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Abound Energy — Interim / Quarterly Report 2022
Nov 30, 2022
47815_rns_2022-11-29_c7b2b4dc-8a6c-45d8-8bfc-2a0417230739.pdf
Interim / Quarterly Report
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Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021
(Unaudited - expressed in Canadian Dollars)
Condensed Interim Consolidated Statements of Financial Position As at (Unaudited - expressed in Canadian Dollars)
| Note | September 30, 2022 |
December 31, 2021 |
|
|---|---|---|---|
| \$ | \$ | ||
| Assets | |||
| Current Assets | |||
| Cash | 5,184,346 | 10,203,442 | |
| Restricted cash | 11 | 90,000 | 90,000 |
| Prepaid and deposits | 190,935 | 584,440 | |
| Amounts receivable | 38,988 | 72,274 | |
| 5,504,269 | 10,950,156 | ||
| Non-Current Assets | |||
| Equipment | 4 | 2,592,228 | 1,940,252 |
| 2,592,228 | 1,940,252 | ||
| Total Assets | 8,096,497 | 12,890,408 | |
| Liabilities | |||
| Current Liabilities | |||
| Accounts payable and accrued liabilities | 6 | 919,719 | 750,552 |
| Lease liability – short term | 7 | 404,977 | 289,784 |
| DSU Liability | 5 | 202,213 | - |
| 1,526,909 | 1,040,336 | ||
| Lease liability – long term | 7 | 734,365 | 786,031 |
| 734,365 | 786,031 | ||
| Total Liabilities | 2,261,274 | 1,826,367 | |
| Shareholders' Equity (deficiency) | |||
| Share capital | 5 | 40,544,783 | 38,093,484 |
| Contributed surplus | 5 | 7,713,836 | 7,066,427 |
| Deficit | (42,423,396) | (34,095,870) | |
| 5,835,223 | 11,064,041 | ||
| Nature of operations and continuance of business (Note 1) |
|---|
| Contingencies (Note 12) |
| Subsequent events (Note 13) |
Approved and authorized by the Board on November 29, 2022
The accompanying notes are an integral part of these condensed interim consolidated financial statements
Total Liabilities and Shareholders' Equity 8,096,497 12,890,408
Zinc8 Energy Solutions Inc. Condensed Interim Consolidated Statements of Financial Position As at (Unaudited - expressed in Canadian Dollars)
| "Ron MacDonald" | Director | "Charn Deol" | Director |
|---|---|---|---|
| Ron MacDonald | Charn Deol |
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
| Three months ended | Nine months ended | ||||
|---|---|---|---|---|---|
| September 30, | September 30, | ||||
| Note | 2022 | 2021 | 2022 | 2021 | |
| \$ | \$ | \$ | \$ | ||
| Expenses | |||||
| Amortization | 4 | 233,171 | 200,154 | 628,062 | 303,079 |
| General and administrative | 92,239 | 103,019 | 371,123 | 269,421 | |
| Interest | 19,988 | (117,221) | 53,211 | (66,167) | |
| Filing and listing fees | 19,746 | 6,523 | 58,316 | 104,336 | |
| Management fees | 6 | 201,232 | 169,743 | 776,842 | 483,156 |
| Marketing | 6 | 274,527 | 80,359 | 584,380 | 412,544 |
| Payroll | 6 | 92,326 | 93,616 | 292,522 | 228,234 |
| Professional fees | 169,892 | 59,920 | 351,952 | 176,739 | |
| Research and development | 1,266,268 | 1,162,323 | 3,849,699 | 3,531,198 | |
| Rent | 6 | 35,852 | 37,126 | 124,148 | 94,639 |
| Share-based compensation | 5,6 | 640,122 | 2,658 | 1,251,324 | 3,730,302 |
| Travel | - | 9,723 | 20,378 | 14,696 | |
| 3,045,363 | 1,807,943 | 8,361,957 | 9,282,177 | ||
| Loss before other items | (3,045,363) | (1,807,943) | (8,361,957) | (9,282,177) | |
| Other items: | |||||
| Interest income | 25,412 | 33,101 | 63,751 | 73,868 | |
| Gain on debt settlement | - | 29,703 | - | 199,004 | |
| Contract revenue | - | 93,750 | - | 93,750 | |
| Grant revenue | 22,372 | - | 109,614 | 290,000 | |
| Fair value of DSU | (8,560) | - | 787 | - | |
| Disposal of assets | (5,350) | - | (139,721) | 9,000 | |
| 33,874 | 156,554 | 34,431 | 665,622 | ||
| Net and Comprehensive loss | |||||
| for the period | (3,011,489) | (1,651,389) | (8,327,526) | (8,616,555) | |
| Basic and diluted loss per share | (0.02) | (0.01) | (0.05) | (0.06) | |
