NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2018
NOTE 1
- NATURE OF OPERATIONS
QUANTUM ENERGY
INC. (“the Company”)
was
incorporated
under
the name “Boomers Cultural
Development
Inc.”
under
the laws
of
the State
of
Nevada
on February 5, 2004.
On
May 18, 2006, the Company changed its name to Quantum
Energy, Inc.
The Company
is a development stage diversified holding company with an emphasis in land holdings, refinery and fuel distribution.
The
Company is domiciled in the Unites
States
of
America and trades on the
OTC market
under
the
symbol QEGY.
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
This summary
of significant accounting policies is presented to assist in understanding the financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. The
accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial information, as well as the instructions
to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary
for a fair statement of its financial position as of November 30, 2018, and its results of operations for the three and nine month
periods ended November 30, 2018 and 2017, and cash flows for the nine month periods ended November 30, 2018 and 2017. The
balance sheet at February 28, 2018, was derived from audited annual financial statements but does not contain all of the footnote
disclosures from the annual financial statements. All amounts presented are in U.S. dollars. For further information, refer
to the financial statements as of and for the year ended February 28, 2018 and footnotes thereto in the Company’s Registration
Form S-1/A filed December 6, 2018.
Principles
of Consolidation
The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries FTPM Resources Ltd. and Dominion Energy
Processing Group, Inc. after elimination of the intercompany accounts and transactions.
Going Concern
These consolidated
financial statements have been prepared in accordance with U.S. GAAP to a going concern, which assumes that the Company will be
able to meet its obligations and continue its operations for the next twelve months.
As shown in
the accompanying financial statements, the Company has incurred operating losses since inception. As of November 30, 2018, the
Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows.
As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $11,266,989
at November 30, 2018, and a working capital deficit of $224,769. Achievement of the Company's objectives will be dependent upon
the ability to obtain additional financing, generate revenue from current and planned business operations, and control costs.
The Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and/or lenders,
and attaining additional commercial revenue. However, there is no assurance that the Company will be able to achieve these objectives,
therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments
relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable
to continue as a going concern. In the event the Company is unable to fulfill the terms as specified in the Farm Contract of Purchase
and Sale (Note 4), the Company could default on the agreement and surrender its right to future claims on the respective property.
Use of
Estimates
The preparation
of financial statements in accordance with accounting principles generally accepted in the United States of America requires the
use of estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management
assumptions and estimates relate to long-lived asset impairments and stock-based compensation. Actual results could differ from
these estimates and assumptions and could have a material effect on the Company’s reported financial position and results
of operations.
QUANTUM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2018
Risks and
uncertainties
The Company’s
operations are subject to significant risks and uncertainties, including financial, operational, technological and other risks
associated with operating an emerging oil and gas business, including the potential risk of business failure.
Cash and
cash equivalents
The Company
considers all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents.
Income
taxes
The Company
accounts for income taxes using the liability method. The liability method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of (i) temporary differences between financial statement carrying amounts
of assets and liabilities and their basis for tax purposes and (ii) operating loss and tax credit carry-forwards for tax purposes.
Deferred tax assets are reduced by a valuation allowance when management concludes that it is more likely than not that a portion
of the deferred tax assets will not be realized in a future period.
Fair value of financial instruments
The Company's
financial instruments include cash and cash equivalents, promissory notes payable, and promissory notes payable, related parties.
All instruments are accounted for on a cost basis, which, due to the short maturity of these financial instruments, approximates
fair value at November 30, 2018 and February 28, 2018, respectively.
Long-Lived Assets
The Company
reviews long-lived assets which include a deposit on land purchase for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions or a forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows and reports
any impairment at the lower of the carrying amount or the fair value less costs to sell.
Fair value
measurements
When required
to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective
evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair
value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for
identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs.
The amount of the total gains or losses for the period are included in earnings that are attributable to the change
in unrealized gains or losses relating to those assets and liabilities still held at the reporting date. The Company has no financial
assets or liabilities that are adjusted to fair value on a recurring basis.
At November
30, 2018 and February 28, 2018, the Company had no assets or liabilities accounted for at fair value on a recurring basis.
Stock-based
Compensation
The Company
estimates the fair value of options to purchase common stock using the Black-Scholes model, which requires the input of some subjective
assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising
them (“expected life”), the estimated volatility of the Company’s common stock price over the expected term
(“volatility”), employee forfeiture rate, the risk-free interest rate and the dividend yield. Changes in the subjective
assumptions can materially affect the estimate of fair value of stock-based compensation. Options granted have a ten-year maximum
term and varying vesting periods as determined by the Board of Directors. The value of shares of common stock awards is determined
based on the closing price of the Company’s stock on the date of the award. Compensation expense for equity awards are recognized
over the period during which the recipient is required to provide service in exchange for the award.
QUANTUM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2018
Reclassifications
Certain reclassifications
have been made to the 2017 financial statements in order to conform to the 2018 presentation. These reclassifications have
no effect on net loss, total assets or accumulated deficit as previously reported.
New Accounting
Pronouncements
In August
2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on
classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company adopted the
provisions of the pronouncement effective March 1, 2018 and it did not result in a material change to the statement of cash flows.
In January
2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The Company will apply the provisions of the update to potential
future acquisitions occurring after the effective date.
In June 2018,
the FASB issued ASU No. 2018-07, Compensation-Stock Compensation, Improvements to Nonemployee Share-Based Payment Accounting.
ASU No. 2018-07 aligns accounting for share-based payment transactions for acquiring goods and services from nonemployees with
transaction with employees. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. The Company is currently evaluating the impact of this update on its consolidated financial statements and
related disclosures.”
Other accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that
are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE
3 – EARNINGS PER SHARE
Basic Earnings
Per Share ("EPS") is computed as net income (loss) available to common stockholders divided by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares
issuable through stock options and warrants.
The dilutive
effect of outstanding securities as of November 30, 2018 and November 30, 2017, respectively, would be as follows:
|
November
30, 2018
|
|
November
30, 2017
|
Stock
options
|
|
986,666
|
|
|
4,845,000
|
Warrants
|
|
2,129,802
|
|
|
1,000,000
|
TOTAL
POSSIBLE DILUTION
|
|
3,116,468
|
|
|
5,845,000
|
|
|
|
|
|
|
QUANTUM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOVEMBER 30, 2018
At November
30, 2018 and 2017, respectively, the effect of the Company's outstanding options and warrants would have been anti-dilutive.
NOTE 4
– OTHER ASSETS
Deposit
on land purchase
On December
5, 2016, the Company executed a Farm Contract of Purchase and Sale with a land owner in Stoughton, Saskatchewan (“the Stoughton
Agreement”). The purchase price of the property is $500,000 (Canadian) subject to certain terms and conditions including
approval of the purchase by the Saskatchewan Farm Land Review board, the Company completing various test for hydrology and land
suitability, the proposed refinery project meeting all requirements of various Saskatchewan government laws and bylaws, and full
approval by all levels of provincial government and agencies. The Company paid $7,822 as a deposit on the property.
