OILCF 10-Q
Permex Petroleum Corp (OILCF)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by checkmark 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 ☐
Indicate
by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company. or an emerging growth company. See the 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 ☐ | |
| Smaller
Reporting Company | ||
| Emerging
Growth Company |
If
an emerging growth company, indicate by check mark 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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
As of October 22, 2024, there were common shares of the registrant issued and outstanding.
PERMEX PETROLEUM CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2024
TABLE OF CONTENTS
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EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this “Report”) to “we,” “us,” “our,” “Permex,” and the “Company” are to Permex Petroleum Corporation., a corporation existing under the laws of the Province of British Columbia, Canada, and our wholly-owned subsidiary.
Unless otherwise indicated in this Report, natural gas volumes are stated at the legal pressure base of the state or geographic area in which the reserves are located at 60 degrees Fahrenheit. Crude oil and natural gas equivalents are determined using the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or natural gas liquids.
The following definitions shall apply to the technical terms used in this Report.
Terms used to describe quantities of crude oil and natural gas:
“Bbl.” One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil, condensate or NGLs.
“Boe.” A barrel of oil equivalent and is a standard convention used to express crude oil, NGL and natural gas volumes on a comparable crude oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of crude oil or NGL.
“MBoe” One thousand barrels of oil equivalent.
“MBbl.” One thousand barrels of crude oil, condensate or NGLs.
“Mcf.” One thousand cubic feet of natural gas.
“NGLs.” Natural gas liquids. Hydrocarbons found in natural gas that may be extracted as liquefied petroleum gas and natural gasoline.
Terms used to describe our interests in wells and acreage:
“Basin.” A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.
“Completion.” The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil, NGLs, and/or natural gas.
“Developed acreage.” Acreage consisting of leased acres spaced or assignable to productive wells. Acreage included in spacing units of infill wells is classified as developed acreage at the time production commences from the initial well in the spacing unit. As such, the addition of an infill well does not have any impact on a company’s amount of developed acreage.
“Development well.” A well drilled within the proved area of a crude oil, NGL, or natural gas reservoir to the depth of a stratigraphic horizon (rock layer or formation) known to be productive for the purpose of extracting proved crude oil, NGL, or natural gas reserves.
“Differential.” The difference between a benchmark price of crude oil and natural gas, such as the NYMEX crude oil spot price, and the wellhead price received.
“Dry hole.” A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
“Field.” An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
“Formation.” A layer of rock which has distinct characteristics that differs from nearby rock.
“Gross acres or Gross wells.” The total acres or wells, as the case may be, in which a working interest is owned.
“Held by operations.” A provision in an oil and gas lease that extends the stated term of the lease as long as drilling operations are ongoing on the property.
“Held by production” or “HBP” A provision in an oil and gas lease that extends the stated term of the lease as long as the property produces a minimum quantity of crude oil, NGLs, and natural gas.
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“Hydraulic fracturing.” The technique of improving a well’s production by pumping a mixture of fluids into the formation and rupturing the rock, creating an artificial channel. As part of this technique, sand or other material may also be injected into the formation to keep the channel open, so that fluids or natural gases may more easily flow through the formation.
“Infill well.” A subsequent well drilled in an established spacing unit of an already established productive well in the spacing unit. Acreage on which infill wells are drilled is considered developed commencing with the initial productive well established in the spacing unit. As such, the addition of an infill well does not have any impact on a company’s amount of developed acreage.
“Net acres.” The percentage ownership of gross acres. Net acres are deemed to exist when the sum of fractional ownership working interests in gross acres equals one (e.g., a 10% working interest in a lease covering 640 gross acres is equivalent to 64 net acres).
“NYMEX.” The New York Mercantile Exchange.
“Productive well.” A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
“Recompletion.” The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil, NGLs or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
“Reservoir.” A porous and permeable underground formation containing a natural accumulation of producible crude oil, NGLs and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs.
“Spacing.” The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 40-acre spacing, and is often established by regulatory agencies.
“Undeveloped acreage.” Leased acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of crude oil, NGLs, and natural gas, regardless of whether such acreage contains proved reserves. Undeveloped acreage includes net acres held by operations until a productive well is established in the spacing unit.
“Unit.” The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.
“Wellbore.” The hole drilled by the bit that is equipped for natural gas production on a completed well. Also called well or borehole.
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“Working interest.” The right granted to the lessee of a property to explore for and to produce and own crude oil, NGLs, natural gas or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis.
“Workover.” Operations on a producing well to restore or increase production.
Terms used to assign a present value to or to classify our reserves:
“Possible reserves.” The additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than probable reserves.
“Pre-tax PV-10% or PV-10.” The estimated future net revenue, discounted at a rate of 10% per annum, before income taxes and with no price or cost escalation or de-escalation in accordance with guidelines promulgated by the United States Securities and Exchange Commission (the “SEC”).
“Probable reserves.” The additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than proved reserves but which together with proved reserves, are as likely as not to be recovered.
“Proved reserves.” The quantities of crude oil, NGLs and natural gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
“Proved undeveloped reserves” or “PUDs.” Proved Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
“SEC Pricing” means pricing calculated using oil and natural gas price parameters established by current guidelines of the SEC and accounting rules based on the unweighted arithmetic average of oil and natural gas prices as of the first day of each of the 12 months ended on the given date.
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CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This Report contains a number of forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this Report other than statements of historical fact, including statements that address operating performance, the economy, events or developments that management expects or anticipates will or may occur in the future, including the adequacy of funds from operations, cash flows and financing, potential strategic transactions, statements regarding future operating results and non-historical information, are forward-looking statements. In particular, the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “can,” “plan,” “predict,” “could,” “future,” “continue,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2023. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward-looking statements may include statements about:
| ● | our business strategy; | |
| ● | our reserves; | |
| ● | our financial strategy, liquidity and capital requirements; | |
| ● | our realized or expected natural gas prices; | |
| ● | our timing and amount of future production of natural gas; | |
| ● | our future drilling plans and cost estimates; | |
| ● | our competition and government regulations; | |
| ● | our ability to make acquisitions; | |
| ● | general economic conditions; | |
| ● | our future operating results; and | |
| ● | our future plans, objectives, expectations and intentions. |
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production and sale of natural gas. These risks include, but are not limited to, commodity price volatility, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating natural gas reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2023.
Reserve engineering is a method of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of previous estimates. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas and oil that are ultimately recovered.
Should one or more of the risks or uncertainties described in this Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Report. Notwithstanding the foregoing, any public statements or disclosures by us following this Report that modify or impact any of the forward-looking statements contained in this Report will be deemed to modify or supersede such statements in this Report.