| Weighted average shares outstanding |
156,060,962 | 150,521,929 | 153,668,930 | 142,836,158 |
Condensed Interim Consolidated Statements of Changes in Equity For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
| Contributed | Subscriptions | |||||
|---|---|---|---|---|---|---|
| Surplus | received in | |||||
| Common shares | Share Capital | advance | Deficit | Total | ||
| # | \$ | \$ | \$ | \$ | \$ | |
| Balance, December 31, 2020 | 105,222,567 | 21,437,511 | 2,098,703 | 15,500 | (17,823,527) | 5,728,187 |
| Shares issued pursuant to: | ||||||
| Private Placement | 28,750,000 | 14,635,406 | 889,594 | - | - | 15,525,000 |
| Share Issue costs | - | (1,005,377) | - | - | - | (1,005,377) |
| Debt settlement | 116,279 | 60,465 | - | - | - | 60,465 |
| Warrants exercised | 17,667,564 | 2,824,824 | (35,402) | (15,500) | - | 2,773,922 |
| Options exercised | 428,199 | 184,689 | (91,075) | - | - | 93,614 |
| Share-based compensation | - | - | 3,730,302 | - | - | 3,730,302 |
| Net loss for the period | - | - | - | - | (8,616,555) | (8,616,555) |
| Balance, September 30, 2021 | 152,184,609 | 38,137,518 | 6,592,122 | - | (26,440,082) | 18,289,558 |
| Shares issued pursuant to: | ||||||
| Share Issue costs | - | (58,029) | - | - | - | (58,029) |
| Options exercised | 34,020 | 13,995 | (6,881) | - | - | 7,114 |
| Share-based compensation | - | - | 481,186 | - | - | 481,186 |
| Net loss for the period | - | - | - | - | (7,655,788) | (7,655,788) |
| Balance, December 31, 2021 | 152,218,629 | 38,093,484 | 7,066,427 | - | (34,095,870) | 11,064,041 |
| Shares issued pursuant to: | ||||||
| Warrants exercised | 6,062,688 | 1,853,817 | (35,010) | - | - | 1,818,807 |
| Options exercised | 136,081 | 55,982 | (27,405) | - | - | 28,577 |
| RSU Exercise | 2,850,000 | 541,500 | (541,500) | - | - | - |
| Share-based compensation | - | - | 1,251,324 | - | - | 1,251,324 |
| Net loss for the period | - | - | - | - | (8,327,526) | (8,327,526) |
| Balance, September 30, 2022 | 161,267,398 | 40,544,783 | 7,713,836 | - | (42,423,396) | 5,835,223 |
Condensed Interim Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
| \$ \$ Cash provided by (used in): Operating activities Net income (loss) for the period (8,327,526) (6,965,166) Items not affecting cash: Amortization 628,062 102,925 Disposal of asset 139,721 - Gain on debt settlement - (169,301) Share-based compensation 1,251,324 3,727,644 DSU Management fees 203,000 - Gain on fair value of DSU (787) - Changes in non-cash working capital items: Prepaid and deposits 393,505 (66,152) Amounts receivable 33,286 (37,071) Accounts payable and accrued liabilities 169,166 341,374 Net cash used in operating activities (5,510,249) (3,065,747) Investing activity Purchase of equipment (1,068,797) (777,756) Net cash used in investing activity (1,068,797) (777,756) Financing activities Proceeds from private placement - 15,525,000 Share issue costs - (1,014,230) Loan repayment - (60,000) Lease payments (287,433) (35,118) Option exercise 28,577 93,614 Warrant exercise 1,818,806 2,494,917 Net cash from financing activities 1,559,950 17,004,183 Change in cash for the period (5,019,096) 13,160,680 Cash, beginning of period 10,203,442 1,576,581 5,184,346 14,737,261 Cash, end of period Supplemental information \$ \$ Interest received 63,751 - |
2022 | 2021 | |
|---|---|---|---|
| Taxes paid | - | - |
1. NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS
Zinc8 Energy Solutions Inc. ("Zinc8" or the "Company") was incorporated on December 8, 2011, in Canada under the legislation of the Province of British Columbia. Zinc8's head office is located at Unit 1 – 8765 Ash Street, Vancouver, BC, V6P 6T3, Canada. Zinc8 is a development-stage company and in the process of developing zinc-air batteries. The Company's shares trade on the Canadian Stock Exchange ("CSE").
