PETROTEQ ENERGY INC. 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 Form 10-K filed with theSecurities and Exchange Commission onDecember 16, 2019 . 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 theSecurities and Exchange Commission .
Overview and financial condition
Overview
Since our corporate reorganization and agreement to dispose of our interest inMCW Fuels, Inc. , which was effectiveMay 13, 2015 and for which regulatory approval was received onJune 19, 2015 , we have had one wholly owned subsidiary,Petroteq Energy CA, LLC . ("PCA"), which has three wholly owned active subsidiary companies,Petroteq Oil Sands Recovery, LLC . ("POSR"),TMC Capital LLC ("TMC") andPetrobloq LLC ("Petrobloq"). We are now primarily focused on developing our oil sands extraction and processing business and related mining interests. Through our wholly owned subsidiary PCA, and its two subsidiaries POSR and TMC, we are in the business of oil sands mining operations on the TMC Mineral Lease, where we process mined oil sands ores and sediments using our proprietary extraction technology ("the Extraction Technology") to produce finished crude oil and hydrocarbon products. Our primary extraction and processing operations are conducted at ourAsphalt Ridge processing facility located on the TMC Mineral Lease inUintah County, Utah , which is owned/operated by POSR. OurAsphalt Ridge processing facility uses the Extraction Technology in the extraction, production and upgrade of oil extracted from oil sands and was recently relocated to the TMC Mineral Lease (near ourAsphalt Ridge Mine ) to improve logistical and processing efficiencies in the oil sands recovery process. After relocating our processing facility from the site of its initial operation in 2015 as a pilot plant, we restarted our oil sands mining and processing operations at the end ofMay 2018 and completed our expansion project to increase production to at least 1,000 barrels of oil per day during the last quarter of fiscal 2019. We commenced commercial production in the first quarter of fiscal 2020 (the quarter endingNovember 30, 2019 ) and expect to generate revenue from the sale of hydrocarbon products produced during the second quarter of fiscal 2020. However, until we are at full production, our revenue will be limited. In addition, once ourAsphalt Ridge processing facility is operating at or near capacity, we anticipate that we will need to hire additional personnel at various levels. We expect that we will require additional capital to continue our operations and planned growth. There can be no assurance that funding will be available if needed or that the terms will be acceptable. PQE owns the intellectual property rights to the Extraction Technology, which is used at ourAsphalt Ridge processing facility to extract, upgrade and produce crude oil and hydrocarbon products from oil sands utilizing a closed-loop solvent based extraction system. Our indirect subsidiary, Petrobloq, was formed inNovember 2017 and is developing a blockchain-powered supply chain management platform for the oil and gas industry. We also own a 25% interest in Recruiter OGG, a recruitment venture that provides a website focused on careers in the oil and gas industry. Our primary mineral lease, the TMC Mineral Lease, is held by TMC and covers approximately 1,229.82 acres of land in theAsphalt Ridge area of easternUtah . InJune 2018 , we finalized the acquisition at auction of a 100% interest in the SITLA Leases, consisting of two oil sands mineral leases issued to POSR by theState of Utah's School and Institutional TrustLand Administration (SITLA), encompassing a total of 1,311.94 acres of land that largely adjoin our TMC Mineral Lease in theAsphalt Ridge area. InApril 2019 TMC acquired a 50% interest in the operating rights under five federalU.S. Department of Interior's Bureau of Land Management ("BLM") onshore mineral leases encompassing a total of 5,960 acres (2,980 net acres) located in eastern and southeasternUtah . OnJuly 22, 2019 , we acquired the remaining 50% of the operating rights underU.S. federal oil and gas leases, administered by the BLM covering approximately 5,960 gross acres (2,980 net acres) within theState of Utah . The total consideration of$13,000,000 was settled by the issuance of 30,000,000 shares at an issue price of$0.40 per share, and a cash consideration of$1,000,000 ,
which has not been paid to date. BetweenMarch 14, 2019 andNovember 30, 2019 , we made cash deposits of$1,857,000 , included in prepaid expenses and other current assets on the consolidated balance sheets for the acquisition of 100% of the operating rights underU.S. federal oil and gas leases, administered by the BLM inGarfield andWayne Counties covering approximately 8,480 gross acres inP.R. Springs and the Tar Sands Triangle within theState of Utah . The total consideration of$3,000,000 has been partially settled by the$1,857,000 cash deposit, with the balance of$1,143,000 still outstanding. 1
