Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
Special Note Regarding Forward-Looking Statements and Business sections in this
Annual Report. We use words such as "anticipate," "estimate," "plan," "project,"
"continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should,"
"could," and similar expressions to identify forward-looking statements.
The following discussion and analysis constitutes forward-looking statements for
purposes of the Securities Act and the Exchange Act and as such involves known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements. The words "expect", "estimate", "anticipate",
"predict", "believes", "plan", "seek", "objective" and similar expressions are
intended to identify forward-looking statements or elsewhere in this report.
Important factors that could cause our actual results, performance or
achievement to differ materially from our expectations are discussed in detail
in Item 1 above. All written or oral forward-looking statements attributable to
us are expressly qualified in their entirety by such factors. We undertake no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Notwithstanding the foregoing, we are not entitled to rely on the safe harbor
for forward looking statements under 27A of the Securities Act or 21E of the
Exchange Act as long as our stock is classified as a penny stock within the
meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined
to be any equity security that has a market price (as defined in Rule 3a51-1) of
less than $5.00 per share, subject to certain exceptions.
The following discussion should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto.
Overview
Business Overview
Since 2016, the focus of our business has been to build crude oil distillation
units and refining facilities (CDUs) in the Permian Basin in West Texas. We
revised our business plan in 2021 to move MMEX to clean energy use and
production, leveraging our history, management and business relationships from
the traditional energy sector. The focus of our business plan is to
· Modify our planned CDU projects in Pecos County (West Texas) to produce
potentially hydrogen and ultra-low sulfur fuel products combined with CO2
capture.
· Purchase additional acreage allowing us to develop additional megawatts of
solar power for distribution to our projects in West Texas.
Our immediate plans are to pursue the following three projects:
Project 1: A clean refining 10,000 barrel per day facility at our Pecos County
site to produce 87° gasoline, ultra-low sulphur diesel and low-sulphur fuel oil,
utilizing the Ultra Fuels concept.
Project 2: We have teamed with Black Tree Group to develop a "blue hydrogen"
facility in Pecos County to produce hydrogen with carbon capture and storage
employing steam methane reformer technology with the abundant natural gas
supplies in the immediate area as the feedstock.
Project 3: A parallel "green hydrogen" plant in Pecos County, which plans to
utilize the proprietary electrolizer technology of a major international
technology partner.
We are in various stages of negotiations with major company off-takes that range
from specialty air and gas companies to international trading companies. We
would expect the sales of hydrogen by these companies will be to their customer
base, which are more traditional chemical end uses. The proposed distribution
network of liquid hydrogen from our planned projects will be by truck and rail.
9
Table of Contents
Completion of these projects is dependent upon our obtaining the necessary
capital for planning, construction and start-up costs. We are in consultation
with the local and state tax authorities to file for tax abatement treatment
generally applicable to projects such as our hydrogen projects. However, neither
the receipt of adequate capital or tax abatement treatment can be assured.
Through April 30, 2021, we have had no revenues and have reported continuing
losses from operations.
Results of Operations
We recorded a net loss of $24,526,886 or $(14.23) per share, for fiscal year
ended April 30, 2021, compared to a net loss of $4,393,689 or $(6.57) per share,
for the fiscal year ended April 30, 2020. As discussed below, the net income or
loss for any fiscal year fluctuates materially due to non-operating gains and
losses.
Revenues
We have not yet begun to generate revenues.
General and Administrative Expenses
Our general and administrative expenses decreased $36,835 to $867,471 for the
year ended April 30, 2021 from $904,306 for the year ended April 30, 2020. The
decrease resulted from lower salaries, travel and other expenses associated with
securing debt financing and administrative activities of our development
activities due to limitations on funding during the current fiscal year.
Refinery Start-Up Costs
During the year ended April 30, 2021, the expenditures for the development of
our CDU project in Pecos County, Texas decreased from the prior fiscal year due
to financing constraints. We have expensed all costs incurred, including
acquisition of refinery rights, planning, design and permitting. Such costs
totaled $179,133 and $214,439 for the years ended April 30, 2021 and 2020,
respectively.
Depreciation and Amortization Expense
Our depreciation and amortization expenses remained constant, totaling $34,875
and $34,663 for the years ended April 30, 2021 and 2020, respectively. The
expense results from the depreciation of land improvements and amortization of
land easements.
