Registration Statement No. 000-55991

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

AMENDMENT NO. 1

TO

FORM 20-F

 

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

 

OR

 

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

 

For the fiscal year ended     

 

OR

 

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

 

For the transition period from        to          

 

OR

 

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

 

Date of event requiring this shell company report

 

Commission file number

 

PETROTEQ ENERGY INC.

(Exact Name of Registrant)

 

 

Ontario

 

15165 Ventura Blvd., #200

Sherman Oaks, California 91403

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

 

Mr. David Sealock

15165 Ventura Blvd., #200

Sherman Oaks, California 91403

(800) 979-1987

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

 

Copies to:

 

Leslie Marlow, Esq.

Hank Gracin, Esq.

Gracin & Marlow, LLP

The Chrysler Building

405 Lexington Avenue, 26th Floor

New York, New York 10174

 

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

 

Title of each class

 

Name of each exchange on which registered

     

 

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

 

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

 

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

 

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

 

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

 

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

 

  

 

 

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

 

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

 

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

 

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

 

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

 

U.S. GAAP  ☐  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☒

  Other  ☐

 

 

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

 

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

 

 

 

 

 

Table of Contents

 

INTRODUCTION 1
     
PART I 2
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 2
A. Directors and Senior Management 2
B. Advisers 2
C. Auditors 2
     
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 2
A. Offer Statistics
B. Method and Executed Time Table
     
ITEM 3. KEY INFORMATION 2
A. Selected Financial Data 2
B. Capitalization and Indebtedness 4
C. Reasons for the Offer and Use of Proceeds 4
D. Risk Factors 4
     
ITEM 4. INFORMATION ON THE COMPANY 19
A. History and Development of the Company 19
B. Business Overview 20
C. Organizational Structure 30
D. Property, Plants and Equipment 30
     
ITEM 4A. UNRESOLVED STAFF COMMENTS 32
     
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 32
A. Operating Results 32
B. Liquidity and Capital Resources 41
C. Research and Development, Patents and Licenses 42
D. Trend Information 42
E. Off-Balance Sheet Arrangements 42
F. Tabular Disclosure of Contractual Obligations 42
G. Safe Harbor 43
     
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 44
A. Directors and Senior Management 44
B. Compensation 46
C. Board Practices 51
D. Employees 55
E. Share Ownership 55
     
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 56
A. Major Shareholders 56
B. Related Party Transactions 56
C. Interests of Experts and Counsel 59
     
ITEM 8. FINANCIAL INFORMATION 59
A. Consolidated Statements and Other Financial Information 59
B. Significant Changes 60
   
ITEM 9. THE OFFER AND LISTING 60
A. Offer and Listing Details 60
B. Plan of Distribution 61
C. Markets 61
D. Selling Shareholders 61
E. Dilution 61
F. Expenses of the Issue 61

 

i

 

 

ITEM 10. ADDITIONAL INFORMATION 61
A. Share Capital 61
B. Memorandum and Articles of Association 65
C. Material Contracts 68
D. Exchange Controls 68
E. Taxation 69
F. Dividends and Paying Agents 73
G. Statement by Experts 73
H. Documents on Display 73
I. Subsidiary Information 74
     
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 74
     
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 74
A. Debt Securities 74
B. Warrants and Rights 74
C. Other Securities 74
D. American Depositary Shares 74
     
PART II   75
   
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 75
   

ITEM 14.

 

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

75
   
ITEM 15. CONTROLS AND PROCEDURES 75
(a) Disclosure Controls and Procedures
(b) Managements Annual Report Over Financial Reporting
(c) Attestation Report of the Registrant
(d) Changes in Internal Control over Financial Report  
     
ITEM 16. RESERVED 75
   
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 75
     
ITEM 16B. CODE OF ETHICS 75
     
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 75
     
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 75
     
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 75
     
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 75
     
ITEM 16G. CORPORATE GOVERNANCE 75
     
ITEM 16H. MINE SAFETY DISCLOSURE 75
     
PART III   76
     
ITEM 17. FINANCIAL STATEMENTS 76
   
ITEM 18. FINANCIAL STATEMENTS 76
     
ITEM 19. EXHIBITS 76

 

ii

 

 

INTRODUCTION

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

 1 

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A. Directors and Senior Management 

 

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

 

B. Advisers

 

Our principal United States legal advisers are Gracin & Marlow, LLP, located in the United States at The Chrysler Building, 26th Floor, 405 Lexington Avenue, New York, New York 10174, United States and our principal Canadian legal advisers are DLA Piper (Canada) LLP located in Canada at 1 First Canadian Place, Suite 6000, 100 King Street West, Ontario M5X 1E2.

 

C. Auditors

 

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

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION 

 

A. Selected Financial Data

 

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

 

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

 

Our functional currency is the U.S. Dollar.

