Exhibit 99.1
Trillion Energy International Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited - Stated in United States dollars)
NOTICE OF NO AUDITOR REVIEW OF CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated interim financial statements for Trillion Energy International Inc. (the “Company”) have been prepared by management in accordance with International Financing Reporting Standards (“IFRS”). These condensed consolidated interim financial statements, which are the responsibility of management, are unaudited and have not been reviewed by the Company’s auditors. The Company’s Audit Committee and Board of Directors have reviewed and approved these condensed consolidated interim financial statements. In accordance with the disclosure requirements of National Instrument 51-102 released by the Canadian Securities Administrators, the Company’s independent auditors have not performed a review of these condensed consolidated interim financial statements.
TRILLION ENERGY INTERNATIONAL INC.
Index to Consolidated Interim Financial Statements
TRILLION ENERGY INTERNATIONAL INC.
Consolidated
Interim Statements of Financial Position
(Expressed in U.S. dollars)
| Notes | September 30, 2022 (Unaudited) | December 31, 2021 |
December 31, 2020 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||
| Amounts receivable | 4 | |||||||||||||||
| Prepaid expenses and deposits | ||||||||||||||||
| Total current assets | ||||||||||||||||
| Oil and gas properties, net | 5 | |||||||||||||||
| Evaluation and exploration assets | 6 | |||||||||||||||
| Property and equipment, net | 7 | |||||||||||||||
| Restricted cash | 3 | |||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | |||||||||||||
| Loans payable | 8 | |||||||||||||||
| Lease liability | 9 | |||||||||||||||
| Total current liabilities | ||||||||||||||||
| Asset retirement obligation | 11 | |||||||||||||||
| Loans payable | 8 | |||||||||||||||
| Convertible debt | 12 | |||||||||||||||
| Derivative liability | 15 | |||||||||||||||
| Lease liability | 9 | |||||||||||||||
| Total liabilities | ||||||||||||||||
| Stockholders’ equity (deficiency): | ||||||||||||||||
| Common stock | 13 | |||||||||||||||
| Share premium | 13 | |||||||||||||||
| Notes and amounts receivable for equity issued | 10 | ( | ) | ( | ) | |||||||||||
| Warrant and option reserve | 14,15 | |||||||||||||||
| Shares to be cancelled | ||||||||||||||||
| Obligation to issue shares | 13 | |||||||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||||||
| Total stockholders’ equity (deficiency) | ( | ) | ( | ) | ||||||||||||
| Total liabilities and stockholders’ equity (deficiency) | $ | $ | ||||||||||||||
| Nature of operations and going concern | 1 | |||||||||||||||
| IFRS first-time adoption | 2 | |||||||||||||||
| Subsequent events | 22 | |||||||||||||||
| APPROVED BY THE BOARD OF DIRECTORS ON NOVEMBER 29, 2022: | |||
| “Arthur Halleran” | “David Thompson” | ||
| Director | Director | ||
See accompanying notes to unaudited consolidated interim financial statements.
| 2 |
TRILLION ENERGY INTERNATIONAL INC.
Consolidated Interim Statements of Loss and Comprehensive Loss
(Expressed in U.S. dollars)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
| Notes | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Revenue | ||||||||||||||||||||
| Oil and gas revenue | 19 | $ | $ | $ | $ | |||||||||||||||
| Cost and expenses | ||||||||||||||||||||
| Production | ||||||||||||||||||||
| Depletion | 5 | |||||||||||||||||||
| Depreciation | 7, 9 | |||||||||||||||||||
| Accretion of asset retirement obligation | 11 | |||||||||||||||||||
| Investor relations | ||||||||||||||||||||
| Stock-based compensation | 16 | |||||||||||||||||||
| General and administrative | 18 | |||||||||||||||||||
| Total expenses | ||||||||||||||||||||
| Loss before other income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||||||
| Interest income | ||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Finance cost | 8 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Foreign exchange gain | ( | ) | ( | ) | ||||||||||||||||
| Change in fair value of derivative liability | 11 | ( | ) | |||||||||||||||||
| Provision for settlement agreement | 13,17 | ( | ) | ( | ) | |||||||||||||||
| Gain (loss) on debt settlement | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Total other income (expense) | ||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Foreign currency translation | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||
| Loss per share – Basic and diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||
| Weighted average shares outstanding – Basic and diluted | ||||||||||||||||||||
See accompanying notes to unaudited consolidated interim financial statements.
| 3 |
TRILLION ENERGY INTERNATIONAL INC.
