MMEX RESOURCES CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) – Marketscreener.com

The following discussion and analysis constitute forward-looking statements for purposes of the Securities Act and the Exchange Act and as such involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect”, “estimate”, “anticipate”, “predict”, “believes”, “plan”, “seek”, “objective” and similar expressions are intended to identify forward-looking statements or elsewhere in this report. Important factors that could cause our actual results, performance or achievement to differ materially from our expectations are discussed in detail in Item 1 above. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by such factors. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Notwithstanding the foregoing, we are not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the Exchange Act as long as our stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto.
Company Information and Business Plan
MMEX Resources Corporation (“MMEX”) was formed as a Nevada corporation in 2005. The current management team lead an acquisition of the Company (then named Management Energy, Inc.) through a reverse merger completed in 2010 and thereafter changed the Company’s name to MMEX Mining Corporation.
MMEX is focused on the development, financing, construction and operation of clean fuels infrastructure projects powered by renewable energy. We have formed two operating sub-divisions of the Company – one sub-division to transition from legacy refining transportation fuels by producing them as ultra clean fuels with carbon capture or as stand-alone renewable or clean fuels projects, and the second sub-division which plans to produce green and/or blue hydrogen with the option of hydrogen conversion to ammonia or methanol. These two sub-divisions will be operating respectively as Clean Energy Global, LLC and Hydrogen Global, LLC. The planned projects are designed to be powered by solar and wind renewable energy.
Our portfolio contains the following pipeline of planned projects:
Project 1: Pecos Clean Fuels & Transport, LLC -Ultra Clean Fuels Refining-Pecos County, Texas
We have teamed with Polaris Engineering to develop an ultra-clean transportation fuel, up to 11,600 barrel per day feedrate crude oil refining facility at our Pecos County, Texas site to produce 87° gasoline, ultra-low sulphur diesel and low-sulphur fuel oil, utilizing the Polaris Ultra FuelsTM patented concept, which removes over 95% emissions of a standard refinery. The planned carbon capture features of the project will be owned, financed, constructed and operated by an independent third-party. The Ultra FuelsTM concept, with capex and technical details completed in the Front-End Load-2 (“FEL-2”) study, features small size facilities to take advantage of proximity to smaller markets and/or locate directly near crude oil production areas near the Company’s owned 126-acre site. Because equipment is fabricated in modular units and shipped to site, this allows for an 18-month project completion time and more rapid implementation than traditional facilities. The smaller size and footprint, as well as lower emissions, also allows for faster permitting which we obtained for this facility from the Texas Commission on Environmental Quality on February 18, 2022.
Project 2: Arroyo Cabral, Cordoba Province Argentina Solar Power Project.
The Company along with its international partners have entered a proposal with EPEC, the local utility in Cordoba Province to build potentially the Arroyo Cabral 48 MWe solar park for local power demand following the Company’s completion of a confidential information memorandum and pre-feasibility study for the project completed in June 2021. The local utility, EPEC, has proposed a Build Own Transfer structure with EPEC contributing 15% of the project costs as an equity contribution. The financing of the project potentially is to be provided by the Company’s international partners and other third parties.
Project 3: Hydrogen Global- Pecos County, Texas- Green Hydrogen Project
This planned project to utilize the proprietary electrolyzer technology of Siemens Energy, a major international technology provider to the Company, plans to convert water to hydrogen through electrolysis. The facility will utilize solar power, with the Company’s water supply to produce up to 55 tons of hydrogen production per day. The Company and Siemens have completed the Front-End Engineering and Design (“FEED”) study in April 2022, which outlines the capex of the electrolyzer complex on the Company’s 321-acre site. The Company is in discussions with several renewable power developers to become the technology provider for 160 MWe solar power component. In addition, the Company is in discussions with two potential product off-takes (i) with a technology provider for the Ammonia complex, for conversion of the hydrogen to ammonia to facilitate transportation of the finished product for the export market in either Europe or Asia and (ii) international partners to provide turn-key mobility markets to include hydrogen fueling stations and buses utilizing hydrogen fuel cells. The potential markets would be the major metropolitan areas in the U.S. and Texas to include Austin, Dallas, Houston, and San Antonio.
Project 4: Hydrogen Global- Tierra del Fuego Province Argentina-Green Hydrogen Project
On April 28, 2022, the Province of Tierra del Fuego and the Company announced the potential joint development of a green hydrogen project in the Río Grande, Tierra del Fuego area powered by wind energy. The Company has signed an amendment with Siemens Energy to adapt the Green H2 electroylzer FEED Study completed for Pecos County to this Project. In addition, the Company has a preliminary understanding with Siemens Gamesa as the technology provider for the wind energy. The Company estimates the land requirement of up to 10,000 hectares for the wind farm and the Green H2 facilities. The Company is in discussions with the same technology provider for the Ammonia complex as for Pecos County. The potential market for the Ammonia is Europe or Asia and the project location is ideal for ocean borne shipping east or west.
