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Helium Evolution Incorporated — Interim / Quarterly Report 2022
Aug 23, 2022
47789_rns_2022-08-23_7151f8f7-6fbb-451b-b4d7-213eb64956bb.pdf
Interim / Quarterly Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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The following Management's Discussion and Analysis ("MD&A") as provided by the management of Helium Evolution Incorporated ("HEVI" or the "Company") (formerly Duckhorn Ventures Ltd. (“Duckhorn”)) is dated August 23, 2022 and should be read in conjunction with HEVI’s condensed interim consolidated financial statements and related notes for the three and six months ended June 30, 2022, three months ended June 30, 2021 and the period from incorporation on January 14, 2021 to June 30, 2021. The reporting currency is Canadian Dollars.
The Company
HEVI is a public company trading on the TSX Venture Exchange (“TSXV”) under the symbol HEVI. Duckhorn was incorporated under the British Columbia Business Corporations Act on March 25, 2019.
The Company was formed following the amalgamation of a private company of the same name being Helium Evolution Incorporated (“Helium Evolution Private”) and Duckhorn. Helium Evolution Private was incorporated on January 14, 2021 under the Business Corporations Act (Alberta). On March 16, 2022, Helium Evolution Private and Duckhorn entered into an Amalgamation Agreement (the “Amalgamation”) resulting in the reverse takeover of Duckhorn by Helium Evolution Private, including a change of control of Duckhorn. Following completion of the Arrangement, Helium Evolution Private shareholders held approximately 96% of the outstanding shares of the Company and the Board of Directors and key management of the Company are substantially the same as Helium Evolution Private. As a result, the transaction has been accounted for as a reverse take-over acquisition with Helium Evolution Private being the acquirer for accounting purposes. Helium Evolution Private is the continuing entity and accordingly, the presentation of the comparative period information is that of Helium Evolution Private.
The Company has significant land holdings in Saskatchewan’s “helium fairway” having been granted helium permits by the Government of Saskatchewan covering 5.5 million acres of land. HEVI holds a 100% working interest in these permits, encumbered by a 4.25% government royalty and a 3.0% gross overriding royalty (“GORR”).
On November 10, 2021, the Company closed a non-brokered private placement (the “Offering”) of subscription receipts (the “Subscription Receipts”) for total gross proceeds of $12.3 million. In connection with the Offering, Helium Evolution Private issued 40,998,636 Subscription Receipts at a price of $0.30 per Subscription Receipt, with each Subscription Receipt automatically converting into one common share for no additional consideration or action on the part of the holder. Each common share was subsequently exchanged for 1.00542 common shares in the capital of Duckhorn in accordance with the terms of the Agreement.
On June 28, 2022, HEVI closed a strategic investor private placement, brokered and non-brokered private placements (the “Offerings”) for total gross proceeds of $6.9 million ($6.4 million net of share issuance costs). In connection with the Offerings, HEVI issued 17,295,500 units comprised of 17,295,500 common shares and 5,765,152 warrants.
In conjunction with the strategic investor private placement, the Company entered into a farmout agreement with North American Helium (“NAH”) pursuant to which NAH will drill a total of five wells, incurring 100% of the drilling expenditures, on three predetermined blocks of land in Saskatchewan comprising approximately 2.3 million acres located west of the third meridian (the “Blocks”). For each well drilled, NAH will earn an 80% operated interest in the section on which the well was drilled plus nine contiguous sections of land adjoining to the well, up to a maximum of 32,000 acres. The farmout agreement specifically excludes HEVI’s current drilling focus in the McCord area. The Company will retain a 20% working interest in the earned lands and each successful well drilled by NAH (the “HEVI Working Interest“). NAH must notify HEVI of its five drilling targets within six months following the execution date of the Farmout Agreement, with a requirement to drill all five wells within 24 months. NAH must drill one well in each of the three Blocks, with no more than three wells drilled in any given Block.
In connection with the farmout agreement, HEVI and NAH have entered into a standstill agreement pursuant to which NAH will be subject to certain standstill restrictions relating to, among other things, the acquisition of HEVI
1
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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securities for a 24-month period following completion of the Offerings (as defined herein). In addition, HEVI and NAH have entered into a pro-rata participation and board nomination agreement pursuant to which NAH will be permitted to maintain its pro rata undiluted percentage of HEVI Common Shares following completion of the Offering for a 24-month period. Furthermore, should NAH’s ownership reach over 10% in the next two years, NAH will have a right to appoint a nominee to the HEVI board of directors.
