PureBase Corp - Quarter Report: 2018 February (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2018

 

OR 

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

EXCHANGE ACT FOR THE TRANSITION PERIOD FROM

 

_______________ to _______________

 

Commission File Number   333-188575

 

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:     Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ☒     No ☐

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  (Check one):

 

	Large accelerated filer	☐		Accelerated filer	☐
	Non-accelerated filer	☐		Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐     No ☒

 

Indicate the number of shares outstanding of the issuer's common stock, as of March 31, 2018 was 141,347,173.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDEX

PART I - FINANCIAL INFORMATION	4
ITEM 1.      FINANCIAL STATEMENTS	4
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS  OF OPERATION	19
ITEM 4.      CONTROLS AND PROCEDURES	23
PART II - OTHER INFORMATION	24
ITEM 1.      LEGAL PROCEEDINGS	24
ITEM 1A.   RISK FACTORS	25
ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES	25
ITEM 3.      DEFAULTS UPON SENIOR SECURITIES	25
ITEM 4.      MINE SAFETY DISCLOSURES	25
ITEM 5.       OTHER INFORMATION	25
ITEM 6.      EXHIBITS	26
SIGNATURES	26

 

 

 

 

 

 

 

ITEM 1.       FINANCIAL STATEMENTS

 

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Condensed Consolidated Balance Sheets as of February 28, 2018 (unaudited) and November 30, 2017 (audited)	5
Condensed Consolidated Statements of Operations for the Three Months Ended February 28, 2018 and February 28, 2017 (unaudited)	6
Condensed Consolidated Statement of Stockholders' Equity for the period ended February 28, 2018 (unaudited)	7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended February 28, 2018 and February 28, 2017 (unaudited)	8
Notes to Financial Statements (unaudited)	9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PUREBASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

  

  

The accompanying notes are an integral part of these financial statements

 

 

PUREBASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS

ENDED FEBRUARY 28, 2018 AND FEBRUARY 28, 2017

(UNAUDITED)

 

 

 

  

 

The accompanying notes are an integral part of these financial statements

 

 

 

PUREBASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF

STOCKHOLDERS' EQUITY

(UNAUDITED)

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

PUREBASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2018 AND FEBRUARY 28, 2017

 (UNAUDITED)

 

 

The accompanying notes are an integral part of these financial statements

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

Note 1.  Nature of Business

Purebase Corporation (the "Company"), was incorporated in the State of Nevada on March 2, 2010 to create a web-based service that would offer boaters an easy, convenient, fun, easy to use, online resource to help them plan and organize their boating trips. Pursuant to a corporate reorganization consummated on December 23, 2014 the Company changed its business focus to an exploration, mining and product marketing company which will focus on identifying and developing advanced stage natural resource projects which show potential to achieve full production. The business strategy of the Company is to identify, acquire, define, develop and operate world-class industrial and natural resource properties and to contract for mine development and operations services to its mining properties located initially in the Western United States and currently in California and Nevada. The Company intends to engage in the identification, acquisition, development, mining and full-scale exploitation of industrial and natural mineral properties in the United States. The Company plans to package and market such industrial and natural minerals to retail and wholesale industrial and agricultural market sectors. The Company will initially seek to develop deposits of pozzolan and potassium sulfate on its own properties or acquire such minerals from other sources. These minerals have a wide range of uses including construction, agriculture additives, animal feedstock, ceramics, synthetics and absorbents. The Company's activities are subject to significant risks and uncertainties including its ability to secure additional funding to pursue its operations

The Company is headquartered in Ione, California. The Company's business is divided into wholly-owned and majority-owned subsidiaries which will operate as business divisions whose sole focus is to develop sector related products and to provide for distribution of those products into primarily the agricultural and construction industry sectors.

Note 2.  Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements include the accounts of Purebase Corporation and its wholly owned subsidiaries Purebase Agricultural, Inc. (f.k.a. Purebase, Inc.) and US Agricultural Minerals, LLC ("USAM") and its majority-owned subsidiary Purebase Networks, Inc.(until March, 2017), collectively referred to as the "Company".  All intercompany transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the consolidated financial position at February 28, 2018 and the consolidated results of operations and cash flows of the Company for the three months ended February 28, 2018 and February 28, 2017.  Operating results for the three months ended February 28, 2018 are not necessarily indicative of the results that may be expected for the year ending November 30, 2018. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and footnotes thereto for the year ended November 30, 2017 filed on Form 10-K on February 28, 2018.