The purchase
contract originally expired on December 15, 2017, however, the contract was amended to extend the closing date to July 10, 2018
for removal of all terms and conditions to the purchase.
On
June 8, 2018, the Company amended the Stoughton Agreement to a purchase price of $525,000 (Canadian) and extended the option to
purchase the property until December 31, 2018. The Stoughton Agreement expired on December 31, 2018. Management is currently negotiating
an additional extension of the Stoughton Agreement.
NOTE 5
–NOTES PAYABLE
On October
31, 2018, the Company executed a Promissory Note with a principal amount of $5,000. The note is due on demand and bears interest
in the amount of eight percent (8%) per annum, computed on the basis of actual number of days based upon a 360-day year. As of
November 30, 2018, the accrued interest payable on the promissory note was $33 which is included in “Accounts payable and
accrued liabilities”.
The Company’s
outstanding notes payable are summarized as follows:
|
November
30, 2018
|
|
February
28, 2018
|
0%
unsecured note payable
|
$
|
2,980
|
|
$
|
2,980
|
8%
unsecured note payable
|
|
5,000
|
|
|
-
|
TOTAL
|
$
|
7,980
|
|
$
|
2,980
|
These notes
are all due on demand.
NOTE 6
–RELATED PARTY TRANSACTIONS
Certain officers
and directors of the Company had personally incurred various expenses on behalf of the Company. As of November 30, 2018 and February
28, 2018, the balances due to the officers and directors were $133,734 and $28,444, respectively.
On October
31, 2018, the Company entered into a promissory note with a principal amount of $60,000 with a limited partnership in which a
director of the Company is the general partner. The note is due on demand and bears interest in the amount of eight percent (8%)
per annum, computed on the basis of actual number of days based upon a 360-day year. As of November 30, 2018, the accrued interest
payable on the promissory note was $400 which is included in “Accounts payable and accrued liabilities, related party”.
|
November
30, 2018
|
|
February
28, 2018
|
0%
unsecured note payable
|
$
|
4,300
|
|
$
|
4,300
|
8%
unsecured note payable
|
|
60,000
|
|
|
-
|
TOTAL
|
$
|
64,300
|
|
$
|
4,300
|
|
|
|
|
|
|
QUANTUM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOVEMBER 30, 2018
NOTE 7
– COMMITMENTS AND CONTINGENCIES
On
April 15, 2018, the Company executed a conditional binding letter of intent, pursuant to which upon satisfaction of certain conditions,
IEC Arizona, Inc, a privately-held Wyoming corporation and affiliated company of IEC Arizona, Inc (“IEC”), would be
merged into Quantum Energy, Inc. The proposed merger is conditioned upon, among other things, IEC’s successful completion
of its due diligence examination of the Company, the negotiation and execution of a definitive agreement, and IEC raising in the
aggregate $50,000,000. Provided such conditions are satisfied including IEC’s funding of the Total Capital Investment, Quantum
will issue to IEC such number of shares of Quantum common stock as shall represent 60% of the then issued and outstanding shares
of Quantum common stock. Quantum will also, based on valuations yet to be determined, issue additional shares (after the initial
issuance to IEC), to additional investors, as necessary to accommodate the closing of the Total Capital Investment. The combined
entity will also provide the necessary funds required to prove out the viability of the development of the refinery (the “Refinery”)
currently planned to be developed in Stoughton Saskatchewan, Canada including (a) obtaining environmental and engineering studies
to prove the viability of the intended site, (b) if the site is determined to be viable, to acquire the land, (c) obtain required
permits and (d) pay other related costs. The transaction is expected to be completed on or before December 31, 2018 or 180 days
following approval of the S-1 filing, whichever date is later and may be extended by written agreement of Quantum Energy, Inc.
and IEC.
Several members
of the Company’s board of directors are also officers and directors of IEC Arizona, Inc.
NOTE 8
– COMMON STOCK
Common
stock
The Company
is authorized to issue 495,000,000 shares of its common stock with a par value of $0.001 per share. All shares of common stock
are equal to each other with respect to voting, liquidation, dividend, and other rights. Owners of shares are entitled to one
vote for each share owned at any Shareholders’ meeting.
Preferred stock
The Company
is authorized to issue 5,000,000 shares of its preferred stock with a no-par value per share with no designation of rights and
preferences.
On December
13, 2017, the Company issued 1,000,000 shares of its common stock pursuant to a retirement of 1,000,000 shares of convertible
Series A preferred stock. On February 6, 2018, the Company’s Board of Directors cancelled and rescinded the certificate
of Designations, Preferences and Rights of the Series A Preferred Stock. This exchange resulted in a deemed distribution to the
preferred shareholders based on the fair value of the common shares received compared to the carrying value of the preferred shares
exchanged.
Common
shares issued for cash
On February
28, 2018, the Company closed a private placement of its securities (the “2018 Offering). The 2018 Offering consisted of
the sale of “units” of the Company’s securities at the per unit price of $0.15. Each unit consisted of one share
of common stock and one warrant to purchase an additional share of common stock. Warrants issued pursuant to the 2018 Offering
entitled the holders to purchase shares of common stock for the price of $0.15 per share. The term of each warrant is for twenty-four
months from date of issuance. The proceeds of $125,000 for the 2018 Offering were received prior to February 28, 2018 but the
shares had not been issued until after that date. Thus, the proceeds are classified as “Common Stock Payable” as of
February 28, 2018. The Company issued 833,333 shares of its common stock on April 4, 2018.
QUANTUM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOVEMBER 30, 2018
Common
shares issued for services
On April 12,
2017, the Company issued 850,000 shares of its common stock with a fair value of $85,000 based on the closing price of $0.10 per
share for professional services.
On April 4,
2018, the Company issued 181,323 shares of its common stock to two service providers in lieu of cash payment for accounts payable
pursuant to the terms of the 2018 Offering. Based on a share price of $0.15, the fair value of the shares issued was $27,198 which
approximates the fair value of the consideration given and were classified as “Common Stock Payable” as of February
28, 2018.
On April 4,
2018, the Company issued 115,146 shares of its common to a service provider in lieu of cash for professional services provided
during March and April 2018. Based on a share price of $0.15, the fair value of the shares issued is $17,272.
Common
stock retirement
On January
27, 2018, the former chairman of the Company’s board of directors and a current director of the Company’s board of
directors agreed to return 5,000,000 shares of the Company’s common stock, respectively for an aggregate total of 10,000,000
common shares for consideration of $Nil. The shares are held by the Company as authorized but unissued treasury shares as of November
30, 2018.