 

 2 

 

 

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

 

Consolidated Statement of Operations and Comprehensive Loss Data: 

 

Year ended 

Nine Months Ended

May 31,

2018
($)

  

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

  

August 31, 2014

($)

  

August 31, 2013

($)

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

8,557,082

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

8,557,082

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

 

Consolidated Balance Sheet Data

 

 

Nine Months Ended

May 31,

2018
($)

  

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

  

August 31, 2014

($)

  

August 31, 2013

($)

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

 

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

 

 3 

 

 

B. Capitalization and Indebtedness

 

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

 

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

 

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

 

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

  

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

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

 

 4 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 5 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 6 

 

 

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

 

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

 

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

 

TMC, our subsidiary holds a mining and mineral lease, granted by Asphalt Ridge, Inc., on the Asphalt Ridge property located in Uintah County, Utah (the “TMC Mineral Lease”). We recently moved our processing facility to a location near the site of the TMC Mineral Lease. The TMC Mineral Lease is subject to termination under various circumstances, including our non-payment of certain royalty fees as well as us not meeting certain minimum production requirements and receiving funding commitments for expanding or building additional production facilities. We currently intend to fund the expansion/ additional facilities through revenue generated from the processing facility near the site of the TMC Mineral Lease, which to date has been minimal, and/ or third party funding sources for which we currently have no commitments. If the TMC Mineral Lease were to be terminated our operations would be significantly impacted until such time that we were able to enter into a substitute lease. There can be no assurance that we could enter into a substitute lease upon favorable terms if at all or that such lease would not require us to relocate our extraction facility.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 7 

 

 

We may be required to make significant capital expenditures to comply with laws and the applicable regulations and standards of governmental authorities and organizations.

 

We are subject to various national, state, and local laws and regulations in the various countries in which we operate, including those relating to the renewable energy industry in general, and may be required to make significant capital expenditures to comply with laws and the applicable regulations and standards of governmental authorities and organizations. Moreover, the cost of compliance could be higher than anticipated. On the effective date hereof, our operations will become subject to compliance with the U.S. Foreign Corrupt Practices Act in addition to certain international conventions and the laws, regulations and standards of other foreign countries in which we operate. 

 

In addition, many aspects of our operations are subject to laws and regulations that relate, directly or indirectly, to the renewable industry. Existing and proposed new governmental conventions, laws, regulations and standards, including those related to climate and emissions of “greenhouse gases,” may in the future add significantly to our operating costs or limit our activities or the activities and levels of capital spending by our customers. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and even criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that may limit or prohibit our operations. The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations which impose substantial new regulatory requirements on our oil extraction operations could also harm our business, results of operations, financial condition and prospects. 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 8 

 

 

Certain Factors Related to Oil Sands Exploration

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Environmental and regulatory compliance may impose substantial costs on us.

 

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

 

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

 

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

 

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

 

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

 

 9 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 10 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 11 

 

 

We may have difficulty distributing the oil we produce, which could harm our financial condition. 

 

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

 

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

 

Challenges to our properties may impact our financial condition.

 

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

 

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

 

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

 

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

 

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

 

 12 

 

 

Certain Factors Related to Our Common Shares

 

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

 

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

 

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

 

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

 

We do not anticipate paying any cash dividends.

 

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

 

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

 

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

 

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

 

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

speculation in the press or investment community;

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

 

 13 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our ability to issue an unlimited number of common shares and preferred shares may have anti-takeover effects that could discourage, delay or prevent a change of control and may result in dilution to our investors.

 

Our charter documents currently authorize the issuance of an unlimited number of common shares without nominal or par value and an unlimited number of preferred shares without nominal or par value in one or more series without the requirement that we obtain any shareholder approval. The Board could authorize the issuance of additional preferred shares that would grant holders rights to our assets upon liquidation, special voting rights, redemption rights. That could impair the rights of holders of common shares and discourage a takeover attempt. In addition, in an effort to discourage a takeover attempt, our Board could issue an unlimited number of additional common shares. There are currently no preferred shares outstanding. If we issue any additional shares or enter into private placements to raise financing through the sale of equity securities, investors' interests in our company will be diluted and investors may suffer substantial dilution in their net book value per share depending on market conditions and the price at which such securities are sold. If we issue any such additional shares, such issuances also will cause a reduction in the proportionate ownership and voting power of all other shareholders.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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B. Business Overview

 

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

 

 

 

Oil Sands Mining

 

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

 

Oil Sands Exploration and Processing Plant 

 

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

 

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

 

Resources and Mining Operations

 

Through its acquisition of TMC on June 1, 2015, PQE indirectly acquired certain mineral rights under a Mining and Mineral Lease Agreement, dated as of July 1, 2013, between Asphalt Ridge, Inc., as lessor, and TMC, as lessee, covering lands consisting of approximately 1,229.82 acres near Temple Mountain area in Asphalt Ridge, Utah (the “TMC Mineral Lease”). More recently, PQE Oil acquired mineral rights under two mineral leases entitled “Utah State Mineral Lease for Bituminous-Asphaltic Sands”, each dated and made effective on June 1, 2018, entered into between the State of Utah’s School and Institutional Trust Land Administration (“SITLA”), as lessor, and PQE Oil, as lessee, covering lands in Asphalt Ridge that largely adjoin the lands held under the TMC Mineral Lease (collectively, the “SITLA Mineral Leases”). At this time, PQE (through its subsidiaries) holds mineral leases encompassing a total of 2,541.76 acres in the Asphalt Ridge areas, consisting of 1229.82 acres currently held under the TMC Mineral Lease, and an additional 833.03 acres and 478.91 acres, respectively, held under the SITLA Mineral Leases.

 

The following table sets forth the gross and net developed and undeveloped acreage held under the TMC Mineral Lease.