At the date of this MD&A there are 96,033,974 common shares, 7,418,428 options and 10,786,276 warrants issued and outstanding (see Share Data on page 3).
Basis of Presentation
The 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") as at and for the three and six months ended June 30, 2022, and the comparative three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021, and have been prepared in accordance with the accounting policies and methods of computation as set forth in note 3 of Helium Evolution Private’s December 31, 2021 audited financial statements.
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the revenues and expenses during the reporting period. Management reviews these estimates, including those related to accruals and income taxes at each financial reporting period. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates. Readers should be aware that historical results are not necessarily indicative of future performance.
Forward-looking Statements
Certain information included in this MD&A constitutes forward-looking information under applicable securities legislation. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements, or developments in the industry to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. Forward looking statements are statements that are not historical facts and are generally, but not always, identified by the words "expects," "plans," "anticipates," "believes," "intends," "estimates," "projects," "potential" and similar expressions, or that events or conditions "will," "would," "may," "could" or "should" occur.
Forward-looking statements in this document include statements regarding the granting of additional permits over lands under application and other statements that are not historical facts. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors and risks include, among others:
-
HEVI may require additional financing from time to time in order to continue its operations; financing may not be available when needed or on terms and conditions acceptable to the Company;
-
new laws or regulations could adversely affect the Company's business and results of operations;
-
stock markets have experienced volatility that has often been unrelated to the performance of companies which may adversely affect the price of the Company's securities regardless of its operating performance; and
-
the granting of additional permits is subject to a competitive process over which the Company has no control.
When relying on forward-looking statements and information to make decisions, investors and others should carefully consider the foregoing factors and risks and other uncertainties and potential events. The Company has assumed that the material factors referred to in the previous paragraphs will not cause such forward-looking
2
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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statements and information to differ materially from actual results or events. However, the list of these factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors.
Selected Financial Information
| Selected Financial Information | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Financial Net loss Net lossper share, basic and diluted |
$ 65 0.00 |
$ 785 0.04 |
||
| $ 1,342 |
$ 2,996 |
|||
| 0.02 | 0.05 | |||
| Cash Working capital Total assets Total liabilities |
14,216 | 332 320 341 $ 21 |
14,216 | 332 320 341 $ 21 |
| 14,803 | 14,803 | |||
| 17,674 | 17,674 | |||
| $ 976 |
$ 976 |
|||
| Weighted average shares outstanding Basic and diluted1 |
20,274,129 | 17,910,925 | ||
| 79,118,595 | 60,467,902 |
Selected Quarterly Financial Information
| Selected Quarterly Financial Information | ||
|---|---|---|
| Period ended | Net Loss($) | Net Loss($/share) |
| June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 January14, 2021 to March 31, 2021 |
1,342 1,654 389 238 65 720 |
0.02 0.04 0.01 0.01 0.00 0.05 |
Share Data
| Share Data | |
|---|---|
| Number of common shares outstanding | 96,033,974 |
| Options2 Warrants2 |
7,418,428 |
| 10,786,276 | |
| Number of common shares outstandingafter exercise of options and warrants | 114,238,678 |
The above share data table outlines the number of common shares, options and warrants outstanding after closing of the transaction detailed in the Company section on page 1. The above share data should be read in conjunction with the June 30, 2022 condensed interim consolidated financial statements.
1 The weighted average number of common shares outstanding is not increased for outstanding stock options and warrants when the effect is anti-dilutive.
2 Options and warrants reflect the 1.00542 exchange ratio in accordance with the terms of the Amalgamation.
3
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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Outlook
The Company continues to execute its strategy of acquiring a significant land base in Saskatchewan for helium exploration and production. The total permits held by the Company under an initial 3-year term with the Government of Saskatchewan as of June 30, 2022, cover approximately 5.5 million acres.
The Company is undertaking extensive geological and geophysical modelling, which will include the purchase of existing 2D seismic lines, shooting additional 2D seismic lines, seismic reprocessing and interpretation, and well log integration to refine and mold the Company’s geological model, and select initial drilling targets. HEVI commenced drilling operations in June 2022, results of which will be further incorporated into the geological model.