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PART 1 – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
PERMEX PETROLEUM CORPORATION
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June
30, 2024 | September
30, 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Trade and other receivables (net of allowance: June 30, 2024 - $; September 30, 2023 - $) | ||||||||
| Prepaid expenses and deposits | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Reclamation deposits | ||||||||
| Property and equipment, net of accumulated depletion and depreciation | ||||||||
| Right of use asset, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Trade and other payables | $ | $ | ||||||
| Loans payable | ||||||||
| Convertible debentures | ||||||||
| Lease liability – current portion | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Asset retirement obligations | ||||||||
| Lease liability, less current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| * |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
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PERMEX PETROLEUM CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| Three
Months Ended June 30, 2024 | Three
Months Ended June 30, 2023 | Nine
Months Ended June 30, 2024 | Nine
Months Ended June 30, 2023 | |||||||||||||
| Revenues | ||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | ||||||||||||
| Royalty income | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Lease operating expense | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depletion and depreciation | ||||||||||||||||
| Accretion on asset retirement obligations | ||||||||||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Foreign exchange gain (loss) | ( | ) | ( | ) | ||||||||||||
| Interest and debt expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Gain on settlement of warrant liability | ||||||||||||||||
| Change in fair value of warrant liability | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss and comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Deemed dividend arising from warrant modification | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of common shares outstanding* | ||||||||||||||||
| * |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
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PERMEX PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Three months ended June 30
Number of Shares* | Share capital | Additional paid-in capital | Accumulated other comprehensive loss | Deficit | Total equity | |||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Warrants issued in private placement | - | |||||||||||||||||||||||
| Warrants issued for debt amendment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Number of Shares* | Share capital | Additional paid-in capital | Accumulated other comprehensive loss | Deficit | Total equity | |||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||
| Share issuance costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Deemed dividend arising from warrant modification | - | |||||||||||||||||||||||
| Warrant modification | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| 9 |
Nine months ended June 30
Number of Shares* | Share capital | Additional paid-in capital | Accumulated other comprehensive loss | Deficit | Total equity | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Warrants issued in private placement | - | |||||||||||||||||||||||
| Warrants issued for debt amendment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Number of Shares* | Share capital | Additional paid-in capital | Accumulated other comprehensive loss | Deficit | Total equity | |||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||
| Share issuance costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Deemed dividend arising from warrant modification | - | |||||||||||||||||||||||
| Warrant modification | - | ( | ) | ( | ) | |||||||||||||||||||
| Share-based payments | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| * |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
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PERMEX PETROLEUM CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30
(UNAUDITED)
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Accretion on asset retirement obligations | ||||||||
| Depletion and depreciation | ||||||||
| Foreign exchange loss (gain) | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Loss on debt extinguishment | ||||||||
| Gain on settlement of warrant liability | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Share-based payments | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | ||||||||
| Prepaid expenses and deposits | ||||||||
| Trade and other payables | ||||||||
| Right of use asset and lease liability | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capital expenditures on property and equipment | ( | ) | ||||||
| Reclamation deposit redemption | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from debenture financing | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Share issuance costs | ( | ) | ||||||
| Loan payable proceeds | ||||||||
| Loan payable repayment | ( | ) | ||||||
| Debenture repayment | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Change in cash during the period | ( | ) | ||||||
| Cash, beginning of the period | ||||||||
| Cash, end of the period | $ | $ | ||||||
| Supplemental cash flow disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Share purchase warrants issued in connection with exercise of warrants | $ | $ | ||||||
| Share purchase warrants issued in connection with debt issuance | $ | $ | ||||||
| Trade and other payables related to property and equipment | $ | $ | ||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
| 11 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 1. | BACKGROUND |
Permex
Petroleum Corporation (the “Company”) was incorporated on
On September 12, 2023, the Company’s board of directors approved a reverse stock split of the Company’s issued and outstanding common stock at a 1 for 4 ratio, which was effective October 23, 2023. All issued and outstanding common stock, options, and warrants to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect the reverse stock splits for all periods presented.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2023 or for any other interim period or for any other future fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and footnotes included in Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Principles of Consolidation
The accompanying consolidated financial statements include the assets, liabilities, revenue and expenses of the Company’s wholly-owned subsidiary, Permex Petroleum US Corporation. All intercompany balances and transactions have been eliminated.
| 12 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 2. | Significant Accounting Policies (cont’d…) |
Going concern of operations
These
consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue in operation
for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course
of business. The Company has incurred losses since inception in the amount of $
The
Company expects to raise additional funds through equity and debt financings. There is no assurance that such financing will be available
in the future. During the quarter ended June 30, 2024, the Company raised $
In view of these matters, continuation as a going concern is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to, meet its financial requirements, raise additional capital, and the success of its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should the Company not continue as a going concern.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances.
Significant estimates have been used by management in conjunction with the following: (i) the fair value of assets when determining the existence of impairment factors and the amount of impairment, if any; (ii) the costs of site restoration when determining decommissioning liabilities; (iii) the useful lives of assets for the purposes of depletion and depreciation; (iv) petroleum and natural gas reserves; and (v) share-based payments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
New accounting standards
On October 1, 2023, the Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as issued by the FASB, the modified retrospective approach. This update replaces the incurred loss methodology with a forward-looking current expected credit loss (CECL) model for most financial assets measured at amortized cost. The CECL model requires the recognition of credit losses for financial assets based on expected losses rather than incurred losses. Adoption of this standard is on a modified retrospective basis and had no impact on the Company’s financial position, results of operations, cash flows or net loss per share.
In November 2023, the FASB issued ASU 2023 - 07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which becomes effective for fiscal years beginning after December 15, 2024. This update requires public entities to disclose significant expenses for reportable segments in both interim and in annual reporting periods, while entities with only a single reportable segment must now provide all segment disclosures required both in ASC 280 and under the amendments in ASU 2023-07. The Company does not expect the standard to have a material effect on its consolidated financial statements and has begun evaluating disclosure presentation alternatives.
In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic740) Improvements to Income Tax Disclosures, which becomes effective for fiscal years beginning after December 15, 2024. The standard requires companies to disclose specific categories in the income tax rate reconciliation table and the amount of income taxes paid per major jurisdiction. The Company does not expect the standard to have a material effect on its consolidated financial statements and has begun evaluating disclosure presentation alternatives.
| 13 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 3. | REVENUE |
Revenue from contracts with customers is presented in “Oil and gas sales” on the Consolidated Statements of Operations.
As
of June 30, 2024 and September 30, 2023, receivable from contracts with customers, included in trade and other receivables, were $
The following tables present our revenue from contracts with customers disaggregated by product type and geographic areas.
| Three months ended June 30, 2024 | Texas | New Mexico | Total | |||||||||
| Crude oil | $ | $ | $ | |||||||||
| Natural gas | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Three months ended June 30, 2023 | Texas | New Mexico | Total | |||||||||
| Crude oil | $ | $ | $ | |||||||||
| Natural gas | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Nine months ended June 30, 2024 | Texas | New Mexico | Total | |||||||||
| Crude oil | $ | $ | $ | |||||||||
| Natural gas | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Nine months ended June 30, 2023 | Texas | New Mexico | Total | |||||||||
| Crude oil | $ | $ | $ | |||||||||
| Natural gas | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| 4. | CONCENTRATION OF CREDIT RISK |
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of its cash equivalents and trade receivables. The Company’s cash balances sometimes exceed the United States’ Federal Deposit Insurance Corporation insurance limits. The Company mitigates this risk by placing its cash and cash equivalents with high credit quality financial institutions and attempts to limit the amount of credit exposure with any one institution. To date, the Company has not recognized any losses caused by uninsured balances.
Trade
receivables included in the Company’s receivable balance are $
| 14 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 5. | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following:
June 30, 2024 | September 30, 2023 | |||||||
| Oil and natural gas properties, at cost | $ | $ | ||||||
| Less: accumulated depletion | ( | ) | ( | ) | ||||
| Oil and natural gas properties, net | ||||||||
| Other property and equipment, at cost | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Other property and equipment, net | ||||||||
| Property and equipment, net | $ | $ | ||||||
Depletion
and depreciation expense was $
| 6. | LEASES |
All of the Company’s right-of-use assets are operating leases related to its office premises. Details of the Company’s right-of-use assets and lease liabilities are as follows:
June 30, 2024 | September 30, 2023 | |||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liabilities | ||||||||
| Balance, beginning of the year | $ | $ | ||||||
| Addition | ||||||||
| Liability accretion | ||||||||
| Lease payments | ( | ) | ( | ) | ||||
| Balance, end of the year | $ | $ | ||||||
| Current lease liabilities | $ | $ | ||||||
| Long-term lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
The following table presents the Company’s total lease cost.