  

TMC Mineral Lease

Developed/Undeveloped Acreage (Gross/Net)

Total Acreage  
Gross Acres (Working Interests & Royalty) 1229.82 acres
Net Acres (100% Working Interests, less Royalty) 1111.76 acres
Developed Acreage  
TME AR Mine #1/Permit Boundaries  
Gross Acres (Working Interests & Royalty) 174.00 acres
Net Acres (100% Working Interests, less Royalty) 157.30 acres
Undeveloped Acreage  
Acreage Outside TME AR Mine #1/Permit Boundaries  
Gross Acres (Working Interests & Royalty) 1055.82 acres
Net Acres (100% Working Interests, less Royalty) 954.46 acres

 

The TMC Mineral Lease

 

Under the TMC Mineral Lease, TMC has the exclusive right to explore for, mine and produce oil and other minerals associated with oil sands, subject to certain depth limits. The TMC Mineral Lease was amended on October 1, 2015 and further amended on March 1, 2016, on February 21, 2018, and most recently on November 21, 2018. The primary term (the “Primary Term”) of the TMC Mineral Lease, as amended, commenced July 1, 2013 and continues for six years, plus an extension period. The term “extension period” is defined as a period of time measured from March 1, 2018 to the earlier of (i) March 1, 2019, or (ii) the date on which TMC delivers to the lessor a written financial commitment for the construction of PQE’s second proposed facility (or an expansion to the existing processing facility located on the Lease).

 

During the Primary Term, if TMC fails to satisfy the requirements of “continuous operations”, the TMC Primary Lease will terminate unless the parties agree in writing to continue the Lease. If TMC, at the end of the Primary Term, has satisfied the requirements of continuous operations, the TMC Mineral Lease will continue in effect beyond the Primary Term as long as TMC continues to comply with any applicable requirements of continuous operations. Under the Lease, the term “continuous operations” consists of the following two requirements:

 

(a) Processing Capacity. TMC must construct or operate one or more facilities (or any expansion to an existing facility) having the capacity to produce an average daily quantity (“ADQ”) of oil other hydrocarbon products from oil sands mined or extracted from the Lease that, in the aggregate will achieve (or exceed) the following:

 

By 07-01-2019, at 80% of an ADQ of 1,000 barrels/day;

By 07-01-2010, at 80% of an ADQ of 2,000 barrels/day; and

By 07-01-2021 (and for the remaining term of the Lease), at 80% of an ADQ of 3,000 barrels/day.

 

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(b) Minimum Operations. From and after July 1, 2019, TMC must achieve oil sands processing operations that equal (or exceed) the applicable ADQ requirements specified above either (i) during at least 180 days in each lease year, or (ii) during at least 600 days in any three consecutive lease years.

 

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

 

  (i) Termination will be automatic if there is a lack of a written financial commitment to fund PQE’s proposed second 1,000 barrels per day processing facility or expansion of its current facility to an additional 1,000 barrels per day prior to March 1, 2019 or a lack of a written financial commitment to fund a proposed third 1,000 barrels per day processing facility or expansion of its current facility to an additional 1,000 barrels per day prior to March 1, 2020.  We further expect the cost of constructing each of these two proposed facilities or expansion of our current facility will range between $10 million and $12 million, which we intend to fund from revenue derived from operations, which to date have been minimal and/ or third party funding sources for which we have no commitment to date.  See Risk Factors- “Our operations are dependent upon us maintaining our mineral lease for the Asphalt Ridge Property”).

(ii)Cessation of operations or inadequate production due to increased operating costs or decreased marketability and production is not restored to 80% of capacity within three months of any such cessation will cause a termination.
(iii)Cessation of operations for longer than 180 days during any lease year or 600 days in any three consecutive years will cause a termination.
(iv)A failure of PQE’s proposed three 1,000 barrels per day plants to produce a minimum of 80% of their rated capacity for at least 180 calendar days during the lease year commencing July 1, 2020 plus any extension periods will cause a termination.
(v)PQE may surrender the lease with 30 days written notice.
(vi)In the event of a breach of the material terms of the lease, the lessor will inform the lessee in writing and PQE will have 30 days to cure financial breaches and 150 days to cure any other non-monetary breach.

  

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

 

(i)From July 1, 2018 to June 30, 2020, minimum payments of $100,000 per quarter.
(ii)From July 1, 2020, minimum payments of $150,000 per quarter.
(iii)Minimum payments commencing on July 1, 2020 will be adjusted for CPI inflation.

 

Production royalties payable under the TMC Mineral Lease, as amended are eight percent (8%) of the gross sales revenue, subject to certain adjustments up until June 30, 2020. After that date, royalties will be calculated on a sliding scale based on crude oil prices ranging from 8% to 16% of gross sales revenues, subject to certain adjustments.

 

On March 1, 2016, the TMC Mineral Lease was terminated as a result of our failure to deliver to the lessor a financial commitment for the construction of an initial processing facility by March 1, 2016. The Restatement of and Second Amendment to Mining and Mineral Lease Agreement, dated as of March 1, 2016, reinstated the TMC Mineral Lease and extended the deadline for delivering to the lessor the financial commitment to March 1, 2017. We are currently in full compliance with the terms of the TMC Mineral Lease. As of May 31, 2018, we have paid advance royalties of $1,824,836 (August 31, 2017 - $1,356,040) to the lessor, of which a total of $1,057,500 have been used to pay royalties as they have come due under the terms of the TMC Mineral Lease. During the three months ended May 31, 2018, $134,500 in advance royalties were paid and $33,750 have been used to pay royalties that have come due.

 

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

 

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

 

i) Average sales price for fiscal year 2015

 

Month  

Average

Sales Price

    Net Barrels1
August   $ 30.39       1,277.00  
September   $ 32.97       1,926.53  
October   $ 33.79       1,866.99  
November   $ 30.42       898.21  
December   $ 24.83       1,808.60  
Total             7,777.33  

 

 

1 The calculation of the “Net Barrels” produced is based on the exclusion of any applicable state severance (production), ad valorem or sale taxes, royalty interests, and third-party non-operating working interests under the TMC Mineral Lease.