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

The Company incurred a net loss of $497,977 for the fiscal quarter ended February 28, 2018 and generated negative cash flows from operations. In addition, the Company has generated only limited revenue in conjunction with its business plan. In order to support its operations, the Company will require additional infusions of cash from the sale of equity instruments or the issuance of debt instruments, or the commencement of profitable revenue generating activities.  If adequate funds are not available or are not available on acceptable terms, the Company's ability to fund its operations, take advantage of potential acquisition opportunities, develop or enhance its properties in the future or respond to competitive pressures would be significantly limited. Such limitations could require the Company to curtail, suspend or discontinue parts of its business plan.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty. The condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

The Company uses the specific identification method for recording the provision for doubtful accounts, which was $0 at February 28, 2018 and February 28, 2017. Accounts receivable are written off when all collection attempts have failed.

Revenue is recognized when the product has shipped, and the title has transferred to the customer.

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share includes potentially dilutive securities such as outstanding warrants and stock options.  The outstanding warrants and stock options have been excluded from the calculation of the diluted loss per share due to their anti-dilutive effect. For the quarters ended February 28, 2018 and February 28, 2017 warrants and options to purchase 500,000 and 6,805,494, respectively, have been excluded from the computation of potential dilutive securities.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Property and equipment are carried at cost. Depreciation is computed using straight line depreciation methods over the estimated useful lives as follows:

Major additions and improvements are capitalized. Costs of maintenance and repairs which do not improve or extend the life of the associated assets are expensed in the period in which they are incurred. When there is a disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in net income.

 

 

The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.

In accordance with U.S. GAAP, expenditures relating to the acquisition of mineral rights are initially capitalized as incurred while exploration and pre-extraction expenditures are expensed as incurred until such time the Company exits the Exploration Stage by establishing proven or probable reserves. Expenditures relating to exploration activities such as drill programs to establish mineralized materials are expensed as incurred. Expenditures relating to pre-extraction activities are expensed as incurred until such time proven or probable reserves are established for that project, after which expenditures relating to mine development activities for that particular project are capitalized as incurred.

Acquisition costs of mineral rights are capitalized as incurred while exploration and pre-extraction expenditures are expensed as incurred until such time the Company exits the Exploration Stage by establishing proven or probable reserves, as defined by the SEC under Industry Guide 7, through the completion of a "final" or "bankable" feasibility study. Expenditures relating to exploration activities are expensed as incurred and expenditures relating to pre-extraction activities are expensed as incurred until such time proven or probable reserves are established for that project, after which subsequent expenditures relating to development activities for that particular project are capitalized as incurred.

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

Where proven and probable reserves have been established, the project's capitalized expenditures are depleted over proven and probable reserves upon commencement of production using the units-of-production method. Where proven and probable reserves have not been established, such capitalized expenditures are depleted over the estimated production life upon commencement of extraction using the straight-line method.

The carrying values of the mineral rights are assessed for impairment by management on a quarterly basis or when indicators of impairment exist. Should management determine that these carrying values cannot be recovered, the unrecoverable amounts are written off against earnings.

 

 

Financial assets and liabilities recorded at fair value in the Company's condensed consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories, as defined by the standard, are as follows:

For certain of our financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short-term nature. The carrying amount of the Company's notes payable approximates fair value based on prevailing interest rates.

The Company is expected to have net operating loss carryforwards that it can use to offset a certain amount of taxable income in the future. The Company is currently analyzing the amount of loss carryforwards that will be available to reduce future taxable income. The resulting deferred tax assets will be offset by a valuation allowance due to the uncertainty of its realization. The primary difference between income tax expense attributable to continuing operations and the amount of income tax expense that would result from applying domestic federal statutory rates to income before income taxes relates to the recognition of a valuation allowance for deferred income tax assets.

The Company has adopted FASB ASC 740-10, "Income Taxes" which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not as a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the

 

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company's policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the three months ended February 28, 2018 and February 28, 2017.  The Company's net operating loss carryforwards are subject to IRS examination until they are fully utilized, and such tax years are closed.