| Three
Months Ended June 30, 2024 |
Three
Months Ended June 30, 2023 |
Nine
Months Ended June 30, 2024 |
Nine
Months Ended June 30, 2023 |
|||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Variable lease expense | ||||||||||||||||
| Sublease income | ( |
) | ( |
) | ||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||
As of June 30, 2024, the Company has one office lease agreement for its office premises for terms ending in November 2025. The maturities of the Company’s operating lease liabilities are as follows:
| Year | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
| 15 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 7. | ASSET RETIREMENT OBLIGATIONS |
Asset retirement obligations reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with the Company’s oil and gas properties. Changes to the asset retirement obligations are as follows:
June 30, 2024 | September 30, 2023 | |||||||
| Asset retirement obligations, beginning of the year | $ | $ | ||||||
| Obligations derecognized | ( | ) | ||||||
| Revisions of estimates | ( | ) | ||||||
| Accretion expense | ||||||||
| $ | $ | |||||||
During
the year ended September 30, 2023, the Company had a revision of estimates totaling $
Reclamation deposits
As
of June 30, 2024, the Company held reclamation deposits of $
| 8. | DEBT |
Convertible debentures
During
the three months ended June 30, 2024, the Company completed private placement financings of convertible debenture units (each a
“Unit”) for gross proceeds of $
Of
the Units issued, Units were originally comprised of one secured convertible debenture in the principal amount of $
| 16 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 8. | DEBT (cont’d…) |
Convertible debentures (cont’d…)
The
Company allocated the proceeds received from the issuance of the convertible debentures and warrants between the debt and equity components
based on their relative fair values at the issuance date. Due to the lack of an active market for the Company’s privately placed
debt instruments and the absence of relevant observable inputs, the Company determined that a reliable estimate of the fair value of
the convertible debentures could not be obtained. Accordingly, the face value of the debentures is considered to be a reasonable approximation
of their fair value at the issuance date. The fair value of the warrants issued was determined using the Black-Scholes option pricing
model (assuming a risk-free interest rate of
The
Convertible Debentures will mature on the earlier of: (i) one-year from the date of issuance or (ii) three-months from the date of issuance
if the Company does not enter into a securities exchange, unit purchase or merger agreement with a third party to the reasonable satisfaction
of a majority of the holders of Debentures. The Convertible Debentures are secured by the Company’s assets, bear simple interest
at a rate of
As June 30, 2024, the following Convertible Debentures were outstanding:
| Principal Amount | Interest rate | Maturity Date | ||||||
| % | ||||||||
| % | ||||||||
These
Convertible Debentures are currently in default due to the Company’s failure to repay the principal and accrued interest on the
maturity date. As of the date of this report, the aggregate amount due under these Convertible Debentures, including accrued interest
is $
Loans payable
During
the nine months ended June 30, 2024, the Company received a $
On
April 28, 2023, the Company issued a promissory note with a principal amount of $
Debenture loan – Related party
During
the year ended September 30, 2023, the Company repaid the remaining principal amount of $
| 17 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 9. | RELATED PARTY TRANSACTIONS |
| i) | The
Company entered into an employment agreement with Bradley Taillon, the Company’s CEO, on April 29, 2024, for an annual base
salary of base salary of $ | |
| ii) | The
Company had an employment agreement with Mehran Ehsan, the former CEO of the Company, for an annual base salary of $ | |
| iii) | On
May 1, 2022, the Company entered into an employment agreement with the CFO of the Company
for an annual base salary of $
| |
| iv) | The convertible debenture loan from the former CEO of the Company mentioned in Note 8 was paid off during the nine months ended June 30, 2023. |
| 10. | LOSS PER SHARE |
| Three
Months Ended June 30, 2024 | Three
Months Ended June 30, 2023 | Nine
Months Ended June 30, 2024 | Nine
Months Ended June 30, 2023 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and diluted loss per share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
For the three and nine months ended June 30, 2024, stock options and warrants were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive. For the three and nine months ended June 30, 2023, stock options and warrants were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive.
| 18 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 11. | EQUITY |
Common stock
The
Company has authorized an number of common shares with
There were no share issuance transactions during the three and nine months ended June 30, 2024.
During
the year ended September 30, 2023, the Company announced a warrant exercise incentive program (the “Program”) whereby the
Company amended the exercise prices of
On
June 30, 2023, the Company issued common shares at a price of $ per share from the exercise of the Eligible Warrants pursuant
to the Program for gross proceeds of $
Share-based payments
Stock options
The
Company has a stock option plan (the “Plan”) in place under which it is authorized to grant options to executive officers
and directors, employees and consultants. Pursuant to the Plan, the Company may issue aggregate stock options totaling up to
| 19 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 11. | EQUITY (cont’d…) |
Share-based payments (cont’d…)
Stock option transactions are summarized as follows:
| Number
of options | Weighted
Average Exercise Price | |||||||
| Balance, September 30, 2022 | $ | |||||||
| Cancelled | ( | ) | ||||||
| Balance, September 30, 2023 | $ | |||||||
| Cancelled | ( | ) | ||||||
| Balance, June 30, 2024 | $ | |||||||
| Exercisable at June 30, 2024 | $ | |||||||
The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2024 was $ (September 30, 2023 - $).
The options outstanding as of June 30, 2024 have exercise prices in the range of $ to $ and a weighted average remaining contractual life of years.
During the three and nine months ended June 30, 2024, the Company recognized $ share-based payment expense. During the three and nine months ended June 30, 2023, the Company recognized share-based payment expense of $ and $, respectively, for the portion of stock options that vested during the period.
| Number
of Options | Exercise Price | Issuance Date | Expiry Date | |||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| 20 |
PERMEX PETROLEUM CORPORATION
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 11. | EQUITY (cont’d…) |
Warrants
Warrant transactions are summarized as follows:
| Number
of Warrants | Weighted
Average Exercise Price | |||||||
| Balance, September 30, 2022 | $ | |||||||
| Exercised | ( | ) | ||||||
| Granted | ||||||||
| Balance, September 30, 2023 | $ | |||||||
| Granted | ||||||||
| Expired | ( | ) | ||||||
| Balance, June 30, 2024 | $ | |||||||
As June 30, 2024, the following warrants were outstanding:
| Number
of Warrants | Exercise Price | Issuance Date | Expiry Date | |||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| 21 |
PERMEX PETROLEUM CORPORATION
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2024
(UNAUDITED)
| 12. | SEGMENT INFORMATION |
Operating segments
The Company operates in a single reportable segment – the acquisition, development and production of oil and gas properties in the United States.
| 13. | CONTINGENCIES |
The
Company from time to time may be involved with disputes, claims and litigation related to the conduct of its business. The Company had
$
| 14. | SUBSEQUENT EVENT |
Subsequent
to June 30, 2024, the Company announced a non-brokered private placement of up to convertible debenture units of the Company (each,
a “Unit”). Each Unit consists of one convertible debenture (a “Debenture”) in the principal amount of $
| 22 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This Report contains forward-looking statements. These statements relate to future events or our future financial performance. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined at the beginning of this Report under “Cautionary Notice Regarding Forward-Looking Statements” the risks outlined under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2023 and in our other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statements. All amounts in this report are in U.S. dollars, unless otherwise noted.
Reserve engineering is a method of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of previous estimates. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas and oil that are ultimately recovered.
Company Overview
The Company was incorporated on April 24, 2017 under the laws of British Columbia, Canada. The Company is an independent energy company engaged in the acquisition, exploration, development and production of oil and gas properties on private, state and federal land in the United States, primarily in the Permian Basin which includes the Midland Basin and Delaware Basin. The Company focuses on acquiring producing assets at a discount to market, increasing production and cash-flow through recompletion and re-entries, secondary recovery and lower risk infill drilling and development. Currently, the Company owns and operates various oil and gas properties located in Texas and New Mexico. In addition, the Company holds various royalty interests in 73 wells and 5 permitted wells across 3,800 acres within the Permian Basin of West Texas and southeast New Mexico. Moreover, the Company has more than 11,700 net acres of producing oil and gas assets, 62 shut-in opportunities, and 17 saltwater disposal wells allowing for waterflood secondary recovery.