 

ii) Average production costs for fiscal year 2015

 

Month 

Average

Production

Cost

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

  

The costs involved in PQE’s Extraction Technology Process include: the costs for oil sands ore, natural gas liquids, aromatic solvent, operator labor, electricity, propane, nitrogen, water, diesel fuel and rental equipment.  The primary costs are the costs of the oil sand ore, natural gas liquid, aromatic solvent, labor costs and freight costs for transportation of the oil sand ore form the mine site to the facility.  Other than the aromatic solvent, the solvents used in the Extraction Technology is produced by PQE by processing natural gas liquids through the distillation column.  The aromatic solvent is added to the distillate. The fixed costs per barrel based upon current pricing is as follows: operator labor ($3.77 per barrel), electricity ($0.63 per barrel), propane ($0.94 per barrel), nitrogen ($0.25 per barrel), water ($0.31 per barrel), diesel fuel ($0.31 per barrel) and rental equipment ($).93 per barrel) and freight costs ($6.25 per barrel); the fixed costs remain the same regardless of the API as does the cost for the oil sands ore (two tons of oil sands ore are required per barrel regardless of the API being produces).  The cost of the solvent increases per barrel based upon the desired API, the higher the API the higher the cost (ranging from $2.62 per barrel for an API of 15.7 to $16.27 for an API of 42, all based on current prices). We further do not expect our operating costs to materially change as the depth of the open pit at Asphalt Ridge increases over time, and further anticipate various economies of scale, such as bulk purchases, could reduce average production costs per barrel as operating capacities are increased.

 

The API gravity for the raw heavy oil or bitumen extracted from oil sands ores initially treated at the Asphalt Ridge plant average approximately 10 degrees. Through the application of our Extraction Technology at the plant, a new or distinct crude oil is produced having a range of API gravity of between 20 degrees and 35 degrees. Through the use of our solvent formulation and the select distillation capabilities, the plant is able to draft a final crude oil product to meet the specifications of a range of customers (and pipeline).

 

We are currently selling our finished crude oil product directly to a refinery customer at a price representing a discount to West Texas Intermediate Crude benchmark market price. The purchaser takes delivery of the finished crude oil product or near the plant and transports it to a refinery in Nevada. The specifications of the finished crude oil produced at the plant are effectively tailored to meet customer (pipeline and refinery) specifications.

  

On September 15, 2008, a large mining permit was granted to TME Asphalt Ridge, LLC by the State of Utah Division of Oil, Gas, and Mining (“UDOGM”) for the mining and development of the TME AR Mine #1, an open pit mine located on TMC Mineral Lease.

 

On or about July 9, 2015, UDOGM approved an application filed by TMC Capital to transfer the “Notice of Intention to Commence Large Mining Operations” for the TME AR Mine #1 (Permit # M/047/0089) from TME Asphalt Ridge LLC to TMC Capital. On October 27, 2017, UDOGM granted final approval to TMC Capital’s “Amended Notice of Intention to Commence Large Mining Operations” and issued final Permit # M/047/0089 authorizing TMC to conduct operations at TME AR Mine #1.

 

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On or about August 6, 2018, PQE Oil filed an amended “Notice of Intention to Commence Large Mining Operations” at the TME AR Mine #1, primarily for the purpose of notifying UDOGM that PQE Oil will be the operator under the TMC Minerals Lease and to provide an update on the mining and oil sands processing plan developed by PQE Oil for the TME AR Mine #1. The August 2018 Notice of Intention to Commence Large Mining Operations is currently pending with UDOGM and we anticipate its approval by the end of the 2018 calendar year.

 

Mining operations, including the initial development of the mine at the property and removal of the overburden soil layer has already been performed. In addition to the mining permits, all environmental, construction, utility and other local permits necessary for the construction of the plant and the processing of the oil sands have been granted to PQE.

 

Specifically, a Groundwater Discharge Permit was issued by the Utah Department of Environmental Quality (Division of Water Quality, Water Quality Board), on July 26, 2016 (expiration on July 27, 2021), covering disposal of tailings from ore sands produced from the land area encompassed by the TME AR Mine #1. This permit was required by Utah law even though our processing facility does not use a water-based process and authorizes a return of residual sand tailings to the mine for backfill and capping. A Small Source Registration air permit was issued by the Utah Department of Environmental Quality by a letter dated November 2, 2018. The letter confirms that our processing facility at Asphalt Ridge is exempt from any requirement of additional air quality permits since the facility produces less emissions than the level that would require a special air permit. A Conditional Use Permit (CUP) was issued by the Uintah County (Utah) Commission to us on January 29, 2018, for the operation of our current processing facility. The CUP is a right/interest in land under Utah law and will continue in effect in perpetuity. A local business license was issued to PQE Oil by the County Commission of Uintah County, Utah on November 19, 2018. The business license must be renewed annually on payment of a license renewal fee.