NOTE 9
- STOCK OPTIONS
Options
issued for consulting services
In consideration
of various agreements in exchange for consulting services, the Company issued stock options to purchase shares of the Company’s
common stock based on "fair market price" which is typically the closing price of the Company's common stock on the
issue dates.
On March 15,
2018, by mutual agreement, the Company amended 666,666 fully-vested options to purchase common stock at an exercise price of $0.40
per share to an exercise price of $1.00 per share. The expiration date of the options was extended from August 13, 2018 to December
31, 2018. By mutual agreement, the Company and the holder also rescinded 333,334 non-vested options to purchase common stock.
The Company recognized an expense of $5,131 which represents the excess of fair value of the options post-modification compared
to the fair value of the options pre-modification as of March 15, 2018.
On March 15,
2018, by mutual agreement, the Company amended 1,100,000 options to purchase common stock at an exercise price of $0.22 per share
to 320,000 fully-vested options to purchase common stock at an exercise price of $1.00. The expiration date of the options was
modified from August 13, 2018 to December 31, 2018. The fair value of the options after modification of terms did not exceed the
fair value of the options prior to modification.
On March 23,
2018, 1,000,000 options, of which 666,666 were fully vested, were terminated at the request of the option holder. Prior to termination
the options had an exercise price of $0.40 per share.
As of November
30, 2018, there was no unrecognized stock option expense for consulting services.
Options
issued for land purchase option agreements
In consideration
for option agreements to purchase land located in the State of Montana, the Company issued stock options to purchase shares of
the Company’s common stock based on "fair market price" which is typically considered the closing price of the
Company's common stock on the issue dates.
All the options
for land purchase options expired on July 21, 2017 and August 22, 2017.
The following
table summarizes additional information about all options granted by the Company as of November 30, 2018:
Date
of Grant
|
Options
outstanding
|
|
Options
exercisable
|
|
|
Price
(a)
|
|
Remaining
term (b)
|
August
13, 2015
|
666,666
|
|
666,666
|
|
$
|
1.00
|
|
0.03
|
December
2, 2016
|
320,000
|
|
320,000
|
|
|
1.00
|
|
0.03
|
Total
options
|
986,666
|
|
986,666
|
|
$
|
1.00
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Weighted
average exercise price per shares
|
|
(b)
|
Weighted
average remaining contractual term in years.
|
NOTE
10 - WARRANTS
On March 15,
2018, by mutual agreement, the Company amended 500,000 common stock purchase warrants from an exercise price of $0.13 per share
to $1.00 per share.
On or about
March 15, 2018, by mutual agreement, the Company amended 500,000 common stock purchase warrants from an exercise price of $0.21
per share to $1.00 per share and extended the expiration date to June 9, 2020.
The following is a summary of the Company’s
warrants issued and outstanding:
|
For
the nine months ended November 30,
|
|
2018
|
|
2017
|
|
|
Warrants
|
|
Price
(a)
|
|
Warrants
|
|
Price
(a)
|
Beginning
balance
|
|
2,129,802
|
|
$
|
1.00
|
|
|
1,177,934
|
|
$
|
0.19
|
Issued
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
0.10
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Expired
|
|
-
|
|
|
-
|
|
|
(677,934)
|
|
|
(0.90)
|
Ending
balance
|
|
2,129,802
|
|
$
|
1.00
|
|
|
1,000,000
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Weighted
average exercise price per shares
|
The
following table summarizes additional information about the warrants granted by the Company as of November 30, 2018:
Date
of Grant
|
Warrants
outstanding
|
|
Warrants
exercisable
|
|
Price
|
|
Remaining
term (years)
|
November
19, 2016
|
500,000
|
|
500,000
|
|
$
1.00
|
|
0.97
|
July
10, 2017
|
500,000
|
|
500,000
|
|
1.00
|
|
1.53
|
February
28, 2018
|
1,129,802
|
|
1,129,802
|
|
1.00
|
|
1.25
|
Total
warrants
|
2,129,802
|
|
2,129,802
|
|
$
1.00
|
|
1.27
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly
Report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. Such forward-looking statements concern the Company’s anticipated results and
developments in the Company’s operations in future periods, plans related to its business and other matters that may occur
in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates
of amounts not yet determinable and assumptions of management.
Any statement
that expresses or involves discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions
or future events or performance (often, but not always using words or phrases such as “expects” or “does not
expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”,
“estimates”, or “intends”, or states that certain actions, events or results “may” or “could”,
“would”, “might” or “will” be taken, occur or be achieved) are not statements of historical
fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties
and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking
statements, including, without limitation:
|
·
|
Risks
related to the Company being in the exploration stage;
|
|
·
|
Risks
related to government regulation;
|
|
·
|
Risks
related to environmental concerns;
|
|
·
|
Risks
related to the Company’s ability to obtain additional required capital to implement
the Company’s business strategy reqarding the development, construction and operation
of the Stoughton refinery;
|
|
·
|
Risks
related to the Company’s insurance coverage for operating risks;
|
|
·
|
Risks
related to the fluctuation of prices for crude oil;
|
|
·
|
Risks
related to the competitive oil refinery industry;
|
|
·
|
Risks
related to the possible dilution of the Company’s common stock from additional
financing activities;
|
|
·
|
Risks
related to potential conflicts of interest with the Company’s management;
|
|
·
|
Risks
related to the Company’s shares of common stock.
|
This list
is not exhaustive of the factors that may affect the Company’s forward-looking statements. Some of the important risks and
uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors”,
“Description of Business” and “Management’s Discussion and Analysis and Plan of Operation” of this
Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, estimated or expected. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as of the date made. Quantum Energy, Inc. disclaims
any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law. The Company advises
readers to carefully review the reports and documents filed from time to time with the Securities and Exchange Commission (the
“SEC”), particularly the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K.
Quantum
Energy, Inc. qualifies all forward-looking statements contained in this Quarterly Report by the foregoing cautionary statement.
Certain statements
contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements.” These statements, identified
by words such as “plan,” “anticipate,” “believe,” “estimate,” “should,”
“expect,” and similar expressions include the Company’s expectations and objectives regarding its future financial
position, operating results and business strategy. These statements reflect the current views of management with respect to future
events and are subject to risks, uncertainties and other factors that may cause actual results, performance or achievements, or
industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties
include those set forth under the caption “Management’s Discussion and Analysis and Plan of Operation” and elsewhere
in this Quarterly Report.
As used in
this Quarterly Report, the terms “we,” “us,” “our,” “Quantum Energy,”, “Quantum”
and the “Company”, mean Quantum Energy, Inc., unless otherwise indicated. All dollar amounts in this Quarterly Report
are expressed in U.S. dollars, unless otherwise indicated.