The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 350, "Intangibles – Goodwill and Other" and ASC 360, "Property and Equipment". Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the quarters ended February 28, 2018 and February 28, 2017.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 will become effective for the Company in the quarter ending February 2018.  Early adoption is permitted in any interim or annual period.  The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In April 2016, the FASB issued AS 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board's new revenue standard, ASU 201-09, Revenue from Contracts with Customers.  The standard should be adopted concurrently with the adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017.  The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.

Note 3.  Properties

Placer Mining Claim Notices have been filed and recorded with the US Bureau of Land Management (the "BLM") relating to 50 Placer mining claims identified as "USMC 1" thru "USMC 50" covering 1,145 acres of mining property located in Lassen County, California and known as the "Long Valley Pozzolan Deposit". The Long Valley Pozzolan Deposit is

 

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

a placer claims resource in which the Company holds non-patented mining rights to 1,145acres of contiguous placer claims within the boundaries of a known and qualified Pozzolan deposit. These claims were assigned to Purebase by one of its founders at his original cost basis of $0. These claims require a payment of $30,000 per year to the BLM.

This Preference Rights Lease is granted by the BLM covering approximately 2,500 acres of land located in the Mount Diablo Meridian area of Nevada. Contained in the leased property is the Chimney 1 Potassium/Sulfur Deposit which consists of 15.5 acres of land fully permitted for mining operation which is situated within the 2,500 acres held by Purebase. All rights and obligations under the Preference Rights lease have been assigned to the Company by US Mine Corp, a company owned by the majority stockholders and Directors of the Company, A. Scott Dockter and John Bremer. These rights are presented at their cost of $200,000. This lease requires a payment of $3,000 per year to the BLM.

On November 28, 2014 US Mining and Minerals Corporation entered into a Purchase Agreement in which US Mining and Minerals Corp. agreed to sell its fee simple property interest and certain mining claims to US Mine Corp. In contemplation of the Plan and Agreement of Reorganization, on December 1, 2014, US Mine Corp assigned its rights and obligations under the Purchase Agreement to the Company pursuant to an Assignment of Purchase Agreement. As a result of the Assignment, the Company assumed the purchaser position under the Purchase Agreement. The Purchase Agreement involves the sale of approximately 280 acres of mining property containing 5 placer mining claims known as the Snow White Mine located near Barstow, California in San Bernardino County. The property is covered by a Conditional Use Permit allowing the mining of the property and a Plan of Operation and Reclamation Plan has been approved by San Bernardino County and the US Bureau of Land Management ("BLM").   An initial deposit of $50,000 was paid to escrow, and the agreement required the payment of an additional $600,000 at the end of the escrow period.  There was a delay in the seller receiving a clear title to the property and a fully permitted project, both of which were conditions to closing. In light of the foregoing, and the payment of another $25,000, the parties agreed to extend the closing.  Due to delays in the Company securing the necessary funding to close the purchase of the Snow White Mine property, John Bremer, a shareholder and a director of Purebase, paid $575,000 to acquire the property on or about October 15, 2015. Mr. Bremer will transfer title to the Company when the Company pays Mr. Bremer $575,000 plus expenses. The mining claims require a minimum royalty payment of $3,500 per year.

 

During the year ended November 30, 2017, US Mine Corp. agreed to offset the $75,000 deposit against money owed to US Mine Corp. Mr. Bremer has not restricted the Company from continuing its exploration on the property or access to property in any way.

Note 4.  Notes Payable

Purebase assumed a $1,000,000 promissory note on November 24, 2014 in connection with the acquisition of USAM by Purebase. The note bears simple interest at an annual rate of 5% and the principal and accrued interest were payable on May 1, 2016. Upon the occurrence of an event of default, which includes voluntary or involuntary bankruptcy, all unpaid

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

principal, accrued interest and other amounts owing are immediately due, payable and collectible by the lender pursuant to applicable law. The balance of the note was $1,000,000 at February 28, 2018 and November 30, 2017. The Note is in default however, the Company continues to have discussions with Note Holder to extend the Note under the same terms and conditions.

