PureBase Corp - Quarter Report: 2020 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 29, 2020

or

  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 000-55517

PUREBASE CORPORATION

(Exact name of registrant as specified in its charter)

(209) 274-9143

(Registrant’s telephone number, including area code)

N/A

(Former address)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: [  ]

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

As of April 13, 2020, there were 208,650,751 shares of the registrant’s common stock outstanding.

PUREBASE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2020

PART I – FINANCIAL INFORMATION

1. FINANCIAL STATEMENTS

PUREBASE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

PUREBASE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

PUREBASE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED FEBRUARY 29, 2020

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

PUREBASE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2019

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

PUREBASE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

PUREBASE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – organization and business operations

Corporate History

PureBase Corporation (the “Company”) was incorporated in the State of Nevada on March 2, 2010, under the name Port of Call Online, Inc. 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 engaged in identifying and developing advanced stage natural resource projects which, the Company believes, show potential to achieve full production. Effective January 12, 2015, the Company amended its articles of incorporation to change its name to PureBase Corporation. The Company, through its wholly-owned operating subsidiaries PureBase Agricultural, Inc., a Nevada corporation, (“PureBase AG”) and U.S. Agricultural Minerals, LLC, a Nevada limited liability company (“USAM”) is engaged in the identification, acquisition, exploration, development, mining and full-scale exploitation of its industrial and natural mineral properties in the United States for the agriculture and construction materials markets. On the agricultural side, the Company’s business is to develop agricultural specialized fertilizers, minerals and bio-stimulants for organic and sustainable agriculture. On the construction side, the Company is focused on developing construction sector-related products such as cements. The Company intends to provide for distribution of its products into each industry related market.

The Company is headquartered in Ione, California.

Business Overview

PureBase is a diversified, industrial mineral and natural resource company working to provide solutions to the agriculture and construction materials markets. In addition, the Company intends to focus on identifying and developing other advanced stage natural resource projects in support of its agricultural business. PureBase’s business is currently divided into two divisions: “PureBase Agricultural, Inc.” to develop agricultural specialized fertilizers, minerals and biostimulants for organic and sustainable agriculture and “PureBase Build/SCM” which will be focused on developing construction sector related products such as cements. PureBase will provide for distribution of those products into each industry related market.

The Company’s initial focus is on the organic agricultural market sectors. The Company has developed and will seek to develop additional products derived from mineralized materials of Leonardite, Kaolin Clay, Laterite, Potassium Silicate Sulfate, and other natural minerals. These important minerals are used in the agricultural industry to protect crops, plants and fruits from the sun, winter damage, provide nutrients to plants, improve dormancy and improve soil ecology with agricultural minerals and soil amendments to help farmers increase the yields of their harvests.

The Company utilizes the services of US Mine Corporation (“USMC”), a private company focusing on the development and contract mining of industrial mineral and metal projects throughout North America to perform exploration drilling, preparation of feasibility studies, mine modeling, on-site construction, mine production, and mine site reclamation. Exploration services also include securing necessary permits, environmental compliance, and reclamation plans. In addition, a substantial portion of the minerals to be utilized by the Company is obtained from properties owned or controlled by USMC of which Scott Dockter and John Bremer are officers, directors, and owners.

The Company intends to develop innovative solutions that represent an important value-enhancing element for our agricultural customers. We are building a brand family under the parent trade name, “PureBase”, consisting of three primary product lines: PureBase Shade Advantage WP, PureBase SulFi Hume Si Advantage, and PureBase Humate INU Advantage.

NOTE 2 – GOING CONCERN AND LIQUIDITY

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At February 29, 2020, the Company had a significant accumulated deficit of approximately $11.4 million and working capital deficit of approximately $768,000. For the three months ended February 29, 2020, we had a loss from operations of approximately $150,000 and negative cash flows from operations of approximately $216,000. The Company’s operating activities consume the majority of its cash resources. The Company anticipates that it will continue to incur operating losses as it executes its development plans for 2020, as well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company has previously funded, and plans to continue funding, these losses primarily additional infusions of cash from advances from an affiliate, the sale of equity, and convertible notes. The accompanying 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’s plan, through the continued promotion of its services to existing and potential customers, is to generate sufficient revenues to cover its anticipated expenses. The Company is currently exploring several options to meet its short-term cash requirements, including issuances of equity securities or equity-linked securities from third parties.

Although no assurances can be given as to the Company’s ability to deliver on its revenue plans or that unforeseen expenses may arise, management believes that the revenue to be generated from operations together with potential equity and debt financing or other potential financing will provide the necessary funding for the Company to continue as a going concern, management cannot guarantee any potential debt or equity financing will be available on favorable terms. As such, these matters raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issue date of this report. If adequate funds are not available on acceptable terms, or at all, the Company will need to curtail operations, or cease operations completely.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments, unless otherwise indicated) which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited financial statements and explanatory notes for the year ended November 30, 2019 as disclosed in our Form 10-K filed on February 28, 2020. The results of the three months ended February 29, 2020 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending November 30, 2020.