The following
statements may be forward-looking in nature and actual results may differ materially.
Corporate Background
Our business
strategy is to develop a “state-of-the art”, energy efficient, 40,000 BPD full slate refinery in Stoughton, Saskatchewan,
Canada (the “Stoughton Refinery”) to refine the light shale crude oil primarily from the Viewfield oil field of the
Bakken formation in Saskatchewan, Canada. Our principal executive offices are located at 218 N. Jefferson Street, Suite 400, Chicago,
Illinois 60661. The Company’s telephone number is (480) 734-0337. Our website is www.quantum-e.com and is not part of this
Quarterly Report.
Historical
Operations
We were originally
incorporated as Boomers Cultural Development, Inc. (“Boomers”) on February 5, 2004, in the State of Nevada to be a
service-oriented firm that would integrate the cultural interests of baby boomers with destination learning, by packaging onsite
personal growth, education, and entertainment seminars with a variety of vacation destinations. On May 18, 2006, our name was
changed to Quantum Energy, Inc. and our business focus was changed to focus on the energy industry and in particular the oil and
gas segments of the energy industry. From 2008 through 2010, we planned, when and if funding became available, to acquire high-quality
oil and gas properties, primarily proven producing and proven undeveloped reserves as well as exploring low-risk development drilling
and work-over opportunities with experienced, well-established operators. However, the anticipated funding opportunities did not
materialize.
On October
30, 2017, Mr. Wilson, our then sole director and principal shareholder, appointed Jeffrey J. Mallmes and Andrew J. Kacic as directors
and on November 8, 2017, our directors appointed Jeffrey J. Mallmes as our chairman, president, treasurer and director, Andrew
J. Kacic as our secretary and director and Lorne Keith Stemler as our vice-president and director. At or about this time, we focused
our business strategy to develop a “state-of-the art”, energy efficient, 40,000 BPD full slate refinery in Stoughton,
Saskatchewan, Canada (the “Stoughton Refinery”) to refine the light shale crude oil from the Bakken formation of the
Viewfield oil field area of Saskatchewan, Canada.
Also, at or
about this time, Mr. Mallmes, our chairman and president, reviewed all of the outstanding agreements and transactions that we
had entered into between August 2013 and November 2017. Mr. Mallmes began to renegotiate, rescind or settle all of those agreements
that had proven not to be in our best interest or the best interest of our stockholders. As a result of Mr. Mallmes’ efforts
(i) a total of 39,699,800 shares of our Common Stock were returned to us (consisting of (a) 14,699,800 shares of Common Stock
that were returned to us pursuant to an October 26, 2017 cancellation and settlement of a July 21, 2015 agreement with Native
Son Refining LLC, (b) 10,000,000 shares of Common Stock that were returned to us in connection with the January 24, 2017 mutual
rescission and cancellation of the July 2016 agreement with Mountain Top Properties, Inc. relating to the acquisition of partnership
interests in New Tex Petroleum IV, LP; (c) 5,000,000 shares of Common Stock that were returned to us in connection with the January
15, 2018 mutual rescission of a July 2016 agreement with Mountain top Properties, Inc. relating the acquisition of a working interest
in a heavy oil project in Missouri; (d) 5,000,000 shares of Common Stock that were returned to us from Stanley F. Wilson at the
request of Mr. Mallmes; and (e) 5,000,000 shares of Common Stock that were returned to us from Andrew J. Kacic at the request
of Mr. Mallmes), (ii) at the request of Mr. Mallmes, Mr. Wilson and Mr. Kacic each returned to us 500,000 shares of Series A Preferred
Stock (which were convertible into Common Stock at a 1 for 100 ratio) were cancelled and returned to our treasury and the designation
of rights and preferences of the Series A Preferred Stock was rescinded, and in consideration we issued 500,000 shares of our
Common stock to each of Mr. Wilson and Mr. Kacic, (iii) the certificate evidencing shares of our Series B Preferred Stock (which
had previously been converted into Common Stock) was returned to us and the designation of rights and preferences of the Series
B Preferred Stock was rescinded, (iv) the exercise prices for our outstanding unexpired warrants and stock options, which had
exercise prices ranging from $0.13(USD) per share to $0.40(USD) per share, were all renegotiated and reset at $1.00(USD) per share,
(v) several outstanding promissory notes evidencing loans to Sierra Global in 2016 in the aggregate amount of $67,500(USD) were
determined by management to be not collectable and we recognized an expense of $67,500(USD) for the year ended February 28, 2018,
(vi), various land purchase option agreements with various landowners in and around the States of Montana and North Dakota encompassing
approximately 1,150 acres were cancelled or expired. The Land Contract for the purchase of the Land (480 acres) for the intended
site of the Stoughton Refinery in the Province of Saskatchewan is discussed below.
Effective
May 11, 2017, Mr. Wilson then our sole director and officer appointed Robert L. Monday (who at the time was the managing principal
of Native Son Holdings LLC), as our CEO and director and as CEO of, and our subsidiary FTMP Resources, Inc. On October 26, 2017,
Robert L Monday resigned as our CEO and director and as CEO of our subsidiary FTMP Resources, Inc.
On February
24, 2018, Lorne Keith Stemler, resigned as a director and officer of the Company and all subsidiaries.
On February
28, Stan Wilson, resigned as a director and officer of the Company.
On April 12,
2018, William J. Hinz was appointed as a director of the Company.
On July 2,
2018, Richard K. Ethington and Pamela L. Bing were appointed as directors of the Company.
We currently
have two subsidiaries: Dominion Energy Processing Goup, Inc. (“DEPG”), a Canadian Federal business corporation, which
is our 100% owned Canadian subsidiary through with we intend to develop, construct and operate the Stoughton Refinery; and FTPM
Resources, Inc., a Texas corporation which is a dormant company.
Overview of Current Operations
Our
current and planned operations are to develop, construct and operate a “state-of-the-art”, energy efficient, full
slate oil refinery including a storage tank farm and associated facilities in Stoughton, Saskatchewan, Canada (the Stoughton Refinery”).
In this regard, on August 2, 2016, we formed our Canadian subsidiary, Dominion Energy Processing Group, Inc. for purposes of the
Pre-development work, construction and operation of the Stoughton Refinery. The Stoughton Refinery, when fully developed and operating,
will be designed be a 40,000 barrel per day facility utilizing Bakken sweet crude produced from the Bakken formation in the province
of Saskatchewan province.
We
have identified a 480-acre site in Stoughton Saskatchewan (the “Land”) on which we intend to construct the Stoughton
Refinery. The Land is located in southeastern Saskatchewan in the regional municipality of Tecumseth in the heart of the Viewfield
oil field area of the Bakken formation. The unconventional, marketable resources of the Bakken in the Viewfield oil field area
are expected to be 74 million m³ (464 million barrels) (see “The Ultimate Potential for Unconventional Petroleum from
the Bakken Formation of Saskatchewan – Energy Briefing Note” April 2015 of the National Energy Board (an independent
economic regulatory agency created in 1959 by the Government of Canada,http://www.nebone.gc.ca/nrg/sttstc/crdlndptrlmprdct/rprt/2015bkkn/2015bkkn-eng.pdf).