Project 5: Hydrogen Global- Tangier Morocco- Green Hydrogen Project
The Company has identified sea-based land assets in Tangier Morocco and is in negotiations for the supply of 160MWe of certified renewable power with local utility. The Company has international partners with local presence in Morocco. Tangier has developed what is now the largest trading hub in Africa with ten major ports (https://www.marineinsight.com/know-more/10-major-ports-in-morocco/)
including multi-modal deep seaports, multiple free-zones areas with substantial tax and trade incentives and it is located 15km from Europe ports (Spain and Gibraltar). Tangier and the neighboring coastal area benefit from some of the best wind conditions in the world, which can also be associated with solar power generation. The Kingdom of Morocco is strongly pushing the use of renewable energy and has recently issued a Green Hydrogen regulatory framework. The principal off-take markets are the shipping and terminal companies present in the Tangier Port Med including APM Terminals (https://www.apmterminals.com/en/medport-tangier/about/our-terminal ), and CGM-CMA (https://www.cma-cgm.com ).
Project 6: Hydrogen Global- Southern Coast of Peru-Green Hydrogen Project
The Company has entered advanced discussions with Peru’s principal electric power distribution company to develop potentially a Green Hydrogen project to produce up to 55 tons per day of hydrogen, requiring 160 MWe of constant and certified renewable power load. The Company plans to use its Siemens Energy Electrolyzer FEED template and adapt it for Peru. The Peru distribution company will also provide the land area as part of the transaction – approximately 5 hectares, by the sea to facilitate exports of green Hydrogen/Ammonia/Methanol to Asia and the U.S. West Coast. Peru’s mining industry with its use of heavy extraction and transportation equipment has significant market potential for the Company’s hydrogen production.
Project 7: Hydrogen Global- Pecos County, Texas-Blue Hydrogen Project
The Company is in planning discussions with a super major oil company (the “Super Major”) to develop jointly a Blue Hydrogen project at the Company’s Pecos County, Texas site. The Project plans to utilize potentially a portion of the Super Major’s 2 billion cubic feet per day natural gas production and transportation from the area to produce hydrogen utilizing an autothermal reformer (“ATR”) technology, In turn, the hydrogen will be used in Siemens Energy turbines and generator sets to produce 365 MWe of electric power which are projected to utilize initially a 75% hydrogen-25% natural gas feed and moving to a 100% hydrogen feed, with the electric power to be marketed by the power commodity trading desk of the Super Major. Solar and wind power will be utilized in the ATR and under discussions with the renewable power companies developing the Company’s other solar projects in the area. The planned carbon capture features of the project will be owned, financed, constructed and operated by an independent third-party.
Completion of these projects is dependent upon our obtaining the necessary capital for planning, construction and start-up costs. There is no assurance that such financing can be obtained on favorable terms.
We have not yet begun to generate revenues.
General and Administrative Expenses
Our general and administrative expenses increased to $364,343 for the three months ended October 31, 2022 from $274,493 for the three months ended October 31, 2021, resulting from due diligence fees incurred in our pursuit of financing. Our general and administrative expenses increased to $1,168,201 for the six months ended October 31, 2022 from $717,000 for the six months ended October 31, 2021. The increase was a result of the previously mentioned due diligence fees, as well as the Company issuing 3,000,000 shares each to two entities affiliated with the Company’s two board members and a consultant and recognizing $495,000 as stock-based compensation during the six months ended October 31, 2022, versus no similar expense recognized during the six months ended October 31, 2021.
We expense the direct costs incurred on our projects, including acquisition of rights, planning, design and permitting. Our project costs have decreased to $71,683 for the three months ended October 31, 2022 from $1,006,666 for the three months ended October 31, 2021 and decreased to $76,040 for the six months ended October 31, 2022 from $1,009,726 for the six months ended October 31, 2021. The levels of spending on our projects will vary from period to period based on availability of financing and will be expensed as project costs are incurred. The decrease in the current period, then, was because we did not have funding available to invest in our projects during the current period.
Depreciation and Amortization Expense
Our depreciation and amortization expense results from the depreciation of land improvements and amortization of land easements and totaled $9,100 and $9,246 for the three months ended October 31, 2022 and 2021, respectively, and totaled $18,197 and $17,964 for the six months ended October 31, 2022 and 2021, respectively.
Our interest expense includes interest accrued on debt, amortization of debt discount and penalties assessed on debt. Interest expense totaled $63,125 and $57,645 for the three months ended October 31, 2022 and 2021, respectively and totaled $126,013 and $262,255 for the six months ended October 31, 2022 and 2021, respectively. The decrease in interest expense for the six months is due to lower levels of new non-related party convertible debt in the current period as a result of debt being paid off or converted into shares common stock. Additionally, the lower levels of debt also resulted in less amortization of debt discount to interest expense and less loan penalties incurred in the period.