Since March 2020, several measures have been implemented in Canada and the rest of the world in response to the increased impact from novel coronavirus ("COVID-19"). The Company continues to operate and move its business activity forward at this time. While the impact of Covid-19 is expected to be temporary, the current circumstances are dynamic and the impacts of Covid-19 on business operations cannot be reasonably estimated at this time. The Company anticipates this could have an adverse impact on its business, results of operations, financial position and cash flows in future years.
At the date of the statements, the Company has not yet realized profitable operations and it has relied on non-operational sources of financing to fund operations. The ability of the Company to achieve its objectives, meet its ongoing obligations and recover its investment in its technology and assets will depend on management's ability to successfully execute its business plan, achieve profitable operations and obtain additional financing, if or when required. There is no assurance that these initiatives will be successful.
These condensed interim consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. As at September 30, 2022, the Company had a net loss of \$8,327,526 (2021- \$ 8,616,555) an accumulated deficit of \$42,423,396 (December 31, 2021 - \$34,095,870) and expects to incur further losses in the development of its business, all of which casts significant doubt about the Company's ability to continue as a going concern. The continued operations of the Company are dependent on its ability to generate future cash flow or obtain additional financing. Management is of the opinion that sufficient working capital will be obtained from external financing to meet the Company's liabilities and commitments as they become due, although there is a risk that additional financing will not be available on a timely basis or on terms acceptable to the Company. These condensed interim consolidated financial statements do not reflect any adjustments to the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used that may be necessary if the Company is unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the presentation of interim financial statements, including IAS 34 Interim Financial Reporting. The condensed interim consolidated financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2021, which have bene prepared in accordance with IFRS as issued by the IASB.
The Company uses the same accounting policies and methods of computation as in the annual consolidated financial statements for the year ended December 31, 2021.
Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
There have been no changes to the critical accounting estimates and judgements. Refer to the Company's annual consolidated financial statements and notes for the year ended December 31, 2021.
4. EQUIPMENT
| Lab | Right of | Leasehold | ||||
|---|---|---|---|---|---|---|
| Equipment | Equipment | use asset | improvements | Software | Total | |
| \$ | \$ | \$ | \$ | \$ | \$ | |
| Cost: | ||||||
| Balance, | ||||||
| December 31, 2021 | 596,623 | 161,272 | 1,394,476 | 334,466 | 79,122 | 2,565,959 |
| Additions | 777,454 | 81,110 | 350,961 | 123,547 | 86,686 | 1,419,758 |
| Disposal | (142,224) | - | - | - | - | (142,224) |
| Balance, | ||||||
| September 30, 2022 | 1,231,853 | 242,382 | 1,745,437 | 458,013 | 165,808 | 3,843,493 |
| Accumulated | ||||||
| Depreciation: | ||||||
| Balance, | ||||||
| December 31, 2021 | 164,821 | 38,818 | 321,182 | 60,434 | 40,452 | 625,707 |
| Amortization | 171,881 | 42,328 | 304,517 | 72,834 | 36,502 | 628,062 |
| Disposal | (2,504) | - | - | - | - | (2,504) |
| Balance, | ||||||
| September 30, 2022 | 334,198 | 81,146 | 625,699 | 133,268 | 76,954 | 1,251,265 |
| Net Book Value: | ||||||
| December 31, 2021 | 431,802 | 122,454 | 1,073,294 | 274,032 | 38,670 | 1,940,252 |
| September 30, 2022 | 897,655 | 161,236 | 1,119,738 | 324,745 | 88,854 | 2,592,228 |
5. SHARE CAPITAL
a) Authorized
Unlimited number of common shares without par value. Unlimited number of preferred shares without par value.
During the nine months ended September 30, 2022, the Company issued:
- 2,850,000 common shares related to the exercise of restricted share units.