Consolidated
Interim Statements of Stockholders’ Deficiency
(Expressed in U.S. dollars)
(Unaudited)
| Shares | Amount | Share premium | Warrant and option reserve |
Receivables for equity issued | Obligation to issue shares | Shares to be cancelled | Accumulated other comprehensive income (loss) | Accumulated deficit | Total | |||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Issuance of common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issued for debt settlement | ||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| RSU grants and vesting | ||||||||||||||||||||||||||||||||||||||||
| Warrants exercised | ||||||||||||||||||||||||||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Conversion of debentures | ||||||||||||||||||||||||||||||||||||||||
| Warrants issued for loan | - | |||||||||||||||||||||||||||||||||||||||
| Options issued | - | |||||||||||||||||||||||||||||||||||||||
| Warrants issued | - | |||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
Balance, December 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Impact of change in functional currency | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||
| Stock issuance costs | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Stock issued for debt settlement | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issued for prepaid services | ||||||||||||||||||||||||||||||||||||||||
| RSU grants and vesting | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Warrants exercised | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Finder’s warrants issued | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Stock to be issued for services | - | |||||||||||||||||||||||||||||||||||||||
| Options issued | - | |||||||||||||||||||||||||||||||||||||||
| Equity to be issued for settlement agreement | - | |||||||||||||||||||||||||||||||||||||||
| RSUs to be issued | - | |||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
See accompanying notes to unaudited consolidated interim financial statements.
| 4 |
TRILLION ENERGY INTERNATIONAL INC.
Consolidated Interim Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)
Nine Months Ended September 30, | ||||||||||||
| Note | 2022 | 2021 | ||||||||||
| Operating activities: | ||||||||||||
| Net loss for the period | $ | ( | ) | $ | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Stock-based compensation | 16 | |||||||||||
| Stock issued for services | 13 | |||||||||||
| Stock to be issued for services | 13 | |||||||||||
| Depletion | 5 | |||||||||||
| Depreciation | 7 | |||||||||||
| Accretion of asset retirement obligation | 11 | |||||||||||
| Accretion and accrued interest expense | 8, 9 | |||||||||||
| Interest income | ( | ) | ||||||||||
| Change in fair value of derivative liability | 11 | ( | ) | |||||||||
| Interest income | 4 | ( | ) | |||||||||
| Foreign exchange loss | ( | ) | ||||||||||
| Provision for settlement | ||||||||||||
| (Gain) loss on debt settlement | ( | ) | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Restricted cash | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Prepaid expenses and deposits | ( | ) | ( | ) | ||||||||
| Accounts payable and accrued liabilities | ||||||||||||
| Operating lease liabilities | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| Investing activities: | ||||||||||||
| Property and equipment expenditures | ( | ) | ( | ) | ||||||||
| Oil and gas properties expenditures | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| Financing activities: | ||||||||||||
| Proceeds from stock subscriptions received | ||||||||||||
| Stock issuance costs on subscriptions received | ( | ) | ||||||||||
| Proceeds from exercise of options | ||||||||||||
| Proceeds from exercise of warrants | ||||||||||||
| Proceeds from loans payable | ||||||||||||
| Repayments of loans payable | ( | ) | ( | ) | ||||||||
| Repayment of notes receivable | ||||||||||||
| Lease payments | ( | ) | ||||||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ||||||||||||
| Net increase in cash and cash equivalents | ||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||
| Cash and cash equivalents, end of period | $ | |||||||||||
| 5 |
TRILLION ENERGY INTERNATIONAL INC.