The Company’s common shares are listed on the Canadian Securities Exchange (“CSE”) under the symbol “OIL”, and on the Frankfurt Stock Exchange under the symbol “75P”. On April 16, 2024, the Company received a failure to file cease trade order (the “FFCTO”) issued by the British Columbia Securities Commission (the “BCSC”) due to its failure to file the annual financial statements for fiscal 2023 and quarterly reports for fiscal 2024. The trading was halted on the CSE effective April 17, 2024. Subsequently, the Company brought all filings required by the BCSC up to date. On September 6, 2024, the FFCTO was revoked by the BCSC, and the Company’s common shares (“Common Shares”) were reinstated for trading on the CSE effective September 9, 2024.
Key activities:
| ● | On October 23, 2023, the Company effected a 1-for-4 reverse split of the Company’s outstanding common shares. |
| ● | On February 28, 2024, the Company announced the commencement of a private placement of convertible debenture units (the “Initial Units”) of the Company for gross proceeds of up to $20,000,000 (the “Original Private Placement”). Under the terms of the Original Private Placement, each Initial Unit consists of one convertible debenture (an “Initial Unit Debenture”) in the principal amount of $1,000 and one common share purchase warrant, that was to be exercisable for a period of five years from the date of issuance for one Common Share at an exercise price of $4.08 (the “Initial Unit Warrants”). The maturity date for the Initial Unit Debentures (the “Initial Unit Debenture Maturity Date”) was the earlier of: (i) one-year from the date of issuance or (ii) three-months from the date of issuance if the Company does not enter into a securities exchange, unit purchase or merger agreement with a third party to the reasonable satisfaction of a majority of the holders of Initial Unit Debentures. The Initial Unit Debentures bore simple interest at a rate of 10% per annum, payable on the Maturity Date or the date on which all or any portion of the Initial Unit Debenture is repaid, and had a conversion price of $3.40 per Common Share. Interest will be paid on the Initial Unit Debenture in cash or Common Shares at the holder’s option based on a conversion price of $3.40. The Initial Unit Debentures will rank senior to all other existing and future indebtedness of the Company and are secured by a general security agreement over certain assets of the Company. |
| 23 |
| ● | On April 16, 2024, the Company announced the closing of the first tranche of the Original Private Placement, consisting of 500 Units for gross proceeds of $500,000. |
| ● | On May 1, 2024, the Company announced the appointment of Bradley Taillon as the President and Chief Executive Officer (“CEO”) of the Company, replacing. Mehran Ehsan, the former President and CEO of the Company, who continued to work with the Company as the Company’s Vice President of Business Development until August 30, 2024. |
| ● | On May 29, 2024, the Company announced that it had applied to the BCSC for a partial revocation of the FFCTO. The Company also announced that all Initial Units previously issued and to be issued in future tranches under the Original Private Placement would consist of one Initial Unit Debenture and 294 Initial Unit Warrants. Pursuant to this amendment, the number of outstanding Initial Unit Warrants issued with the first tranche was increased from 500 to 147,000. |
| ● | On June 18, 2024, the Company announced the closing of the second tranche of the Original Private Placement, consisting of 865 Initial Units for gross proceeds of $865,000. As a result, the Company issued an Initial Unit Debenture with a principal amount of $865,000 and 254,310 Initial Unit Warrants, exercisable for a period of five years at an exercise price of $4.08 per share. The second tranche was conducted pursuant to a partial revocation of the FFCTO which was issued by the BCSC on June 5, 2024. The Company used the proceeds of the second tranche to prepare and file all outstanding financial statements and continuous disclosure records, pay all outstanding related fees and penalties, pay certain outstanding amounts owing pursuant to summary judgments and to continue operations until it could apply for and receive a full revocation of the FFCTO. |
| ● | On June 18, 2024, the Company announced the appointment of Brad Taillon, the Company’s President and Chief Executive Officer, as a director, and that each of Melissa Folz, Barry Whelan, James Perry Bryan and Mehran Ehsan had resigned from the Company’s Board of Directors for personal reasons. Subsequently, on June 26, 2024, the Company announced that each of John Lendrum, and Douglas Urch resigned from the Company’s Board of Directors for personal reasons and on August 27, 2024, the Company announced that Richard Little and Kevin Nanke had been appointed to serve as directors on the Company’s Board of Directors. These changes to the Company’s Board of Directors were a result of resignations by the then current directors for personal reasons, including the time commitment associated with serving as a director on the Company’s Board of Directors, and were not part of any strategic reconstitution and expansion initiative. |
| ● | On August 29, 2024, the Company filed all required outstanding financial statements and continuous disclosure with the CSE. |
| ● | On September 9, 2024, the Company announced the revocation of the FFCTO issued by the BCSC and the reinstatement of trading of its Common Shares on the CSE effective September 9, 2024. The Company also announced the termination of the Original Private Placement and the commencement of a new non-brokered private placement of units (the “Subsequent Units”) of the Company for gross proceeds of up to $18,635,000 (the “Subsequent Private Placement”) and on September 18, 2024, the Company announced a repricing of the Subsequent Private Placement. Under the terms of the Subsequent Private Placement, each Subsequent Unit consists of one convertible debenture (a “Subsequent Unit Debenture”) in the principal amount of $1,000 and originally included 245 common share purchase warrants but were subsequently repriced to include 523 common share purchase warrants (each, a “Subsequent Unit Warrant”). Each Subsequent Unit Warrant is exercisable for a period of five years from the date of issuance for one Common Share and originally had an exercise price of $4.90 per share, but was subsequently repriced so that the Subsequent Unit Warrants now have an exercise price of $1.91 per share. The Subsequent Debentures will mature one-year from the date of issuance. Upon issuance, the Subsequent Unit Debentures are expected to rank pari passu with the Initial Unit Debentures and rank senior to all other existing and future indebtedness of the Company and will be secured by a general security agreement over certain assets of the Company. The Subsequent Debentures originally bore simple interest at a rate of 15% per annum, but such interest rate was subsequently reduced to 10% per annum, payable on the maturity date or the date on which all or any portion of the Subsequent Debenture is repaid. Interest will be paid in cash or Common Shares at the holder’s option based on a conversion price of $1.91 per share (the conversion price was originally $4.08, but was subsequently reduced). As of the date of this quarterly report, the Company has received subscription proceeds totaling $2,400,000. |
| 24 |
Oil And Gas Properties
Breedlove “B” Clearfork Leases - Texas
In September 2021, the Company, through its wholly-owned subsidiary, Permex Petroleum US Corporation, acquired a 100% Working Interest and an 81.75% Net Revenue Interest in the Breedlove “B” Clearfork leases located in Martin County, Texas. The Breedlove “B” Clearfork properties situated in Martin County, Texas are over 12 contiguous sections for a total of 7,870.23 gross and 7,741.67 net acres, of which 98% is held by production in the core of the Permian Basin. It is bounded on the north by Dawson County, on the east by Howard County, on the south by Glasscock and Midland Counties, and on the west by Andrews County. There is a total of 25 vertical wells of which 12 are producers, 4 are saltwater disposal wells and 9 that are shut-in opportunities. During fiscal 2023, the Company engaged in various operating activities across the Breedlove assets including the completion and production of the Eoff #3 well that was completed in November 2022. The Eoff #3 was put online fully following the build out of production facilities, tank battery, etc. The Eoff #3 was subsequently shut in due to maintenance issues that were deferred due to financing efforts being undertaken by the Company. The Eoff #3 is currently available to resume production potentially as a top recomplete candidate for the Company, pending successful capital raising efforts. The Company is currently evaluating a number of re-entry opportunities across this asset including production optimization of the producing wells as well as the 9 currently shut-in wells. As of September 2024, the Company has resumed production of these assets including limited recompletion activity based on available capital.