- 6,062,688 common shares related to the exercise of warrants for gross proceeds of \$1,818,806
- The Company transferred \$35,010 from contributed surplus to share capital related to the exercise of warrants
- 136,081 common shares related to the exercise of stock options for gross proceeds of \$28,577
On February 24, 2021, the Company closed a private placement offering of 28,750,000 common shares at a price of \$0.54 per share for gross proceeds of \$15,525,000. The Company incurred cash issue costs of \$1,063,406 and issue 1,725,000 compensation warrants with each compensation warrant exercisable at a price of \$0.54 per warrant until February 24, 2023. The Company fair valued the warrants at \$889,594 using
Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
the Black-Scholes option pricing model based on the following assumptions: risk free rate – 0.23%; expected dividend - nil; expected life – 2 years; expected volatility – 138%.
b) Options
The Company has adopted a Stock Option Plan, which is a rolling stock option plan under which options may be granted equal in number to 10% of the issued and outstanding capital of the company at the time of grant of the stock option. No single participant may be granted options to purchase a number of Company shares equaling more than 5% of the issued shares of the Company in any 12-month period. The Board may determine the term of the options, but the term shall in no event be greater than five years from the date of issuance. Terms of vesting of the options, eligibility of directors, officers, employees, management company employees and consultants to receive options and the number of options issued to each participant shall be determined at the discretion of the Board of Directors.
The balance of options outstanding as at September 30, 2022 and December 31, 2021 and the changes for the periods then ended is as follows:
| Number of Options # |
Weighted Average Exercise Price \$ |
Weighted Average Life Remaining (years) |
|
|---|---|---|---|
| Balance, December 31, 2020 | 6,621,323 | 0.26 | 3.84 |
| Granted | 7,275,000 | 0.62 | - |
| Exercised | (462,219) | 0.22 | - |
| Forfeited | (721,674) | 0.27 | - |
| Balance, December 31, 2021 | 12,712,430 | 0.46 | 3.65 |
| Granted | 1,000,000 | 0.22 | 9.52 |
| Exercised | (136,081) | 0.21 | |
| Forfeited | (1,126,456) | 0.53 | |
| Balance, September 30, 2022 | 12,449,893 | 0.44 | 3.42 |
On April 5, 2022, the Company granted 1,000,000 options to a director of the Company, the options vest immediately and expire on April 5, 2032. The Company fair valued the options at \$211,181 using the Black-Scholes option pricing model using the following assumptions: Risk free rate – 2.54%; expected volatility – 126%; forfeiture rate – nil; dividend rate – nil; expected life – 10 years.
As at September 30, 2022 the following options were outstanding:
| Exercise Price | ||
|---|---|---|
| Expiry Date | \$ | Options # |
| September 12, 2024 | 0.21 | 2,599,146 |
| February 18, 2025 | 0.32 | 2,316,747 |
| July 28, 2023 | 0.20 | 200,000 |
| April 5, 2026 | 0.62 | 6,334,000 |
| April 5, 2032 | 0.22 | 1,000,000 |
| 12,449,893 |
c) Warrants
The balance of warrants outstanding as at September 30, 2022 and December 31, 2021 and the changes for the periods then ended is as follows:
| Number of Warrants # |
Weighted Average Exercise Price \$ |
Weighted Average Life Remaining (years) |
|
|---|---|---|---|
| Balance, December 31, 2020 | 26,904,417 | 0.21 | 1.27 |
| Issued | 1,725,000 | 0.54 | |
| Exercised | (17,667,564) | 0.16 | |
| Expired | (58,333) | 0.12 | |
| Balance, December 31, 2021 | 10,903,520 | 0.35 | 0.71 |
| Exercised | (6,062,688) | 0.30 | - |
| Expired | (3,115,832) | 0.34 | - |
| Balance, September 30, 2022 | 1,725,000 | 0.34 | 0.40 |
As at September 30, 2022 the following share purchase warrants were outstanding and exercisable:
| Number | Exercise Price | |
|---|---|---|
| Expiry Date | Outstanding | \$ |
| February 24, 2023 | 1,725,000 | 0.54 |
| 1,725,000 | ||
d) Restricted Share Units ("RSU")
During the year ended December 31, 2021, the Company approved a Restricted Stock Unit (RSU) Plan under which RSU's maybe granted equal in number up to 10% of the issued and outstanding common shares of the Company to directors, employees, and consultants in lieu of cash compensation for services rendered.
On May 27, 2022, the Company granted 6,150,000 RSU's to directors of the Company. The RSU's vest 25% on the grant date, 25% on August 27, 2022, 25% on November 27, 2022 and 25% on February 27, 2023.