Principles of Consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and wholly-owned subsidiaries PureBase AG and USAM. Intercompany accounts and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and equity-based transactions at the date of the financial statements and the revenues and expenses during the reporting period. 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.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, useful lives of property and equipment, deferred tax asset and valuation allowance, assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

Revenue

The Company derives revenues from the sale of its agricultural products. The Company’s contracted transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s contracts have a single performance obligation which are not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s performance obligation is satisfied upon the transfer of risk of loss to the customer, which occurs when the product is shipped from the Company’s warehouse.

Practical Expedients

As part of ASC Topic 606, the Company has adopted several practical expedients including that the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less.

Disaggregated Revenue

Revenue consists of the following by product offering for the three months ended February 29, 2020:

Revenue consists of the following by product offering for the three months ended February 28, 2019:

Cash

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There are no cash equivalents as of February 29, 2020 or February 28, 2019.

Account Receivable

The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. As of and for the three months ended February 29, 2020 and February 28, 2019, the Company has determined that an allowance of $11,137 for doubtful accounts was necessary, respectively.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the related assets, generally three to five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated.

Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. No impairment losses were recorded during the three months ended February 29, 2020 and February 28, 2019.

Exploration Stage

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 as 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. There were no costs related to exploration activities for the three months ended February 29, 2020 and February 28, 2019.

Mineral Rights

Acquisition costs of mineral rights are capitalized as incurred while exploration and pre-extraction expenditures are expensed as incurred until such time as 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.

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. Total capitalized costs related to mineral rights was $200,000 as of February 29, 2020 and February 28, 2019.

Shipping and Handling

The Company incurs shipping and handling costs which are charged back to the customer. The net amounts incurred were $0 and $1,900 included in general administrative expenses for the three months ended February 29, 2020 and February 28, 2019, respectively.

Advertising and Marketing Costs

The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $490 and $0 for the three months ended February 29, 2020 and February 28, 2019, respectively, and are recorded in selling, general and administrative expenses on the statement of operations.

Fair Value Measurements

As defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amount of notes approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all of the Company’s debt and interest payable on the notes approximates the Company’s incremental borrowing rate.

Net Loss Per Common Share

Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. All vested outstanding options are considered potential common stock. The dilutive effect, if any, of stock options are calculated using the treasury stock method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options have been excluded from the Company’s computation of net loss per common share for the three months ended February 29, 2020 and February 28, 2019.

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less than the average market price of the common shares:

Stock-Based Compensation

The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.

For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.

Pursuant to ASU 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company utilizes ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.

For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations.

Recent Accounting Pronouncements

In January 2017, FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated the calculation of implied goodwill fair value. Instead, companies will record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. This guidance simplifies the accounting as compared to prior GAAP. The guidance is effective for fiscal years beginning after December 15, 2019. The Company does not expect the implementation of this new pronouncement to have a material impact on its consolidated financial statements.

All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Total depreciation expense for the three months ended February 29, 2020 and February 28, 2019 was $579 and $579, respectively.

NOTE 5 – MINING RIGHTS

Federal Preference Rights Lease in Esmeralda County NV

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 the Company. All rights and obligations under the Preference Rights lease have been assigned to the Company by USMC. These rights are presented at their cost of $200,000. This lease requires a payment of $7,503 per year to the BLM.

Snow White Mine located in San Bernardino County, CA – Deposit

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 USMC. In contemplation of the Plan and Agreement of Reorganization, on December 1, 2014, USMC, a related party, 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 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 the Company, 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, however, the Company is under no obligation to do so. The mining claims require a minimum royalty payment of $3,500 per year.

During the year ended November 30, 2017, USMC, agreed to offset the $75,000 deposit against money owed to USMC. As a result, the purchase price is $650,000 plus expenses. Mr. Bremer has not restricted the Company from continuing its exploration on the property or access to property in any way.

On September 5, 2019, the Company’s Board of Directors approved to discontinue any and all mining and related activities at the Snow White project. The Company has no further obligation related to this project.

On April 1, 2020, the Company entered into a purchase and sale agreement with the Bremer Family 1995 Living Trust, a related party through 19% beneficial ownership of the Company, pursuant to which the Company will purchase the Snow White Pozzolan Mine for a purchase price of $836,000 (the “Purchase Price”). The Purchase Price plus 5% interest shall be payable in full in cash at the closing date. The closing date can be completed any time before April 1, 2022.

NOTE 6 – NOTES PAYABLE

Bayshore Capital Advisors, LLC

On February 26, 2016, the Company entered into a promissory note with Bayshore Capital Advisors, LLC, an affiliate through common ownership of a 10% major shareholder of the Company, for $25,000 for working capital at an interest rate of 6% per annum. The note was payable August 26, 2016, or when the Company closes a bridge financing, whichever occurs first. The Company is in default on this note at February 29, 2020. The balance on the note was $25,000 as of February 29, 2020 and November 30, 2019, respectively See (Note 10). Total interest expense on the note was $370 for the three months ended February 29, 2020 and February 28, 2019.

A. Scott Dockter – President and Chief Executive Officer

On August 31, 2017, the Company issued a note in the amount of $197,096 to A. 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 is due upon demand. During the year ended November 30, 2019, the Company repaid $44,500 towards the balance of the note. The balance on the note was $129,016 and $132,596 as of February 29, 2020 and November 30, 2019, respectively (See Note 10). Total interest expense on the note was $2,916 for the three months ended February 29, 2020 and February 28, 2019, respectively.