Other Income (Expense)
Our interest expense decreased $703,108 to $1,143,495 for the year ended April
30, 2021 from $1,846,603 for the year ended April 30, 2020. We entered into
fewer convertible debt arrangements in the current fiscal year, resulting in
less amortization of debt discount to interest expense, which was partially
offset by the increase in loan penalties and default interest.
For the years ended April 30, 2021 and 2020, we reported losses on derivative
liabilities of $22,906,922 and $1,402,233, respectively. In a series of
subscription agreements, we issued warrants in prior years that contain certain
anti-dilution provisions that we have identified as derivatives. We also
identified the variable conversion feature of certain convertible notes payable
as derivatives. We estimate the fair value of the derivatives using multinomial
lattice models that value the warrants based on a probability weighted cash flow
model using projections of the various potential outcomes. These estimates are
based on multiple inputs, including the market price of our stock, interest
rates, our stock price volatility and management's estimates of various
potential equity financing transactions. These inputs are subject to significant
changes from period to period and to management's judgment; therefore, the
estimated fair value of the derivative liabilities will fluctuate from period to
period, and the fluctuation may be material.
We reported a gain on extinguishment of debt of $605,010 for the year ended
April 30, 2021 compared to a gain on extinguishment of debt of $8,555 for the
year ended April 30, 2020. The gain on extinguishment of debt generally results
from the settlement and extinguishment of convertible notes payable and certain
accounts payable and accrued expenses. During the year ended April 30, 2021 we
settled certain notes which resulted in principal and accrued interest being
written off for a gain of $242,102. We also recorded a gain of $194,008 for the
write off of the derivative liabilities associated with the settlement of the
notes and we recorded a gain of $167,900 when the United States Small Business
Administration forgave our loan issued under the Paycheck Protection Program.
10
Table of Contents
Net Income (Loss)
As a result of the above, we reported net losses of $24,526,886 and $4,393,689
for the years ended April 30, 2020 and 2019, respectively.
Liquidity and Capital Resources
Working Capital
As of April 30, 2021, we had current assets of $368,342, comprised of cash of
$330,449 and prepaid expenses and other current assets of $37,893, and current
liabilities of $6,611,452, resulting in a working capital deficit of $6,243,110.
Included in our current liabilities as of April 30, 2021 are derivative
liabilities of $3,010,042, which we do not anticipate will require the payment
of cash.
Sources and Uses of Cash
Our sources and uses of cash for the years ended April 30, 2021 and 2020 were as
follows:
2020 2019
Cash, Beginning of Year $ 66,830 $ 55,188
Net Cash Used in Operating Activities (805,683 ) (734,518 )
Net Cash Used in Investing Activities
- (10,540 )
Net Cash Provided by Financing Activities 1,069,302 756,700
Cash, End of Year $ 330,449 $ 66,830
We used net cash of $805,683 in operating activities for the year ended April
30, 2021 as a result of our net loss of $24,526,886, our non-cash gain of
$605,010 and our increase in prepaid expenses and other current assets of
$14,748, partially offset by non-cash expenses totaling $23,402,206, and
increases in accounts payable of $3,695, accrued expenses of $756,839 and
accounts payable and accrued expenses - related parties of $178,221.
In comparison, we used net cash of $734,518 in operating activities for the year
ended April 30, 2020 as a result of our net loss of $4,393,689 and non-cash gain
of $8,555, partially offset by non-cash expenses totaling $3,020,499, decrease
in prepaid expenses and other current assets of $15,804, and increases in
accounts payable of $58,753, accrued expenses of $375,732 and accounts payable
and accrued expenses - related parties of $196,938.
Net cash used in investing activities was $0, and $10,540 for the years ended
April 30, 2021 and 2020, respectively, comprised on the purchase of property and
equipment.
Net cash provided by financing activities was $1,069,302 for the year ended
April 30, 2021, comprised of proceeds from notes payable of $775,000, proceeds
from convertible notes payable of $10,000, proceeds from convertible notes
payable - related parties of $163,500, proceeds from SBA bridge loan of $10,000,
and proceeds from a PPP loan payable of $150,000, partially offset by repayments
of convertible notes payable of $39,198.
By comparison, net cash provided by financing activities was $756,700 for the
year ended April 30, 2020, comprised of proceeds from convertible notes payable
of $365,300, proceeds from convertible notes payable - related parties of
$323,500 and proceeds from PPP loan payable of $167,900, partially offset by
repayments of convertible notes payable of $100,000.