On August 16, 2022, the Company granted an additional 850,000 RSU's to a director the Company. The RSU's vest 25% on the grant date, 25% on August 27, 2022, 25% on November 27, 2022 and 25% on February 27, 2023.
The RSU's were fair valued at \$1,330,000 and during the nine months ended September 30, 2022 the Company recorded \$1,040,206 in share-based compensation expense related to the vesting of RSU's. During the period ended September 30, 2022, 2,850,000 RSU's were exercised and the Company transferred \$541,500 from contributed surplus to share capital pursuant to the exercise.
Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
The balance of RSU's outstanding as at September 30, 2022 and December 31, 2021 and the changes for the periods then ended is as follows:
| Number of | |
|---|---|
| RSU # |
|
| Balance, December 31, 2021 | - |
| Granted | 7,000,000 |
| Exercised | (2,850,000) |
| Balance, September 30, 2022 | 4,150,000 |
| Unvested | (3,500,000) |
| Exercisable at September 30, 2022 | 650,000 |
e) Deferred Share Units ("DSU")
During the nine months ended September 30, 2022, the Company adopted a DSU plan as an alternative form of compensation for directors and officers of the Company. Each DSU is comprised of one notional common share that entitles the participant, on termination of services, to receive, at the discretion of the Company, common shares of the Company up to the number of DSUs held or the cash equivalent. In the event the Company decides to settle all or a portion of the DSUs outstanding in cash, the total DSUs owing will be multiplied by the fair market value of one common share of the Company. The fair market value will be determined as the VWAP of the Company's common shares on the valuation date.
As the DSU can be settled in cash or shares, at the discretion of the Company, the value associated with each DSU grant is recorded as a liability and fair valued at each reporting period.
During the nine months ended September 30, 2022, the Company granted 901,435 DSU's, all fully vested with a deemed value of \$203,000 to directors of the Company. As at September 30, 2022, 901,435 DSU's are outstanding and the fair market value of the DSU's was \$0.226 per DSU. As at September 30, 2022, the Company had recorded a total of \$203,724 in DSU liabilities and loss on DSU valuation of \$724.
6. RELATED PARTY DISCLOSURES
Key management includes the CFO, CEO, VP of Engineering and the Board of Directors. Compensation paid to key management for the three and nine months ended September 30, 2022 and 2021 was as follows:
| Three months ended September 30, |
Nine months ended September 30, |
|||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| \$ | \$ | \$ | \$ | |
| Management fees | 202,464 | 143,500 | 765,496 | 440,500 |
| Payroll expense | 112,500 | 55,500 | 337,500 | 166,500 |
| Share-based compensation | 510,748 | - | 1,177,116 | 2,268,099 |
| 825,712 | 199,000 | 2,280,112 | 2,875,099 |
Zinc8 Energy Solutions Inc. Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
A company (Zimtu Capital) related by common directors (David Hodge) charged marketing fees of \$nil (2021 - \$50,000) and rent of \$9,000 (2021 - \$9,000) during the nine months ended September 30, 2022.
As at September 30, 2022, the Company had \$nil (2021 - \$nil) owing to other related parties included in accounts payable and accrued liabilities.
7. LEASE LIABILITIES
The Company has entered into leases for an office space and certain pieces of office equipment. The office lease was entered into on June 1, 2020 and during the nine months ended September 30, 2022 the Company renewed the lease for an additional two year term, expiring May 31, 2024, with monthly payments of \$15,873. The Company also entered into leases for an office copier and office chairs with the lease terms commencing on April 1, 2020, and July 1, 2020, respectively. The copier has a 60-month term with monthly payment of \$107 while the office chair lease has a 24-month term with monthly payment of \$1,142.
During the year ended December 31, 2021, the Company entered into additional leases for office equipment, the leases range from 24 to 60 months with monthly payments between \$138 and \$15,900 per month. During the year ended December 31, 2021, the Company recalculated certain outstanding leases and recorded a credit to previously incurred lease interest expense of \$58,246.
The Company recognized its right-of-use assets and lease liabilities for these leases based on the present value of future minimum lease payments. The present value of minimum lease payments for the copier and office chairs were calculated using the interest rate implicit in the leases and the present value of minimum lease payments for office lease and lab equipment were calculated using the incremental borrowing rate of 8%.