Convertible Promissory Notes - USMC

December 1, 2019

On December 1, 2019, in connection with the September 26, 2019, securities purchase agreement with USMC, a related party, (See Note 10), the Company issued a two-year convertible promissory note in the amount of $20,000 to USMC, with a maturity date of December 31, 2021 (“Tranche #1”). The principal bears interest at 5% per annum which is also payable on maturity. Amounts due under the note may be converted into shares of the Company’s common stock, $0.001 par value, at any time at the option of the Holder, at a conversion price of $0.16 per share.

The issuance of Tranche #1 resulted in a discount from the beneficial conversion feature totaling $20,000. Total straight-line amortization of this discount totaled $2,365 during the three months ended February 29, 2020. Total interest expense on Tranche #1 was approximately $250 for the three months ended February 29, 2020.

January 1, 2020

On January 1, 2020, in connection with the September 26, 2019, securities purchase agreement with USMC, a related party, (See Note 10), the Company issued a two-year convertible promissory note in the amount of $86,000 to USMC, with a maturity date of January 1, 2022 (“Tranche #2”). The principal bears interest at 5% per annum which is also payable on maturity. Amounts due under the note may be converted into shares of the Company’s common stock, $0.001 par value, at any time at the option of the Holder, at a conversion price of $0.16 per share.

The issuance of Tranche #2 resulted in a discount from the beneficial conversion feature totaling $32,250. Total straight-line amortization of this discount totaled $2,603 during the three months ended February 29, 2020. Total interest expense on Tranche #1 was approximately $700 for the three months ended February 29, 2020.

February 1, 2020

On February 1, 2020, in connection with the September 26, 2019, securities purchase agreement with USMC, a related party, (See Note 10), the Company issued a two-year convertible promissory note in the amount of $72,000 to USMC, with a maturity date of February 1, 2022 (“Tranche #3”). The principal bears interest at 5% per annum which is also payable on maturity. Amounts due under the note may be converted into shares of the Company’s common stock, $0.001 par value, at any time at the option of the Holder, at a conversion price of $0.16 per share.

The issuance of Tranche #2 resulted in a discount from the beneficial conversion feature totaling $36,000. Total straight-line amortization of this discount totaled $1,379 during the three months ended February 29, 2020. Total interest expense on Tranche #1 was approximately $275 for the three months ended February 29, 2020.

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following amounts:

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Office and Rental Property Leases

The Company is using office space provided by USMC, a related party that is owned by the Company’s majority shareholders and directors A. Scott Dockter and John Bremer. There is currently no lease for use of such office space.

Mineral Properties

The Company’s mineral rights require various annual lease payments (See Note 5).

Legal Matters

On September 21, 2016 the Company its employment agreement with its then President, David Vickers. Subsequently, Mr. Vickers alleged 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 with a demand for arbitration of the above referenced claims. The arbitration proceeding is being handled by the Judicial Arbitration and Mediation Services, Inc. and is currently in the discovery phase. On June 5, 2018 the parties participated in a voluntary mediation but were unable to reach a resolution. The arbitration proceeding based on Vickers demand for arbitration was held in August 6-8, 2019. The case is still pending. An interim-preliminary decision has been rendered in connection with the arbitration, however, the Final Award has not yet been fully determined. Although the evidentiary hearing at the Arbitration has been completed, the Parties have filed supplemental briefing on a multitude of issues before the Arbitrator will release his Final Award. The Arbitrator has tentatively set a conference regarding those supplemental issues for April 10, 2020, and it is estimated the Arbitrator’s Final Award would be released 30-60 days after that time. Should the Final Award issue liability against Respondents, the Company believes its potential exposure to be approximately $475,000, plus potential pre-and-post judgment interest. While the Company believes the potential liability is estimated to the above, there is, however, the potential for the Arbitrator to render a ruling where the Company could be liable for more, or less. On January 20, 2020, the Company paid an initial $50,000 in cash towards the estimated liability noted above.

On August 30, 2018 the Company was named as a defendant in a complaint filed by Tessenderlo Kerley, Inc. (“Tessenderlo”) alleging trademark infringement relating to the plaintiff’s trademark PURSHADE and the Company’s product PureBase Shade Advantage. The Company filed its answer on September 21, 2018, denying the allegations set forth in the complaint. A settlement conference was held on June 11, 2019. The Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Tessenderlo effective July 8, 2019. Pursuant to the Settlement Agreement the Company agreed, among other requirements for dissemination of information with its product, to make various changes to the packaging of its PureBase Shade Advantage products relating to the visual representation of the product’s names. Under the Settlement Agreement, each party fully released the other party from all existing claims and liabilities. There were no monetary damages as part of the Settlement Agreement. As a result of the Settlement Agreement, the case was dismissed on July 9, 2019. The settlement provided for the Company to make changes to its Shade Advantage product, to refrain from making certain claims about Shade Advantage, to make certain disclosures about the Shade Advantage product, and to provide internal training and policies about those actions. There was no monetary payment as part of the settlement and each party bore its own attorney fees. On January 16, 2020, counsel for Tessenderlo sent a letter asserting that PureBase had not complied with some of its obligation under the settlement and invoking the arbitration provision of the settlement agreement. The parties have been in negotiation to resolve the matter without the necessity of arbitration. On February 25, 2020, Tessenderlo offered a standstill of the arbitration until April 5 to give the Company time to make additional changes to the packaging and remove existing inventory from the market. The Company has reported to counsel that it has made those changes. Tessenderlo has agreed that if the Company certifies and provides documentary evidence demonstrating that it has fully complied with its obligation as set forth in the original Settlement Agreement and in the standstill agreement, and Tessenderlo is able to confirm the same within five business days of the Company’s certification/documentation of full compliance, the arbitration will be dismissed.