Results of Operations for the three months ended
Net Revenue, Cost of Sales and Gross Loss
The Company is fine tuning its processes to ensure continuous production on its 1,000 barrel per day plant and continuing with its expansion project to increase production capacity by an additional 3,000 barrels per day. Revenue generation during the quarter endedNovember 30, 2019 of$100,532 represents the sale of hydrocarbon products to refineries of$41,810 and sales of asphalt to theState of Utah amounting to$58,722 . Prior toAugust 31, 2019 , we had only sold test production to determine the quality of our processed product. We commenced commercial production during the first quarter of fiscal 2020 (the quarter endingNovember 30, 2019 ) and expect to increase our revenue from the sale of hydrocarbon products during the second quarter of 2020. The cost of sales during the three months endedNovember 30, 2019 and 2018 consists of; i) advance royalty payments which expire at the end of the calendar year two years after the payment has been made; and ii) certain production related expenses consisting of labor and maintenance expenditure. During the current period, production related costs have been expensed as the plant expansion has been completed and we expect to generate commercial production in the second fiscal quarter. Expenses
Expenses were$2,513,469 and$4,845,356 for the three months endedNovember 30, 2019 and 2018, respectively, a decrease of$1,781,435 or 28.4%. The decrease in expenses is primarily due to:
Depletion, depreciation and amortization
Depletion, depreciation and amortization was$74,320 and$16,173 for the three months endedNovember 30, 2019 and 2018, respectively, an increase of$58,147 or 359.3%. The increase is primarily due to the accelerated amortization of leasehold improvements which were incurred at premises previously occupied by the Company, prior to relocating to the current corporate office inSherman Oaks, California . The Company had ceased depletion, depreciation and amortization on production related assets and reserves until such time as the plant recommences full commercial operations, which is expected to occur during the second quarter of fiscal 2020.
Selling, general and administrative expenses
Selling, general and administrative expenses was$2,382,082 and$3,805,989 for the three months endedNovember 30, 2019 and 2018, respectively, a decrease of$1,423,907 or 37.4%. Included in selling, general and administrative expenses are the following major expenses:
a. Professional fees was
decrease is primarily related to legal fees incurred in the prior fiscal
period of
decrease of
undertaken by the Company in the prior fiscal period. Other professional fees
was
period, a decrease of
expenses incurred on strategy and marketing efforts as we focused all of our
attention on increasing our production capacity and readying the plant for
commercial production.
b. Travel and promotional fees was
ended
decrease is due to a reduction in investor relations and public relations
expenses of
potential investors, offset by an increase in marketing expenditure of
related expenditure decreased by approximately
period due to our management concentrating resources on completion of the
plant for commercial production during the current fiscal period.
c. Research and development expenses was
ended
the prior fiscal period $112,625 was spent on the Petrobloq blockchain
project. During the current fiscal period, all resources were focused on
achieving commercial production in our hydrocarbon extraction business
segment.
d. General and administrative expenses was
months ended
current fiscal period as we prepare for commercial production.
2
Financing costs
Financing costs was $509,294 and $477,574 for the three months ended November
30, 2019 and 2018, respectively, an increase of $31,720 . Financing costs
includes; (i) interest expense of $143,308 and $45,087 for the three months
ended November 30, 2019 and 2018, respectively, an increase of $98,221 , is
attributable to the increase in debt and convertible debt outstanding over the
prior fiscal period; (ii) amortization of debt discount of $353,098 and $415,697
for the three months ended November 30, 2019 and 2018, respectively, a decrease
of $62,599 , primarily due to the significant debt discount incurred in the prior
fiscal period on the Bay Private Equity debt placements and the subsequent
amortization thereof; and (iii) other finance related expense of $12,891 and
$16,790 for the three months ended November 30, 2019 and 2018, respectively.