The Company's future minimum lease payments as at September 30, 2022 and December 31, 2021 are as follows:
| September 30, 2022 \$ |
December 31, 2021 \$ |
|
|---|---|---|
| Less than 1 year | 480,241 | 360,832 |
| 1 to 5 years | 789,233 | 894,971 |
| 5+ Years | - | - |
| Total minimum lease payments | 1,269,474 | 1,255,803 |
| Less: imputed interest | (130,132) | (179,988) |
| Total lease obligation | 1,139,342 | 1,075,815 |
| Current portion of lease obligations | (404,977) | (289,784) |
| Non-current portion of lease obligations | 734,365 | 786,031 |
| Lease obligations | \$ |
|---|---|
| At December 31, 2020 | 139,785 |
| Additions | 1,229,382 |
| Payments | (293,352) |
| At December 31, 2021 | 1,075,815 |
| Additions | 350,960 |
| Payments | (287,433) |
| At September 30, 2022 | 1,139,342 |
8. FINANCIAL INSTRUMENTS
(a) Fair values
The Company has classified fair value measurements of its financial instruments using a fair value hierarchy that reflects the significance of inputs used in making the measurements as follows:
Level 1:Valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2:Valuations based on directly or indirectly observable inputs in active markets for similar assets or liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates; and
Level 3:Valuations based on significant inputs that are not derived from observable market data, such as discounted cash flow methodologies based on internal cash flow forecasts.
As at September 30, 2022, the fair values of cash, restricted cash, amounts receivable, and accounts payable and accrued liabilities, approximate their carrying value due to the short-term maturity of these instruments. Lease liabilities are measured at amortized costs using effective interest rate. Cash and restricted cash is carried at level 1 fair value measurement.
(b) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations out of cash. The ability to do this relies on the Company raising equity financing in a timely manner and by maintaining sufficient cash in excess of anticipated needs. As at September 30, 2022, the Company had working capital of \$3,977,360.
(c) Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations.
The Company's cash is largely held in large Canadian financial institutions. The Company does not have any asset-backed commercial paper. The Company's receivables consist of GST receivable due from the Federal Government of Canada. The Company maintains cash deposits with Schedule A financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any significant credit losses and believes it is not exposed to any significant credit risk.
(d) Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. The Company does maintain bank accounts which earn interest at variable rates but it does not believe it is currently subject to any significant interest rate risk.
(e) Foreign currency exchange rate risk
The Company's functional and reporting currency is the Canadian dollar and major purchases are transacted in Canadian dollars. As a result, the Company's exposure to foreign currency risk is minimal.
(f) Other price risk
Other price risk is the risk that the fair value or future cash flows of a financing instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk. The Company is exposed to other price risk in terms of its deferred share units. The DSU liability would increase or decrease by \$20,400 as a result of a 10% change in market prices.
9. CAPITAL MANAGEMENT
The Company's objective when managing capital is to maintain adequate cash resources to support planned activities which include administrative costs and general expenditures. In the management of capital, the Company includes cash, lease liabilities, and the components of shareholders' equity. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company manages the capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. Historically, funding for the Company's plan is primarily managed through the issuance of additional common shares, through its commercial activities and through obtaining financing. There are no assurances that funds will be made available to the Company when required.
In order to carry out the planned development and pay for administrative costs, the Company will spend its existing working capital and expects to raise additional amounts as needed. The Company will continue to assess new business and seek to acquire an interest in additional business if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so.
The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments, such as cash, and all are held in major Canadian financial institutions. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
There were no changes in the Company's approach to capital management during the nine months ended September 30, 2022. The Company is not subject to externally imposed capital requirements.
10. COOPERATION AGREEMENT
The Company entered into a Cooperation agreement (the "Agreement") dated December 24, 2019 with The Power Authority of the State of New York (the "Authority") for the installation of a 100kW/1MWh Zinc-Air Battery Energy Storage System in New York State.
Under the Agreement with the Authority, the Authority agreed to collaborate with the Company and contribute to a research and development project through its participation in aspects of design and fabrication of a zinc air energy storage system, then demonstration of the system and the Company agreed to collaborate with the Authority to pursue the research and development project.
The Authority agreed to contribute the following monetary contributions to the Company for the research and development of the Product:
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First Contribution - \$835,000 USD (CAD\$ 1,109,632 received in 2020), to be paid within 30 days following the Effective Date of this Agreement.