11
Table of Contents
Going Concern Uncertainty
Our financial statements are prepared using accounting principles generally
accepted in the United States of America applicable to a going concern, which
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. We have incurred continuous losses from operations,
have an accumulated deficit of $67,984,693 and a total stockholders' deficit of
$5,770,041 at April 30, 2021, and have reported negative cash flows from
operations since inception. In addition, as of April 30, 2021 we did not have
the cash resources to meet our operating commitments for the next twelve months.
We require capital investments to implement our business plan, including the
development of our planned hydrogen projects. On July 15, 2021, we entered into
a Securities Purchase Agreement ("SPA") which closed on July 20, 2021, pursuant
to which we issued and sold to an institutional investor in a registered direct
offering 170,000 shares of our common stock, 2,575,000 warrants, and 3,580,000
pre-funded warrants. We received proceeds of $2,650,850 after deducting
placement agent fees and related offering expenses. We have subsequently
utilized approximately $560,000 of the proceeds to reduce indebtedness and
intend to utilize the remaining amount for working capital purposes.
Nevertheless, our ability to continue as a going concern must be considered in
light of the problems, expenses and complications frequently encountered by
entrance into established markets and the competitive environment in which we
operate.
In addition to the SPA, we expect to continue to seek additional funding through
private or public equity and debt financing.
Our ability to continue as a going concern is dependent on our ability to
generate sufficient cash from operations to meet our cash needs and/or to raise
funds to finance ongoing operations and repay debt. However, there can be no
assurance that we will be successful in our efforts to raise additional debt or
equity capital and/or that our cash generated by our operations will be adequate
to meet our needs. These factors, among others, raise substantial doubt that we
will be able to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments that might result from
the outcome of any uncertainty as to the Company's ability to continue as a
going concern. The financial statements also do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors.
Critical Accounting Policies
Our results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to inventories, investments, intangible assets, income
taxes, financing operations, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed 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. Actual results may differ from
these estimates under different assumptions or conditions.
For further information on our significant accounting policies see the notes to
our consolidated financial statements included in this Annual Report. There were
no material changes to our significant accounting policies during the year ended
April 30, 2021. The following is a description of those significant accounting
policies that involve estimates and judgment by management.
12
Table of Contents
Derivative liabilities
In a series of subscription agreements, the Company issued warrants in prior
years that contain certain anti-dilution provisions that have been identified as
derivatives. In addition, the Company identified the conversion feature of
certain convertible notes payable and convertible preferred stock as
derivatives. As of April 30, 2021, the number of warrants or common shares to be
issued under these agreements is indeterminate; therefore, the Company concluded
that the equity environment is tainted and all additional warrants, stock
options and convertible debt are included in the value of the derivative. We
estimate the fair value of the derivatives using multinomial lattice models that
value the derivative liabilities based on a probability weighted cash flow model
using projections of the various potential outcomes. These estimates are based
on multiple inputs, including the market price of our stock, interest rates, our
stock price volatility and management's estimates of various potential equity
financing transactions. These inputs are subject to significant changes from
period to period and to management's judgment; therefore, the estimated fair
value of the derivative liabilities will fluctuate from period to period, and
the fluctuation may be material.
Fair value of financial instruments
Under Financial Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 820, Fair Value Measurements and Disclosures, and ASC 825,
Financial Instruments, the FASB establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement reaffirms that fair value is the relevant
measurement attribute. The adoption of this standard did not have a material
effect on the Company's financial statements as reflected herein. The carrying
amounts of cash, accounts payable, accrued expenses and notes reported on the
accompanying consolidated balance sheets are estimated by management to
approximate fair value primarily due to the short-term nature of the
instruments.
An entity is required to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value using a hierarchy based on
the level of independent, objective evidence surrounding the inputs used to
measure fair value. A financial instrument's categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. The hierarchy prioritized the inputs into three
levels that may be used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in
active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than
quoted prices that are observable for the asset or liability such as quoted
prices for similar assets or liabilities in markets that are not active.
Level 3 applies to assets or liabilities for which there are unobservable inputs
to the valuation methodology that are significant to the measurement of the fair
value of the assets or liabilities.
Our derivative liabilities are measured at fair value on a recurring basis and
estimated as follows:
April 30, 2021 Total Level 1 Level 2 Level 3
Derivative liabilities $ 3,010,042 $ - $ - $ 3,010,042
April 30, 2020 Total Level 1 Level 2 Level 3
Derivative liabilities $ 2,607,433 $ - $ - $ 2,607,433© Edgar Online, source Glimpses
MMEX RESOURCES CORPORATION 