The Company expects to provide further guidance on anticipated capital expenditures and potential timing of helium production volumes once additional geological and geophysical work is completed, surface leases are acquired, and service contracts have been signed.
Results of Operations
| Results of Operations | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Exploration and evaluation expense Share based compensation expense Listing expense Transaction costs Interest expense (income) (net) Depletion and depreciation expense General and administrative expense |
$ 833 |
$ - - - - - - 65 |
$ 838 |
$ 720 - - - - - 65 |
| 96 | 212 | |||
| - | 1,142 | |||
| - | 96 | |||
| (25) | 7 | |||
| 13 | 25 | |||
| 425 | 676 | |||
| Net loss | $ 1,342 |
$ 65 | $ 2,996 |
$ 785 |
Exploration and Evaluation (E&E) Expense
| Three months ended | Three months ended | Six months ended |
Period ended | |
|---|---|---|---|---|
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Exploration and evaluation expense | $ 833 |
$ - | $ 838 |
$ 720 |
The Company commenced drilling the 06-12-006-05W3M well in June on its 100% owned and operated McCord property. Drilling costs totaling $815,000 were capitalized to E&E assets and subsequently transferred to E&E expense as the initial results did not return sufficient quantities of helium to warrant production testing. As such, field operations on both wells were halted to conduct further analysis on the results and the Company’s planned exploration program. An additional $18,000 was recorded to E&E expense in the quarter for future decommissioning obligations associated with the 06-12-006-05W3M well.
Pursuant to a Royalty Agreement between HEVI and certain HEVI founders, a 3.0% GORR on the Company’s Saskatchewan helium permits applied for prior to March 30, 2022 was granted to executive members and companies controlled by directors and officers of the Company. As a result, the Company assigned a value of $nil and $5,000, respectively, to E&E expense for the three and six months ended June 30, 2022.
4
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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During the three months and period ended June 30, 2021, the Company incurred $nil and $720,000, respectively, of exploration and evaluation expense as settlement of intellectual property obligations and other rights through the issuance of 15,081,300 Class A common shares.
Share Based Compensation Expense
| Share Based Compensation Expense | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Share based compensation expense | $ 96 |
$ - | $ 212 |
$ - |
The Company has an incentive Stock Option Plan (the “Plan”) for directors, officers, employees, and consultants, under which the Company may issue stock options to purchase common shares of the Company provided that the amount of incentive stock options which may be granted and outstanding under the Plan at any time shall not exceed 10% of the then issued and outstanding common shares of the Company.
The number of share options issued and outstanding, weighted average exercise price and weighted average remaining life is as follows:
| Number of Options | Weighted Average Exercise Price ($/share) |
Weighted Average Remaining Life (years) |
|
|---|---|---|---|
| December 31, 20211 Issued |
3,418,428 4,000,000 |
$ 0.300 $ 0.385 |
4.9 5.0 |
| June 30, 2022 | 7,418,428 | $ 0.345 |
4.7 |
1 Each option reflects the 1.00542 exchange ratio in accordance with the terms of the Amalgamation
The number of share options exercisable and the weighted average exercise price is as follows:
| Exercisable Options | Weighted Average Exercise Price ($/share) |
|
|---|---|---|
| December 31, 2021 | - | $ 0.30 |
| June 30, 2022 | 683,626 | $ 0.30 |
The fair value of options granted is measured using the Black Scholes pricing model. Measurement inputs include the share price on the measurement date, exercise price of the instrument, expected volatility based on publicly available information for similar companies, weighted average expected life, estimated forfeiture rate, expected dividends, and the risk-free interest rate. The fair value is amortized to share based compensation expense or capitalized to exploration and evaluation assets over the option vesting period with a corresponding offset to contributed surplus.
5
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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The fair value of the options on the date of issuance was determined using the following Black-Scholes pricing model inputs:
| Share price Risk-free interest rate Expected life (years) Expected volatility Forfeiture rate Expected dividends Fair value |
$ 0.385 3.10% 5 103% 0% Nil $ 0.30 |
|---|---|
The amount recorded as share-based compensation expense for the three and six months ended June 30, 2022 totaled $96,000 and $212,000, respectively (three months and period ended June 30, 2021 – $nil). Additionally, $51,000 and $115,000, respectively, was capitalized to exploration and evaluation assets (three months and period ended June 30, 2021 – $nil).
