
Private lender  July 24, 2022   8.00%   120,000    120,000 
            5,826,246    10,126,246 
Unamortized debt discount           (3,603,656)   (3,978,710)
Total loans          $2,222,590   $6,147,536 

 

The maturity date of the convertible debentures are as follows:

 

   November 30,
2021
   August 31,
2021
 
Principal classified as repayable within one year  $1,023,371   $5,255,874 
Principal classified as repayable later than one year   1,199,219    891,662 
           
   $2,222,590   $6,147,536 

 

F-29

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

  

12.CONVERTIBLE DEBENTURES (continued)

 

  (a) Cavalry Fund I LP

 

    (i)

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

 

In terms of an Amended and Restated Amending Agreement between the parties entered into on August 7, 2020, the maturity date of the convertible debenture was amended to July 31, 2021 and the conversion price was amended to $0.0412 per share and the exercise price of the warrant was amended to $0.0412 per share and the maturity date was amended to July 31, 2021.

 

On April 13, 2021, in terms of a conversion notice received, the Company issued a total of 9,708,737 shares of common stock converting $400,000 of the aggregate principal of the note entered into on August 19, 2019.

 

On July 6, 2021, in terms of a debt conversion agreement entered into with Cavalry, the Company agreed to convert unpaid interest of $22,500 on the note entered into on October 12, 2018; and unpaid principal of $80,000 and unpaid interest of $30,560 on this convertible note; and unpaid principal of $25,000 on a convertible note entered into on August 7, 2020 into 1,681,488 shares of common stock at a conversion price of $0.094 per share for a total of 1,681,488 shares, which have not been issued as yet and are subject to TSXV approval. The Company may have to renegotiate the terms of the debt conversion agreement based on the recommendations of the TSXV.

 

The aggregate principal amount of $80,000 of the convertible loan, which has past the maturity date of July 31, 2021, remains outstanding.

       
    (ii)

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

 

On May 26, 2021, in terms of a conversion notice received, the Company issued a total of 9,101,942 shares of common stock converting $250,000 of the aggregate principal of the note entered into on October 12,2018, see note 16(a)(ii) above, and $125,000 of the aggregate principal of this note entered into on August 7, 2020.

 

On July 6, 2021, in terms of a debt conversion agreement entered into with Cavalry, the Company agreed to convert unpaid interest of $22,500 on the note entered into on October 12, 2018; and unpaid principal of $80,000 and unpaid interest of $30,560 on the convertible note entered into on August 19, 2019; and unpaid principal of $25,000 on this convertible note, into 1,681,488 shares of common stock at a conversion price of $0.094 per share for a total of 1,681,488 shares, which have not been issued as yet and are subject to TSXV approval. The Company may have to renegotiate the terms of the debt conversion agreement based on the recommendations of the TSXV.

 

The aggregate principal amount of $25,000 of the convertible loan, which has past the maturity date of August 7, 2021, remains outstanding.

 

F-30

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(b)Cantone Asset Management, LLC

  

    (i)

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

 

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

 

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

 

On March 17, 2021, The company entered into an amending agreement whereby the conversion price of the convertible note was amended to $0.0475 per share, the maturity date was extended to December 17, 2021 and the interest rate was amended to 18% with effect from October 20, 2020.

 

On March 17, 2021, the Company entered into a debt conversion agreement whereby outstanding interest of $22,660 accrued until December 28, 2020 on two convertible notes was converted into 581,026 shares of common stock. The debt conversion agreement included $14,160 of interest related to this September 2019 convertible note.

 

On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $132,007, consisting of outstanding interest of $92,007 accrued until June 1, 2021 on various convertible notes and a principal amount outstanding of $40,000 on one convertible note, was converted into 949,688 shares of common stock. The debt conversion agreement included $21,840 of interest related to this September 2019 convertible note.  

       
    (ii)

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

 

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

 

On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $132,007, consisting of outstanding interest of $92,007 accrued until June 1, 2021 on various convertible notes and a principal amount outstanding of $40,000 on one convertible note, was converted into 949,688 shares of common stock. The debt conversion agreement included $37,050 of interest related to this September 2020 convertible note.

 

On August 30, 2021, in terms of a conversion notice received, the Company issued a total of 4,545,454 shares of common stock converting $250,000 of the aggregate principal of the note entered into on September 2020.

       
    (iii)

On July 1, 2021, in terms of a subscription agreement entered into with Cantone Asset Management, LLC, the Company issued a convertible debenture in the aggregate principal amount of $300,000, bearing interest at 8% per annum and maturing on July 1, 2023 and convertible into common stock at a conversion price of $0.12 per share. In addition, the Company issued Cantone a warrant exercisable for 2,500,000 shares of common stock at an exercise price of $0.12 per share expiring on July 1, 2023. Neither the convertible debenture nor the warrant has been approved by the TSXV as of the date of this filing.

 

F-31

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(c)Private lender

 

On October 29, 2019, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $200,000. The convertible debenture bears interest at 10.0% per annum and matured on October 29, 2020.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 555,555 common shares at an exercise price of $0.18 per share, which expired on October 29, 2020.

 

The aggregate principal amount of $200,000 of the convertible loan, which has past the maturity date of October 29, 2020, remains outstanding.

 

  (d) Petroleum Capital Funding LP

  

All of the convertible notes issued to Petroleum Capital Funding LP. (“PCF”) are secured by a first priority lien on all bitumen reserves at the Asphalt Ridge property consisting of 8,000 acres.

 

The Company may force the conversion of all of the convertible debentures if the trading price of the Company’s common shares on the TSXV Venture Exchange is above $0.40 for 20 consecutive trading days, with an average daily volume of greater than 1 million common shares, and has agreed to certain restrictions on paying dividends, registration rights and rights of first refusal on further debt and equity offerings.