The Land is approximately 100 kilometers north of the Canadian USA border. The Land has sufficient acreage to accommodate expansion
of the Stoughton Refinery facilities to included future ethanol and rail car load and unload facilities.
On
December 5, 2016, we executed a Farm Contract of Purchase and Sale (the “Land Contract”) with the landowner. The purchase
price of the Land under the Land Contract was $500,000(CAD). We paid $10,000(USD) ($7,822(USD)) as a deposit on the Land. Our
obligation to purchase the Land under the Land Contract is subject to certain terms and conditions including the completion of
the various tests to confirm the validity and suitability of the hydrology and the Land for the construction and operation of
the Stoughton Refinery, the proposed Stoughton refinery meeting all requirements of various Saskatchewan government laws, and
bylaws and being fully approved by all levels of the Saskatchewan government and agencies, and the Land purchase being approved
the Saskatchewan Farm Land Security Board (collectively the “Predevelopment Work”). The Land Contract had an expiration
date of December 15, 2017, however, we have negotiated an extension of the Land Contract until December 31, 2018 (unless further
extended), for removal of all terms and conditions to the purchase of the Land and the purchase price of the Land under the Land
Contract was increased to $525,000(CAD). Management is currently negotiating an additional extension of the Stoughton Agreement.
No assurances can be given that we will be able to obtain all required governmental approvals.
If
the viability and suitability of the Land for the development, construction and operation of the Stoughton Refinery is validated,
and provided we have the required capital, we intend to commence the process of obtaining necessary permits and approvals to develop,
construct and operate the Stoughton Refinery.
We
estimate that costs to complete the Predevelopment Work and the purchase of the Land will be approximately $7,500,000(CAD). We
intend to use the proceeds from our Primary Offering to pay for a portion of the Predevelopment Work. Even if we raise all $4,000,000(USD)
from our Primary Offering will need to obtain additional financing to cover the balance of the costs for the Predevelopment Work
and the purchase of the Land and permitting. We have entered into a conditional binding letter of intent which provides that if
the stated conditions in the letter of intent are satisfied we will receive the necessary funds (estimated at $7,500,000 CAD)
to complete the Predevelopment Work and the purchase of the Land. See, “Letter of Intent with Inductance Energy Corporation”
and “Certain Relationships and Related Transactions.” However, no assurances can be given that the conditions of the
letter of intent will be satisfied or that we will obtain the financing needed to complete the Predevelopment Work and the purchase
of the Land.
The
Stoughton Refinery
When
completed, the Stoughton Refinery will be a smaller, “state-of-the-art”, energy efficient refinery 40,000 BPD refining
facility located southeastern Saskatchewan in the regional municipality of Tecumseth in the heart of the Viewfield oil field area
of the Bakken formation. The Stoughton Refinery will be designed to use light sweet crude feedstock from the Bakken formation
in the Viewfield oil field area to produce a limited number of products for the local market. We intend to utilize Bakken crude
as our feed stock since it would be the most plentiful crude slate in the Viewfield oil field area where the Stoughton Refinery
will be located. We intend to refine and sell a variety of refined products to our customers, including natural gas liquids, gasoline,
jet fuel, diesel, drilling mud oil, ultra-low sulfur fuel oil, and sulfur and feedstocks.
We
intend to reduce emissions at the Stoughton Refinery by utilizing modern technologies as follows:
|
●
|
Installing ultra-low
NOx heating elements in burners & boilers.
|
|
●
|
Utilizing new technologies
that are on the market for sulfur removal systems.
|
|
●
|
Procuring hydrogen
from a separate source provider or onsite with “state-of-the-art” technology limiting emissions.
|
|
●
|
Utilizing the low
sulfur “sweet” Bakken crude oil as a feed source.
|
|
●
|
Installing vapor
recovery systems on all tanks in the tank farm.
|
|
●
|
Capturing the CO2
emissions.
|
|
●
|
Installing quality
air monitoring sensors and controls.
|
|
●
|
Utilizing SCR and
oxidizing catalysts to reduce NOx, CO and VOC emissions from selected process heaters.
|
We
believe the gasoline and diesel that we refine at the Stoughton Refinery will be less expensive because we will be able to reduce
the transportation costs of shipping crude from outside this area and then having to pay for the “return” shipping
of the refined products. However, no assurances can be given that we will be able to reduce the transportation costs so that our
refined products will be less expensive than our competitors.
Capital
Costs and Startup
We
estimate that the capital cost of developing and constructing the Stoughton Refinery will be approximately $525,000,000(CAD),
which includes the Pre-development Work, Land acquisition, permitting, engineering, ISBL (inside battery limit) plant equipment
and site work. We estimate that initial working capital and the cost of initial crude will add approximately $75,000,000(CAD),
for a total of $600,000,000(CAD). It is our intent that this total amount will also include financing fees, reserves, taxes, wages,
insurance, and other contingency expenses. No assurances can be given that the actual capital costs and startup capital will not
exceed these estimates. No assurances can be given that such financing will be available at all or, if available, on terms that
will be acceptable to us. We currently have no agreements or source or commitments for such financing.
Business
Strategy
We
have implemented several initiatives that we believe will further our business strategy to build and operate the Stoughton Refinery.
The principal elements of our business strategy are:
Identify
and Attract Growth Capital.
In order to execute our business strategy, we will require a significant amount of financing.
Any proceeds we receive from our Primary Offering will be used to commence only the very early stages of this process. If we raise
the maximum amount of funds from our Primary Offering, we will be able to commence the process of obtaining the studies to validate
the viability and suitability of the Land for the purpose of building the Stoughton Refinery and obtain the environmental permit
and purchase the Land. If the Land is determined to be viable and suitable, we will need financing, in addition to the proceeds
from our Primary Offering, to do the balance of the Predevelopment Work and to purchase the Land. Also, we estimate that the Stoughton
Refinery will cost approximately $600,000,000(CAD) to build and commence operations. Accordingly, we intend to seek the necessary
substantial financing to for the construction of the Stoughton Refinery after completion of the Pre-development Work.
Increase
Refinery Throughput.
As we commence building operations for the Stoughton Refinery and the Stoughton Refinery comes online,
we will seek to increase crude oil throughput. We intend to construct the Stoughton Refinery to be able to process up to approximately
40,000 barrels per day.
Location
of the Stoughton Refinery reducing Logistics Costs
Because
of the location of the Stoughton Refinery, we believe that the logistics costs will be reduced due to the proximity of the supply
of feed stock and the consumption of our refined products by our intended customers.