Listing Expense
| Listing Expense | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Listingexpense | $ - |
$ - | $ 1,142 |
$ - |
On March 16, 2022, Duckhorn acquired all the issued and outstanding common shares through a wholly owned subsidiary of the Company that previously amalgamated with Helium Evolution Private, which resulted in a reverse takeover of the Company by the former shareholders of Helium Evolution Private.
In connection with the Amalgamation and pursuant to the terms of the Amalgamation, Duckhorn changed its name to Helium Evolution Incorporated and issued 75,405,141 common shares to the shareholders of Helium Evolution Private. Immediately following the Amalgamation there were 78,738,474 common shares issued and outstanding, with the former Helium Evolution Private shareholders holding approximately 96% of the issued and outstanding common shares, and the board of directors and key management of the Company being substantially the same as Helium Evolution Private. As a result of the transaction, former Duckhorn shareholders received 3,333,333 common shares in the new entity.
The Amalgamation was treated as a reverse takeover (“RTO”) for accounting purposes based on the terms of the Amalgamation. In accordance with IFRS, Duckhorn did not meet the definition of a business for accounting purposes. Therefore, the RTO does not constitute a business combination but a capital transaction of Duckhorn in substance with Helium Evolution Private being the continuing entity from an accounting perspective. As a result of the excess of the purchase price being greater than the net liabilities, the Company has recorded $1,142,000 of listing expenses in the profit and loss.
6
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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The fair value of the net assets (liabilities) that were acquired pursuant to the RTO is as follows:
| Cash Accounts receivable Accountspayable and accrued liabilities |
$ - 7 (149) |
|---|---|
| Net assets(liabilities) acquired | $ (142) |
| Fair value of the common shares of Duckhorn(3,333,333 common shares) | $ 1,000 |
| Total consideration | $ 1,000 |
| Excess ofpurchaseprice consideration over net liabilities acquired(listing expense) | $ 1,142 |
Transaction Costs
| Transaction Costs | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Transaction costs | $ - |
$ - | $ 96 |
$ - |
Acquisition costs incurred by the Company in the amount of $96,000 have been excluded from consideration paid and were recognized as transaction costs in the six months ended June 30, 2022.
Interest Expense (Income) (net)
| Interest Expense (Income) (net) | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Interest expense(income) (net) | $ **(25) ** |
$ - | $ 7 |
$ - |
Interest expense (income) recorded in the three and six months ended June 30, 2022 of $(25,000) and $7,000, respectively, was incurred on a short-term loan that was repaid during in the first quarter of 2022 and the Company’s lease obligations, or credited as a result of investing excess cash balances into redeemable short-term Guaranteed Investment Certificates (“GIC” or “GICs”) with interest rates ranging from 0.8% to 3.0% depending on the term (three months and period ended June 30, 2021, $nil).
Depletion and depreciation Expense
| Depletion and depreciation Expense | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Depletion and depreciation expense | $ 13 |
$ - | $ 25 |
$ - |
Depletion and depreciation expense in the amount of $13,000 and $25,000, respectively, was recorded in the three and six months ended June 30, 2022 and is related to the Company’s office equipment and right-of-use assets (three months and period ended June 30, 2021, $nil). Office equipment is depreciated on a straight-line basis over a period of 2 years and the Company’s right-of-use assets are depreciated over the term of the Company’s office and office equipment leases.
7
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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General and Administrative Expense
| General and Administrative Expense | ||||
|---|---|---|---|---|
| Three months ended | Six months ended |
Period ended | ||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| General and administrative expense Overheard recoveries |
$ 433 |
$ 65 - |
$ 634 |
$ 65 - |
| (8) | (8) | |||
| General and administrative expense | $ 425 |
$ 65 | $ 626 |
$ 65 |
General and administrative expenses for the three and six months ended June 30, 2022 totaled $425,000 and $626,000, respectively (three months and period ended June 30, 2021 – $65,000). The Company has incurred costs associated with startup of a new entity including management salaries, consulting fees, software fees, office related expenses, legal and regulatory fees, and marketing and investor relations.