 

  (i)

On November 26, 2019, further to a term sheet entered into with PCF, the Company issued a convertible debenture in the aggregate principal amount of $318,000, including an OID of $53,000 for net proceeds of $226,025 after certain issue expenses. The convertible debenture bears interest at 10% per annum and the gross proceeds less the OID of $265,000 is convertible into common shares at a conversion price of $0.21 per share, and matures on November 26, 2023.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 1,558,730 common shares and a brokers warrant exercisable for 124,500 common shares, at an exercise price of $0.17 per share, expiring on November 26, 2023.

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 1,558,730 shares was amended to $0.055 per share, in terms of the Amending Agreement the conversion price became $0.08 per share on September 22, 2021.

 

On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $61,050, consisting of outstanding interest accrued until June 1, 2021 on various convertible notes was converted into 439,209 shares of common stock. The debt conversion agreement included $15,900 of interest related to this November 2019 convertible note. 

     
  (ii)

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

 

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

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 2,117,520 shares was amended to $0.055 per share, in terms of the Amending Agreement the conversion price became $0.08 per share on September 22, 2021. 

 

On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $61,050, consisting of outstanding interest accrued until June 1, 2021 on various convertible notes was converted into 439,209 shares of common stock. The debt conversion agreement included $21,600 of interest related to this December 2019 convertible note.  

 

F-32

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(d)Petroleum Capital Funding LP (continued)

  

  (iii)

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

 

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

 

On September 22, 2020, the Company entered into an Amending Agreement, whereby the conversion price of the convertible debenture was amended to $0.055 per share and the exercise price of the warrant exercisable for 4,906,250 shares was amended to $0.055 per share, in terms of the Amending Agreement the conversion price became $0.08 per share on September 22, 2021.

 

On June 3, 2021, the Company entered into a debt conversion agreement whereby a total amount of $61,050, consisting of outstanding interest accrued until June 1, 2021 on various convertible notes was converted into 439,209 shares of common stock. The debt conversion agreement included $23,550 of interest related to this March 2020 convertible note.  

     
  (iv)

On July 21, 2021, in terms of a subscription agreement for debentures and warrants, the Company entered into a convertible debenture agreement with PCF in the aggregate principal amount of $3,000,000 including an OID of $500,000 for net proceeds of $2,191,000 after placement fees and expense allowances of $309,000. The convertible debenture bears interest at 10% per annum and the gross proceeds of $2,500,000 is convertible into common shares at a conversion price of $0.12 per share, subject to anti-dilution adjustments and matures on July 21, 2025. The company also entered into a registration rights agreement with PCF, whereby the Company has agreed to register any securities that the convertible note is convertible into and any warrant shares issuable in terms of the subscription agreement for debentures and warrants.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 20,833,333 common shares and a brokers warrant exercisable for 5,208,333 common shares, at an exercise price of $0.12 per share, expiring on July 21, 2025.

 

(e)Power Up Lending Group Ltd.

 

  (i)

On April 21, 2021, the Company issued a convertible promissory note to Power Up Lending Group Ltd. (“Power Up”) in the aggregate principal sum of $92,125, including an original issue discount of $8,375 for net proceeds of $80,000 after certain expenses. The note bears interest at 12% per annum and matures on April 21, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management S.A. (“Morison Management”), whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $83,750 will be convertible under the note at a conversion price of $0.048 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

 

F-33

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(e)Power Up Lending Group Ltd. (continued)

 

  (ii)

On May 20, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $141,625, including an original issue discount of $12,875 for net proceeds of $125,000 after certain expenses. The note bears interest at 12% per annum and matures on May 20,  2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $128,750 will be convertible under the note at a conversion price of $0.042 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

     
  (iii)

On July 2, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $114,125, including an original issue discount of $10,375 for net proceeds of $100,000 after certain expenses. The note bears interest at 12% per annum and matures on July 2, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $103,750 will be convertible under the note at a conversion price of $0.042 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

 

  (f) EMA Financial, LLC

  

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

 

Between January 25, 2021 and March 2, 2021, EMA converted the aggregate principal sum of $161,880 into 5,200,000 common shares.

 

F-34

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

  (g) Morison Management S.A.

  

  (i)

On October 15, 2018, the Company entered into an agreement with SBI Investments, LLC (“SBI”) whereby the Company issued 250 one year units for proceeds of $250,000, each debenture consisting of a $1,000 principal convertible unsecured debenture, bearing interest at 10% per annum and convertible into common shares at $0.86 per share, and a warrant exercisable for 1,162 shares of common stock at an exercise price of $0.86 per share, expiring on October 15, 2019.

 

During December 2019, the maturity date of the convertible loan was extended to October 15, 2020 and the conversion price of the note was reset to $0.18 per share. On February 25, 2021, the Company repaid principal of $16,516 and interest thereon of $33,484, totaling $50,000 and on March 9, 2021, the Company repaid a further $49,232 of principal and interest of $768, totaling 50,000.

 

On August 3, 2021, in terms of a debt assignment agreement entered into with SBI Investments, SBI Investments assigned an October 15, 2018 convertible debenture with an aggregate principal amount outstanding of $184,251.

     
  (ii)

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

 

On August 3, 2021, in terms of a debt assignment agreement entered into with SBI Investments, SBI Investments assigned a January 26, 2020 convertible debenture with an aggregate principal amount outstanding of $55,000, to Morison Management.