Other (income) expense, net
Other income was $(416,680) and other expense was $545,620 for the three months
ended November 30, 2019 and 2018, respectively, an increase of $962,300 . In the
current fiscal period we realized a gain on the settlement of liabilities and on
amendment to convertible debt outstanding balances of $416,680 . In the prior
fiscal period we realized losses on the settlement of liabilities and
convertible debt of $188,383 and a further loss of $383,496 on warrants issued
to certain shareholders.
Mark to market of derivative liability
The mark to market of the derivative liability was$35,547 and$0 for the three months endedNovember 30, 2019 and 2018, respectively. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The charge during the current period represents the mark-to-market of the derivative liability outstanding as ofNovember 30, 2019 , which depends on our current share price, risk free interest rates and the volatility of our common share price.
Net loss before income tax and equity loss
Net loss before income tax and equity loss was$3,182,671 and$4,879,106 for the three months endedNovember 30, 2019 and 2018, respectively, a decrease of$1,696,435 or 34.8%. The decrease is primarily due to the reduction in expenses, offset by the increase in production and maintenance costs, as discussed above.
Equity loss from investment in Accord GR Energy, net of tax
Equity loss from investment in Accord GR Energy, net of tax was$0 and$50,000 for the three months endedNovember 30, 2019 and 2018, respectively. We provided a 100% of the carrying amount of our investment onAugust 31, 2019 due to the lack of activity and adequate investment in this venture. The prior year charge represented an estimate of our share of the ongoing operating losses for the three months endedNovember 30, 2018 .
Net loss and comprehensive loss
Net loss and comprehensive loss was
Liquidity and Capital Resources
As atNovember 30 2019 , we had cash of approximately$31,807 . We also had a working capital deficiency of approximately$10,598,709 , due primarily to accounts payable, short term debt, convertible debentures and accrued interest thereon which remain outstanding as ofNovember 30, 2019 . During the three months endedNovember 30, 2019 , we raised$2,494,744 in private placements, and a further$950,225 in convertible debt, which was offset by the repayment of convertible debt in the aggregate amount of$75,000 . These funds were primarily used on to fund the expansion of the plant, the acquisition of mineral rights, the investment in notes receivable and for working capital purposes. Subsequent toNovember 30, 2019 , we raised a further$941,250 in the form of various convertible debt and promissory note agreementsto fund our operations and for working capital purposes. We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy and do not have sufficient cash on hand to implement our business strategy. Our financial statements have been prepared assuming we are a going concern. To date, we have generated minimal revenue from operations and have financed our operations primarily through sales of our securities, and we expect to continue to seek to obtain our required capital in a similar manner. During the quarter endedNovember 30, 2019 , our primary sources of funding were from our sales of convertible notes through which we received gross proceeds of approximately$3.4 million . There can be no assurance that we will be able to generate sufficient revenue to cover our operating costs and general and administrative expense or continue to raise funds through the sale of debt. If we raise funds by securities convertible into common shares, the ownership interest of our existing shareholders will be
diluted.
3
Capital Expenditures
We continue to incur capital expenditure on the oil extraction plant as we
refine our processes and improve on our efficiencies. These expenses are at
times unpredictable but we do not anticipate spending more than
We also intend to construct two new oil extraction facilities and expand the
existing facility. Each facility is estimated to cost
Other Commitments
In addition to commitments otherwise reported in this MD&A, the Company's
contractual obligations as at
Total Up to 1 Year 2 - 5 Years After 5 Years
Contractual Obligations ($ millions) ($ millions) ($ millions) ($ millions)
Convertible Debt[1] 8.56 7.80 0.76 -
Debt[2] 1.15 0.96 0.19 -
Total Contractual Obligations 9.71 8.76 0.95 -
[1] Amount includes estimated interest payments. The recorded amount as at
November 30, 2019 was approximately$7.08 million .
[2] Amount includes estimated interest payments. The recorded amount as at
November 30, 2019 was approximately$1.03 million .
Recently Issued Accounting Pronouncements
The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.
Off-balance sheet arrangements
We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
Inflation
The effect of inflation on our revenue and operating results was not significant.
Climate Change We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
© Edgar Online, source