On February 26, 2016, Bayshore Capital, a major shareholder, advanced $25,000 to Purebase Corp for working capital at 6% per annum.  The note was payable August 26, 2016, or when the Company closes its bridge financing, whichever occurs first. As of February 28, 2018, this note had not been repaid and is currently in default.

On August 31, 2017, the Company issued a Note in the amount of $197,096 to Arthur Scott Dockter, President, CEO and a Director of the Company to consolidate the total amounts due to and assumed by Mr. Dockter. The Note to Mr. Dockter bears interest at 6% and was due the earlier of closing of bridge financing or January 15, 2018. As of February 28, 2018, this note had not been repaid and is currently in default, however, the Company is currently negotiating with Mr. Dockter to extend this Note.

Note 5.  Commitments and Contingencies

Our mineral rights require various annual lease payments. See Note 3.

Purebase and US Agricultural Minerals, LLC along with certain principals of those entities were named as defendants in a Complaint filed in the Second Judicial District Court in Washoe County, Nevada (Case # CV14 01348) on June 23, 2014. The Complaint was filed by Madelaine and Edwin Durand alleging various causes of action including breach of contract and misrepresentations by various defendants and certain principals of Purebase and USAM. The substance of the Complaint involves the alleged breach and other wrongful acts pertaining to a Mineral Lease Contract and a Non-Disclosure, Confidentiality and Non-Compete Agreement entered into between the Plaintiffs and the Defendants. On June 16, 2015 the Plaintiffs filed an Amended Complaint which, among other things, added the Company as a named Defendant. On March 2, 2016, the Court issued its decision regarding Defendant's Motion to Dismiss all claims. The Court dismissed nine (9) of the twelve (12) claims against the Defendants.  The Plaintiffs were ordered to further amend their Complaint and add their corporation as a named party.  On March 25, 2016, the Plaintiffs filed the Court ordered Second Amended Complaint.  On April 11, 2016 Defendants filed their Answer to the Second Amended Complaint and filed their Counter Claims against the Plaintiffs. Discovery closed in June 2017. The jury trial commenced on February 12, 2018 and following the Plaintiff's presentation of their case, on February 14, 2018 the Judge entered a Directed Verdict in favor of the Defendants.

 

On September 21, 2016 the Company's President, David Vickers, left the Company. Subsequent to his departure, Mr. Vickers has retained legal counsel and is now alleging claims of age discrimination, fraud in the inducement, violation of California Labor Code §970 and breach of contract against the Company.

 

On April 14, 2017 the Company was served by Mr. Vickers' attorney with a demand for arbitration of the above referenced claims. It is too early to estimate the likelihood of an unfavorable outcome, however Mr. Vickers' demand for arbitration stated a claim of over $1,000,000. An evidentiary hearing is scheduled for May 23, 2018. The Company plans to vigorously defend these claims in arbitration.

 

 

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

 

On November 1, 2013, Purebase entered into an agreement with US Mine Corp, which performs services relating to various technical evaluations and mine development services to Purebase with regard to the various mining properties/rights owned by Purebase. Terms of services and compensation will be determined for each project undertaken by US Mine Corp.

The Company made payments totaling $75,000 towards the purchase of the Snow White Mine. During the year ended November 30, 2017, US Mine Corp. agreed to offset the $75,000 deposit against money owed to US Mine Corp.  The Company will need to pay Mr. Bremer, a director of both US Mine Corp and Purebase, the additional sum of $650,000 plus expenses, in order to obtain title of this property.

The Company maintains cash accounts at financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation ("FDIC"). The cash accounts, at times, may exceed federally insured limits. At February 28, 2018 there were no accounts which exceeded FDIC insurance limits.

Note 6.  Stockholder's Equity

The Company's amended Articles of Incorporation authorize the issuance of up to 520,000,000 shares of $0.001 par value common stock and up to 10,000,000 shares of $0.001 par value preferred shares.  No preferred stock was outstanding at February 28, 2018 and November 30, 2017.

Warrants and Option Awarded

 

There were no warrants outstanding as of February 28, 2018.