  

The TMC Mineral Lease and the lands covered thereby are in the Asphalt Ridge area of northeastern Utah. Asphalt Ridge is located along the northern edge of the Uintah Basin and contains a number of oil sands deposits located on the margins of the basin. Most of the oil-impregnated reservoirs or deposits in the Asphalt Ridge area are found in the Rimrock Sandstone (Mesaverde Group Formations) and in the (Tertiary) Duchense River Formation. Substantial bitumen deposits in the Rimrock and Duchense River Formations extend from the northwest in a southeasterly direction through a substantial part (almost all) of the lands included in the TMC Mineral Lease, particularly the acreage located in T5S-R21E (Section 25) and T5S-R22E (Section 31) where the TME AR Mine #1 is located. Bitumen-saturated pay thicknesses existing within the lands covered by the TMC Mineral Lease generally range from 50-200 feet, with some areas of the deposits approaching 300 feet in pay thickness. PQE expects that oil sands (bitumen) deposits may be mined economically at depths up to 250-300 feet below the surface.

 

The oil and gas properties (including plants, equipment etc) included in or under the TMC Mineral Lease are subject to the State of Utah’s property (ad valorem) tax. The actual tax rate is established by each county in the State (and therefore may vary) and is generally assessed against the “fair market value” of the property. Under Utah Code § 59-2-1103, the oil and gas properties included in the SITLA Leases are exempt from the State’s property (ad valorem) tax (although this exemption does not apply to improvements on state lands).

 

Under Utah Code § 59-5-120, beginning January 1, 2006 and ending June 30, 2026, no severance (production) tax will be imposed on oil and gas produced from oil sands (tar sands). Accordingly, severance tax will not be owed to the State of Utah on the production of oil and hydrocarbon substances from the TMC Mineral Lease or the SITLA Leases until after June 30, 2026.

 

The SITLA Leases

 

The following table sets forth the total gross and total net undeveloped acreage of the SITLA Leases.

 

Table 3
SITLA Leases
Developed/Undeveloped Acreage (Gross/Net)
SITLA Mineral Lease #53806  
Total Gross Acres (Working Interests & Royalty) 833.03 acres
Total Net Acres (100% Working Interests) 766.39 acres1
   
SITLA Mineral Lease #53807  
Total Gross Acres (Working Interests & Royalty) 478.91 acres
Total Net Acres (100% of Working Interests) 440.60 acres1
   
All Acreage is Currently Undeveloped  

  

The SITLA Leases have a primary term of ten (10) years, and will remain in effect thereafter for as long as (a) bituminous sands are produced in paying quantities, or (b) PQE is otherwise engaged in diligent operations, exploration or development activity and certain other conditions are satisfied. Generally, the SITLA Leases will not continue in effect after the 20th anniversary of their effective dates except by production of leased substances in paying quantities. An annual minimum royalty of $10 an acre must be paid during the first ten years of the SITLA Leases; from and after the 11th year of the leases, the annual minimum royalty may be adjusted by the lessor based on certain “readjustment” provisions in the SITLA Leases. Annual minimum royalty paid in any lease year may be credited against production royalties accruing in the same year.

 

The SITLA Leases provide that PQE must pay: (i) an annual rent equal to the greater of $1 an acre or a fixed sum of $500 (without regard to acreage); and (ii) a production royalty of 8% of the market price received by it for products produced from the leases at the point of first sale, less reasonable actual costs of transportation to the point of first sale (with the royalty rate subject to increase on or after the 10th anniversary of the lease, subject to a 12.5% cap during the term thereof, and a proviso that production royalties under the leases shall never be less than $3.00/bbl during the term of the leases). As the sole lessee under the SITLA Leases, PQE owns 100% of the working interests under the leases, subject to payment of annual rentals, advance annual minimum royalty, and production royalties.

 

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Extraction Technology

 

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

 

The Extraction Technology, which has been midwifed since 2015 and unlike the technology utilized in 2015, utilizes no water in the process, is anticipated to produce no greenhouse gases, requires no high temperature and/or pressure for the extraction process, and expects to extract up to 99% of all hydrocarbon content and recycle up to 99% of the solvents. The proprietary solvent composition consists of hydrophobic, hydrophilic and polycyclic hydrocarbons. It is expected to dissolve up to 99% of heavy bitumen/asphalt and other lighter hydrocarbons from the oil sands, and prevent their precipitation during the extraction process. Solvents used in this composition form an azeotropic mixture which has a low boiling point of 70 – 75 C degrees and it is expected to allow recycling of over 99% of the solvent. These features, in the event they produce as anticipated by PQE, make it possible to perform hydrocarbon extraction from oil sands at mild temperatures of 50 – 60 degrees C, with no vacuum or/and pressure applied that would lead to high energy and economic efficiency of the extraction of oil from the overall oil sands extraction process.

  

In the oil extraction process, depending upon the customer’s request for an API level (the extracted bitumen starts from the ground at an average API gravity of 10 degrees), through the use of a distillation process and a solvent which we develop ourselves from natural gas condensate, ordinary chemicals and recycled solvent (the solvent can be used at least four times), the hydro-carbons in the extracted bitumen are manipulated. The higher the temperature, the higher the resultant API, more hydrocarbons are removed and more solvent is used. The crude oil produced and sold to the customer is not bitumen and not solvent, it is not a “blend” of separate products and does not include diluent. It is a hydro-carbon, a distinct product having its own specifications.

 

As such, in the refining process no diluents or blending agents are used to increase the viscosity of the heavy oil extracted from bitumen saturated ores. Instead, varying amounts of solvent is introduced into a mixing tank with a raw bitumen-saturated stream generated from the initial treatment of mined or extracted oil sands ores and sands (via crushing etc.). The solvent is designed to release crude oil from bitumen-saturated sandstones during processing. This process yields an unfinished crude oil containing the solvent on the one hand, and a second residual consisting of clean sand (containing little to no hydrocarbons).