Pittcock Leases - Texas
The Pittcock Leases are situated in Stonewall County. Stonewall County is in Northwest Texas, in the central part of the North Central Plains and consists of the Pittcock North property, the Pittcock South property and the Windy Jones Property. It is bounded on the north by King County, on the east by Haskell County, on the south by Fisher and Jones Counties, and on the west by Kent County. The Pittcock North property covers 320 acres held by production. There is currently one producing well, ten shut-in wells, two saltwater disposal wells, and a water supply well. The Company holds a 100% working interest in the Pittcock North Property and an 81.25% net revenue interest. The Pittcock South property covers 498 acres in four tracts. There are currently 19 shut-in wells and two saltwater disposal wells. The Company holds a 100% working interest in the lease and a 71.90% net revenue interest. The Windy Jones Property consists of 40 acres and includes two injection wells and two suspended oil wells. The sole purpose of the Windy Jones property is to provide waterflood assistance to the offset wells being the Pittcock wells located east boundary of the Windy Jones Property. The Company holds a 100% working interest in the Windy Jones Property and a 78.9% net revenue interest. These assets were shut-in in April 2024 and remain shut in pending successful capital raising of the Company.
Mary Bullard Property - Texas
The Company acquired the Mary Bullard Property in August 2017 for a cash consideration of approximately $50,000. The Mary Bullard Property is located in Stonewall County, about 5 ½ miles southwest of Aspermont, Texas. It is bounded on the north by King County, on the east by Haskell County, on the south by Fisher and Jones Counties, and on the west by Kent County. The asset is situated on the Eastern Shelf of the Midland Basin in the central part of the North Central Plains. The Mary Bullard Property covers 241 acres held by production and is productive in the Clearfork formation at a depth of approximately 3,200 feet. There is currently one producing well, four shut-in wells, and two water injection wells. The Company holds a 100% working interest in the Mary Bullard Property and a 78.625% net revenue interest. These assets were shut-in in April 2024 and remain shut in pending successful capital raising of the Company.
West Henshaw Property - New Mexico
The West Henshaw Property is located in Eddy County, New Mexico, 12 miles northeast of Loco Hills in the Delaware Basin. Eddy County is in Southeast New Mexico. It is bounded by Chaves County to the north, Otero County to the east, Loving County, Texas to the south, and Lea County to the west. The West Henshaw Property covers 1,880 acres held by production. There are two producing wells, seven shut-in wells and four saltwater disposal wells. The Company holds a 100% working interest in the West Henshaw Property and a 72% net revenue interest.
In January 2022, the Company began the pilot re-entry on the West Henshaw well #15-3, one out of the 67 shut-in wells it currently owns. The re-entry and re-stimulation involved the West Henshaw property targeting the Grayburg formation at a depth of 2,850 feet. The recompletion was successful and came online at an initial rate of 30 bopd and has stabilized at 15 bopd.
In April 2022, the Company began the re-entry on the West Henshaw well #6-10. The re-entry and re-stimulation involved the West Henshaw property targeting the Grayburg formation at a depth of 2,850 feet. The recompletion was successful and came online at an initial rate of 15 bopd and has stabilized at 10 bopd. Throughout 2023, the Company completed a number of re-entry and basic workover efforts to try and establish more steady production from the West Henshaw assets. These assets were shut-in in April 2024 and remain shut in pending successful capital raising of the Company.
The remaining 67 shut-in wells that the Company plans to re-enter have potential to yield similar results increasing our total daily production solely by re-entering shut-in wells.
| 25 |
Oxy Yates Property - New Mexico
The Oxy Yates Property is located in Eddy County, approximately eight miles north of Carlsbad, New Mexico in the Delaware Basin. It is bounded by Chaves County to the north, Otero County to the east, Loving County, Texas to the south, and Lea County to the west. The Oxy Yates Property covers 680 acres held by production. There is one producing well and nine shut-in wells. The Yates formation is located at an average depth of 1,200 feet and overlies the Seven River formation and underlies the Tansill formation. The Company holds a 100% working interest in the Oxy Yates Property and a 77% net revenue interest.
Royalty Interest Properties
The Company holds royalty interests in 73 producing oil and gas wells located in Texas and New Mexico.
Conversion of Undeveloped Acreage
The Company’s process for converting undeveloped acreage to developed acreage is tied to whether there is any drilling being conducted on the acreage in question. The Company has started development and conversion of its undeveloped acreage located in Martin County, Texas. The PPC Eoff #3 well, operated by Permex Petroleum, is the first of two permitted wells to be drilled by the Company on the 7,780 gross acre Breedlove oilfield. Drilling of the first well commenced on September 14, 2022. Management expects to restart its drilling and development program in the fourth quarter of 2024, subject to receipt of additional funding.
An aggregate of 1,609 MBO and 1,277 MMCF, of the Company’s proved undeveloped reserves as of September 30, 2023, are part of a development plan that has been adopted by management that calls for these undeveloped reserves to be drilled within the next five years, thus resulting in the conversion of such proved undeveloped reserves to developed status within five years of initial disclosure at September 30, 2023. Management currently anticipates spending approximately $0.5 million in capital expenditures towards developing the Company’s proved undeveloped reserves during the 2024 fiscal year, subject to the Company acquiring the necessary financing.
Financing of Proved and Probable Undeveloped Reserves
The Company currently estimates that the total cost to develop the Company’s proved undeveloped reserves of 1,609.7 MBbl of oil and 1,277.1 Mcf of natural gas as of September 30, 2023 is $15,710,000. The Company expects to finance these capital costs through a combination of current cash on hand, debt financing through a line of credit or similar debt instrument, one or more offerings of debt or equity, and from cash generated from estimated revenues from sales of oil and natural gas produced at the Company’s wells.
The Company currently estimates that the total cost to develop the Company’s probable undeveloped reserves of 9,290.4 MBbl of oil and 10,882.8 Mcf of natural gas as of September 30, 2023 is $134,428,500. The Company expects to finance these capital costs through a combination of joint ventures, farm-in agreements, direct participation programs, one or more offerings of equity, a debt offering or entering into a line of credit, and from cash generated from estimated revenues from sales of oil and natural gas produced at the Company’s wells. Management does not currently anticipate any capital expenditures towards developing the Company’s probable undeveloped reserves in the next twelve months.
Drilling Activities
The Company drilled one well during the last three fiscal years. As at September 30, 2023, the Company had 103 gross wells and 23 net productive wells. The Company’s gross developed acreage totaled 5,177 and net developed acreage totaled 3,942 with the following property breakdown:
| Property | Gross Developed Acreage | Net Developed Acreage | Gross Productive Wells | Net Productive Wells | ||||||||||||
| Pittcock | 818 | 664.63 | 1 | 0.81 | ||||||||||||
| Henshaw | 1,880 | 1,353.60 | 8 | 5.76 | ||||||||||||
| Oxy Yates | 680 | 489.60 | 5 | 3.60 | ||||||||||||
| Bullard | 241 | 187.98 | 1 | 0.78 | ||||||||||||
| Breedlove | 1,558 | 1,246.40 | 15 | 12.00 | ||||||||||||
| Royalty Interest Properties | — | — | 73 | 0.01 | ||||||||||||
The Company has 6,000 gross undeveloped acres and 4,800 net undeveloped acres. All of the Company’s undeveloped acreage is on the Company’s Breedlove property.
The Company’s leases are nearly entirely held by production in perpetuity. If a field/lease is undeveloped it typically has a 2, 3 or 5 year term of expiry. The Company has over 340 leases covering undeveloped acreage and less than 5% of these leases have an active expiry date that is less than two years from the date of this Report.
| 26 |
Results of Operations
Sales and Production
The average sales prices of the Company’s oil and gas products sold in the nine months ended June 30, 2024 and 2023, and the fiscal year ended September 30, 2023 was $72.14/Boe, $72.59/Boe, and $71.45/Boe, respectively. The average sales prices of the Company’s oil and gas products sold in the three months ended June 30, 2024 and 2023 was $nil/Boe and $66.91/Boe, respectively.