     
  (iii)

On April 21, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $92,125, including an original issue discount of $8,375 for net proceeds of $80,000 after certain expenses. The note bears interest at 12% per annum and matures on April 21, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $83,750 will be convertible under the note at a conversion price of $0.048 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

 

F-35

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(g)Morison Management S.A. (continued)

 

  (iv)

On May 20, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $141,625, including an original issue discount of $12,875 for net proceeds of $125,000 after certain expenses. The note bears interest at 12% per annum and matures on May 20,  2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $128,750 will be convertible under the note at a conversion price of $0.042 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

     
  (v)

On July 2, 2021, the Company issued a convertible promissory note to Power Up in the aggregate principal sum of $114,125, including an original issue discount of $10,375 for net proceeds of $100,000 after certain expenses. The note bears interest at 12% per annum and matures on July 2, 2022. The note may be prepaid subject to certain prepayment penalties ranging from 110% to 130% based on the period of prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 75% of the average of the lowest three trading bid prices during the previous fifteen prior trading days.

 

On November 17, 2021, Power Up entered into a debt assignment agreement with Morison Management, whereby the convertible note was assigned to Morison Management.

 

On November 17, 2021, in terms of an Amending Agreement entered into with the Company by Morison Management, the Company amended the note to comply with TSXV requirements, whereby only the aggregate principal sum of $103,750 will be convertible under the note at a conversion price of $0.042 per common share and the maximum amount due under the note in terms of interest rate, fees or other payments is restricted to a rate of 24% per annum.

 

F-36

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

12.CONVERTIBLE DEBENTURES (continued)

 

(h)Bellridge Capital LP.

  

  (i)

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

 

On March 22, 2021, the maturity date of the convertible note was extended to October 31, 2021, all other terms remain the same.

 

On November 10, 2021, in terms of a conversion notice received, Bellridge Capital LP, converted the aggregate principal sum of $2,900,000 into 52,727,273 common shares at a conversion price of $0.055 per share.

     
  (ii)

On April 23, 2021, Bellridge took assignment of a $2,400,000 convertible debenture entered into on January 16, 2019 with Bay Private Equity, Inc. the terms of the. Debenture was amended by the Company and the maturity date was extended to September 30, 2021 and the conversion price was amended to $0.048 per share.

 

Simultaneously with the debt assignment, on April 23, 2021, Bellridge converted the aggregate principal sum of $1,000,000 and interest and penalty interest thereon of $827,066 into 41,334,246 shares of common stock.

 

On September 21, 2021, in terms of a conversion notice received, Bellridge Capital LP, converted the aggregate principal sum of $1,400,000 into 29,166,667 common shares at a conversion price of $0.048 per share.

  

(i)Private lender

  

On July 24, 2021, the Company issued a convertible debenture to a private lender in the aggregate principal amount of $120,000, for net proceeds of $100,000, after an OID of $20,000 The convertible debenture bears interest at 8% per annum and is convertible into common shares at a conversion price of $0.12 per share, maturing on July 24, 2023.

 

In conjunction with the convertible debenture, the Company issued a warrant exercisable for 833,333 common shares at an exercise price of $0.12 per share, expiring on July 24, 2023.

 

13.FEDERAL RELIEF LOANS

   

Small Business Administration Disaster Relief loan

 

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

 

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

 

F-37

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

13.FEDERAL RELIEF LOANS (continued)

   

Payroll Protection Plan loans (“PPP Loans”)

 

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

 

On January 20, 2021, POR received a further PPP Loan amounting to $133,826, bearing interest at 1.00% per annum and repayable in a single payment after 5 years. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for.

 

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

 

On May 3, 2021, the PPP loan amounting to $133,890 and all accrued interest thereon was forgiven.

 

On February 3, 2021, PCA received a PPP Loan amounting to $133,890, bearing interest at 0.98% per annum and repayable in monthly installments commencing on December 3, 2021. The loan may be forgiven subject to certain terms and conditions and the use of funds by the Company. Forgiveness is not automatic and will be assessed by the lender once applied for.

 

On November 15, 2021, The remaining PPP loan in the Company’s wholly owned subsidiary, PCA amounting to $133,890 and all accrued interest thereon was forgiven.

 

14.DERIVATIVE LIABILITY

 

Convertible note issued to several lenders, disclosed in note 12(e), above had conversion rights that were linked to the Company’s stock price, at 75% of an average stock price over a period of 15 days prior to the date of conversion.  The number of shares issuable upon conversion of these convertible notes was therefore not determinable until conversion took place. The Company had determined that these conversion features met the requirements for classification as derivative liabilities and had measured their fair value using a Black Scholes valuation model which takes into account the following factors:

 

Historical share price volatility;

 

Maturity dates of the underlying securities being valued;

 

Risk free interest rates; and

 

Expected dividend policies of the Company.

 

The fair value of the derivative liabilities was initially recognized as a debt discount. In terms of amending agreements entered into with Morison Management, as disclosed on note 12(g) (iii) to (v), the terms of the notes were amended and the variable conversion price was amended to fixed conversion prices. The derivative liability was no longer applicable. The derivative liability was evaluated on November 17, 2021, the date of amendment, and the net value of the derivative liability at that date was included in the calculation of the loss on debt extinguishment, based on the beneficial conversion feature of the amended notes on November 17, 2021.

 

F-38

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

14.DERIVATIVE LIABILITY (continued)

 

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

 

     Three months ended
November 30,
2021
 
Conversion price  USD$0.042 to $0.146 
Risk free interest rate   0.35%
Expected life of derivative liability   6 months   
Expected volatility of underlying stock   145.4 to 195.6 %
Expected dividend rate   0%

 

The movement in derivative liability is as follows:

 

  November 30,
2021
   August 31,
2021
 
Opening balance  $322,186   $841,385 
Derivative financial liability arising from convertible notes   
-
    653,826 
Fair value adjustment to derivative liability   (52,420)   (1,173,025)
Fair value of derivative included in beneficial conversion feature   (269,766)   
-
 
   $
-
   $322,186 

 

15.RECLAMATION AND RESTORATION PROVISIONS

 

  Oil         
  Extraction   Site     
  Facility   Restoration   Total 
Balance at August 31, 2020  $498,484   $2,472,013   $2,970,497 
Accretion expense   
-
    
-
    
-
 
Balance at August 31, 2021   498,484    2,472,013    2,970,497 
Accretion expense   
-
    
-
    
-
 
Balance at November 30, 2021  $498,484   $2,472,013   $2,970,497 

 

(a)Oil Extraction Plant

  

In accordance with the terms of the sub-lease agreement disclosed in note 6 above, the Company is required to dismantle its oil extraction plant at the end of the lease term. During the year ended August 31, 2015, the Company recorded a provision of $350,000 for dismantling the facility.

