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/A filed with the Securities and Exchange Commission on December 28,
2020. 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
We are 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 (the
"Extraction Technology"). Our wholly-owned subsidiary, Petroteq Energy CA, Inc.,
a California corporation, conducts our oil sands extraction business through two
wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited
liability company ("POSR"), and TMC Capital, LLC, a Utah limited liability
company ("TMC").
Through PCA, and its two subsidiaries POSR and TMC, we are in the business of
oil sands mining operations on the TMC Mineral Lease in Uintah County, Utah,
where we process mined oil sands ores using our Extraction Technology to produce
crude oil and hydrocarbon products. Our primary extraction and processing
operations are conducted at our Asphalt Ridge processing facility, which is
owned by POSR.
Petroteq owns the intellectual property rights to the Extraction Technology
which is used at our Asphalt ridge processing facility to extract and produce
crude oil from oil sands utilizing a closed-loop solvent based extraction
system.
We had expected to generate revenue from the sale of hydrocarbon products
commencing in the third quarter ended 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 ended February 29, 2020, and ultimately suspended
production of hydrocarbon products during the quarter ended May 31, 2020.
On July 2, 2020, TomCo Energy PLC ("TomCo") announced that, following the
establishment by TomCo of Greenfield Energy LLC ("Greenfield") as a joint
venture company with Valkor LLC ("Valkor") on June 17, 2020, Greenfield would
take over the management and operations of our Asphalt Ridge processing
facility. Valkor remains party to a non-exclusive technology licensing agreement
with Petroteq dated July 2, 2019, as amended, in respect of the plant.
Since assuming responsibility for the management of the Asphalt Ridge facility
in July 2020, Greenfield has made certain upgrades to the plant to improve its
capacity and reliability, and is undertaking tests to assess its potential
commerciality. All critical equipment has been received and installed at the
plant. In addition, buildings have been erected over the nitrogen system and the
vapor recovery system, and wind-walls have been erected at the mixing tank area
and decanter deck, to better allow for operations during winter months. Pressure
testing of piping systems is currently underway as part of plant
pre-commissioning activities in preparation for plant start-up, which is
expected to occur in the near term.
The Company expects that Greenfield will also be in a position to restart mining
and ore handling operations in the near term. All site personnel completed
mandatory Mine Safety and Health Administration (MSHA) training in late November
2020, and rental equipment needed for ore crushing and handling has arrived on
site. Valkor has completed its evaluation of recently received mining quotations
and has selected a mining contractor. The mining contract has been executed and
the mining contractor has already begun mobilizing equipment to site. After
initial work to prepare the site, it is expected that mining of oil sands ore
will begin in late January 2021.
Even once we resume production, we anticipate that our revenue will be limited
until we are at full production. We expect that we will require additional
capital to continue our operations and planned growth.
As announced by TomCo on September 16, 2020, the board of TomCo believes that
the Pre-FEED (Front-End Engineering and Design) Report prepared by Crosstrails
Engineering LLC, a subsidiary of Valkor, provides a high level of confidence
that the processes being utilized at the Asphalt Ridge processing facility can
be scaled up to enable commercial production of 10,000 barrels of oil per day
from a single site. Proof of commerciality though is subject to the successful
completion of the upgrade works to the plant, that are currently being completed
prior to its restart, and the associated trials to demonstrate the commerciality
of the processes used in Petroteq's Extraction Technology process and the
identification and securing of a suitable site for a commercial scale plant.
Once the Asphalt Ridge processing facility has been restarted, Petroteq intends
to undertake a series of associated tests and trials, to be verified by an
independent third party, to demonstrate both the commerciality of the Extraction
Technology process and validate the proposed design for the commercial scale
plant, thereby enabling Greenfield to move forward with the final FEED report
for a 10,000 barrels of oil per day plant.
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In addition, Greenfield has announced that, following the restart of the Asphalt
Ridge processing facility, it intends to start working with Quadrise Fuels
International plc, regarding a trial of Quadrise's MSAR® technology at the
plant. This will initially comprise the supply of oil samples produced by at the
plant to Quadrise to enable them to undertake test work in the United Kingdom to
finalize the required MSAR® formulations, before the planned on-site
demonstration trial to produce approximately 600 barrels (100 tonnes) of MSAR®.
MSAR® is a low viscosity oil-in-water emulsified synthetic heavy fuel oil
("HFO"). It is manufactured using Quadrise's proprietary technology to mix heavy
residual oils with small amounts of specialist chemicals and water to a bespoke
formulation. According to Quadrise, the resulting emulsion contains
approximately 30% water and less than 1% chemicals. The emulsion is a low
viscosity liquid at room temperature, which makes it easier to handle and
reduces the heating costs for storing, transportation and use in comparison to
HFOs.
Results of Operations for the three months ended November 30, 2020 and the three
months ended November 30, 2019
Net Revenue, Cost of Sales and Gross Loss
During the current period, the Company entered into a Technology License
Agreement with Valkor whereby Valkor paid $2,000,000 for a non-exclusive license
to the Oil Sands Recovery Technology, the Company has no obligation to delivery
any technology or know-how on an ongoing basis to Valkor, therefore the revenue
is recognizable immediately.