The Company’s net production quantities by final product sold in the nine months ended June 30, 2024 and 2023, and the fiscal year ended September 30, 2023 was 1,470.20 Boe, 10,260.71 Boe, and 12,979.36 Boe, respectively. The Company’s net production quantities by final product sold in the three months ended June 30, 2024 and 2023 was nil Boe and 3,258.07 Boe, respectively.
The Company’s average production costs per unit for the nine months ended June 30, 2024 and 2023, and the fiscal year ended September 30, 2023, was $112.44/Boe, $74.33/Boe, and $67.76/Boe, respectively. The Company’s average production costs per unit for the three months ended June 30, 2024 and 2023 was $nil/Boe and $72.29/Boe, respectively.
The breakdown of production and prices between oil/condensate and natural gas was as follows:
| Net Production Volumes | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | ||||||||||||
| Oil/Condensate (Bbl) | - | 3,022 | 1,470 | 9,589 | ||||||||||||
| Natural Gas (Mcf) | - | 1,418 | - | 4,030 | ||||||||||||
| Average Sales Price | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | ||||||||||||
| Oil/Condensate ($/Bbl) | - | 70.29 | 72.14 | 75.49 | ||||||||||||
| Natural Gas ($/Mcf) | - | 3.95 | - | 5.20 | ||||||||||||
The breakdown of the Company’s production quantities by individual product type for each of the Company’s fields that contain 15% or more of the Company’s total proved reserves expressed on an oil-equivalent-barrels basis was as follows:
Breedlove
| Net Production Volumes | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | ||||||||||||
| Oil/Condensate (Bbl) | - | 1,961 | 735 | 6,534 | ||||||||||||
| Natural Gas (Mcf) | - | 1,418 | - | 4,030 | ||||||||||||
| 27 |
Henshaw
| Net Production Volumes | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | ||||||||||||
| Oil/Condensate (Bbl) | - | 898 | 735 | 2,385 | ||||||||||||
| Natural Gas (Mcf) | - | - | - | - | ||||||||||||
Pittcock & Mary Bullard
| Net Production Volumes | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | ||||||||||||
| Oil/Condensate (Bbl) | - | 163 | - | 670 | ||||||||||||
| Natural Gas (Mcf) | - | - | - | - | ||||||||||||
Operating Results
Three Months Ended June 30, 2024 and 2023
During the three months ended June 30, 2024, the Company reported a net loss of $1,248,755, compared to a net loss of $909,593 for the same quarter in 2023. The increase in loss in 2024 was mostly as a result of lower revenue and higher other expenses, which more than offset the reduction in operating expenses during the third quarter of fiscal 2024. The Company reported interest and debt expenses of $97,191 (2023 - $1,026) related to debenture loans issued during the 2024 quarter and a loss on debt extinguishment of $495,051 (2023 - $nil) due to the modification of the number of warrants issued with a debenture loan.
The Company reported oil and gas sales revenue of $nil in the third quarter of the current fiscal year compared to $156,716 in the same quarter of the previous fiscal year. The decrease in revenue is due to the shutdown of oil and gas production across all fields, resulting from financial constraints that impacted field operations. Net oil-equivalent production by final product sold in the current quarter was nil, compared to 35.80 barrels per day in the same quarter of last year.
The Company’s total operating expenses for the three months ended June 30, 2024 was $664,330 compared to $1,069,450 for the same period in 2023. Lease operating expenses decreased to $10,421 from $235,511 in the comparative period due to the production shutdown. General and administrative expenses for the three month period ended June 30, 2024 were $629,836, compared to $788,659 for the same quarter in the prior fiscal year. The decrease in accounting, audit and legal fees is attributable to a reduction in overall activity. Investor relations and marketing expenses also decreased as management scaled back these efforts. However, consulting fees increased as the Company engaged a consultant for merger and acquisition activities. Additionally, salaries rose due to the appointment of a new CEO during the quarter, with an annual salary of $250,000 and a one-time sign-on bonus of $50,000.
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General and administrative expenses
| Three
Months Ended June 30, 2024 | Three
Months Ended June 30, 2023 | Nine
Months Ended June 30, 2024 | Nine
Months Ended June 30, 2023 | |||||||||||||
| Accounting and audit | $ | 103,250 | $ | 174,931 | $ | 247,697 | $ | 697,109 | ||||||||
| Consulting | 80,550 | 29,823 | 147,707 | 172,698 | ||||||||||||
| Filing and transfer agent | 10,047 | 15,002 | 40,212 | 64,305 | ||||||||||||
| Insurance | 69,497 | 45,316 | 131,139 | 190,556 | ||||||||||||
| Investor relations | 4,631 | 72,816 | 73,145 | 245,841 | ||||||||||||
| Legal fees | 72,051 | 156,359 | 349,111 | 545,911 | ||||||||||||
| Marketing and promotion | 9,360 | 88,643 | 45,076 | 388,050 | ||||||||||||
| Office and miscellaneous | 26,011 | 22,745 | 110,157 | 138,968 | ||||||||||||
| Rent | 36,042 | 37,853 | 109,106 | 108,697 | ||||||||||||
| Salaries and benefits | 214,376 | 112,339 | 391,728 | 329,940 | ||||||||||||
| Share-based payments | - | - | - | 318 | ||||||||||||
| Travel | 4,021 | 32,832 | 29,660 | 131,914 | ||||||||||||
| $ | 629,836 | $ | 788,659 | $ | 1,674,738 | $ | 3,014,307 | |||||||||
Nine Months Ended June 30, 2024 and 2023
During the nine months ended June 30, 2024, the Company reported a net loss of $2,415,991 compared to a net loss of $3,330,107 for the same period in 2023. The net loss for the first nine months of current fiscal year was mainly attributable to operating expenses of $1,922,466 compared to operating expenses of $3,921,416 in the prior year, and other expenses of $580,181, compared to other income of $31,710 in 2023. These losses were partially offset by revenue from oil and gas sales and royalty income of $86,656, compared to $559,599 in the same period of fiscal 2023. Other expense for the 2024 period mainly consists of interest and debt expenses of $98,217 (2023 - $2,208) related to debenture loans issued during the 2024 period and a non-cash loss on debt extinguishment of $495,051 (2023 - $nil) due to the modification of the number of warrants issued with a debenture loan.
The Company reported oil and gas sales revenue of $75,466 in the first nine months of the current fiscal year compared to $541,459 in the same period last year. The decrease was due to reduced oil and gas production across all fields, resulting from financial constraints that impacted field operations. Net oil-equivalent production by final product sold in the current period averaged 5.39 barrels per day, compared with 37.59 barrels per day in the same period of the previous fiscal year.
The lease operating expenses for the nine months ended June 30, 2024 were $165,305 compared with $762,668 in the nine months ended June 30, 2023. The decrease in lease operating expenses is attributed to reduced production in the current period compared to the same period in the previous fiscal year. Lease operating expenses exceeded oil and gas sales revenue mainly due to significant maintenance expenses on the West Henshaw wells.
| 29 |
General and administrative expenses for the nine months ended June 30, 2024 were $1,674,738, compared with $3,014,307 in the nine months ended June 30, 2023. The significant reduction is mainly due to the decreased property development and corporate activities during the current period, as management scaled back operations in response to tighter financial constraints. Specifically, the variance from the prior year was mainly attributable:
| ● | Accounting and audit fees of $247,697, which decreased from $697,109 in the first nine months of the prior fiscal year. The decrease was largely due to a significant decrease in overall activities. A substantial portion of the fees in the current period was related to regulatory compliance work associated with the proposed U.S. uplisting in November 2023. |
| ● | Legal fees of $349,111 in the current period, down from $545,911 in the same period of the prior fiscal year. The legal fees mainly related to the regulatory work associated with the Company’s proposed uplisting to the NASDAQ in November 2023 as well as compliance with the disclosure requirements under the Exchange Act in the United States. |
| ● | Marketing, investor relations, news and media, and promotion expenses of $85,288 in the current period, compared to $633,891 in the same period of the previous fiscal year. The reduction was due to the Company scaling back marketing and promotion activities. |
| ● | Salaries and benefits for the current period totaled $391,728, compared to $329,940 in the previous year. Of this amount, $340,594 was allocated to management salaries, an increase from $252,305 in 2023, while $51,134 was spent on administrative salaries, down from $77,635 in the previous year. The increase in management salaries was due to the appointment of a new CEO in April 2024, with an annual salary of $250,000 and a one-time sign-on bonus of $50,000. |
| ● | Travel expenses of $29,660 in the current period compared to $131,914 in the same period of the previous fiscal year. The reduction was due to reduced travel by management for marketing and promotion activities.
|
Update on Use of Proceeds
During the nine months ended June 30, 2024, the Company completed two tranches of the private placement of convertible debenture units for gross proceeds of $1,365,000. The net proceeds were intended for potential mergers and acquisitions, general working capital, preparing and filing all outstanding financial statements and continuous disclosure records, paying revocation related legal and filing fees, settling outstanding amounts under certain claim judgments.