On November 10, 2017 the Company's Board of Directors approved the 2017 Purebase Corporation Stock Option Plan which is intended to be a qualified stock option plan (the "Option Plan"). The Board allocated up to 10,000,000 shares of Purebase common stock to be issued pursuant to options granted under the Option Plan. The Company plans to obtain shareholder approval within one year of its establishment. As of February 28, 2018, no options had been granted under the Option Plan.

 

The Company has also granted options pursuant to employment contracts entered into by the Company and the respective employee.

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

There were no stock options granted during the three months ended February 28, 2018 or February 28, 2017.

 

Employee stock-based options compensation expenses for the three-month period ended February 28, 2018 and 2017 included in general and administrative expense totaled $49,909 and $158,855, respectively.

 

Common stock, stock options or other equity instruments issued to non-employees (including consultants) as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of stock options is determined using the Black-Scholes option-pricing model and is periodically re-measured as the underlying options vest.

 

The following is a schedule summarizing employee and non-employee stock option activity for the three months ended February 28, 2018:

 

The aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company's common stock for each of the respective periods.

As of February 28, 2018, the total unrecognized fair value compensation cost related to non-vested stock options to employees was approximately $210,173 which is expected to be recognized over approximately 1 year.

Note 7.  Related Party Transactions

The Company entered into a Contract Mining Agreement with USMC, a company owned by the majority stockholders of the Company, A. Scott Dockter and John Bremer, pursuant to which USMC will provide Product fulfillment and various technical evaluations and mine development services to the Company.  Services totaling $104,091 and $17,888 were rendered by USMC for the three-month period ended February 28, 2018 and 2017, respectively.

 

During the three-month period ended February 28, 2018, USMC paid $165,857 of expenses to the Company's vendors and creditors on behalf of the Company and also made cash advances to the Company of $325,000. The balance due to USMC is $3,092,656 and $2,497,708 at February 28, 2018 and November 30, 2017, respectively.

 

PUREBASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
FEBRUARY 28, 2018

On August 31, 2017, the Company issued a Note in the amount of $197,096 to Arthur Scott Dockter, President, CEO and a Director of the Company to consolidate the total amounts due to and assumed by Mr. Dockter. The Note to Mr. Dockter bears interest at 6% and was due on January 15, 2018. As of February 28, 2018, this Note is in default.  However, the Company is currently negotiating with Mr. Dockter to extend this Note.

Purebase is using office space provided by U S Mine Corp, a company that is owned by the Company's majority stockholders and Directors, A. Scott Dockter and John Bremer.  There is currently no lease between the two Companies for its use of the office space provided.

 

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

THE FOLLOWING DISCUSSION OF THE RESULTS OF OUR OPERATIONS AND FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO. IN ADDITION, MATERIAL EVENTS DESCRIBED BELOW UNDER "OTHER INFORMATION" OCCURRING AFTER THE QUARTER ENDED FEBRUARY 29, 2016 WILL HAVE A MATERIAL IMPACT ON THE COMPANY'S FUTURE BUSINESS.

 

Cautionary Note About Forward-Looking Statements:

 

THIS FORM 10-Q INCLUDES "FORWARD-LOOKING" STATEMENTS ABOUT FUTURE FINANCIAL RESULTS, FUTURE BUSINESS CHANGES AND OTHER EVENTS THAT HAVE NOT YET OCCURRED.  FOR EXAMPLE, STATEMENTS LIKE THE COMPANY "EXPECTS," "ANTICIPATES" OR "BELIEVES" ARE FORWARD-LOOKING STATEMENTS.  INVESTORS SHOULD BE AWARE THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE COMPANY'S EXPRESSED EXPECTATIONS BECAUSE OF RISKS AND UNCERTAINTIES ABOUT THE FUTURE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE INFORMATION IN THIS FORM 10-Q IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE.  DETAILS ABOUT RISKS AFFECTING VARIOUS ASPECTS OF THE COMPANY'S BUSINESS ARE DISCUSSED THROUGHOUT THIS FORM 10-Q AND SHOULD BE CONSIDERED CAREFULLY.

 

Current Plan of Operations

 

 

Results of Operation

 

We have included a discussion and analysis of the Company's current consolidated operations for the quarter ending February 28, 2018 as compared to the Company's previous consolidated operations for the quarter ending February 28, 2017. The results of operations for the first quarter of 2017 and until March 27, 2017, included the consolidated operations of the majority owned subsidiary Purebase Network, Inc.