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Second Contribution - \$0 USD, to be paid after 6 months following the Effective Date of this Agreement, after receipt and approval of the first interim fiscal report for the first 6-month period, but not before actual qualified expenses and the Company's project expenses have equaled or exceeded the minimum required expenditures.
Minimum Required Qualified Expenses: \$355,000 USD Minimum Required the Company's Project Expenses: \$0
Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
- Third Contribution - \$0 USD, to be paid after 12 months following the Effective Date of this Agreement, after receipt and approval of the second interim fiscal report for the second 6-month period, but not before actual qualified expenses and the Company's project expenses have equaled or exceeded the minimum required expenditures.
Minimum Required Qualified Expenses: \$835,000 USD Minimum Required the Company's Project Expenses: 80% of \$2,950,000 USD
- Fourth Contribution - \$160,000 USD, to be paid after 18 months following the Effective Date of this Agreement, after receipt and approval of the third interim fiscal report for the third 6-month period, but not before actual qualified expenses and the Company's project expenses have equaled or exceeded the minimum required expenditures.
Minimum Required Qualified Expenses: \$995,000 USD Minimum Required the Company's Project Expenses: 80% of \$4,100,000 USD
- Fifth Contribution - \$380,000 USD, to be paid after 24 months following the Effective Date of this Agreement, after receipt and approval of the fourth interim fiscal report for the fourth 6-month period, but not before actual qualified expenses and the Company's project expenses have been equaled or exceeded the minimum required expenditures, whichever is later.
Minimum Required Qualified Expenses: \$1,375,000 USD Minimum Required the Company's Project Expenses: 80% of \$5,400,000 USD
- Sixth Contribution \$20,000 USD, to be paid after 30 months following the Effective Date of this Agreement, after receipt and approval of the fifth interim fiscal report for the fifth 6-month period, or after actual qualified expenses and the Company's project expenditures have been equaled or exceeded the required expenditure, whichever is later.
Minimum Required Qualified Expenses: \$1,395,000 USD Minimum Required the Company's Project Expenses: 80% of \$6,450,000 USD
- Final Contribution – After receipt and approval of the final fiscal report, a final contribution of \$155,000 will be paid for actual qualified expenses and the Company's project expenditures have equaled or exceeded the required expenditures.
Minimum Required Qualified Expenses: \$1,550,000 USD Minimum Required the Company's Project Expenses: 80% of \$6,450,000 USD
The term of this Agreement (the "Term") shall begin on the Effective Date and shall be valid for an initial period of 10 years as of the Effective Date, with automatic renewals of one (1) year periods each unless either Party provides written notification to the other. The Authority, within its sole discretion and for any reason, may terminate this Agreement at any time upon 30 days' notice to the Company. Upon such termination, the Parties will conduct a final payment schedule, which will include any and all final payments due to each side.
In May 2020, the Company and the Authority reached a mutual agreement to delay the timeline of the project due to COVID-19 restrictions. A revised project timeline is pending further information. As such, the Company did not receive the Fourth and Fifth Contributions.
11. CREDIT FACILITY
Zinc8 Energy Solutions Inc. Notes to the Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited - expressed in Canadian Dollars)
The Company has a line of credit, acquired at the request of the office premises lessor, that bears interest at the lender's prime rate of interest plus 3.48% per annum and is secured by \$70,000 term deposit. The Company may borrow up to \$70,000 under this credit facility. The Company did not draw on the credit facility during the nine months ended September 30, 2022. The Company also has \$20,000 restricted as security for a credit card.
12. CONTINGENCIES
On June 10, 2022, OCI Inc. ("OCI") filed a claim against the Company for unpaid invoices of \$361,000 relating to a strategic advisory services agreement. The Company's position is that it did not receive any of the services mentioned in the advisory agreement. As at September 30, 2022 the Company had \$135,600 in accounts payable and accrued liabilities owing to OCI.
13. SUBSEQUENT EVENTS
Subsequent to September 30, 2022 the Company granted 6,600,000 RSU's to employees. The RSU's vest in stages based on time and certain milestones.
987,500 of the RSUs issued to employees vested on 5, October 2022.
On 5 October, Tom Hodgson resigned as Director of the Company and elected to exercise 322,419 DSUs 168,000 unexercised options were forfeited due to employment terminations
Subsequent to September 30, 2022 the Company filed a preliminary short form prospectus with securities regulatory authorities in each of the provinces and territories of Canada to raise up to \$60 million.