As of September 30, 2024, the Company has fully utilized $1,365,000 of the net proceeds. The following table provides the Company’s use of these proceeds.
Offering Net Proceeds $1,365,000
Intended Use of Net Proceeds: Mergers and acquisitions, accounting and audit, revocation related legal and filing fees, claim judgement payments, and general working capital
Actual Use of Net Proceeds ($) | Variance – (Over)/Under Expenditures | Explanation of Variance | |||||||
| Accounting and audit fees related to outstanding filings | $ | 284,000 | N/A | N/A | |||||
| Claim judgement payments | $ | 209,615 | N/A | N/A | |||||
| Potential mergers and acquisitions | $ | 124,000 | N/A | N/A | |||||
| Revocation-related legal and filing fees | $ | 61,915 | N/A | N/A | |||||
| General working capital | $ | 685,470 | N/A | N/A | |||||
| Total | $ | 1,365,000 | |||||||
Liquidity and Capital Resources
As of June 30, 2024, the Company had a cash balance of $428,385, an increase of $345,649 from the cash balance of $82,736 on September 30, 2023. During the nine months ended June 30, 2024, cash used in operating activities was $1,124,351, primarily covering accounting, insurance, salary and general office expenses. The Company received $1,365,000 from debenture financings, $70,000 from reclamation deposit redemption, and $45,000 from a related party loan, while repaying $10,000 on a third-party loan.
The Company had a working capital deficiency of $4,480,663 as of June 30, 2024 compared to a working capital deficiency of $3,142,916 as of September 30, 2023. The Company will need substantial additional funding to pay the outstanding payables and bring the operated assets back to production. This raises substantial doubt about the Company’s ability to continue as a going concern. The company has decreased its activity to a minimal level to minimize the expected increases in additional balances to the working capital deficiency. The company has dramatically limited its ongoing commitments and account demands going forward and expects a meaningful reduction in the rate of increase of the working capital deficiency account. Additionally, the company is actively engaging with its trade partners to remedy its working capital deficiency through all means available to it including but not limited to financing arrangements, payment plans, and principal reductions.
| 30 |
Management has budgeted approximately $1.5 million in minimum operating expenses and $0.5 million in capital expenditures for the next 12 months, which the Company plans to finance principally from one or more equity or debt financings. The purpose of these funds will be to resume full field operations, reduce the working capital deficit, as well as invest in additional oil and gas production activities across the company’s assets. This capital can be adjusted as necessary based on economic or business factors. The amount and timing of capital expenditures will depend on several factors including, but not limited to, the speed with which we are able to bring our wells to production, our ability to complete an equity financing or to secure a suitable line of credit, commodity prices, supply/demand considerations and attractive rates of return. There are no guarantees that we will be able to acquire the necessary funds to meet our budgeted capital expenditures, and any postponement of our planned development of our proved undeveloped reserves could materially affect our business, financial condition and results of operations.
Although the Company has budgeted investments of additional capital in the continued development of our oil and gas operations, the Company currently does not have any material commitments for capital expenditures. As of the date of our Quarterly Report on Form 10-Q for the nine months ended June 30, 2024, the Company does not have sufficient working capital to meet its anticipated operating and capital requirements over the next 12 months. Subsequent to June 30, 2024, the Company received $2.4 million in financing proceeds. The Company will also continue to monitor the current economic and financial market conditions and evaluate their impact on the Company’s liquidity and future prospects.
Critical Accounting Estimates
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. We believe the following discussions of critical accounting estimates address all important accounting areas where the nature of accounting estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.
Oil and natural gas reserves
Crude oil and natural gas reserves are estimates of future production that impact certain asset and expense accounts included in the consolidated financial statements. Proved reserves are the estimated quantities of oil and gas that geoscience and engineering data demonstrate with reasonable certainty to be economically producible in the future under existing economic conditions, operating methods and government regulations. Proved reserves include both developed and undeveloped volumes. Proved developed reserves represent volumes expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are volumes expected to be recovered from new wells on undrilled proved acreage, or from existing wells where a relatively major expenditure is required for recompletion. Variables impacting the Company’s estimated volumes of crude oil and natural gas reserves include field performance, available technology, commodity prices, and development, production and carbon costs.
The estimation of proved reserves is important to the consolidated statements of operations because the proved reserve estimate for a field serves as the denominator in the unit-of-production calculation of the depletion of the capitalized costs for that asset. If the estimates of proved reserves used in the unit-of-production calculations had been lower by 10 percent across all calculations, the depletion in the 2024 period would have increased by approximately $1,800.
Impairment
The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a field-by-field basis for oil and gas assets. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates and prices believed to be consistent with those used by principal market participants. The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future production volumes, commodity prices, operating costs and capital decisions, considering all available evidence at the date of review. Differing assumptions could affect the timing and the amount of an impairment in any period.
| 31 |
Asset retirement obligations
The Company is subject to retirement obligations for certain assets. The fair values of these obligations are recorded as liabilities on a discounted basis, which is typically at the time the assets are installed. In the estimation of fair value, the Corporation uses assumptions and judgments regarding such factors as the existence of a legal obligation for an asset retirement obligation, technical assessments of the assets, estimated amounts and timing of settlements, discount rates, and inflation rates.
A sensitivity analysis of the ARO impact on earnings is not practicable, given the broad range of the company’s long-lived assets and the number of assumptions involved in the estimates. Favorable changes to some assumptions would have reduced estimated future obligations, thereby lowering accretion expense and amortization costs, whereas unfavorable changes would have the opposite effect.