On January 11, 2019, the Company filed a complaint in the Nevada District Court for Washoe County (Case # CV19-00097) against Agregen International Corp (“Agregen”) and Robert Hurtado alleging the misuse of proprietary and confidential information acquired by Mr. Hurtado while employed by the Company as VP of Agricultural Research and Development. Mr. Hurtado was terminated in March 2018 and since that time the Company alleges that he conspired with Agregen to improperly use proprietary and confidential information to compete with the Company which constitute breaches of the non-compete and confidentiality provisions of his employment agreement with the Company. The Company is seeking $100,000,000 in monetary damages. On March 14, 2019 Agregen and Mr. Hurtado filed an answer to the Company’s Complaint that the allegations were false. An Early Case Conference was held on April 26, 2019 and a pre-trial conference was held on July 10, 2019. A trial is currently scheduled to be held in July 2020. On March 13, 2020, the Company filed its First Amended Complaint in this lawsuit, adding Todd Gauer and John Gingerich as additional defendants. The Court has requested a hearing on continuing the current trial date, but due to the ongoing state of emergency that has been declared in the State of Nevada and the related court closures, that hearing has not yet occurred.

On March 29, 2019, the Company was served with a complaint filed by Superior Soils Supplements LLC (“Superior Soils”) relating to 64 truckloads of soil amendments delivered to a customer by the Company on behalf of Superior Soils. Superior Soils alleged that the soil amendments were not labeled correctly requiring the entire shipment of product to be returned to the Company. The complaint alleges breach of contract, misrepresentations, fraudulent concealment and unfair competition. The complaint seeks damages of approximately $300,000. The Company filed its answer on May 6, 2019, denying responsibility for the mis-labelling and denying any liability for damages therefrom. The parties are currently in settlement negotiations.

Contractual Matters

On November 1, 2013, we entered into an agreement with USMC, a related party, in which USMC performs services relating to various technical evaluations and mine development services for the Company with regard to the various mining properties/rights owned by the Company. Terms of services and compensation will be determined for each project undertaken by USMC.

On October 12, 2018 the Company’s board of directors approved a material supply agreement with USMC, a related party, pursuant to which USMC will provide designated natural resources to the Company at predetermined prices (See Note 10).

Note 9 – StocK-BASED COMPENSATION

The Company accounted for its stock-based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, “Compensation – Stock Compensation.”

2017 Equity Incentive Plan

On November 10, 2017 the Company’s Board of Directors (the “Board”) 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 the Company’s common stock to be issued pursuant to options granted under the Option Plan. The Option Plan was subsequently approved by shareholders on September 28, 2018. As of February 29, 2020, 50,000 options have been granted under the Option Plan.

The Company has also granted an aggregate of 500,000 options pursuant to employment contracts with certain employees prior to the adoption of the Option Plan.

There were no stock options granted during the three months ended February 29, 2020 and February 28, 2019.

Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:

The following table summarizes information about options to purchase shares of the Company’s Common Stock outstanding and exercisable at February 29, 2020:

The compensation expense attributed to the issuance of the options is recognized as they are vested.

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

The aggregate intrinsic value totaled $15,375 and was based on the Company’s closing stock price of $0.43 as of February 29, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

Total compensation expense related to the options was $0 and $51,279 for the three months ended February 29, 2020 and February 28, 2019, respectively. As of February 29, 2020, there was no future compensation cost related to non-vested stock options.

NOTE 10 – RELATED PARTY TRANSACTIONS

Bayshore Capital Advisors, LLC

On February 26, 2016, the Company issued a promissory note in the principal amount of $25,000 with an interest rate of 6% per annum to Bayshore Capital Advisors, LLC, an affiliate through common ownership of a 10% shareholder of the Company for working capital purposes. The note was payable August 26, 2016, or when the Company closes a bridge financing, whichever occurs first. The Company is in default on this note at February 29, 2020.

US Mine Corporation

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 various technical evaluations and mine development services to the Company. During the three months ended February 29, 2020 and February 28, 2019, the Company made no purchases from USMC. Services totaling $0 and $38,116 were rendered by USMC for the three months ended February 29, 2020 and February 28, 2019, respectively, and are recorded as part of due to affiliates on the Company’s unaudited condensed consolidated balance sheets. In addition, during the three months ended February 29, 2020 and February 28, 2019, USMC paid $0 and $12,433, respectively, of expenses to the Company’s vendors and creditors on behalf of the Company and also made cash advances to the Company of $33,000 and $212,000, respectively, and are recorded as part of due to affiliates on the unaudited condensed consolidated balance sheets. The balance due to USMC is $33,000 and $0 at February 29, 2020 and November 30, 2019, respectively.