 

The oil extraction process has a reboiler, distillation column at the top of the reboiler, heat exchangers, air fin condenser, and a utility boiler plus propane tank as the energy source. Reboiler and distillation column are used to recycle the solvent. The hydrocarbon stream containing the solvent is then subjected to a distillation process where the solvent is recovered and recycled for reuse in future process streams. The oil-solvent mixture is heated up at the reboiler to the solvent’s boiling temperatures, overheated vapors travel through the distillation column and solvents are condensed back into the liquid in the air fin cooler and returned back into the process.

 

During the recovery of the solvent through reboiling and distillation, the plant’s engineering and technical personnel are able to select the hydrocarbon chains in the condensate/solvent that are to be flashed off and recovered for recycled reuse in the plant, which in turn produces a crafted finished crude oil. In other words, by selectively stripping or flashing off different hydrocarbon chains from the condensate in the solvent (whether it the heavier hydrocarbons such as the C5 pentanes/pentenes or C6 hexanes, or the lighter hydrocarbons such as methane (C1), ethane (C2), propane (C3) and the butanes (C4), plant personnel are able, by design, to use the condensate component of the solvent as a feedstock to produce a relatively sweet heavy to medium crude oil (with an API gravity in the 20-30 degree range) or a sweet lighter crude oil (with an API gravity in the 30-40 degree range).

 

As part of a hydrocarbon refining process utilizing basic chemistry, the natural gas condensate used in the solvent serves dual functions of (1) a solvent that effectively causes a release of heavy oil from the bitumen-saturated stream, and (2) a feedstock that, during distillation or reboiling with a second feedstock consisting of the heavy crude oil stream extracted from bitumen, produces a finished crude oil product. The solvent that is not recovered in the refining process effectively acts as a feed stock to produce the crude oil.

 

While the initial tests of the Extraction Technology in 2015 did not include recycling of the solvents, PQE’s revised Extraction Technology process is expected to be able to recycle over 99% of the solvent, based, among other things, on the results of third party tests of the different batches of the heavy oil that have been produced.

 

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

 

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

 

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

 

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Intellectual Property

 

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

 

DOCKET   TITLE   COUNTRY  

DATE FILED

SERIAL NO.

 

DATE ISSUED

PATENT NO./STATUS

1492.2  

Oil From Oil Sands

Extraction Process

  USA  

09/26/12

13/627,518

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

10/07/11

61/545,034

 

02/06/18

9,884,997

Expires: 10/07/31

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

 

Corresponding Foreign Patent Properties

 

11492.2a   Oil Extraction Process   Canada  

09/30/11

2,754,355

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

Oil From Oil Sands

Extraction Process

  Russia  

04/28/14

2014117162

 

12/20/15

2571827

Expires: 09/27/2032

 

The Oil Sands Market

  

As an unconventional hydrocarbon resource, oil sands hold hundreds of billions of barrels of oil on a worldwide basis. Although Canada is the only country that is currently extracting large quantities of oil from its oil sands deposits, the United States also has large oil sands resources that can be developed. In a 2007 Report entitled “A Technical, Economic, and Legal Assessment of North American Oil Shale, Oil Sands, and Heavy Oil Resources In Response to Energy Policy Act of 2005 Section 369(p)” (September 2007), prepared by the Utah Heavy Oil Program, Institute For Clean and Secure Energy and The University of Utah for the U.S. Department of Energy (the “2007 Report”), the authors reported the following:

 

The United States has an estimated 76 billion barrels of oil-in-place (OIP)1 from bitumen and heavy oil contained in oil sands resources, consisting of proven or measured OIP (22.5 billion barrels) and speculative OIP (53.6 billion barrels);

  

In the United States, Utah is known to have the largest oil sands deposits, with total resource estimates ranging from 23 to 32 billion barrels of OIP from bitumen and heavy oil contained in oil sands formations and deposits. This total resource estimate range may be subdivided into proven or measured OIP (11.6 to 22.5 billion barrels) and speculative OIP (20.7 to 53.6 billion barrels); and

  

Within the state of Utah, the region that has experienced the most oil sands development, both in terms of existing oil production and supporting infrastructure, is the Asphalt Ridge area located on the northern edge of the Uinta Basin in eastern Utah. In the 2007 Report, it is estimated that about one (1) billion barrels of OIP exist in the form of bitumen and heavy oil contained in oil sands formations and deposits in the Asphalt Ridge area. This estimate of total oil sand resources consists of proven or measured OIP (435 million barrels); probable OIP (438 million barrels); and possible OIP (175 million barrels).

  

From our own investigation of the oil sands deposits in the Asphalt Ridge area, we believe that a substantial part of the oil sands deposits in this area are accessible through outcroppings or in shallow depths with limited or no overburden. In our view, the location and accessibility of oil sands deposits in Asphalt Ridge create an opportunity for commercial development, supported by positive economics, using surface mining techniques and our extraction technology.

  

The worldwide growing demand for heavy crude oil and the recent decline in heavy crude oil production in countries such as Venezuela, makes the high quality, low sulfur, heavy oil found in oil sands deposits in the United States a valuable resource that has been underdeveloped to date. The development of “tight shale” oil plays in the United States has produced significant quantities of light, sweet crude oil reserves, but heavy oil development in the United States has lagged. The development of oil sands domestically has the potential to turn the United States into a major supplier of heavy oil to world markets. To date, oil sands development has been limited by the absence of a viable technology that can extract the heavy oil from the oil sands deposits in an economical and environmentally responsible manner. To that end, PQE has developed, and patented an extraction technology that aims to develop oil sands reserves in an economical and environmentally responsible manner PQE is currently expanding its commercial oil sands extraction operations in Asphalt Ridge, Utah utilizing a process that is economical, environmentally friendly and produces high quality heavy oil.