Consolidated Interim Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)
| 2022 | 2021 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental information: | ||||||||
| Taxes paid | $ | $ | ||||||
| Interest paid on credit facilities | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Stock issued for prepaid services | $ | |||||||
| Stock issued for debt settlement | $ | $ | ||||||
| Stock issued for debt conversion | $ | $ | ||||||
See accompanying notes to unaudited consolidated interim financial statements.
| 6 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
1. Organization
Trillion Energy International Inc. and its consolidated subsidiaries, (collectively referred to as the “Company”) is a Canadian based oil and gas exploration and production company. Effective January 2022, the corporate headquarters moved to Suite 700, 838 West Hastings Street, Vancouver, B.C., Canada from Turan Gunes Bulvari, Park Oran Ofis Plaza, 180-y, Daire:54, Kat:14, 06450, Oran, Cankaya, Anakara, Turkey. The Company also has a registered office in Canada and Bulgaria. The Company was incorporated in Delaware in 2015. The Company’s shares trade on the OTCQB under the symbol “TRLEF” and trade on the Canadian Securities Exchange under the symbol “TCF”.
On January 21, 2022, the Company redomiciled from Delaware to a British Columbia corporation by way of an amalgamation transaction with the Company’s British Columbian subsidiary, Trillion Energy Inc. (the “Repatriation Transaction”). Pursuant to the Repatriation Transaction, for every one common stock of Trillion Energy International Inc., the shareholders will receive one common stock of Trillion Energy Inc. The Company will continue to operate and report under the name of Trillion Energy International Inc.
As a result of the Repatriation Transaction, the Company meets the definition of a foreign private issuer, as defined under Rule 3b-4 of the Securities Exchange Act of 1934, as amended.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation and Going Concern
Consolidation
The unaudited consolidated interim financial statements (“Financial Statements”) of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Accounting Standards (“IAS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”), effective for the Company’s reporting for the quarter ended September 30, 2022. These Financial Statements are the first that the Company has prepared in accordance with IFRS. Refer to Note 2(r) for details on the impact of IFRS first-time adoption. The Financial Statements are expressed in U.S. dollars. These Financial Statements include the accounts of the Company and its wholly owned subsidiaries Park Place Energy Corp. (“PPE Corp.”), Park Place Energy Bermuda (“PPE Bermuda”), BG Exploration EOOD (“BG Exploration”), and Park Place Energy Turkey (“PPE Turkey”). All intercompany balances and transactions are eliminated on consolidation. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Certain comparative information has been reclassified to conform with the financial statement presentation adopted in the current period.
| 7 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
(b) Use of Estimates and Judgements
In the process of applying the Company’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognized in the Financial Statements:
Functional Currency
The functional currency for the Company and each of its subsidiaries is the currency of the primary economic environment in which the entity operates. Determination of the functional currency involves certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions which determined the primary economic environment.
Determination of Cash Generating Units (CGUs)
A CGU is the lowest grouping of integrated assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The allocation of assets into CGUs requires significant judgment and interpretations with respect to the integration between assets, the existence of active markets, similar exposure to market risks, shared infrastructure, and the way in which management monitors the operations.
In the process of applying the Company’s accounting policies, management has made the following estimates, which have the most significant effect on the amounts recognized in the Financial Statements:
Oil and Gas Reserves
The company’s estimate of oil and gas reserves is considered in the measurement of depletion, depreciation, impairment, and decommissioning and restoration obligations. The estimation of reserves is an inherently complex process and involves the exercise of professional judgment. All reserves are evaluated annually, by independent qualified reserves evaluators. Oil and gas reserves estimates are based on a range of geological, technical and economic factors, including projected future rates of production, projected future commodity prices, engineering data, and the timing and amount of future expenditures, all of which are subject to uncertainty. Estimates reflect market and regulatory conditions existing at the evaluation date, which could differ significantly from other points in time throughout the period, or future periods. Changes in market and regulatory conditions and assumptions, as well as climate change, and the evolving worldwide demand for energy and global advancement of alternative sources of energy that are not sourced from fossil fuels can materially impact the estimation of net reserves.
| 8 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Allowance for doubtful accounts
Estimates are inherent in the on-going assessment of the recoverability of trade and other receivables. The Company maintains an allowance for doubtful accounts to reflect the expected credit losses. Uncertainty relates to the actual collectability of customer balances that can vary from the Company’s estimation.