 

 

Overview

 

During the current fiscal quarter ended February 28, 2018, the Company generated revenue of $124,491. Total assets decreased slightly from $286,103 as of November 30, 2017 to $283,082 as of February 28, 2018. Total liabilities increased from $4,318,665 at November 30, 2017 to $4,763,712 at February 28, 2018 reflecting an increase of $445,047.

 

Results of Operations for the fiscal quarter ended February 28, 2018 compared to the quarter ended February 28, 2017

 

The Company's operating results for the quarters ended February 28, 2018 and February 28, 2017 are summarized as follows:

 

 

 

Since inception the Company, its subsidiary Purebase Agricultural, Inc. have generated only minimal revenue from operations with revenues commencing during the second quarter of FY 2016. Revenues increased significantly during the current fiscal quarter to $124,491 compared to $24,970 for the comparable fiscal quarter last year. The increase is attributable to the increase in the Company's agricultural minerals and supplements and expansion of the agricultural markets reached by the Company.

 

 

Total operating expenses for the Company for the fiscal quarter ended February 28, 2018 were $601,060 compared to $948,585 of expenses incurred for the fiscal quarter ended February 28, 2017. This decrease is attributed to a significant decrease in general and administrative expenses of $426,533.

 

General and administrative costs for the Company for the three months ended February 28, 2018 were $482,155 and the general and administrative costs for the same period in 2017 were $908,688. The decrease in general and administrative expenses is attributed to the decreases in expenses incurred due to the decrease in salaries of $150,000 and the deconsolidation of Purebase Networks Inc. in March 2017. Included in G&A expenses are professional fees for the fiscal quarter ended February 28, 2018 which were $200,917 compared to professional fees of $173,940 for the same quarter in 2017. The increase in professional fees is attributed to the increase in legal and accounting expenses due to the legal matters related to the Durand litigation. A decrease in stock based compensation also accounts for the decrease in G&A expenses.

 

Exploration and mining expense for the three months ended February 28, 2018 were $115,315 compared to $39,886 of such expenses incurred during the same period in 2017. The increase in exploration and mining costs is the result of costs attributable to the increased recovery of mineral resources used in the Company's agricultural products.

 

The Company's interest expense increased to $21,408 for the quarter ended February 28, 2018 compared to $16,066 for the fiscal quarter ended February 28, 2017. The increase was due to interest incurred on past due federal payroll taxes which were paid during the current quarter.

 

 

 

The Company incurred a net loss of $497,977 for the fiscal quarter ended February 28, 2018 compared to the Company's net loss of $939,681 for the fiscal quarter ended February 28, 2017, a decrease of 47%. The decrease in net loss is the result of a decrease in General & Administrative expenses, coupled with an increase of revenues to offset operating expenses.

 

Liquidity and Capital Resources

 

At February 28, 2018, the Company's cash balance was $41,635 and it had a working capital deficit of $4,690,135.  The Company has insufficient cash on hand to pursue its current or long range business plan and the Company will be required to raise additional capital to fund its operations. Until we are able to establish a sufficient revenue stream from operations our ability to meet our current financial liabilities and commitments will be primarily dependent upon the continued advances from USMC, investments from new or existing investors or loans from existing stockholders and management or outside capital sources. During the three-month period ended February 28, 2018, the Company was primarily reliant for its working capital needs on advances and support from USMC which aggregated $594,948 for the three-month period ended February 28, 2018.  Management believes that our current cash and cash equivalents will not be sufficient to meet our working capital requirements for the next twelve-month period. We have had negative cash flow from operating activities as we have not yet begun to generate sufficient revenues from mineral production or product sales to offset operating expenses.  The Company plans to raise the capital required to satisfy its immediate short-term needs and additional capital required to meet its estimated funding requirements for the next twelve months primarily through additional advances from USMC, the private placement of Company equity securities, by way of loans, and through such other financing transactions as the Company may determine.