  

During the year ended August 31, 2019, in accordance with the requirements to provide a surety bond to the Utah Division of Oil Gas and Mining in terms of the amendment to the Notice of Intent to Commence Large Mining Operations at an estimated production of 4,000 barrels per day, the Company estimated that the cost of dismantling the oil extraction plant and related equipment would increase to $498,484. The discount rate used in the calculation is estimated to be 2.32%.

 

Because of the long-term nature of the liability, the greatest uncertainties in estimating this provision are the costs that will be incurred and the timing of the dismantling of the oil extraction facility. In particular, the Company has assumed that the oil extraction facility will be dismantled using technology and equipment currently available and that the plant will continue to be economically viable until the end of the lease term.

 

F-39

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

15.RECLAMATION AND RESTORATION PROVISIONS (continued)

  

(b)Site restoration

  

In accordance with environmental laws in the United States, the Company’s environmental permits and the lease agreements, the Company is required to restore contaminated and disturbed land to its original condition before the end of the lease term, which is expected to be in 25 years. During the year ended August 31, 2015, the Company provided $200,000 for this purpose.

  

The site restoration provision represents rehabilitation and restoration costs related to oil extraction sites. This provision has been created based on the Company’s internal estimates. Significant assumptions in estimating the provision include the technology and equipment currently available, future environmental laws and restoration requirements, and future market prices for the necessary restoration works required.

 

During the year ended August 31, 2019, in accordance with the requirements to provide a surety bond to the Utah Division of Oil Gas and Mining in terms of the amendment to the Notice of Intent to Commence Large Mining Operations at an estimated production of 4,000 barrels per day, the Company estimated that the cost of restoring the site would increase to $2,472,013. The discount rate used in the calculation is estimated to be 2.32%.

  

16.COMMON SHARES

  

Authorized unlimited common shares without par value
Issued and Outstanding 646,053,821 common shares as at November 30, 2021

  

Contractual obligations to issue common shares

 

On July 1, 2021, the Company entered into debt conversion agreements with 4 directors whereby 600,836 common shares are to be issued at $0.094 per share to settle $56,479 of outstanding directors fees. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 9, 2021, the Company entered into a debt conversion agreement with Alpha Capital Anstalt whereby $60,258 representing accrued and unpaid interest on a secured convertible note issued on November 6, 2020 was convertible into 641,046 common shares at a conversion price of $0.094 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 6, 2021, the Company entered into a debt conversion agreement with Cavalry Fund I LP whereby unpaid interest of $22,500 on a convertible note entered into on October 12, 2018, unpaid principal of $80,000 and interest thereon on a convertible note entered into on August 19, 2019 and unpaid principal of $25,000 on a convertible note entered into on August 7, 2020, totaling $158,060 was convertible into 1,681,488 common shares at a conversion price of $0.094 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

During August 2021 the company received $750,000 from a private investor in terms of an irrevocable subscription agreement for the issue of 6,250,000 units, at an issue price of $0.12 per unit. Each unit consists of one common share and one transferable share purchase warrant exercisable at $0.12 per share, for a period of twenty four months from closing. Due to the suspension of trading by the TSXV, these shares have not been issued as yet.

 

On August 27, 2021, the Company entered into a debt conversion agreement with a creditor whereby an unpaid invoice for $30,000 for services rendered was convertible into 250,000 common shares at a conversion price of $0.12 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On August 27, 2021, the Company entered into a debt conversion agreement with a creditor whereby an unpaid invoice for $670,000 for services rendered was convertible into 5,583,333 common shares at a conversion price of $0.12 per share. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On October 15, 2021, the Company entered into a debt conversion agreement with Strategic IR whereby the aggregate amount due to Strategic of $299,719 in terms of unpaid professional services rendered to the Company will be settled by the issue of 2,518,645 common shares at an issue price of $0.119 per share, subject to approval of the Board of Directors and the TSXV.

 

On October 15, 2021, the Company entered into a debt conversion agreement with Morison Management whereby the aggregate principal amount of convertible debt of $239,251 related to an October 2018 convertible debenture of $184,251 and a January 20, 2020 convertible debenture of $55,000 will be convertible into 2,010,521 common shares at a conversion price of $0.119 per share, subject to approval of the Board of Directors and the TSXV.

 

F-40

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

16.COMMON SHARES (continued)

 

Convertible debt conversions

 

Between September 2, 2021 and November 10, 2021, in terms of conversion notices received, the Company issued 181,893,940 shares of common stock for convertible debt in the aggregate sum of $4,300,000.

 

Between November 3, 2021 and November 15, 2021, the Company received $499,970 in restitution for convertible debt converted into common shares at prices below that allowed by the TSX Ventures exchange regulations.

 

17.STOCK OPTIONS

  

During the three months ended November 30, 2021 and 2020, the share-based compensation expense was $0 and $199,632.