Asset Retirement Obligation
The company recognizes obligation for the future decommissioning and restoration of the Company’s exploration and evaluation assets and oil and gas properties based on estimated future decommissioning and restoration costs. Management applies judgment in assessing the existence and extent as well as the expected method of reclamation of the company’s decommissioning and restoration obligations at the end of each reporting period. Management also uses judgment to determine whether the nature of the activities performed is related to decommissioning and restoration activities or normal operating activities.
Actual costs are uncertain and estimates may vary as a result of changes to relevant laws and regulations related to the use of certain technologies, the emergence of new technology, operating experience, prices and closure plans. The estimated timing of future decommissioning and restoration may change due to certain factors, including reserves life. Changes to estimates related to future expected costs, discount rates, inflation assumptions, and timing may have a material impact on the amounts presented.
Impairment of Assets
Management applies judgment in assessing the existence of impairment indicators based on various internal and external factors. The recoverable amount of assets is determined based on the higher of fair value less costs of disposal or value-in-use calculations. The key estimates the company applies in determining the recoverable amount normally include estimated future commodity prices, discount rates, expected production volumes, future operating and development costs, income taxes, and operating margins. In determining the recoverable amount, management may also be required to make judgments regarding the likelihood of occurrence of a future event. Changes to these estimates and judgments will affect the recoverable amounts of assets and may then require a material adjustment to their related carrying value.
Share-based Compensation
The cost of share-based transactions with directors, officers and employees are measured by reference to the fair value of the equity instruments. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, volatility, risk-free interest rate, expected forfeiture rate and dividend yield of the stock option. Changes to these estimates and judgments will affect the operating result and may then require a material adjustment.
| 9 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Fair Value of Derivative Liability
The Company’s warrants and conversion features with exercise prices denominated in a currency other the Company’s functional currency are recognized as derivatives measured at fair value through the consolidated interim statement of loss and comprehensive loss. Estimating fair value for derivative liability requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the issuance. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, volatility, risk-free interest rate, expected forfeiture rate and dividend yield of the derivatives. Changes to these estimates and judgments will affect the operating result and may then require a material adjustment.
Deferred Income Tax
Judgments are made by management at the end of the reporting period to determine the likelihood that deferred income tax assets will be realized from future taxable earnings. Assessing the recoverability of deferred income tax assets requires the Company to make judgments related to the expectations of future cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in consolidated interim statement of loss and comprehensive loss in the period in which the change occurs.
(c) Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
(d) Revenue Recognition
Revenue from Contracts with Customers
The Company recognizes revenue when it satisfies its performance obligation(s) by transferring control over a product to a customer. Revenue is measured based on the consideration the Company expects to receive in exchange for those products.
Performance Obligations and Significant Judgments
The Company sells oil and natural gas products in Turkey. The Company enters into contracts that generally include one type of distinct product in variable quantities and priced based on a specific index related to the type of product.
The oil and natural gas are typically sold in an unprocessed state to processors and other third parties for processing and sale to customers. The Company recognizes revenue at a point in time when control of the oil is transferred. For oil sales, control is typically transferred to the customer upon receipt at the wellhead or a contractually agreed upon delivery point. Under the Company’s natural gas contracts with processors, control transfers upon delivery at the wellhead or the inlet of the processing entity’s system. For the Company’s other natural gas contracts, control transfers upon delivery at the inlet or to a contractually agreed upon delivery point. In the cases where the Company sells to a processor, the Company has determined that the Company is the principal in the arrangement and the processors are the Company’s customers. The Company recognizes the revenue in these contracts based on the net proceeds received from the processor.
| 10 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
For the Company’s product sales that have a contract term greater than one year, the Company uses the practical expedient in IFRS 15 Paragraph 121(a) which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to an unsatisfied performance obligation. Under these sales contracts, each unit of product represents a separate performance obligation; therefore, future volumes are unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. The Company has no unsatisfied performance obligations at the end of each reporting period.