 

 

1. OIP are not estimates of reserves or recoverable resources. Moreover, OIP estimates indicated as “probable”, “speculative” or “possible” carry greater risks of uncertainty than resources that are “proven” or “measured”.

 

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We have tested our Extraction Technology both in Asphalt Ridge and with oil sands sourced from different parts of the world and having different hydrocarbon chemical compositions. To date, we have conducted tests with oil sands from Russia, China, Indonesia and the Middle East. Our tests with Russian oil sands, conducted in Ufa, Bashkorkostan (Russia) using a multi-ton pilot plant, used a local oil sands ore with oil saturation in a range of 7-10%, resulted in the industrial quantities of heavy oil. Other tests, consisting of oil sands samples from China, Indonesia and Jordan, were conducted at PQE’s laboratory in San Diego using lab bench testing with our own solvent blend. By introducing the solvent mixture to crushed and treated ore containing bitumen oil, the oil was separated by recycling the solvent with a laboratory-scale rotor vacuum evaporator. Sand tailings were separated by centrifugation and dried under the vacuum.

 

Through our testing of oil sands sourced from different countries, we found that the efficiency and consistency of PQE’s extraction technology are not affected by differences in the chemical composition of the oil/bitumen in the oil sands. Despite relatively significant differences in oil/bitumen chemistry, both the efficiency and consistency of our extraction technology remained intact, resulting in an oil recovery efficiency that in each test exceeded 99%. We believe that this testing demonstrates that PQE’s extraction process is universal in its application and does not depend on the material source or the hydrocarbon content or fingerprint.

 

Accord Acquisition

 

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

 

Petrobloq, LLC

  

In November 2017, through our wholly owned subsidiary, PQE, we formed a subsidiary Petrobloq. Petrobloq has entered into an agreement with First Bitcoin Capital Corp. (“FBCC”), a global developer of blockchain-based applications, to design and develop a blockchain-powered supply chain management platform for the oil and gas industry. The platform is being designed to be a “one-stop shop” that will provide both small and large oil and gas producers and operators with the ability to customize their own distributed ledger modules that will permit each company, in a secure “closed” environment, to document, track, and account for the supply of equipment, materials and services in project, field, and lease development. The agreement with FBCC requires that Petroteq pay FBCC $500,000 for the services to be provided, of which an initial $100,000 has been paid to FBCC to commence its research and development activities.

 

The supply chain management platform is currently in the v1 Beta early stage of development and we are in the process of continuing research and development activities. The current development plans are that the platform will be blockchain agnostic and able to run on any blockchain that is commercially available. The Company’s business does not entail and it is not anticipated that it will entail, the creation, issuance, or use of any digital assets.

 

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

 

Recruiter.com

 

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

 

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Enforceability of Civil Liabilities

 

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

 

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

 

Regulation

 

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

 

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

 

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

 

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

 

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

 

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OSHA and Other Laws and Regulations.

 

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

 

Oil Pollution Act.

 

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

 

Clean Water Act.

 

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

 

Competition

 

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

 

Implications of Being an Emerging Growth Company

 

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

 

 29 

 

 

C. Organizational Structure

 

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

 

 

D. Property, Plant and Equipment

 

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

 

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

 

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

 

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

 

 

 

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

 

Source: JT Boyd, 2015.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

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

 

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

 

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

 

Overview

 

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

 

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

 

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

 

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

 

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

 

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

 

A.Operating Results

 

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

 

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

 

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

 

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

 

Summary of Quarterly Results

 

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

 

Three months ended 

May 31,

2018
($)

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

 

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

 

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

 

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

 

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

 

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

 

Three months ended 

May 31,

2017
($)

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

 

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

 

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

 

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

 

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

 

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

 

  

Three months
ended

May 31,

2018

  

Three months

ended

May 31,

2017

  

Change

($)

  

Change

%

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

 

  

Nine months

ended

May 31,

  

Nine months ended

May 31,

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

 

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

 

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

 

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

 

Net Revenue, Cost of Sales and Gross Loss

 

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

 

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Operating Expenses

 

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

 

An increase in travel and promotion expenditure of $1,641,576 or 1,611.5% as we completed our expansion product and embarked on a public relations and investor relations exercise to communicate progress to the market.
Professional fees increased by $798,361 or 872.5%, primarily due to advisory services offered to us in formulating the business operations and strategy.
Salaries and wages had increased by $100,555 or 66.2% as we had recruited a number of employees related to the expansion of the facility.
Gain on settlement of liabilities was $(216,297) and 2,253,385 for the three months ended May 31, 2018 and 2017, respectively. The gain on settlement in the prior year arose on certain debt conversions settled at a discount to the carrying value of the debt. The current year gain was as a result of settling liabilities at a discount by the issue of shares.

Interest expense decreased by 83.7% due to the conversion of a significant amount of debt into equity during the prior year to improve our equity position and allow future funding to expand the processing facility.