 

We expect further exploration and development of our current or future projects and the sale of our agricultural products to continue generating sales revenues, but we do not expect revenues from these activities to cover our entire current operating expenses which we expect to increase as we implement our business plan. Consequently, we will be dependent on outside sources of capital to sustain our operations and implement our business plan until operating revenues are sufficient to cover our operating expenses.  If we are unable to raise sufficient capital we will be required to delay or forego some portion of our business plan, which would have a material adverse effect on our anticipated results from operations and financial condition.  There is no assurance that we will be able to obtain necessary amounts of capital or that our estimates of our capital requirements will prove to be accurate.  Even if we are able to secure outside financing, it may not be available in the amounts or times when we require or on terms we find acceptable.  Furthermore, such financing would likely take the form of bank loans, private placements of debt or equity securities or some combination of these.  The issuance of additional equity securities would dilute the stock ownership of current investors while incurring loans, lines of credit or long-term debt by the Company would increase its cash flow requirements and possible loss of valuable assets if such obligations were not repaid in accordance with their terms.

 

Going Concern

 

The consolidated financial statements presented in this quarterly report have been prepared under the assumption that the Company will continue as a going concern. The Company had net operating losses of $497,977 and $939,681 during the first fiscal quarters of 2018 and 2017, respectively. The Company had a working capital deficiency of $4,690,135 at February 28,2018. The Company did not have sufficient cash at February 28, 2018 to fund normal operations for the next 12 months. The Company has realized modest revenues and its ability to continue as a going concern is dependent on the Company's ability to raise capital to fund its future product development and sales as well as working capital requirements. The Company's plans for the long-term attainment and continuation as a going concern include

 

 

 

financing the Company's future operations through outside capital advances from USMC, sales of its common stock, entering into debt or line of credit facilities, generating increasing revenue from the sale of agricultural production and sales activities and the eventual profitable exploitation of its mineral resource properties. There is no assurance that the Company will be able to obtain funds from any of these potential sources of capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently investigating a number of alternatives for raising additional capital with potential investors, lenders and joint venture partners.

 

Financings

 

During the first quarter of FY 2018 our operations have been funded by short-term loans and advances from affiliates. All of our equity funding has come from the private placement of our securities while loans have been obtained from related parties.

 

 

None.

 

 

No shares of the Company's common stock were issued during the fiscal quarter ended February 28, 2018.

 

 

Tabular Disclosure of Contractual Obligations as of February 28, 2018:

 

 

●

Lack of an independent financial expert on the Board. The current board of directors now includes a majority of non-employee Directors however the Board still lacks an independent financial expert. The current board is composed of four members and may be expanded to as many as nine members under the Company's By-Laws.

●

Lack of adequate accounting resources and adequate segregation of duties over various accounting and reporting functions. Currently, the Company's CFO is responsible for all bookkeeping and oversight relating to the Company's financial reports and cash flow. The Company plans to diversify some of the CFO's current functions in order to achieve adequate segregation of duties over various accounting and reporting functions.

●

Lack of adequate oversight/approval of transactions with related parties of the Company. In order to partially address this issue, the Board consented to appointing its two independent directors, Messrs. Gingerich and Lim, as "Negotiators" to negotiate any transactions on behalf of the Company with affiliated entities or where a conflict of interest may be present. The Company intends to adopt additional procedures for disbursing funds to officers and affiliates of the Company.

ITEM 1.       LEGAL PROCEEDINGS

 

Purebase Ag and US Agricultural Minerals, LLC ("USAM") along with certain principals of those entities were named as defendants in a Complaint filed in the Second Judicial District Court in Washoe County, Nevada (Case # CV14 01348) on June 23, 2014. The Complaint was filed by Madelaine and Edwin Durand alleging various causes of action including breach of contract and misrepresentations by various defendants and certain principals of Purebase Ag and USAM. The substance of the Complaint involves the alleged breach and other wrongful acts including the staking and attempted recordation of claims by Defendants pertaining to a Non-Disclosure, Confidentiality and Non-Compete Agreement entered into between the Plaintiffs and the Defendants on June 26, 2012 and a Mineral Lease contract dated July 10, 2012 relating to certain mining claims allegedly owned by Plaintiffs and known as the Sierra Lady Mining Claims. The Plaintiffs are seeking an injunction to prevent further staking and disclosure of confidential information relating to the Sierra Lady Mining Claims and monetary damages while the Defendants seek to dismiss the case alleging that the Plaintiffs did not have good title to the mineral rights they were attempting to lease to Defendants. On June 16, 2015 the Plaintiffs filed an Amended Complaint which, among other things, added the Company as a named Defendant. On March 25, 2016, the Plaintiffs filed a Court ordered Second Amended Complaint.  On April 11, 2016 Defendants filed their Answer to the Second Amended Complaint and filed their Counter Claims against the Plaintiffs. Discovery will close in June 2017. A jury trial commenced on February 12, 2018 and following the Plaintiff's presentation of their case, on February 14, 2018, the Judge entered a Directed Verdict dismissing the claims against the Defendants. Furthermore, pursuant to a Settlement Agreement and Release, in exchange for the Defendants waiving their cross complaint for damages, Plaintiffs agreed to release all claims against the Defendants and waive all rights to appeal the verdict.