 

Stock option transactions under the stock option plan were: 

 

  

Three months ended

November 30, 2021

  

Year ended

August 31, 2021

 
   Number of
Options
   Weighted average
exercise price
   Number of
options
   Weighted average
exercise price
 
Balance, beginning of period   7,250,000   CAD$0.79    9,470,000   CAD$          0.63   
Options granted   
-
    
-
    
-
    
-
 
Options forfeited   
-
    
-
    (2,220,000)  CAD$0.11   
Balance, end of period   7,250,000   CAD$          0.79    7,250,000   CAD$0.79   

  

Stock options outstanding and exercisable as at November 30, 2021 are:

 

Expiry Date  Exercise Price   Options
Outstanding
   Options
Exercisable
 
August 7, 2025  CAD$        0.085    3,000,000    3,000,000 
November 30, 2027  CAD$2.270    950,000    950,000 
June 5, 2028  CAD$1.000    3,300,000    3,300,000 
         7,250,000    7,250,000 
Weighted average remaining contractual life        5.3 years    5.3 years 

 

18.SHARE PURCHASE WARRANTS

 

During August 2021 the company received $750,000 from a private investor in terms of an irrevocable subscription agreement for the issue of 6,250,000 units, at an issue price of $0.12 per unit. Each unit consists of one common share and one transferable share purchase warrant exercisable at $0.12 per share, for a period of twenty four months from closing. Due to the suspension of trading by the TSXV, these warrants have not been issued as yet.

 

A summary of the Company’s warrant activity during the period September 1, 2020 and November 30, 2021 is as follows:

 

   Three months ended
November 30, 2021
   Year ended
August 31, 2021
 
   Number of
Options
   Weighted average
exercise price
   Number of
options
   Weighted average
exercise price
 
Balance, beginning of period   73,148,824   $0.1053    48,342,714   $0.4254 
Warrants granted   
-
    
-
    66,496,016    0.1021 
Warrants exercised   
-
    
-
    (14,690,739)   0.0433 
Warrants forfeited   (2,777,777)   0.2300    (26,999,167)   0.7042 
Balance, end of period   70,371,047   $0.1004    73,148,824   $0.1053 

 

F-41

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

18.SHARE PURCHASE WARRANTS (continued)

  

The following table summarizes information about warrants outstanding as of November 30, 2021:

 

   Warrants outstanding and exercisable 
Exercise price  Number of shares   Weighted average
remaining years
 
$0.0550   8,582,500    2.19 
$0.0562   12,846,973    3.08 
$0.0800   392,500    2.33 
$0.1000   276,512    1.16 
$0.1200   47,827,077    3.27 
$0.1400   151,785    3.14 
$0.1700   293,700    2.00 
$0.1004   70,371,047    3.09 

 

The warrants exercisable for 151,785 shares at $0.14 per share have not been approved by the TSXV at the date of this report.

 

In terms of a subscription agreement entered into with Cantone, a warrant exercisable for 2,500,000 shares at $0.12 per share, have not been approved by the TSXV as of the date of this report.

 

19.DILUTED LOSS PER SHARE

 

The Company’s potentially dilutive instruments are convertible debentures, stock options, share purchase warrants and contractual obligations to issue securities. Conversion of these instruments would have been anti-dilutive for the periods presented and consequently, no adjustment was made to basic loss per share to determine diluted loss per share. These instruments could potentially dilute earnings per share in future periods.

 

For the three months ended November 31, 2021 and 2020, the following stock options, share purchase warrants, convertible securities and contractual obligations to issue securities were excluded from the computation of diluted loss per share as the result of the computation was anti-dilutive:

 

   Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
Share purchase options   7,250,000    9,470,000 
Share purchase warrants   70,371,047    47,379,348 
Convertible securities   44,116,827    97,608,979 
Contractual obligations to issue securities   25,785,869      
    147,523,743    154,458,327 

 

Included in the share purchase warrants are warrants exercisable for 2,651,785 common shares which have not been approved by the TSXV, refer note 18 above.

 

The Company has contractual obligations to issue 13,285,869 common shares in terms of various debt conversion agreements entered into, in addition in terms of a subscription agreement, a further 6,250,000 common shares and a warrant exercisable for 6,250,000 common shares is still to be issued. Refer note 16 above.

 

F-42

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

20.RELATED PARTY TRANSACTIONS

 

Related party transactions are as follows: 

 

The Company owes outstanding directors fees of $184,656 and $264,064 as at November 30, 2021 and August 31, 2021, respectively, and outstanding salaries and fees to officers and directors of $25,000 and $447,500 for the three months ended November 30, 2021 and the year ended August 31, 2021, respectively.

 

Related party payables represent non-interest-bearing payables that are due on demand.

 

The balances outstanding are as follows:

 

Related Party payables  November 30,
2021
   August 31,
2021
 
Payable to Aleksandr Blyumkin  $436,203   $493,549 

 

Alex Blyumkin

 

On August 20, 2020, a Company controlled by Mr. Blyumkin entered into a debt settlement agreement, whereby 2,356,374 shares were issued to settle an outstanding promissory note of $94,255.

 

On April 28, 2021, Mr. Blyumkin subscribed for 1,166,666 common shares at a price of $0.06 per share for gross proceeds of $70,000.

 

On July 1, 2021, Mr. Blyumkin entered into a debt conversion agreement whereby $14,120 of outstanding directors fees will be settled by the issue of 150,209 common shares. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 12, 2021, the Company issued Mr. Blyumkin 578,480 common shares valued at $40,494 in partial settlement of directors fees outstanding.

 

On July 27, 2021, Mr. Blyumkin subscribed for 1,875,000 units at a price of $0.12 per unit for gross proceeds of $225,000.

 

Mr. Blyumkin has resigned as an officer and director of the Company effective August 6, 2021.

 

During the current quarter, Mr. Blyumkin made restitution payments to the Company of $499,970 for conversion of convertible debt by third party convertible debt holders to common shares at prices below those allowed by the TSXV regulations.

 

The Company owed Mr. Blyumkin $436,203 and $493,549 as at November 30, 2021 and August 31, 2021, respectively.