We reported gains on derivative liabilities of $0 and $3,010,042 for the six months ended October 31, 2022 and 2021, respectively. We had previously identified the variable conversion feature of certain convertible notes payable as derivatives. We estimated the fair value of the derivatives using multinomial lattice models that value the warrants based on a probability weighted cash flow model using projections of the various potential outcomes. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility and management’s estimates of various potential equity financing transactions. These inputs were subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities would fluctuate from period to period, and the fluctuation has been material. During the six months ended October 31, 2021 all derivative liabilities were written off the books, resulting in a large gain in the prior period.
We reported a net gain (loss) on extinguishment of liabilities of $0 and $196,166 for the six months ended October 31, 2022 and 2021, respectively, and $16,540 and $136,310 for the three months ended October 31, 2022 and 2021, respectively. The larger gain in the prior period was mostly due to our loan from the Small Business Administration being forgiven, versus smaller loan amounts being forgiven in the current period.
As a result of the above, we reported net income (loss) of $(508,251) and $(1,151,884) for the three months ended October 31, 2022 and 2021, respectively and $(1,371,911) and $1,139,407 for the six months ended October 31, 2022 and 2021, respectively.
Effective June 7, 2022 we reduced the conversion price of our Series B preferred stock from $0.10 to $0.05. This resulted in the recognition of a deemed dividend of $2,534,402 during the three months ended July 31, 2022 in order to account for the change in fair value of the Series B preferred stock.
Net Income (Loss) Attributable to Common Shareholders
As a result of the deemed dividend, our net loss attributed to common shareholders was $(3,906,313) for the six months ended October 31, 2022. We had no similar activity during the six months ended October 31, 2021 or the three months ended October 31, 2022 and 2021, therefore net income attributed to the Company was the same as net income of $1,139,407, $(508,251), and $(1,151,884), respectively.
Liquidity and Capital Resources
As of October 31, 2022, we had current assets of $59,333, comprised only of prepaid expenses, and current liabilities of $3,688,705, resulting in a working capital deficit of $3,629,372.
Net cash used in operating activities (589,367 ) (2,275,278 ) Net cash used in investing activities
Net cash provided by financing activities 452,500 2,474,019
We used net cash of $589,367 in operating activities for the six months ended October 31, 2022 as a result of our net loss of $1,371,911, offset by non-cash net expense totaling $533,905, an increase in prepaid expenses of $12,000, and increases in accounts payable, accrued expenses, and accounts payable and accrued expenses – related party of $260,639.
We used net cash of $2,275,278 in operating activities for the six months ended October 31, 2021 as a result of our net income of $1,139,407, non-cash expenses totaling $95,786, decrease in prepaid expenses of $2,460, and increases in accrued expenses of $19,089. This was offset by our non-cash gains of $3,146,352, a decrease in accounts payable of $171,857 and a decrease in accounts payable and accrued expenses – related party of $213,811.
Net cash used in investing activities for the six months ended October 31, 2022 was $0 compared to $255,504 for the six months ended October 31, 2021 which was comprised of the purchase of land and costs incurred for land improvements during the period.
Net cash provided by financing activities for the six months ended October 31, 2022 was $452,500, comprised of proceeds from convertible notes payable.
Net cash provided by financing activities for the six months ended October 31, 2021 was $2,474,019, comprised of proceeds from notes payable of $200,000, proceeds from convertible notes payable of $78,500, and proceeds from the sale of our common stock of $3,000,000. This was offset by repayments of notes payable of $200,000, repayments of convertible notes payable of $255,331, and offering costs incurred of $349,150.
Our financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have incurred continuous losses from operations, have an accumulated deficit, and have reported negative cash flows from operations since inception. Additionally, we have a working capital deficit, therefore there is a question of whether or not we have the cash resources to meet our operating commitments for the next twelve months and have, or will obtain, sufficient capital investments to implement our business plan. Our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established and emerging markets and the competitive environment in which we operate.
Since inception, our operations have primarily been funded through private debt and equity financing, and we expect to continue to seek additional funding through private or public equity and debt financing. Our ability to continue as a going concern is dependent on our ability to generate sufficient cash from operations to meet our cash needs and/or to raise funds to finance ongoing operations and repay debt. However, there can be no assurance that we will be successful in our efforts to raise additional debt or equity capital and/or that our cash generated by our operations will be adequate to meet our needs. These factors, among others, raise substantial doubt that we will be able to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies
Our results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For further information on our significant accounting policies see the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended April 30, 2022 filed with the SEC and Note 2 to our condensed consolidated financial statements included in this quarterly report. There were no changes to our significant accounting policies during the six months ended October 31, 2022.
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