On September 26, 2019, the Company entered into a securities purchase agreement with USMC pursuant to which USMC may purchase up to $1,000,000 of the Company’s 5% unsecured convertible two-year promissory notes in one or more closings. The notes would be convertible into the Company’s common stock at a conversion price of $0.16 per share. As of February 29, 2020, USMC has purchased three two-year convertible notes totaling $178,000 with maturity dates ranging from December 1, 2021 through February 1, 2022 (See Note 6).

On April 9, 2020, the board of directors for USMC approved the forgiveness of $150,257 in outstanding accounts payable from PureBase AG effective February 29, 2020. The Company treated this as a capital contribution and recorded the forgiveness as an increase in additional paid in capital on the unaudited condensed consolidated balance sheet at February 29, 2020.

The Company is using office space provided by USMC rent-free. There is currently no lease for its use of such office space.

Transactions with Officers

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 bears interest at 6% and is due upon demand. During the three months ended February 29, 2020, the Company repaid $3,580 towards the balance of the note. As of February 29, 2020 and November 30, 2019, the principal balance due on this note is $129,016 and $132,596, respectively, and is recorded as Note Payable to Officer on the consolidated balance sheet. Interest expense for this note was $2,916 for the three months ended February 29, 2020 and February 28, 2019.

NOTE 11 – CONCENTRATION OF CREDIT RISK

Cash Deposits

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of February 29, 2020 and November 30, 2019, the Company had approximately no deposits in excess of the FDIC insured limit.

Revenues

One customer accounted for 100% of total revenue for the three months ended February 29, 2020.

One customer accounted for 100% of total revenue for the three months ended February 28, 2019.

Accounts Receivable

Two customers accounted for 100% of the accounts receivable as of February 29, 2020, as set forth below:

Two customers accounted for 100% of the accounts receivable as of November 30, 2019, as set forth below:

Vendors

One supplier, a related party, accounted for 100% of purchases as of February 29, 2020

Two suppliers accounted for 100% of purchases as of November 30, 2019, as set forth below:

NOTE 12 – SUBSEQUENT EVENTS

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread throughout the United States and the World. The Company is monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, in addition to the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s operations and liquidity is uncertain as of the date of this report. While there could ultimately be a material impact on operations and liquidity of the Company, at the time of issuance, the impact could not be determined.

On April 1, 2020, the Company entered into a purchase and sale agreement with the Bremer Family 1995 Living Trust, a related party through 19% beneficial ownership of the Company, pursuant to which the Company will purchase the Snow White Pozzolan Mine for a purchase price of $836,000 (the “Purchase Price”). The Purchase Price plus 5% interest shall be payable in full in cash at the closing date. The closing date can be completed any time before April 1, 2022.

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

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2020, any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Readers are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. However, no assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

As used in this Quarterly Report on Form 10-K and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our,” refer to PureBase Corporation and its wholly-owned subsidiaries, PureBase Agricultural, Inc., a Nevada corporation (“PureBase AG”) and U.S. Agricultural Minerals, LLC, a Nevada limited liability company (“USAM”).

Business Overview

The Company, through its wholly-owned operating subsidiaries PureBase AG and USAM is a diversified, industrial mineral and natural resource company working to provide solutions to the agriculture and construction materials markets. It is engaged in the identification, acquisition, exploration, development, mining and full-scale exploitation of its industrial and natural mineral properties in the United States for the agriculture and construction materials markets. On the agricultural side, our business is to develop agricultural specialized fertilizers, minerals and bio-stimulants for organic and sustainable agriculture. In addition, we intend to focus on identifying and developing other advanced stage natural resource projects in support of our agricultural business. On the construction side, we are focused on developing construction sector-related products such as supplemental cementious material (“SCM”).

We are developing pozzolan-based products that have applications in the construction materials sector. Pozzolans, also known as SCM’s, may have beneficial qualities when added to concrete. We continue our research into SCM markets and believe there are substantial opportunities with pozzolan-based products currently being tested.

Our initial focus has been on the organic agricultural market sector. We hope to develop innovative solutions for our agricultural customers while building a brand under the name, “PureBase”, consisting of three primary product lines: PureBase Shade Advantage WP, PureBase SulFi Hume Si Advantage, and PureBase Humate INU Advantage. and will seek to develop additional products derived from mineralized materials of leonardite, kaolin clay, laterite, potassium silicate sulfate, and other natural minerals. These agricultural minerals and soil amendments are used in the agricultural industry to protect crops, plants and fruits from the sun and winter damage, provide nutrients to plants, and improve dormancy and soil ecology to help farmers increase the yields of their harvests. We also seek to acquire and develop mineralized materials of pozzolan and potassium silicate sulfate for agricultural applications.