Capital Expenditures
The following summarizes the Company’s capital spending:
| Three months ended | Three months ended | Six months ended |
Period ended | |
|---|---|---|---|---|
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |
| Seismic Geological and geophysical Drilling Helium permits Office equipment |
$ 62 |
$ 129 - - 16 - |
$ 808 |
$ 129 - - 16 - |
| 93 | 213 | |||
| 896 | 901 | |||
| 7 | 77 | |||
| - | 5 | |||
| Total | $ 1,058 |
$ 145 | $ 2,004 |
$ 145 |
Capital spending for the three and six months ended June 30, 2022 totaled $1.1 million and $2.0 million, respectively (three months and period ended June 30, 2021 – $145,000). The Company commenced drilling of its first helium exploration well at 06-12-006-05W3M as previously noted on page 4, continued evaluating its existing prospects on helium permits granted to HEVI, and acquired additional helium permits in Saskatchewan.
Share Capital
The following table details the number of common shares issued and outstanding as at June 30, 2022:
| Class A Common Shares December 31, 20211 Shares issued in exchange for subscription receipts2 Shares issued as part of Duckhorn reverse takeover3 Shares issued as part of June 28, 2022 private placement4 Share issuance costs June 30, 2022 |
Number of Shares | Equity |
|---|---|---|
| 34,184,280 41,220,861 3,333,333 17,295,500 - |
$ 1,915 12,300 1,000 6,074 (2,015) |
|
| 96,033,974 | $ 19,274 |
1 In conjunction with the closing of the Amalgamation as detailed in note 3, each common share, option and warrant in Helium Evolution Private was subsequently exchanged for 1.00542 common shares in the capital of the Company. The number of common shares have been restated to reflect the exchange ratio.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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- 2 On November 10, 2021, Helium Evolution Private closed a non-brokered private placement (the “Offering”) of subscription receipts (the “Subscription Receipts”) for total gross proceeds of $12.3 million. In connection with the Offering, Helium Evolution Private issued 40,998,636 Subscription Receipts at a price of $0.30 per Subscription Receipt, with each Subscription Receipt automatically converting into one common share for no additional consideration or action on the part of the holder. Each common share was subsequently exchanged for 1.00542 common shares in the capital of Duckhorn in accordance with the terms of the Amalgamation. As at December 31, 2021 the Subscription Receipts were included in restricted cash and subscription receipts payable.
3 See Listing Expense details on page 6 of the MD&A.
- 4 On June 28, 2022, HEVI closed a strategic investor private placement, brokered and non-brokered private placements (the “Offerings”) for total gross proceeds of $6.9 million ($6.4 million net of share issuance costs). $6.1 million of the gross proceeds ($5.5 million net of share issuance costs) was allocated to share capital and $0.8 million was allocated to warrant capital. In connection with the Offerings, HEVI issued 17,295,500 units comprised of 1 common share and one-third of a warrant.
The following table details the number of warrants issued and outstanding as at June 30, 2022:
| Number of Warrants | Equity | |
|---|---|---|
| December 31, 20211 Warrants issued as part of June 28, 2022 private placement2 Warrants issued aspart of June 28,2022privateplacement3 |
4,846,124 5,765,152 175,000 |
$ 552 844 28 |
| June 30, 20221 | 10,786,276 | $ 1,424 |
-
1 Each warrant reflects the 1.00542 exchange ratio in accordance with the Amalgamation
-
2 On June 28, 2022, HEVI closed a strategic investor private placement, brokered and non-brokered private placements (the “Offerings”) for total gross proceeds of $6.9 million. In connection with the Offerings, HEVI issued 17,295,500 units comprised of 1 common share and one-third of a warrant. The warrants were valued using the Black-Scholes model and the following inputs: exercise price of $0.70 per share, expected term of 24 months, annualized volatility based on publicly traded peer companies of 103%, a risk-free rate of 3.1%, and zero expected dividends. The weighted average Black-Scholes fair value is $0.17 per warrant, with the relative fair value ascribed to the warrants issued as part of the financing totaling $844,000.
-
3 On June 28, 2022, HEVI issued 175,000 warrants to a finder in connection with the strategic investor private placement. The warrants were valued using the Black-Scholes model and the following inputs: exercise price of $0.70 per share, expected term of 24 months, annualized volatility based on publicly traded peer companies of 103%, a risk-free rate of 3.1%, and zero expected dividends. The weighted average Black-Scholes fair value is $0.17 per warrant.