The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including any variable consideration identified. There is a low level of uncertainty due to the precision of measurement and use of index-based pricing with predictable differentials. Additionally, any variable consideration identified is not constrained.
(e) Accounts Receivable
Accounts receivable consist primarily of oil and gas receivables. The Company has classified these as short-term assets in the consolidated statement of financial position because the Company expects repayment or recovery within the next 12 months. The Company evaluates these accounts receivable for collectability and, when necessary, records allowances for expected unrecoverable amounts. The Company deems all accounts receivable to be collectable and has not recorded any allowance for doubtful accounts.
(f) Exploration and Evaluation Assets
Pre-license exploration costs are recognized in the consolidated statement of operations and comprehensive loss as incurred.
The costs to acquire non-producing oil and gas properties or licenses to explore, drill exploratory wells and the costs to evaluate the commercial potential of underlying resources, including related borrowing costs, are initially capitalized as exploration and evaluation assets.
Exploration and evaluation assets are subject to technical, commercial and management review to confirm the continued intent to develop and extract the underlying resources. If an area or exploration well is no longer considered commercially viable, the related capitalized costs are charged to exploration expense.
Exploration and evaluation assets are not subject to depreciation, depletion and amortization.
When management determines with reasonable certainty that an exploration and evaluation asset will be developed, as evidenced by the classification of proved or probable reserves and the appropriate internal and external approvals, the asset is transferred to oil and gas properties.
(g) Oil and Gas Properties
Oil and gas properties (“O&G”) include exploration and evaluation expenditures, development and productions costs, less accumulated depletion and depreciation and accumulated impairment loss. O&G are grouped into cash generating units for impairment testing. The Company has grouped its O&G into two CGUs: the Cendere Oil Field and SASB Gas Field.
When significant parts of an item of O&G have different useful lives, they are accounted for as separate items (major components).
| 11 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of O&G are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in consolidated interim statement of loss and comprehensive loss as incurred.
Such capitalized items generally represent costs incurred in developing proved and/or probable reserves and bringing on or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to-day servicing of oil ang gas properties are recognized in consolidated interim statement of loss and comprehensive loss as incurred.
The net carrying value of oil and gas properties is depleted using the unit-of-production method by reference to the ratio of production in the year to the related proved reserves, taking into account estimated future development costs necessary to bring those reserves into production. These estimates are reviewed by independent reservoir engineers at least annually.
(h) Property and Equipment
Property
and equipment are stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of the
asset or the lease term.
| (i) | Impairment of Non-financial Assets |
Exploration and evaluation assets, oil and gas properties, and property and equipment are reviewed when events or changes in circumstances indicate the assets may not be recoverable. Exploration and evaluation assets are also tested for impairment immediately prior to being transferred to oil and gas properties. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Impairment exists when the carrying value of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. These calculations are based on available data, other observable inputs and projections of cash flows, all of which are subject to estimates and assumptions. Recoverable amounts are also sensitive to assumptions about the future usefulness of in-process development and the related marketing rights.
(j) Provisions
Provisions are recognized by the company when it has a legal or constructive obligation as a result of past events, it is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Provisions are recognized for decommissioning and restoration obligations associated with the company’s exploration and evaluation assets and oil and gas properties. Provisions for decommissioning and restoration obligations are measured at the present value of management’s best estimate of the future cash flows required to settle the present obligation, using the risk-free interest rate. The value of the obligation is added to the carrying amount of the associated asset and amortized over the useful life of the asset. The provision is accreted over time with actual expenditures charged against the accumulated obligation. Changes in the future cash flow estimates resulting from revisions to the estimated timing or amount of undiscounted cash flows are recognized as a change in the decommissioning and restoration provision and related asset.
| 12 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
(k) Financial Instruments
| (i) | Classification |
The company classifies its financial instruments into one of the following categories: fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”), or at amortized cost. This determination is made at initial recognition. All financial instruments are initially recognized at fair value on the balance sheet, net of any transaction costs except for financial instruments classified as FVTPL, where transaction costs are expensed as incurred. Subsequent measurement of financial instruments is based on their classification. The company classifies its derivative liability and cash and cash equivalents as FVTPL, accounts receivable and notes receivable as financial assets at amortized cost, and accounts payable, loans payable, and convertible notes as financial liabilities at amortized cost. Embedded derivative in other financial instruments or other host contracts are recorded as separate derivatives when their risks and characteristics are not closely related to those of the host contract.
| (ii) | Measurement |
Financial assets and liabilities at amortized cost
Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.