We utilize the services of US Mine Corporation (“USMC”), a Nevada corporation, for the development and contract mining of industrial mineral and metal projects. USMC performs exploration drilling, mine modeling, on-site construction, mine production, and mine site reclamation, and prepares feasibility studies for the Company. Exploration services also include securing necessary permits, environmental compliance, and reclamation plans. In addition, a substantial portion of the minerals utilized by the Company is obtained through USMC. Scott Dockter, our President, Chief Executive Officer, and Chief Financial Officer, and John Bremer, a director, are the Treasurer and President, respectively, as well as directors of USMC.

Recent Developments

Amended Debt Conversion Agreement

Between February 19, 2016 and July 31, 2019, USMC made loans to us in the aggregate amount of $4,264,789 (the “USMC Loan Amount”). In addition, on July 31, 2019, Craig Barto, an affiliate of USMC, assigned $1,234,247 of principal and accrued and unpaid interest due to him by us to USMC. Following such assignment, the total amount due to USMC by us was $5,499,036 (the “USMC Debt”). On July 31, 2019, we and USMC agreed to convert the entire USMC Debt into shares of our common stock at a conversion price of $0.09 per share (the “Conversion Price”). The Conversion Price was negotiated in an arm’s-length transaction between us and USMC, and our board of directors determined that, since there was a limited market for the Company’s shares, such Conversion Price represented the fair market value of the Company’s stock as of July 31, 2019.

On September 5, 2019 (the “Conversion Date”), we converted $5,442,363 of the USMC Debt into 60,248,484 shares of our common stock (the “Initial Conversion Shares”), pursuant to the terms of a debt conversion agreement between us and USMC (the “Debt Conversion Agreement”). Subsequently, it came to the attention of our board of directors that the Company mistakenly converted only $5,442,363 of the USMC Debt (rather than the full $5,499,036 USMC Debt) into only 60,248,484 Initial Conversion Shares (rather than 60,470,698 shares of our common stock that USMC should have received upon conversion of the $5,442,363. Therefore, our board of directors determined to (a) issue to USMC the additional 222,216 shares of our common stock that USMC should have received upon the conversion of $5,442,363 of the USMC Debt, and convert the remaining $56,673 of the USMC Debt (at the Conversion Price of $0.09 per share) into 629,700 additional shares of our common stock ( the “Additional Conversion Shares”).

Further, in consideration for USMC’s agreement to convert the USMC Loan Amount, and as an inducement therefor, our board of directors deemed it fair and equitable to pay to USMC a conversion fee on the amount of the USMC Loan Amount, calculated at a rate of 6% per annum through July 31, 2019 (the “Payable Conversion Fee”), and payable by the issuance to USMC of 5,438,178 additional shares of our common stock (the “Payable Conversion Fee Shares”), calculated at the Conversion Price of $0.09 per share. The Payable Conversion Fee was negotiated in an arms-length transaction, based on the market rate that would have been charged by an unrelated third party.

On February 7, 2020, we and USMC entered into an amendment to the Debt Conversion Agreement (the “Amendment to Debt Conversion Agreement”), pursuant to which we issued to USMC 851,916 Additional Conversion Shares and 5,438,178 Payable Conversion Fee Shares. The USMC Debt has been deemed paid-in-full and cancelled as a result of the issuances of the Initial Conversion Shares, the Additional Conversion Shares and the Payable Conversion Fee Shares.

Snow White Mine

On April 1, 2020, we entered into a purchase and sale agreement with Bremer Family 1995 Living Family Trust (the “Seller”) pursuant to which we will purchase the land known as the Snow White Mine. The property, located in San Bernardino County, California, consists of approximately 80 acres together with all mineral rights. The purchase price for the property is $836,000, to be paid within the next two years plus 5% interest thereon. John Bremer, a director of the Company, is the executor of the Seller. The Seller owns approximately 19% of the issued and outstanding shares of the Company. The Company previously had certain rights to the Snow White property but in September 2019 discontinued any and all mining activities at this property.

Results of Operations

Comparison of the Three Months Ended February 29, 2020 to the Three Months Ended February 28, 2019

A comparison of the Company’s operating results for the three months ended February 29, 2020 and February 28, 2019 are summarized as follows:

Revenues

Revenue decreased by $42,740, or 90%, for the three months ended February 29, 2020, as compared to the three months ended February 28, 2019, primarily as a result of the one customer who purchased product during the three months ended February 28, 2019, not ordering any new product during the three months ended February 29, 2020. The Company’s product, which is a sun protectant for crops, has less orders in winter months.

Operating Costs and Expenses

Selling, general and administrative expenses decreased by $152,562, or 49%, for the three months ended February 29, 2020, as compared to the three months ended February 28, 2019, primarily due to the following: (i) a decrease in payroll and related benefits of $65,125 due to a reduction in employees, (ii) a decrease in stock-based compensation of $51,279, and (iii) a decrease in legal and accounting fees of $31,322 due primarily to a change in auditing firms.

Product fulfillment and exploration and mining expenses decreased by $53,056, or 97%, for the three months ended February 29, 2020, as compared to the three months ended February 28, 2019, primarily as a result of the three months ended February 28, 2019, including $37,800 in costs related to the sole product order as mentioned above in the revenue section. In addition, there was no RULCO Mining Claim Royalty Fees during the three months ended February 29, 2020, due to no material being removed from the location.