The number of share options issued and outstanding, weighted average exercise price and weighted average remaining life is as follows:
| remaining life is as follows: | |||
|---|---|---|---|
| Number of Options | Weighted Average Exercise Price ($/share) |
Weighted Average Remaining Life (years) |
|
| December 31, 20211 Issued |
3,418,428 4,000,000 |
$ 0.300 $ 0.385 |
4.9 5.0 |
| June 30, 2022 | 7,418,428 | $ 0.345 |
4.7 |
9
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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1 Each option reflects the 1.00542 exchange ratio in accordance with the terms of the Amalgamation
The number of share options exercisable and the weighted average exercise price is as follows:
| Exercisable Options | Weighted Average Exercise Price ($/share) |
|
|---|---|---|
| December 31, 2021 | - | $ 0.30 |
| June 30, 2022 | 683,626 | $ 0.30 |
The fair value of options granted is measured using the Black Scholes pricing model. Measurement inputs include the share price on the measurement date, exercise price of the instrument, expected volatility based on publicly available information for similar companies, weighted average expected life, estimated forfeiture rate, expected dividends, and the risk-free interest rate. The fair value is amortized to share based compensation expense or capitalized to exploration and evaluation assets over the option vesting period with a corresponding offset to contributed surplus.
The fair value of the options on the date of issuance was determined using the following Black-Scholes pricing model inputs:
| Share price Risk-free interest rate Expected life (years) Expected volatility Forfeiture rate Expected dividends Fair value |
$ 0.385 3.10% 5 103% 0% Nil $ 0.30 |
|---|---|
Liquidity, Financing and Capital Resources
| Liquidity, Financing and Capital Resources | |
|---|---|
| June 30, 2022 | |
| Opening cashposition | $ 171 |
| Inflow of funds Proceeds from share issuance (net of share issuance costs) Changes in workingcapital |
|
| 17,697 | |
| (860) | |
| 16,837 | |
| Outflow of funds Capital expenditures Lease payments Cash flow used in operations |
|
| (2,004) | |
| (9) | |
| (779) | |
| (2,792) | |
| Closing cashposition | $ 14,216 |
Capital Funding and Resources
As at June 30, 2022, the Company’s working capital balance was $14,803,000 including cash of $14,216,000.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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Financial Capacity
At June 30, 2022, the Company’s working capital balance was $14,803,000. The Company has considerable flexibility in managing capital given the terms of helium permits granted by the Government of Saskatchewan. Any commitments related to the lease and permit terms are incorporated into the capital budget.
Financial Risk Management
The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities such as:
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Credit risk
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Market risk
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Liquidity risk
HEVI is exposed to normal market risks inherent in the helium business, including, but not limited to, commodity price risk, foreign currency rate risk, credit risk, liquidity risk and interest rate risk. The Company seeks to mitigate these risks through various business processes and management controls and from time to time by using various derivative financial instruments and physical delivery sales contracts.
(a) 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 and arises principally from the Company’s cash and accounts receivable.
The carrying amount of cash and cash equivalents and accounts receivable represents the maximum credit exposure. As at June 30, 2022, the Company’s receivables consisted of sales taxes paid on general and administrative and capital expenditures and funds owing on the June 28, 2022 private placement.
Cash and cash equivalents are held by a level 1 financial institution.
(b) Market risk
Market risk is the risk that changes in market conditions, such as commodity prices, foreign exchange rates and interest rates will affect the Company’s income or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while maximizing the Company’s return.
Interest rate risk:
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company does not have any interest rate exposure as at June 30, 2022.
Foreign exchange risk:
Helium prices are based on US dollar denominated commodity prices. As a result, the Canadian dollar price received by the Company will be affected by the Canadian and US dollar exchange rates once helium revenues are realized.
(c) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The Company’s financial liabilities consist of accounts payable and accrued liabilities and subscription receipts payable.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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Accounts payable consists of invoices payable to trade suppliers for general and administrative activities and exploration and evaluation expenditures. The Company processes invoices within a normal payment period. Accounts payable have contractual maturities of less than one year. The Company maintains and monitors a certain level of cash which is used to finance all operating and capital expenditures.
HEVI anticipates having adequate funds flow to meet its contractual obligations and commitments and discharge its liabilities as they come due. In order to ensure it has sufficient liquidity, the Company may access capital markets. Management anticipates that these efforts will provide enough financial flexibility to meet the Company’s contractual obligations and commitments and discharge its liabilities, until it generates cashflow from operations.