Use
of Alternative Energy to Run the Stoughton Refinery
. We believe that an important variable direct operating cost of operating
the Stoughton Refinery will be energy, which will be comprised primarily of fuel and other utility services. The volatility in
costs of fuel, principally natural gas, and other utility services, principally electricity, that will be used by the Stoughton
Refinery and other operations will affect our operating costs. Fuel and utility prices have been, and we expect will continue
to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional
markets. Natural gas prices have historically been volatile and, typically, electricity prices fluctuate with natural gas prices.
Future increases in fuel and utility prices may have a negative effect on our revenues, profitability and cash flows. We intend
to explore and, if feasible, use alternative sources of energy to operate the Stoughton Refinery to lower our operating costs.
No assurances can be given that alternative sources of energy will be available or sufficient to operate all of any portion of
the Stoughton Refinery or that the use of alternative sources of energy will lower our operating costs.
Product
Line Quantities
We
believe that the amount of crude oil being produced through new horizontal drilling and hydraulic fracking techniques and technologies
and the recent increases in the price of refined oil has created many opportunities for the refining business throughout the Bakken
area. We believe that most of the products from our proposed Stoughton Refinery can be sold in the Saskatchewan province.
Based
on operating the Stoughton refinery on a 360-day year of operations and refining at a capacity of 40,000 BPD, with crude from
the Viewfield oil field area, we estimate the Stoughton Refinery product output as follows:
Product
Yield in barrels per day, gallons per day, and total gallons per year
Product
|
Barrels
Per Day
|
Gallons
Per Day
|
Total
Gallons Per Year
|
Gasoline
|
18,400
barrels
|
772,800
gallons
|
278,208,000
gallons
|
#2
Diesel
|
13,200
barrels
|
554,400
gallons
|
200,000,000
gallons
|
#1
Diesel
|
5,600
barrels
|
235,200
gallons
|
84,672,000
gallons
|
AGO/bottoms
|
2,800
barrels
|
117,600
gallons
|
42,336,000
gallons
|
These
yields are estimates only and do not take into consideration that the yield per barrel increases about 2.6 gallons when refined.
A refined 42-gallon barrel can yield 44.6 gallons of product due to molecular expansion and light gas off-take. Other products
can include ethane, propane, isobutane, n-butane, isopentane, n-pentane, and hexanes, with the largest volumes of these products
being butane and propane. There will also be elemental sulfur that is a sellable product. These estimates do not include the additional
gasoline produced by refining an additional 10,000 barrels per day of raw naphtha into gasoline. No assurances can be given that
we will be able to achieve such estimated product yields or to achieve a 360-day year of operations.
Although
gasoline and diesel are expected to be the major products derived from the refining process at the Stoughton Refinery, we expect
that additional products can be manufactured from refined by-products including jet fuel, heavy fuel oil, asphalt, lubricants
and many more products.
Marketing
and Sales
The
Stoughton Refinery will require truck loading and unloading facilities for the crude supply and the refined products. We believe
that most of the gasoline and diesel can be sold at the site or “rack” and be transported by truck. Some of the product
may also be shipped by rail tanker car to other refineries or processing plants for the particular product.
We
expect that the price of the gasoline and the diesel per gallon will follow the “rack” prices in the nearby cities.
These prices are posted on a daily basis at reporting groups such as OPIS (oil price information service).
We
intend to sell part of the AGO (atmospheric gas and oil) and bottoms locally to the drilling industry for their diesel-based drilling
fluids and the fluids that are utilized when they turn horizontal. We also intend to sell the balance to other refineries to utilize
their heavy oil conversion units or for ultra-low sulfur ship fuel.
IEC
Letter of Intent
On
April 15, 2018, we entered into a conditional binding letter of intent with Inductance Energy Corporation a Wyoming corporation
(“IEC”), pursuant to which if all of the conditions contained in the letter of intent are satisfied, (a) we will be
merged with a newly formed subsidiary of IEC with us being the surviving company, (b) we will issue to IEC such number of new
shares of our Common Stock as shall represent 60% of our then issued and outstanding shares of Common Stock, and (c) IEC will
provide to us as the surviving company up to $50,000,000(USD), a portion of which (estimated at $7,500,000 CAD) we intend to use
to (i) validate the viability and suitability of the development of the Stoughton Refinery on the intended sight in Stoughton
Saskatchewan Canada, which will include obtaining environmental and engineering studies to validate the viability and suitability
of the intended site for the Stoughton Refinery, and (ii) if the site is determined to be viable and suitable, we will commence
the process of obtaining the required permits to build the Stoughton Refinery and (iii) we will acquire the Land, and (iv) we
will pay other related costs. No assurances can be given that the conditions to the letter of intent with IEC will be satisfied
or that the transactions or the financing, including the estimated $7,500,000(CAD), contemplated in the letter of intent will
be consummated.
Long
Range - Additional Operations
If
we are able to obtain sufficient financing to complete the Predevelopment Work and complete the development and construction of
the Stoughton Refinery and commence the operation of the Stoughton Refinery, and if we can obtain additional substantial financing,
our long range plan is to expand the Stoughton facility on the Land to include (i) a bio-ethanol plant with an initial capacity
of approximately 65,000 tons per year that will provide ethanol for blending the product gasoline from the Stoughton refinery.
We expect that the main feedstock for this plant will be wheat/barley/flax straw sourced from the local market and (ii) a rail
line extension project that will allow us and local grain producers to transport products to the boarder by using only one carrier.
No assurances can be given that we will be able to obtain such additional substantial financing to expand our Stoughton facility
to include a bio-ethanol plant or to develop a rail line extension. We currently have no agreements or source or commitments for
such financing and no assurances can be given that such financing will be available at all or if available on terms that will
be acceptable to us.
Competition
We
intend to develop, construct and operate the Stoughton refinery in the Bakken region of Stoughton, Saskatchewan Canada. Currently,
refined products are supplied from the region’s existing refineries as well as from refineries located in other regions,
including the Midwest via interstate pipelines. We believe that the principal competitive factors that will affect us are costs
of crude oil and other feedstocks, refinery efficiency, refinery product mix and costs of product distribution and transportation.
As a new entrant to the refining industry, we will face significant competition and barriers to entry from larger companies such
as Valero Energy Corp and BP and others. Because of their geographic diversity, larger and more complex refineries, integrated
operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, to compete
on the basis of price, to obtain crude oil in times of shortage, and to bear the economic risk inherent in all phases of the refining
industry.
Intellectual
Property
At
present, we do not have any patents, trademarks, licenses, franchises, concessions, and royalty agreements, labor contracts or
other proprietary interests.
Research
and Development
We
are not currently conducting any research and development activities.