Related party transactions
| (a) | The Company entered into an employment agreement with Bradley Taillon, the Company’s CEO, on April 29, 2024, for an annual base salary of base salary of $250,000, which shall be reviewed by the Company annually. Subject to the discretion of the board of directors, Mr. Taillon is also eligible on an annual basis for a cash bonus of up to 100% of annual salary and additional performance bonuses ranging from $50,000 to $750,000 upon the closing of a qualified financing with proceeds to the Company of $1 million or greater. Further, the terms of this employment agreement provide that if Mr. Taillon’s employment with the Company is terminated without “cause” (as defined in the agreement) than Mr. Taillon is entitled to a severance payment equal to two years of base salary and a bonus equal to 50% of his annual base salary. During the three and nine months ended June 30, 2024, the Company incurred management salary of $59,812 and a one-time sign-on bonus of $50,000 for Mr. Taillon. |
| (b) | The Company had an employment agreement with Mehran Ehsan, the former CEO of the Company, for an annual base salary of $250,000, with no specified term. Mr. Ehsan is also eligible on an annual basis for a cash bonus of up to 100% of annual salary, subject to the discretion of the board of directors. During the nine months ended June 30, 2024, the Company incurred management salary of $187,500 (2023 - $187,500), for Mr. Ehsan, with no bonuses incurred in either period. During the three months ended June 30, 2024, the Company incurred management salary of $62,500 (2023 - $62,500), for Mr. Ehsan. Further, the terms of this employment agreement provide that if Mr. Ehsan’s employment with the Company is terminated without “cause” (as defined in the agreement) than Mr. Ehsan is entitled to a severance payment equal to three years of base salary and a bonus equal to 20% of his annual base salary. Mr. Ehsan resigned as President and CEO of the Company on April 29, 2024. On May 15, 2024, the Company amended the employment agreement to change his role to Vice President of Business Development. All other terms and conditions of the employment agreement remained the same. On August 30, 2024, the Company signed a separation agreement to terminate Mr. Ehsan’s employment. The settlement includes: i) a lump sum payment of $100,000 payable upon the Company’s receipt of capital investment of no less than $1,000,000 or by October 31, 2024, whichever occurs first; ii) six equal monthly payments of $7,500 starting October 1, 2024 (with the first payment already made); and iii) the transfer of ownership of a Company vehicle with a fair value of $35,155. |
| (c) | On May 1, 2022, the Company entered into an employment agreement with the CFO of the Company for an annual base salary of $50,000, with no specified term. The CFO is also eligible on an annual basis for a cash bonus of up to 100% of annual salary, subject to the discretion of the board of directors. The employment agreement may be terminated with a termination payment equal to two months of base salary. During the nine months ended June 30, 2024, the Company incurred management salary of $37,500 (2023 - $37,500), to the CFO of the Company, with no bonuses incurred in either period. During the three months ended June 30, 2024, the Company incurred management salary of $12,500 (2023 - $12,500). |
| (d) | The convertible debenture loan from the former CEO of the Company in the aggregate principal amount of $38,291 with accrued interest of $1,182 was paid off during the nine months ended June 30, 2023. |
| 32 |
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
| ITEM 4. | CONTROLS AND PROCEDURES. |
| Evaluation of disclosure controls and procedures |
We maintain disclosure controls and procedures (as such terms are defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024.
The following control deficiencies constitute material weaknesses in internal control over financial reporting:
| ● | Insufficient resources resulting in inadequate segregation of duties in certain accounting functions, the processing and approval of transactions, due to the size of the accounting department. | |
| ● | Lack of knowledge of US GAAP and ineffective controls associated with the conversion from IFRS to US GAAP | |
| ● | Ineffective controls over inputs used in the valuation of the Asset Retirement Obligation | |
| ● | Ineffective controls over the depletion calculation and the preparation of the oil and gas reserve report | |
| ● | Ineffective controls on the accounting and the valuation of complex financial instruments | |
| ● | Ineffective review of the financial statements due to the limited financial and reporting resources | |
| ● | Ineffective information technology general controls in the areas of user access and program change-management over certain information technology systems that support the Company’s financial reporting processes.” |
Changes in internal controls
There were no changes in our internal controls over financial reporting during the nine months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
| 33 |
PART II – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
The Company from time to time may be involved with disputes, claims and litigation related to the conduct of its business. The following are the material legal proceedings pending to which the Company is a party or to which any of its property is subject.
1. Atlas Tubular, LLC filed a suit against the Company in the 14th Judicial District Court of Dallas, County, Texas, seeking damages of at least $172,981. This amount is included in the Company’s trade payables as of June 30, 2024. The Company made a payment of $100,000 to Atlas Tubular in June 2024 towards this alleged debt.
2. Foundation Energy Services, LLC filed a suit against the Company in the 160th Judicial District Court, Dallas County, Texas, seeking damages of at least $66,074. This amount is included in the Company’s trade payables as of June 30, 2024. Foundation Energy Services, LLC was awarded a judgment for the amount owed, plus attorney’s fees of $11,055, court costs of $485, 5% interest, and $10,000 in post judgment attorney’s fees for collection efforts.
3. Panther Fluids Management, LLC filed a suit against the Company in the County Court at Law No. 3, Harris County, Texas, alleging a breach of contract and seeking payment for an outstanding balance of $81,788. This amount is included in the Company’s trade payables as of June 30, 2024. On October 16, 2024, the Company paid $40,000 toward the outstanding balance.
4. Premier Energy Services, LLC filed a suit against the Company in the 118th Judicial District Court of Martin County, Texas, seeking damages of at least $104,205. Of this amount, $95,541 is included in the Company’s trade payables as of June 30, 2024. The Company disputes the remaining $8,664 of the claimed damages.
| ITEM 1A | RISK FACTORS |
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended September 30, 2023, except as set forth below.
Our obligations to certain of our creditors are secured by security interests in our assets. We are currently in default on these obligations and accordingly our creditors could foreclose on some or all of our assets.
Our obligations to certain of our creditors under certain 10% senior secured convertible debentures are secured by security interests in our assets. As of the date of this prospectus, approximately $1,365,000 in principal was owed to such secured creditors. These 10% senior secured convertible debentures had a maturity date of September 12, 2024. We are currently in default on our obligations under these convertible debentures and accordingly our secured creditors could foreclose on their security interests and liquidate some or all of these assets, which would harm our financial condition and results of operations.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the quarter ended June 30, 2024, the Company issued a total of 1,365 convertible debenture units (the “Units”) in a private placement offering (the “Private Placement”). Each Unit consists of one 10% Senior Secured Convertible Debenture (a “Debenture”) in the principal amount of US$1,000 and 294 Common Share Purchase Warrants (the “Warrants”). Each Warrant is exercisable for a period of five years from the date of issuance for one common share of the Company (a “Share”) at an exercise price of US$4.08.
The Debentures had a maturity date of September 12, 2024 and bear simple interest at a rate of 10%, payable on the maturity date or the date on which all or any portion of the Debenture is repaid. Interest will be paid in cash or Shares based on a conversion price of US$3.40 (the “Conversion Price”), subject to the approval of the Canadian Securities Exchange (the “Exchange”). The Debentures will rank senior to all other existing and future indebtedness of the Company and are secured by a general security agreement over certain assets of the Company pursuant to the terms of a Security Agreement.
At any time during the term of the Debentures, a holder of Debentures may elect to convert the outstanding principal and any accrued and unpaid interest thereon into Shares at the Conversion Price. The Debentures will automatically convert into Shares at the Conversion Price in the event the Company completes a financing of Shares for aggregate gross proceeds of at least US$7,500,000. The Company has the right to repay the Debenture at any time in whole or in part without the consent of the debentureholder and without penalty. The terms of the Debenture provide that upon certain Events of Default (as defined in the Debenture), the outstanding principal and interest owed under the Debenture may become immediately due and payable.
The Company used the proceeds of the Private Placement for general working capital purposes as well as potential mergers and acquisitions.
The Debentures, the Warrants and the Common Shares issuable upon exercise of the Debentures and Warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and are being offered and sold in reliance on the exemption from registration under the Securities Act, afforded by Section 4(a)(2) and/or Rule 506 promulgated thereunder.
The foregoing description of the Debenture, the Warrant and the Security Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Debenture, the Warrant and the Security Agreement, which are attached to this Current Report on Form 8-K as Exhibits 4.1, 4.2, and 10.1 respectively, and are incorporated into this Item 1.01 by reference.
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| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
The Company is in default on $1,365,000 in principal amount of its 10% Senior Secured Convertible Debentures. These 10% Senior Secured Convertible Debentures had a maturity date of September 12, 2024 and are secured by certain assets of the Company. As of the date of this report, the aggregate amount due under these 10% Senior Secured Convertible Debentures, including accrued interest is $1,421,829.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5 | OTHER INFORMATION |
During
the nine months ended June 30, 2024, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company
| ITEM 6. | EXHIBITS |
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PERMEX PETROLEUM CORPORATION | ||
| Date: October 22, 2024 | By: | /s/ Bradley Taillon |
| Bradley Taillon | ||
Chief Executive Officer (Principal Executive Officer) | ||
| PERMEX PETROLEUM CORPORATION | ||
| Date: October 22, 2024 | By: | /s/ Gregory Montgomery |
| Gregory Montgomery | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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