Capital Management
The Company’s capital structure includes shareholders’ equity and working capital. HEVI’s general policy is to maintain a strong financial position to allow for exploration of its existing land base. The Company’s objective is to maintain a capital structure that allows it to finance its business strategy using primarily internally generated cash flow and equity markets, and to optimize the use of its capital to provide an appropriate investment return to its shareholders.
HEVI monitors its capital structure and makes adjustments on an ongoing basis in order to maintain the flexibility needed to achieve the Company’s long-term objectives. To manage its capital structure, the Company may adjust capital spending, issue new equity, issue new debt, or obtain alternative financing.
The Company is in the process of exploring its helium properties and has not yet determined whether these properties contain deposits that are economically recoverable. As the Company does not yet have cash flow from operations, it must rely on equity financing to fund operations. To date the Company’s main source of funding has been the issuance of equity and warrant securities for cash through private placements to sophisticated investors.
The Company’s continuing operations and underlying value and recoverability of the amounts shown for exploration and evaluation assets are entirely dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the exploration and development of its helium property interests and on future profitable production or proceeds from the disposition of the helium property interests.
As at June 30, 2022, the Company had positive working capital of $14,803,000.
These and other factors may adversely affect the Company’s liquidity and ability to generate income and future cash flows.
Commitments
The Company holds helium exploration permits in Saskatchewan with an initial 3-year term. The Company has annual lease expenditure commitments as follows: 2022 – $112,000, 2023 – $209,000, 2024 – $449,000 and annual permit expenditure commitments as follows: 2022 – $808,000, 2023 – $1,322,000, and 2024 – $2,035,000. Permit expenditures can be grouped and carried forward to future years if the expenditure amount is greater than the minimum expenditure required. If the above commitments are not satisfied, the Company will relinquish the associated helium permits.
The Company entered into a 2-year office lease agreement, commencing November 1, 2021, and ending October 31, 2023, and has entered into office equipment leases. The lease commitments as at June 30, 2022 are as follows:
| 1year | 2years | 3years | > 3years | Total | |
|---|---|---|---|---|---|
| Lease obligations | $ 20 | $ 14 | $ 4 | $ 3 | $ 40 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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Related Party Transactions
The following table summarizes transactions with related parties:
| June 30, 2022 | June 30, 2021 | |
|---|---|---|
| Exploration and evaluation expense – management | $ 5 |
$ 720 |
Under the terms of the January 14, 2021 share issuance to certain management and directors, the Company recorded $720,000 as pre-exploration expenditure under E&E expense.
Pursuant to a Royalty Agreement between HEVI and certain HEVI founders, a 3.0% gross overriding royalty (“GORR”) on the Company’s Saskatchewan helium permits applied for prior to March 30, 2022 was granted to executive members and companies controlled by directors and officers of the Company. As a result, the Company assigned a value of $5,000 to E&E expense.
On January 12, 2022, the Company entered into a Secured Promissory Note (the “Promissory Note”) with a director of the Company in the amount of $1.5 million with an annualized interest rate of 10 percent. The note was secured by a General Security Agreement between the parties providing the lending party with security over the assets of the Company. The Promissory Note was repaid in full on March 18, 2022, along with total interest of $37,500, and the security was subsequently discharged.
Use of Judgements and Key Sources of Estimation Uncertainty
The timely preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the year. These estimates are subject to measurement uncertainty and the effect on the financial statements of changes in these estimates could be material. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Critical Judgments
(i) Identification of cash generating units (“CGUs”)
The Company’s assets are aggregated into CGUs for the purpose of calculating impairment. CGUs are based on an assessment of the unit’s ability to generate independent cash inflows. The determination of these CGUs was based on management’s judgment regarding shared infrastructure, geographical proximity, and similar exposure to market risk and materiality.
(ii) Exploration and evaluation (“E&E”) assets
The application of the Company's accounting policy for E&E requires management to make certain judgments as to future events and circumstances as to whether economic quantities of reserves have been found in assessing economic and technical feasibility.