 

George Stapleton

 

On January 25, 2021, Mr. Stapleton was awarded 1,000,000 common shares valued at $58,879 as part of his compensation package.

 

On August 7, 2020, Mr. Stapleton was awarded options exercisable for 3,000,000 common shares exercisable at $0.085 per share and valued at $165,855The options vested over an eight month period.

 

On November 30, 2021, Mr. George Stapleton retired as the Chief Operating Officer of the Company.

 

F-43

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

20. RELATED PARTY TRANSACTIONS (continued)

 

Dr. Gerald Bailey

 

On July 1, 2021, Dr. Bailey entered into a debt conversion agreement whereby $14,120 of outstanding directors fees will be settled by the issue of 150,209 common shares. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 12, 2021, the Company issued Dr. Bailey 578,480 common shares valued at $40,494 in partial settlement of directors fees outstanding.

 

On August 6, 2021, the Board of Directors of the Company has appointed Dr. R. Gerald Bailey, a current director and former Chief Executive Officer of the Company, as Chairman of the Board of Directors and Interim Chief Executive Officer. The Company has not entered into a written employment agreement with Dr. Bailey.  Dr. Bailey is entitled to cash compensation of $10,000 per month in his new role. 

 

Robert Dennewald

 

During June 2021, in terms of an exchange agreement entered into with Mr. Dennewald, Mr. Dennewald exchanged three promissory notes dated August 1, 2019, October 31, 2019 and March 3, 2020 totaling $125,000 for a $125,000 convertible promissory note bearing interest at 8% per annum and maturing on February 12, 2022.

 

On June 10, 2021, in terms of an Assignment and Purchase of Debt Agreement entered into between Mr. Dennewald and Equilibris Management AG (“Equilibris”), the $125,000 Convertible Promissory Note owing to the director was purchased and assigned to Equilibris.

 

On July 1, 2021, Mr. Dennewald entered into a debt conversion agreement whereby $14,120 of outstanding directors fees will be settled by the issue of 150,209 common shares. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 12, 2021, the Company issued Mr. Dennewald 578,480 common shares valued at $40,494 in partial settlement of directors fees outstanding.

 

James Fuller

 

On July 1, 2021, Mr. Fuller entered into a debt conversion agreement whereby $14,120 of outstanding directors fees will be settled by the issue of 150,209 common shares. Due to the suspension of trading by the TSXV, these shares have not been approved for issue by the TSXV and have not been issued yet.

 

On July 12, 2021, the Company issued Mr. Fuller 228,668 common shares valued at $16,007 in partial settlement of directors fees outstanding.

 

Dr. Vladimir Podlipsky

 

The Board of Directors has appointed Dr. Vladimir Podlipsky, currently the Chief Technology Officer of the Company, as a director, with effect from August 6, 2021, to fill the vacancy on the Board created by Mr. Blyumkin’s resignation. 

 

The Company advanced Manhatten Enterprises, a company controlled by Dr. Podlipsky, the sum of $76,000 pursuant to a promissory note on March 16, 2017. The note, which bears interest at 5% per annum, matured on March 16, 2020. The Note has reached its maturity date.

 

During the current quarter, the Company paid $175,025 to V Science Technologies Inc., in terms of a sponsored research agreement. V Science Technologies, Inc. is controlled by Dr. Podlipsky, a director of the Company.

 

Ron Cook

 

Mr. Cook was appointed as the Chief Financial Officer of the Company with effect from October 31, 2021.

 

Mark Korb

 

Mr. Korb resigned as CFO of the Company with effect from October 31, 2021.

 

F-44

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

21.FINANCING COSTS, NET

 

Financing costs, net, consists of the following:

 

  Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
Interest expense  $250,964   $287,639 
Amortization of debt discount   375,054    333,748 
Other   
-
    
-
 
   $626,018   $621,387 

 

22.OTHER EXPENSE (INCOME), NET

 

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

 

  Three months
ended
November 30,
2021
   Three months
ended
November 30,
2020
 
Loss (gain) on settlement of liabilities  $
-
   $134,490 
Loss (gain) on conversion of convertible debt   
-
    80,661 
Loss on debt extinguishment   444,398    330,256 
Forgiveness of federal relief loan   (133,890)   
-
 
Interest income   (28,947)   (948)
   $281,561   $544,459 

 

23. SEGMENT INFORMATION

 

The Company operated in two reportable segments within the USA during the three months ended November 30, 2021 and 2020, oil extraction and processing operations and mining operations. The presentation of the consolidated statements of loss and comprehensive loss provides information about the oil extraction and processing segment. There were limited operations in the mining operations segment during the three months ended November 30, 2021 and 2020. Other information about reportable segments are: 

 

    November 30, 2021  
    Oil     Mining        
(in ’000s of dollars)   Extraction     Operations     Consolidated  
Additions to non-current assets   $
-
    $
-
    $
      -
 
Reportable segment assets     46,553       33,240       79,793  
Reportable segment liabilities     (10,671 )    
-
      (10,671 )
    $ 35,882     $ 33,240     $ 69,122  

 

    November 30, 2020  
    Oil     Mining        
(in ’000s of dollars)   Extraction     Operations     Consolidated  
Additions to non-current assets   $ 4,173     $
-
    $ 4,173  
Reportable segment assets     44,897       33,240       78,137  
Reportable segment liabilities   (18,171   (100   (18,271
    $ 26,726     $ 33,140     $ 59,866  

 

F-45

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

23.SEGMENT INFORMATION (continued)

 

   November 30, 2021 
(in ’000s of dollars)  Oil
Extraction
   Mining
operations
   Consolidated 
Revenue from license fees  $
-
   $
        -
   $
-
 