Other Income (Expense)

Other income (expense) increased by $18,601, or 118%, for the three months ended February 29, 2020, as compared to the three months ended February 28, 2019, primarily due to a decrease in interest expense as a result of the Company converting payables and a note payable owed to USMC to common stock during the fourth quarter of the fiscal year 2019.

Liquidity and Capital Resources

As of February 29, 2020, we had no cash on hand and a working capital deficiency of approximately $768,000, as compared to cash on hand of $8,400 and a working capital deficiency of $946,405 as of November 30, 2019. The decrease in working capital deficiency is mainly due to an approximate $14,000 decrease in accounts receivable and an approximate decrease in accounts payable and accrued expenses of $170,000 which were offset by a $50,000 increase in the settlement liability due to a cash payment.

Future Financing

We will require additional funds to implement our growth strategy for our business. We currently 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 in the near term to cover our entire current operating expenses which we expect to increase as we implement our business plans. We do not believe that our current cash and cash equivalents will 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 and consistent revenues to cover our operating expenses. 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 proceeds from outside capital sources including USMC, an affiliated entity. 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. 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 or cease operations.

Furthermore, such outside financing would likely take the form of bank loans, private offerings of debt or equity securities, advances from affiliates 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 and may subject the Company to restrictions on its operations and corporate actions.

Going Concern

The unaudited condensed 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 has accumulated losses from inception through February 29, 2020, of approximately $11.4 million, as well as negative cash flows from operating activities. During the three months ended February 29, 2020, the Company received net cash proceeds of approximately $33,000 from USMC, an affiliated entity. Presently the Company does not have sufficient cash resources to meet its debt obligations in the twelve months following the date of this Quarterly Report. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is in the process of evaluating various financing alternatives in order to finance the capital requirements of the Company. There can be no assurance that the Company will be successful with its fund-raising initiatives.

The consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.

Working Capital Deficiency

Our working capital deficiency as of February 29, 2020, in comparison to our working capital deficiency as of November 30, 2019, can be summarized as follows:

The decrease in current assets is primarily due to a decrease in cash and accounts receivable of $8,400 and $13,700, respectively. A majority of current liabilities remained consistent during the three month period ending February 29, 2020, however, due to affiliates increased approximately $33,000, settlement liability decreased $50,000, and accounts payable and accrued expenses decreased approximately $170,000 at February 29, 2020.

Cash Flows

Operating Activities

Net cash used in operating activities was $222,672 for the three months ended February 29, 2020. This was primarily due to the net loss of $156,412 and a decrease of $50,000 in the settlement liability due to a cash payment.

Net cash used in operating activities was $187,954 for the three months ended February 29, 2019. This was primarily due to the net loss of $337,891, which was partially offset by non-cash expenses of approximately $51,000 related to stock-based compensation and an increase in accounts payable and accrued expenses of approximately $93,000.

Investing Activities

There were no investing activities for the three months ended February 29, 2020 and February 28, 2019.

Financing Activities

For the three months ended February 29, 2020, net cash provided by financing activities was $214,272, which was primarily due to cash received of $178,000 from convertible notes payable with USMC and cash advanced to the company by USMC of $33,000.

For the three months ended February 28, 2018, net cash provided by financing activities was $212,000, which was primarily due to cash advanced to the Company by USMC of $212,000.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Effects of Inflation

We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.

Critical Accounting Policies and Procedures

Our significant accounting policies are more fully described in the notes to our financial statements included herein for the quarter ended February 29, 2020, and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019, as filed with the SEC on February 28, 2020.

Recently Adopted Accounting Pronouncements

Our recently adopted accounting pronouncements are more fully described in Note 2 to our financial statements herein for the quarter ended February 29, 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that, our disclosure controls and procedures were not effective as of February 29, 2020 due to the material weaknesses in internal control over financial reporting described below.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness, as defined in the standards established by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses:

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended February 29, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as set forth below, there are no pending legal proceedings to which the Company or its subsidiaries area a party or in which any director, officer or affiliate of the Company, any owner of record of beneficially or more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

On September 21, 2016 the Company its employment agreement with its then President, David Vickers. Subsequently, Mr. Vickers alleged 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 with a demand for arbitration of the above referenced claims. The arbitration proceeding is being handled by the Judicial Arbitration and Mediation Services, Inc. and is currently in the discovery phase. On June 5, 2018 the parties participated in a voluntary mediation but were unable to reach a resolution. The arbitration proceeding based on Vickers demand for arbitration was held in August 6-8, 2019. The case is still pending. An interim-preliminary decision has been rendered in connection with the arbitration, however, the Final Award has not yet been fully determined. Although the evidentiary hearing at the Arbitration has been completed, the Parties have filed supplemental briefing on a multitude of issues before the Arbitrator will release his Final Award. The Arbitrator has tentatively set a conference regarding those supplemental issues for April 10, 2020, and it is estimated the Arbitrator’s Final Award would be released 30-60 days after that time. Should the Final Award issue liability against Respondents, the Company believes its potential exposure to be approximately $475,000, plus potential pre-and-post judgment interest. While the Company believes the potential liability is estimated to the above, there is, however, the potential for the Arbitrator to render a ruling where the Company could be liable for more, or less. On January 20, 2020, the Company paid an initial $50,000 in cash towards the estimated liability noted above.