Governmental
Regulation
All
of our contemplated operations and properties are and will be subject to extensive Canadian and U.S. federal, provincial, state
and local environmental and health and safety regulations governing, among other things, the generation, storage, handling, use
and transportation of petroleum and hazardous substances; the emission and discharge of materials into the environment; waste
management; and characteristics and composition of gasoline and diesel fuels. Our operations also require numerous permits and
authorizations under various environmental and health and safety laws and regulations. Failure to comply with these permits or
environmental laws generally could result in fines, penalties or other sanctions or a revocation of our permits. We will have
to make significant capital and other expenditures related to environmental and health and safety compliance, including with respect
to our air permits and the low-sulfur gasoline and ultra-low-sulfur diesel regulations.
Canada
has adopted the Canadian Environmental Protection Act 1999 (“CEPA”) and the U.S. Environmental Protection Agency has
adopted regulations that require significant reductions in the sulfur content in gasoline and diesel fuel. These regulations required
most refineries to begin reducing sulfur content in gasoline. However, we believe we may qualify for what is known as
“
small
refiner status
”
under such regulations which would provide us some relief from some of such regulations. We
intend to have the Stoughton Refinery designed and engineered to adhere to all required regulations of CEPA. No assurances can
be given that the Stoughton Refinery we will adhere to all required regulations of CEPA.
Certain
environmental laws hold current or previous owners or operators of real property liable for the costs of cleaning up spills, releases
and discharges of petroleum or hazardous substances, even if these owners or operators did not know of and were not responsible
for such spills, releases and discharges. These environmental laws also assess liability on any person who arranges for the disposal
or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person.
In
addition to clean-up costs, we may face liability for personal injury or property damage due to exposure to chemicals
or other hazardous substances that we may have manufactured, used, handled or disposed of or that are located at or released from
our refinery or otherwise related to our current or former operations. We may also face liability for personal injury, property
damage, natural resource damage or for clean-up costs for the alleged migration of petroleum or hazardous substances
from our refinery to adjacent and other nearby properties.
Waste
Handling
The
Canadian federal government and provincial statutes and regulations affect oil and natural gas exploration, development and production
activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous
and non-hazardous wastes. With applicable approval, the individual provinces administer some or all of the provisions of such
laws, sometimes in conjunction with their own, more stringent requirements. No assurances can be given the CEPA or applicable
provincial or local governments will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize
some non-hazardous wastes as hazardous for future regulation. Legislation has been proposed from time to time in the Canadian
Parliament to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.”
Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses.
Other
Regulations of the Oil and Natural Gas Industry
The
oil and natural gas industry is extensively regulated by numerous Canadian federal, provincial, state and local authorities. Legislation
affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal, provincial and state, are authorized by statute to issue rules
and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial
penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry will increase our cost of
doing business and, consequently, will affect our profitability, we believe that these burdens generally will not affect us any
differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities
and locations of production.
The
availability, terms and cost of transportation significantly affect sales of oil and natural gas. The inter-provincial transportation
and sale for resale of oil and natural gas is subject to federal and provincial regulation, including regulation of the terms,
conditions and rates for interstate transportation, storage and various other matters, primarily by the Canadian National Energy
Board. Canadian regulations govern the price and terms for access to oil and natural gas pipeline transportation. Regulations
covering inter-provincial oil and natural gas transmission in some circumstances may also affect the intra-provincial transportation
of oil and natural gas.
Although
oil and natural gas prices are currently unregulated, the Canadian Parliament historically has been active in the area of oil
and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what
proposals, if any, might actually be enacted by the Canadian Parliament or the various provincial or state legislatures, and what
effect, if any, the proposals might have on our operations. Sales of condensate, oil and natural gas liquids (“NGLs”)
are not currently regulated and are made at market prices.
Employees
With
the exception of Jeffrey Mallmes, our Chairman, President, and Treasurer and Andrew J. Kacic, our Secretary, we currently have
no other employees. We have no employment agreements with any of our management. Mr. Mallmes, Mr. Kacic, Mr. Hinz, Mr. Ethington
and Ms. Bing are devoting their full efforts and as much time as needed to move the Company forward. We anticipate hiring additional
employees as business activity warrants. We intend to use independent consultants to assist in the development, construction and
initial operations of the Stoughton Refinery.
Legal
Proceedings
In
the ordinary conduct of our business, we may be subject to periodic lawsuits, investigations and claims, including environmental
claims and employee-related matters. There are no material current legal proceedings pending against us.
Properties
Our
current corporate offices are located at our attorney’s office at 218 N. Jefferson street Suite 400, Chicago, Illinois,
60661 at no cost to the Company.
Research and Development Expenditures
The Company
has not incurred any research expenditures since incorporation.
Reports to Security Holders
The Registrant
does not issue annual or quarterly reports to security holders other than the annual Form 10-K and quarterly Forms 10-Q as electronically
filed with the SEC. Electronically filed reports may be accessed at www.sec.gov. Interested parties also may read and copy any
materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, DC 20549. Information
may be obtained on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
PLAN OF
OPERATION
Our business
strategy is to develop a “state-of-the art”, energy efficient, 40,000 BPD full slate refinery in Stoughton, Saskatchewan,
Canada (the “Stoughton Refinery”) to refine the light shale crude oil from the Bakken formation of the Viewfield oil
field area of Saskatchewan, Canada.
Management
believes it can source additional capital in the investment markets in the coming months and years. The Company may also consider
other sources of funding, including debt, potential mergers and joint ventures.
Future liquidity
and capital requirements depend on many factors including timing, cost and progress of the Company’s exploration efforts.
The Company will consider additional public offerings, private placement, mergers or debt instruments to finance its activities.
Additional
financing will be required in the future to complete all necessary steps to apply for a final permit. Although the Company believes
it will be able to source additional financing there are no guarantees any needed financing will be available at the time needed
or on acceptable terms, if at all. If the Company is unable to raise additional financing when necessary, it may have to delay
construction efforts or property acquisitions or be forced to cease operations.