Other production and maintenance costs   (285)   
-
    (285)
Gross Loss   (285)   
-
    (285)
Operating Expenses               
Depreciation, depletion and amortization   11    
-
    11 
Selling, general and administrative expenses   1,394    
-
    1,394 
Investor relations   40    
-
    46 
Professional fees   646    
-
    646 
Research and development   175         175 
Salaries and wages   156    
-
    156 
Travel and promotional expenses   83    
-
    83 
Other   288    
-
    288 
                
Financing costs   626    
-
    626 
Other expense (income)   281    
-
    281 
Forgiveness of federal relief loans   (134)   
-
    (134)
Loss on debt extinguishment   444    
-
    444 
Interest income   (29)   
 
    (29)
Derivative liability movements   (52)   
-
    (52)
                
Net loss  $2,545   $
-
   $2,545 

 

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

 

F-46

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

24.COMMITMENTS AND CONTINGENCIES

 

The company has commitments under equipment financing arrangements entered into in prior periods, see Note 8, above.

 

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

 

   November 30,
2021
 
Undiscounted minimum future lease payments     
Total instalments due:     
Within 1 year  $32,280 
   $32,280 

 

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

 

   November 30,
2021
 
Undiscounted minimum future lease payments     
Total instalments due:     
Within 1 year  $63,375 
1 to 2 years   65,276 
2 to 3 years   50,050 
   $178,701 

 

Legal Matters

 

On December 27, 2018, the Company executed and delivered: (i) a Settlement Agreement (the “Settlement Agreement”) with Redline Capital Management S.A. (“Redline”) and Momentum Asset Partners II, LLC; (ii) a secured promissory note payable to Redline in the principal amount of $6,000,000 (the “Note”) with a maturity date of 27 December 2020, bearing interest at 10% per annum; and (iii) a Security Agreement (together with the Settlement Agreement and the Note, the “Redline Agreements”) among the Company, Redline, and TMC Capital, LLC (“TMC”), an indirect wholly-owned subsidiary of the Company.

 

After undertaking an in-depth analysis of the Redline Agreements in the context of the underlying transactions and events, special legal counsel to the Company has opined that the Redline Agreements are likely void and unenforceable.

 

The Company’s special legal counsel regards the possibility of Redline’s success in pursuing any claims against the Company or TMC under the Redline Agreements as less than reasonably possible and therefore no provision has been raised against these claims.

 

The Company is currently evaluating the options and remedies that are available to it to ensure that the Redline Agreements are declared as void or are rescinded and extinguished.

 

F-47

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

25.SUBSEQUENT EVENTS

 

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

 

Unsolicited takeover bid by Viston United swiss AG

 

On October 27, 2021, 2869889 Ontario Inc., an indirect, wholly-owned subsidiary of Viston United Swiss AG commenced a conditional, unsolicited takeover bid (the “Offer”) to acquire all of the issued and outstanding Common Shares of the Company. Viston filed a Tender Offer Statement with the SEC relating to the Offer on Schedule TO under section 14(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on October 25, 2021, and an amendment to the Tender Offer Statement on October 27, 2021. As set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 under section 14(d)(4) of the Exchange Act filed with the SEC on November 9, 2021, shareholders were advised that the Board of Directors was not yet in a position to make a recommendation to shareholders to accept or reject the Offer, and that the Company has retained Haywood Securities Inc. as financial advisor to the Company and the Board of Directors.

 

As set forth in the amendment to the Solicitation/Recommendation Statement on Schedule 14D-9, as filed with the SEC on January 4, 2022, on December 29, 2021 after thorough consideration of all aspects of the Viston Offer, the advice provided by Haywood and consulting with its other advisors, the Board unanimously determined to recommend that Shareholders accept the Viston Offer and tender their Common Shares, for reasons that include the following:

 

Results of Strategic Review

 

Based on the results of the strategic review presented by Haywood, the Board believes that the ‎immediate cash value offered to Shareholders under the Viston Offer is more favorable to Shareholders ‎than the potential value that might otherwise result from other alternatives reasonably available to ‎Petroteq, including remaining as a stand-alone entity and pursuing Petroteq’s existing strategy, in each case ‎taking into consideration the potential rewards, risks, timelines and uncertainties associated with those ‎other alternatives.

 

Premium Over Market Price

 

The consideration of ‎C$0.74 ‎in cash per Common Share (the “Cash Consideration”) under the Viston Offer represents a premium of ‎approximately 279% over the closing price of the Common Shares on the TSXV on August 6, 2021, being the last trading day that the Common Shares were traded on the T‎SXV.

 

Unlikelihood of Superior Proposal

 

The Board, with ‎the assistance of Haywood, has taken active steps to assess and solicit strategic ‎alternatives and has attempted to secure a proposal that would be superior to the Viston Offer. However, no superior ‎alternative to the Viston Offer has emerged and Petroteq does not expect a superior alternative to emerge ‎in the near term.

 

Common Shares Remain Relatively Illiquid

 

Trading in the Common Shares on the TSXV remains suspended, and there is no certainty as to when ‎‎the TSXV will resume trading in the Common Shares.

 

Certainty of Outcome

 

The Viston Offer provides 100% cash consideration for the Common Shares and offers Shareholders certainty ‎‎of value and immediate liquidity‎.‎

 

Possible Decline in Market Price

 

If the Viston Offer is not successful and another alternative offer with superior financial terms does not emerge, the market price of the Common Shares in the public markets may decline significantly.

 

Reduces Inherent Business Risk

 

Based on the strategic review conducted with Haywood, the Viston Offer appears to provide Shareholders ‎with the value inherent in Petroteq’s portfolio of projects, assuming they are fully realized, without the ‎long-term risks associated with the development and execution of those projects. Given the relatively early ‎stage of Petroteq’s projects, it will be several years before the projects in Petroteq’s portfolio reach ‎commercial production, if at all‎.