 

 

On September 21, 2016 the Company's President, David Vickers, left the Company. Subsequent to his departure, Mr. Vickers has retained legal counsel and is now alleging claims of age discrimination, fraud in the inducement, violation of California Labor Code §970 and breach of contract against the Company. On April 14, 2017 the Company was served by Mr. Vickers' attorney with a demand for arbitration of the above referenced claims. The arbitration proceeding will be handled by the Judicial Arbitration and Mediation Services, Inc. (JAMS) and is currently in the discovery phase. An evidentiary hearing is currently scheduled for May 23, 2018.  The range of loss could not be determined, but Mr. Vickers' demand for arbitration stated a claim of over $1,000,000. The Company plans to vigorously defend these claims in the arbitration proceeding.

 

ITEM 1A.    RISK FACTORS

 

As of the end of the quarter, there were no changes to our risk factors from those disclosed in our annual report on Form 10-K filed with the SEC on February 28, 2018.

 

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES

 

During the quarter ended February 28, 2018, there were no unregistered sales of the Company's securities.

 

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

 

Purebase assumed a $1,000,000 promissory note on November 24, 2014 in connection with the acquisition of USAM by Purebase. The note bears simple interest at an annual rate of 5% and the principal and accrued interest were payable on May 1, 2016. Upon the occurrence of an event of default, which includes voluntary or involuntary bankruptcy, all unpaid principal, accrued interest and other amounts owing are immediately due, payable and collectible by the lender pursuant to applicable law. The principal and accrued interest balance of the note was $1,154,403 at February 28, 2018. The Note is in default however, the Company continues to have discussions with Note Holder to extend the Note under the same terms and conditions.

 

On February 26, 2016, Bayshore Capital, a major shareholder, advanced $25,000 to Purebase Corp for working capital at 6% per annum.  The note was payable August 26, 2016, or when the Company closes its bridge financing, whichever occurs first. As of February 28, 2018, this note had not been repaid and is currently in default.

 

On August 31, 2017, the Company issued a Note in the amount of $197,096 to Arthur Scott Dockter, President, CEO and a Director of the Company to consolidate the total amounts due to and assumed by Mr. Dockter as of that date. The Note to Mr. Dockter bears interest at 6% and is due the earlier of closing of bridge financing or January 15, 2018. As of February 28, 2018, this note had not been repaid and is currently in default.

 

ITEM 4.       MINE SAFETY DISCLOSURES

 

There are no mine safety violations or other regulatory matters required to be disclosed which occurred during the fiscal quarter covered by this report.

 

ITEM 5.       OTHER INFORMATION

 

On March 2, 2018 John Gingerich was appointed to the Board of Directors of Purebase Agricultural, Inc. (a wholly-owned subsidiary of the Company) and was appointed CEO of Purebase Agricultural, Inc. replacing Scott Dockter.

 

 

 

 

ITEM 6.       EXHIBITS

 

The following documents are filed as exhibits to this report:

 

31.1	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).
31.2	Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).
32.1	Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350.

 

 

 

SIGNATURES 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

 

	PUREBASE CORPORATION
Dated:  April 10, 2018	/s/ A. Scott Dockter
	A. Scott Dockter
	Chief Executive Officer
Dated:  April 10, 2018	/s/ Al Calvanico
	Al Calvanico
	Chief Financial Officer