There has been no sale of hydrocarbon products during the three months ended
November 30, 2020 and minimal sales of $100,532 during the three months ended
November 30, 2019.
The cost of sales during the three months ended November 30, 2020 consists of
fees charged to Petroteq by Valkor for plant operations recovery expenses. The
cost of sales for the three months ended November 30, 2019 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.
Expenses
Expenses were $2,065,228 and $2,513,469 for the three months ended November 30,
2020 and 2019, respectively, a decrease of $448,241 or 17.8%. The decrease in
expenses is primarily due to:
Depletion, depreciation and amortization
Depletion, depreciation and amortization was $11,523 and $74,320 for the three
months ended November 30, 2020 and 20190, respectively, a decrease of $62,797 or
84.5%. The decrease is primarily due to the accelerated amortization of
leasehold improvements in the prior period which were incurred at premises
previously occupied by the Company.
Selling, general and administrative expenses
Selling, general and administrative expenses was $1,044,857 and $2,382,082 for
the three months ended November 30, 2020 and 2019, respectively, a decrease of
$1,337,225 or 56.1%. Included in selling, general and administrative expenses
are the following major expenses:
a. Professional fees was $399,129 and $1,026,765 for the three months ended
November 30, 2020 and 2019, respectively, a decrease of $627,636. The
decrease is primarily related to other professional fees incurred on plant
set up in the prior year prior to conclusion of the agreement with Valkor.
Valkor have expertise in oil field operations which is expected to result in
significant expense savings to the Company.
b. Travel and promotional fees was $83,464 and $571,492 for the three months
ended November 30, 2020 and 2019, respectively, a decrease of $488,028, the
decrease is due to an overall reduction in travel expenditure to the site,
impacted by the COVID-19 pandemic and lower promotion expenditure incurred as
Valkor readies the site for production.
c. Salaries and wages was $87,936 and $200,474 for the three months ended
November 30, 2020 and 2019, respectively, a decrease of $112,538. The
decrease is primarily due to Valkor assuming operational responsibility for
the plant all salaries and wages are currently administrative in nature.
d. General and administrative expenses was $234,696 and $381,248 for the three
months ended November 30, 2020 and 2019, respectively, a decrease of
$146,552. The overall decrease is due to Valkor assuming operational
responsibility of the production site.
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Financing costs
Financing costs was $621,387 and $509,294 for the three months ended November
30, 2020 and 2019, respectively, an increase of $112,093. Financing costs
includes; (i) interest expense of $287,639 and $143,308 for the three months
ended November 30, 2020 and 2019, respectively, an increase of $144,331, is
attributable to the increase in debt and convertible debt outstanding over the
prior fiscal period; (ii) amortization of debt discount of $333,748 and $353,095
for the three months ended November 30, 2020 and 2019, respectively, a decrease
of $19,347, primarily due to the timing of the debt agreements entered into and
the subsequent amortization of the discount over the life of the debt.
Other expense (income), net
Other expense was $544,459 and other income was $(416,680) for the three months
ended November 30, 2020 and 2019, respectively, an increase of $961,139. In the
current fiscal period we realized a loss on settlement of labilities and on
convertible debt which had conversion terms at a discount to market prices. In
Addition we renegotiated the maturity dates of several convertible notes as well
as the conversion price of these instruments, resulting in a loss on debt
extinguishment of $330,256
Mark to market of derivative liability
The mark to market of the derivative liability was $(156,998) and $(35,547) for
the three months ended November 30, 2020 and 2019, 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
of November 30, 2020, which depends on our current share price, risk free
interest rates and the volatility of our common share price.
Net loss before income taxes and Net loss and Comprehensive loss
Net loss before income taxes was $410,514 and $3,182,671 for the three months
ended November 30, 2020 and 2019, respectively, a decrease of $2,772,157 or
87.1%. The decrease is primarily due to the $2,000,000 technology license fee
and an overall reduction in operating expenses as Valkor prepares itself for
production at the plant.
Liquidity and Capital Resources
As at November 30 2020, we had cash of approximately $98,510. We also had a
working capital deficiency of approximately $11,285,842, due primarily to
accounts payable, short term debt, convertible debentures and accrued interest
thereon which remain outstanding as of November 30, 2020. During the three
months ended November 30, 2020, we raised $1,547,545 in private placements
warrant exercises and convertible debt issuances, to meet operational
requirements and plant improvement expenditure.
Subsequent to November 30, 2020, we raised a further $75,000 in the form of a
convertible debt and promissory note.
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 ended November 30,
2020, our primary sources of funding were from our sales of convertible notes
through which we received gross proceeds of approximately $1,069,500. 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.
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 $2,000,000 on
the existing plant.
We also intend to construct two new oil extraction facilities and expand the
existing facility. Each facility is estimated to cost $10,000,000.
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Other Commitments
The Company has various commitments including those disclosed under Commitments
in note 23 to the financial statements, in addition the Company has commitments
to repay convertible notes, promissory notes and debt as fully disclosed in
notes 9,10 and 11 to the financial statements.
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.
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