 

Significant Growth Funding Required

 

Petroteq’s projects have significant funding requirements to prove and scale its technology. Petroteq currently has limited cash to fund its necessary capital projects and near-term debt maturities, which will be a further drain on cash. Equity financing sufficient to repay debt and fund the progress of Petroteq’s business plan, if available, may be significantly dilutive to Shareholders.

 

F-48

 

 

PETROTEQ ENERGY INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended November 30, 2021 and 2020

Expressed in US dollars

 

25.SUBSEQUENT EVENTS (continued)

 

Unsolicited takeover bid by Viston United swiss AG (continued)

 

Ability to Respond to Superior Proposals

 

Petroteq has not entered into a support or similar agreement with Viston in respect to the Viston Offer. The Board has reserved the ability to seek out or respond to proposals that may deliver greater value to Shareholders than the Viston Offer. There is nothing to prevent a third party from proposing or making a superior proposal or preclude Petroteq from changing its recommendation.

 

Exercise of warrants

 

In terms of warrant exercise notices received from various investors, warrants exercisable for 39,254,502 common shares were exercised between January 6, 2022 and January 18, 2022, for gross proceeds of $3,929,012 at exercise prices ranging from $0.0562 to $0.12 per share. A portion of the proceeds on the warrants issued was used to repay principal on convertible debt due of $753,500 and $46,075 of interest thereon and a further $180,000 of consulting fees, for net proceeds of $2,949,437.

 

Other than disclosed above, the Company has evaluated subsequent events through the date the financial statements were issued, other than disclosed above, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements. 

 

26.SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS

 

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

 

The Company has not commenced commercial operations, therefore the disclosure of the results of operations of hydrocarbon activities is limited. All expenditure incurred to date is capitalized as part of the development cost of the company’s oil extraction plant.

 

The Company does not have any historical data to forecast the standardized measure of discounted future net cash flows related to proven hydrocarbon reserve quantities. Upon the commencement of production, the Company will be able to forecast future revenues and expenses of its hydrocarbon activities.

 

Costs incurred

 

The following table reflects the costs incurred in hydrocarbon property acquisition and development expenses.

 

All costs were incurred in the US.

 

(In US$ 000’s) 

Three months

ended

November 30,
2021

  

Three months

ended

November 30,
2020

 
         
Construction of oil extraction plant  $
     -
   $4,173 
   $
-
   $4,173 

  

Results of operations

 

The only operating expenses incurred to date on hydrocarbon activities relate to certain maintenance and personnel costs incurred.

 

All costs were incurred in the US. 

 

(In US$ 000’s) 

Three months

ended

November 30,
2021

  

Three months

ended

November 30,
2020

 
         
Production and maintenance costs  $285   $345 
   $285   $345 

 

Proven reserves 

 

The Company does not have any proven hydrocarbon reserves as of November 30, 2021 and August 31, 2021.

 

An evaluation of the reserves at the Asphalt NW site was prepared by an outside specialist with a proved undeveloped valuation of $213. Million at a 10% discount. However the exchange of leases as detailed in note 6 will only take place once approved by SITLA.

 

F-49

 

 

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

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our amended annual report on Form 10-K/A for the fiscal year ended August 31, 2021, filed with the Securities and Exchange Commission on December 15, 2021. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Overview and recent developments

 

Our Company is a holding Company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and gas industry. Through our wholly-owned subsidiary, Petroteq Energy CA Inc., a California corporation (“PCA”) and PCA’s two subsidiaries Petroteq Oil Recovery, LLC, a Utah limited liability company (“POR”) and TMC Capital, LLC, a Utah limited liability company (“TMC Capital”), we are in the business of exploring for, extracting and producing oil and hydrocarbon products from oil sands deposits and sediments located in the Asphalt Ridge area of Uintah County, Utah, utilizing our proprietary extraction technology (the “Petroteq Clean Oil Recovery Technology” or “Extraction Technology”). Our primary oil sands extraction and processing operations are conducted at our Asphalt Ridge processing facility (herein the “Asphalt Ridge Plant” or “Plant”), which is owned by POR.

 

Petroteq owns the intellectual property rights to the Petroteq Clean Oil Recovery Technology which is used at our Asphalt Ridge Plant to extract and produce crude oil from oil sands utilizing a closed-loop solvent based extraction system.

 

The Asphalt Ridge Plant initially commenced operations as a pilot plant in 2015 at a site near Maeser, Utah, but was relocated in 2017 to a site near our Asphalt Ridge Mine #1 located on lands a Mining and Mineral Lease Agreement dated as of July 1, 2013, between Asphalt Ridge, Inc., as lessor, and TMC, as lessee, (the “TMC Mineral Lease”). The relocation of the Plant near our existing mine site was designed to improve logistical and processing efficiencies in the oil sands recovery process. The relocation of the Plant occurred during a temporary suspension of our mining and processing operations in 2016 that resulted from a sharp decline in world oil prices. We restarted operations at the end of May 2018 and completed expansion work on the Plant to increase production capacity to 400-500 barrels of oil per day during the last quarter of fiscal 2019 (the quarter ended August 31, 2019). During our testing of the Plant and its increased production capacity during the first quarter of fiscal 2020 (the quarter ending November 30, 2019), we determined that a number of equipment upgrades were required to support continuous operation of the Plant. As discussed below, these upgrades were completed in December 2020.

 

We had expected to generate revenue from the sale of hydrocarbon products from the Asphalt Ridge Plant commencing in the third quarter ending May 31, 2020. However, due to the COVID-19 pandemic and volatility in oil prices, we reduced operations to a single shift per day during the quarter ending February 29, 2020 and ultimately suspended operations at the Plant during the quarter ending May 31, 2020.