On August 30, 2018 the Company was named as a defendant in a complaint filed by Tessenderlo Kerley, Inc. (“Tessenderlo”) alleging trademark infringement relating to the plaintiff’s trademark PURSHADE and the Company’s product PureBase Shade Advantage. The Company filed its answer on September 21, 2018, denying the allegations set forth in the complaint. A settlement conference was held on June 11, 2019. The Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Tessenderlo effective July 8, 2019. Pursuant to the Settlement Agreement the Company agreed, among other requirements for dissemination of information with its product, to make various changes to the packaging of its PureBase Shade Advantage products relating to the visual representation of the product’s names. Under the Settlement Agreement, each party fully released the other party from all existing claims and liabilities. There were no monetary damages as part of the Settlement Agreement. As a result of the Settlement Agreement, the case was dismissed on July 9, 2019. The settlement provided for the Company to make changes to its Shade Advantage product, to refrain from making certain claims about Shade Advantage, to make certain disclosures about the Shade Advantage product, and to provide internal training and policies about those actions. There was no monetary payment as part of the settlement and each party bore its own attorney fees. On January 16, 2020, counsel for Tessenderlo sent a letter asserting that PureBase had not complied with some of its obligation under the settlement and invoking the arbitration provision of the settlement agreement. The parties have been in negotiation to resolve the matter without the necessity of arbitration. On February 25, 2020, Tessenderlo offered a standstill of the arbitration until April 5 to give the Company time to make additional changes to the packaging and remove existing inventory from the market. The Company has reported to counsel that it has made those changes. Tessenderlo has agreed that if the Company certifies and provides documentary evidence demonstrating that it has fully complied with its obligation as set forth in the original Settlement Agreement and in the standstill agreement, and Tessenderlo is able to confirm the same within five business days of the Company’s certification/documentation of full compliance, the arbitration will be dismissed.

On January 11, 2019, the Company filed a complaint in the Nevada District Court for Washoe County (Case # CV19-00097) against Agregen International Corp (“Agregen”) and Robert Hurtado alleging the misuse of proprietary and confidential information acquired by Mr. Hurtado while employed by the Company as VP of Agricultural Research and Development. Mr. Hurtado was terminated in March 2018 and since that time the Company alleges that he conspired with Agregen to improperly use proprietary and confidential information to compete with the Company which constitute breaches of the non-compete and confidentiality provisions of his employment agreement with the Company. The Company is seeking $100,000,000 in monetary damages. On March 14, 2019 Agregen and Mr. Hurtado filed an answer to the Company’s Complaint that the allegations were false. An Early Case Conference was held on April 26, 2019 and a pre-trial conference was held on July 10, 2019. A trial is currently scheduled to be held in July 2020. On March 13, 2020, the Company filed its First Amended Complaint in this lawsuit, adding Todd Gauer and John Gingerich as additional defendants. The Court has requested a hearing on continuing the current trial date, but due to the ongoing state of emergency that has been declared in the State of Nevada and the related court closures, that hearing has not yet occurred.

On March 29, 2019, the Company was served with a complaint filed by Superior Soils Supplements LLC (“Superior Soils”) relating to 64 truckloads of soil amendments delivered to a customer by the Company on behalf of Superior Soils. Superior Soils alleged that the soil amendments were not labeled correctly requiring the entire shipment of product to be returned to the Company. The complaint alleges breach of contract, misrepresentations, fraudulent concealment and unfair competition. The complaint seeks damages of approximately $300,000. The Company filed its answer on May 6, 2019, denying responsibility for the mis-labelling and denying any liability for damages therefrom. The parties are currently in settlement negotiations.

ITEM 1A. RISK FACTORS

As a smaller reporting company, we are not required to provide the information required by this Item.

Investors should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended November 30, 2019, as filed with SEC on February 28, 2020. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks. In addition:

We face risks related to health epidemics and other outbreaks, which could significantly disrupt our operations.

Our business and operating results could be adversely impacted by the effects of epidemics, including but not limited to the coronavirus that has been reported to have surfaced in Wuhan, China in December 2019 and has since spread to most other parts of the world, including the United States, our principal market. We are closely monitoring the impact of the COVID-19 global outbreak, although there remains significant uncertainty related to the public health situation globally.

Our results of operations could be adversely affected to the extent that such coronavirus or any other epidemic generally harms the global economy. In addition, our customers and/or personnel may be adversely impacted as a result of a health epidemic or other outbreak. Our operation may experience disruptions, such as temporary closure of our offices, facilities and/or those of our customers, suspension of services and the shut-down of our sales efforts. These disruptions may require us to curtail our sales efforts or even force us to reduce our workforce in effort to conserve capital. Additionally, the continued spread of COVID-19 and uncertain market conditions may limit the Company’s ability to access capital and adversely affect our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

There were no sales of equity securities during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Except as set forth below, there are no defaults upon senior securities that were not previously reported in a Current Report on Form 8-K by the Company.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are included as part of this Quarterly Report:

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