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

 

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

 

Net Revenue, Cost of Sales and Gross Loss

 

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

 

Operating Expenses

 

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

 

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

 

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

 

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

 

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

 

Introduction

 

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

 

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

 

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

 

Selected Annual Financial Information

 

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

 

Year ended 

August 31, 2017

($)

  

August 31, 2016

($)

  

August 31, 2015

($)

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

 

Nil

    

 

Nil

    

 

Nil

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Comparison of results of Operations from Continuing Operations

 

Net Revenue, Cost of Sales and Gross Loss

 

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

 

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

 

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Operating Expenses

 

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

 

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

 

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

 

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

 

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

 

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

 

Fuel Operations

 

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

 

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

 

Summary of Quarterly Results

 

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

 

3 months ended 

August 31, 2017

($)

  

May 31, 2017

($)

  

February 28, 2017

($)

  

November 30, 2016

($)

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

 

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

 

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3 months ended 

August 31, 2016

($)

  

May 31, 2016

($)

  

February 28, 2016

($)

  

November 30, 2015

($)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Results of Operations from Continuing Operations

 

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

 

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

 

Net Revenue, Cost of Sales and Gross Loss

 

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

 

Operating Expenses

 

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

 

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

 

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Analysis of Quarter ended August 31, 2016 and 2015

 

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

 

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

 

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

 

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

 

Fuel Operations

 

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

 

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

 

B. Liquidity and Capital Resources

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are obligated to pay future advance royalty payments under the TMC Mineral Lease in addition to our obligation under the TMC Mineral Lease to build a second and third facility or expand production at our current facility. We also have additional obligations to pay $400,000 to FBCC to design and develop a BlockChain-powered supply chain management platform for the oil and gas industry. We currently anticipate funding the royalty payments and the $400,000 form cash generated from operations as well as a significant amount of the costs associated with the new facilities/ expansion. If the cash generated form operations is not sufficient to pay all of the foregoing, we will seek financing from either debt or equity private of public offerings. To date, we have no committed sources of financing and there can be no assurance that financing will be available when needed.

 

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

 

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

 

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

 

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

 

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

 

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

 

D. Trend Information.

 

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

 

E. Off-Balance Sheet Arrangements.

 

We have not had any off balance sheet arrangements.

 

F. Tabular Disclosure of Contractual Obligations.

 

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

 

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

 

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

 

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

 

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G. Safe Harbor

 

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

 

H. Critical Accounting Policies and Significant Judgments and Estimates

 

Our consolidated financial statements are prepared in accordance with IFRS. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

IFRS 9, Financial Instruments (“IFRS 9”)

 

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

 

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

 

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

 

IFRS 16 Leases (IFRS 16”)

 

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

 

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

 

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

 

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

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The following table sets forth certain information about our executive officers, key employees and directors as of November 30, 2018.

 

Name   Age   Positions and Offices with the Registrant
         
Aleksandr Blyumkin   47   Executive Chairman and Chairman of the Board of Directors
David Sealock   58   Chief Executive Officer
Mark Korb   51   Chief Financial Officer
Gerald Bailey   77   Director and President
Vladimir Podlipskiy   55   Chief Technology Officer
Robert Dennewald   65   Director
Travis Schneider   45   Director

 

Biographies

 

The following are brief biographies of our officers and directors:

 

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

 

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

 

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

 

David Sealock, Chief Executive Officer

 

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

 

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Mark Korb, Chief Financial Officer

 

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

 

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

 

Gerald Bailey, President and Director

 

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

 

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

 

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

 

Vladimir Podlipskiy, Chief Technology Officer

 

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

 

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

 

Robert Dennewald, Director

 

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

 

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

 

Travis Schneider, Director

 

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

 

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

 

Family Relationships

 

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

 

B. Compensation

 

Executive Compensation

 

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

 

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Summary Compensation Table

  

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

 

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

 

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

 

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

 

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

  

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

 

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

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

 

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

 

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Outstanding Equity Awards at Fiscal Year-End

 

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

 

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

 

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

 

Narrative to Compensation Tables

 

Overview

 

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

 

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

 

Base Salary

 

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

 

Bonus Framework

 

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

 

Group Benefits

 

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

 

Perquisites and Personal Benefits

 

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

 

Equity Compensation

 

2019 Option Plan

 

Incentive stock options are currently granted under the 2019 Option Plan, a fixed number stock option plan approved by shareholders on November 23, 2018, which amended and replaced our 2018 Option Plan. Pursuant to the 2019 Option Plan our Board of Directors may from time to time, in its discretion and in accordance with the TSX requirements, grant to directors, officers and employees, as well as management company employees and consultants (as such terms are defined in Policy 4.4 as amended from time to time), non-transferable options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed 17,969,849, exercisable for a period of up to ten (10) years from the date of the grant. The number of common shares reserved for issuance to any individual director or officer of our company will not exceed 5% of the issued and outstanding common shares (2% in the case of optionees providing investor relations services to us) unless disinterested shareholder approval is obtained. The exercise price of any option granted pursuant to the 2019 Option Plan shall be determined by our Board of Directors when granted, but shall not be less than the Discounted Market Price (as such term is defined in Policy 4.4 as amended from time to time). Options granted pursuant to the 2019 Option Plan are non-assignable, except by means of a will or pursuant to the laws of descent and distribution.

 

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

 

Employment Agreements

 

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

 

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

 

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

 

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

 

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

 

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

 

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Director Compensation

 

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

  

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

 

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

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

 

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

 

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

 

C. Board Practices

 

Introduction

 

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

 

Corporate Governance Practices

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Board Structure and Composition

 

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

 

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

 

Remuneration Policy

 

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

 

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

 

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

 

Code of Business Conduct and Ethics

 

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

 

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Service Agreements

 

TSX Venture Corporate Governance

 

Non-Executive and Independent Directors

 

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

 

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

 

Committees of the Board of Directors

 

Our Board has appointed only one standing committee.

 

Audit Committee.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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