RESULTS
OF OPERATIONS
|
For the three months ended
November 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$
Change
|
|
%
Change
|
Office and public company
expense
|
$
|
8,458
|
|
$
|
6,710
|
|
$
|
1,758
|
|
26.2%
|
Legal and professional fees
|
|
25,901
|
|
|
49,653
|
|
|
(23,752)
|
|
(47.8%)
|
Other expense (income)
|
|
463
|
|
|
(81)
|
|
|
544
|
|
(671.6%)
|
NET LOSS
|
$
|
34,832
|
|
$
|
56,282
|
|
$
|
(21,450)
|
|
(38.1%)
|
|
For the nine months ended
November 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$
Change
|
|
%
Change
|
Advertising
and marketing
|
$
|
-
|
|
$
|
6,836
|
|
$
|
(6,836)
|
|
(100.0%)
|
Management fees and compensation
|
|
5,131
|
|
|
-
|
|
|
5,131
|
|
N/A
|
Office and public company expense
|
|
30,659
|
|
|
18,760
|
|
|
11,899
|
|
63.4%
|
Amortization of land purchase options
|
|
-
|
|
|
120,032
|
|
|
(120,032)
|
|
(100.0%)
|
Legal and professional fees
|
|
211,430
|
|
|
160,403
|
|
|
51,027
|
|
31.8%
|
Other expense (income)
|
|
2,253
|
|
|
(766)
|
|
|
3,019
|
|
(394.1%)
|
NET LOSS
|
$
|
249,473
|
|
$
|
305,265
|
|
$
|
(55,792)
|
|
(18.3%)
|
|
|
|
|
|
|
|
|
|
|
|
The Company
has earned no operating revenue in 2018 or 2017 and does not anticipate earning any revenues in the near future.
The Company
will continue to focus its capital and resources toward permitting and development activities at its Stoughton Property.
Total net
loss for the three months ended November 30, 2018 of $34,832 decreased by $21,450 from the three months ended November 30, 2017
total net loss of $56,282. Total net loss for the nine months ended November 30, 2018 of $249,473 decreased by $55,792 from the
nine months ended November 30, 2017 total net loss of $305,265.
Office
and public company expense
|
For the three months ended
November 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
General administrative and insurance
|
$
|
818
|
|
$
|
1,089
|
|
$
|
(271)
|
|
(24.9%)
|
Travel
|
|
4,890
|
|
|
4,107
|
|
|
783
|
|
19.1%
|
Transfer agent fees
|
|
2,760
|
|
|
1,514
|
|
|
1,246
|
|
82.3%
|
Total office and public company expense
|
$
|
8,468
|
|
$
|
6,710
|
|
$
|
1,758
|
|
26.2%
|
|
For the nine months ended
November 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
General administrative and insurance
|
$
|
2,834
|
|
$
|
6,133
|
|
$
|
(3,299)
|
|
(53.8%)
|
Travel
|
|
20,122
|
|
|
6,054
|
|
|
14,068
|
|
232.4%
|
Transfer agent fees
|
|
7,703
|
|
|
6,573
|
|
|
1,130
|
|
17.2%
|
Total office and public company expense
|
$
|
30,659
|
|
$
|
18,760
|
|
$
|
11,899
|
|
63.4%
|
Total office
and public company expense increased $1,758 to $8,468 for the three months ended November 30, 2018 compared to 2017 expense of
$6,710. Total office and public company expense for the nine months ended November 30, 2018 compared to 2017 increased $11,899
from $18,760 to $30,659.
Travel expense
increased to $4,890 for the three months ended November 30, 2018 compared to $4,107 for the three months ended November 30, 2017
as management spent a significant amount of time meeting with various capital providers and potential merger candidates (Note
6 to the Consolidated Financial Statements). For the nine months ended November 30, 2018, travel expense increased $14,068 for
the same purpose.
Legal
and professional fees
|
For the three months ended
November 30,
|
|
|
|
2018
|
|
2017
|
|
$
Change
|
|
%
Change
|
Audit
fees
|
$
|
5,331
|
|
$
|
(7,000)
|
|
$
|
12,331
|
|
(176.2%)
|
Accounting
|
|
4,690
|
|
|
3,750
|
|
|
940
|
|
25.1%
|
Consultants
|
|
-
|
|
|
4,063
|
|
|
(4,063)
|
|
(100.0%)
|
Legal
|
|
15,880
|
|
|
48,840
|
|
|
(32,960)
|
|
(67.5%)
|
Total legal and
professional fees
|
$
|
25,901
|
|
$
|
49,653
|
|
$
|
(23,752)
|
|
(47.8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
November 30,
|
|
|
|
2018
|
|
2017
|
|
$
Change
|
|
%
Change
|
Audit
fees
|
$
|
24,662
|
|
$
|
-
|
|
$
|
24,662
|
|
N/A
|
Accounting
|
|
23,208
|
|
|
22,500
|
|
|
708
|
|
3.1%
|
Consultants
|
|
-
|
|
|
89,063
|
|
|
(89,063)
|
|
(100.0%)
|
Legal
|
|
163,560
|
|
|
48,840
|
|
|
114,720
|
|
234.9%
|
Total legal and
professional fees
|
$
|
211,430
|
|
$
|
160,403
|
|
$
|
51,027
|
|
31.8%
|
|
|
|
|
|
|
|
|
|
|
|
Audit fees
increased $12,331 to $5,331 for the three months ended November 30, 2018 compared to a refunded amount of $7,000 for the three
months ended November 30, 2017. For the nine months ended November 30, 2018, audit fees increased $24,662 over the prior year.
Consultant
fees decreased $4,063 and $89,063 for the three and nine months ended November 30, 2018 compared to the three and nine months
ended November 30, 2017, respectively. The Company paid fees with common stock in lieu of cash for services associated with fund
raising and capital reorganization during 2017 that did not recur during the three months ended November 30, 2018.
For the three
months ended November 30, 2018, legal fees decreased $32,960 to $15,880 compared to $48,840 for the three months ended November
30, 2017. For the nine months ended November 30, 2018, legal fees increased $114,720 compared to $48,840 for the nine months ended
November 30, 2017. The Company incurred costs associated with a registration with the SEC and various legal matters associated
with corporate governance. There are no pending legal issues or contingencies as of November 30, 2018.
LIQUIDITY
AND FINANCIAL CONDITION
BALANCE SHEET INFORMATION
|
|
November 30, 2018
|
|
February 28,
2018
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
(224,769
|
)
|
|
$
|
2,301
|
|
Total assets
|
|
|
14,843
|
|
|
|
65,186
|
|
Accumulated deficit
|
|
|
11,266,989
|
|
|
|
11,017,516
|
|
Stockholders’ deficit
|
|
|
216,947
|
|
|
|
142,075
|
|
WORKING CAPITAL
|
|
November 30, 2018
|
|
February 28,
2018
|
|
|
|
|
|
Current assets
|
|
$
|
7,021
|
|
|
$
|
57,364
|
|
Current liabilities
|
|
|
231,790
|
|
|
|
55,063
|
|
Working capital (deficit)
|
|
$
|
(224,769)
|
|
|
$
|
2,301
|
|
|
For
the nine months ended
|
CASH FLOWS
|
November
30, 2018
|
|
November
30, 2017
|
|
|
|
|
|
|
Cash
flow used by operating activities
|
$
|
(77,843)
|
|
$
|
(66,496)
|
Cash
flow provided by financing activities
|
|
65,000
|
|
|
50,000
|
Net
decrease in cash during period
|
$
|
(12,843)
|
|
$
|
(16,496)
|