(iii) Deferred income taxes
Judgments are made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable income. To the extent that assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as the amounts recognized in earnings or loss in the period in which the change occurs.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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(iv) Lease accounting regarding incremental borrowing rate and lease term
The incremental borrowing rates are based on judgments including economic environment, term, currency, and the underlying risk inherent to the asset. The carrying balance of the right-of-use assets, lease obligations, and the resulting interest and depletion and depreciation expense, may differ due to changes in the market conditions and lease term. Lease terms are based on assumptions regarding extension terms that allow for operational flexibility and future market conditions.
Key Sources of Estimation Uncertainty
(i) Taxation
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in profit or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods. Deferred tax assets, if any, are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse.
(ii) Warrants
The estimated fair value of the warrants and share options as part of the share and warrant issuance and share option grants uses the Black-Scholes pricing model incorporating assumptions on volatility, risk-free interest rate, and the expected term.
Off Balance Sheet Arrangements
The Company had no material off-balance sheet arrangements outstanding as at June 30, 2022 other than those previously noted.
Financial Instruments
Financial instruments of the Company include cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, and subscription receipts payable. The carrying values of the financial instruments approximate their fair values due to their relatively short periods to maturity.
Business Risks and Uncertainties
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, have adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations at this time.
The Company’s business of exploring for mineral resources involves a variety of operational, financial, and regulatory risks that are typical in the natural resource industry. The Company was only recently incorporated, has not commenced commercial operations, and has no proven history of performance, earnings, or success. There is no guarantee that the Company will ever be able to achieve profitable results or successfully execute its business plan, and the Company’s common shares must be considered speculative, primarily due to the nature of the Company’s business and early stage of development.
The Company’s property interests are located in Canada. Any changes in governmental laws, regulations, economic conditions or shifts in political attitudes or stability are beyond the control of the Company and may adversely affect its business. In addition, shortages of skilled labour and deficiencies in infrastructure may negatively influence costs of exploration and development.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at June 30, 2022, for the three and six months ended June 30, 2022, the three months ended June 30, 2021 and period from incorporation on January 14, 2021 to June 30, 2021 (tabular amounts in thousands of Canadian Dollars, except share and per share amounts)
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The success of the Company is dependent, among other things, on obtaining sufficient funding to enable the Company to explore and develop its property interests or to fulfil its obligations under applicable agreements. There can be no assurance that the Company will be able to obtain adequate financing in the future or that the terms of such financing will be favourable. Failure to obtain such additional financing could result in delay or indefinite postponement of further exploration and development of new projects with the possible loss of such properties. The Company will require new capital to continue to operate its business and to continue with exploration on its properties, and there is no assurance that capital will be available when needed, if at all. It is likely such additional capital will be raised through the issuance of additional equity which will result in dilution to the Company’s shareholders.
The operations of the Company may require licenses and permits from various governmental authorities. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be required to conduct exploration and development work at its projects. Failure to obtain such licenses and permits may adversely affect the Company’s business as the Company would be unable to legally conduct its intended exploration work, which may result in it losing its interest in the subject property.
Even if the Company’s exploration programs are successful, factors beyond the control of the Company may affect the marketability of any resources discovered. The marketability and price of helium which may be produced or acquired by the Company will be affected by numerous factors beyond the control of the Company. These other factors include delivery uncertainties related to the proximity of its reserves to processing facilities and extensive government regulation relating to price, taxes, royalties, allowable production land tenure, the import and export of minerals and many other aspects of the mineral extraction business. Declines in resource prices may have a negative effect on the Company.
The resource industry is intensely competitive, and the Company must compete in all aspects of its operations with a substantial number of other corporations which have greater technical or financial resources. The Company may be unable to acquire additional attractive resource properties on terms it considers to be acceptable.
The Company’s operations are subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation provides for restrictions and prohibitions of spills, release or emission of various substances produced in association with certain mineral extraction industry operations, which could result in environmental pollution. Failure to comply with such legislation may result in the imposition of fines and penalties. In addition, certain types of operations require submissions to and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards and enforcement, and fines and penalties for non-compliance are becoming more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers, and employees. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of operations. The Company intends to fully comply with all environmental regulations.
Certain directors and officers of the Company are also directors, officers and shareholders of other natural resource or public companies, as a result of which they may find themselves in a position where their duty to another company conflicts with their duty to the Company. There is no assurance that any such conflicts will be resolved in favour of the Company. If any of such conflicts are not resolved in favour of the Company, the Company may be adversely affected.
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