Financial assets and liabilities at FVTPL
Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statements of loss and comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the statements of operations and comprehensive loss in the period in which they arise.
Debt investments at FVTOCI
These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.
Equity investments at FVTOCI
These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to profit or loss.
| (iii) | Impairment of Financial Assets at Amortized Cost |
The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company shall recognize in the statements of loss and comprehensive loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.
| 13 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
| (iv) | Derecognition |
Financial assets
The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity.
Financial liabilities
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The Company also derecognizes a financial liability when the terms of the liability are modified such that the terms and / or cash flows of the modified instrument are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value.
Gains and losses on derecognition are recognized in profit or loss.
| (l) | Income Taxes |
Current Income Tax:
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where the Company operates and generates taxable income.
Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred Tax:
Deferred tax is recognized on temporary differences at the reporting date arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that future taxable income will be available to allow all or part of the temporary differences to be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted and are expected to apply by the end of the reporting period. Deferred tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
| 14 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
(m) Foreign Currency Translation
Functional currencies of the Company’s individual entities are the currency of the primary economic environment in which the entity operates. Transactions in foreign currencies are translated to the appropriate functional currency at foreign exchange rates that approximate those on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the appropriate functional currency at foreign exchange rates as at the balance sheet date. Foreign exchange differences arising on translation are recognized in net earnings. Non-monetary assets that are measured in a foreign currency at historical cost are translated using the exchange rate at the date of the transaction.
In preparing the Company’s Financial Statements, the financial statements of each entity are translated into US dollar (“USD”), the presentation currency of the Company. The assets and liabilities of foreign operations are translated into USD at exchange rates as at the balance sheet date. Revenues and expenses of foreign operations are translated into USD using foreign average exchange rates for the period. Foreign exchange differences are recognized in other comprehensive income or loss.
The functional currency of the Company’s Bulgarian operations is the Bulgarian Lev. The functional currency of the Company’s Turkish operations is the Turkish Lira.
Prior to January 1, 2022, the functional currency of Trillion Energy International Inc. was USD. The Company redomiciled from United States to Canada and became a Canadian Company in January 2022, resulting in the parent’s expenditures being denominated primarily in Canadian dollar (“CAD”) and the Company being funded primarily from issuance of equity instruments which proceeds are in CAD. As a result, the Company determined that the functional currency of the parent was changed to CAD effective January 1, 2022.
The
Company has accounted for the change in functional currency prospectively with no impact of this change on prior period comparative information.
The Company has made an accounting policy choice to reassess the classification of financial instruments as liabilities or equity or
vice versa as applicable when the functional currency of the Company or its subsidiaries changes. The policy will be applied consistently
in the future. As a result, certain of the Company’s CAD denominated warrants with a carrying value of $
Under the company’s share-based compensation plans, share-based awards may be granted to executives, employees and nonemployee directors.
Stock options that give the holder the right to purchase common shares are accounted for as equity-settled plans. The expense is based on the fair value of the options at the time of grant using the Black-Scholes options pricing model and is recognized over the vesting periods of the respective options. A corresponding increase is recorded to option reserve. Consideration paid to the company on exercise of options is credited to share capital and the associated amount in option reserve is reclassified to share capital.
| 15 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
(o) Unit Offerings
Common shares are classified as equity. Proceeds from unit placements are allocated between shares and warrants issued using the residual method. The residual method first allocates fair value to the component with the best evidence of fair value and then the residual value, if any, to the less easily measurable component. The fair value of the common shares, measured on date of issue, was determined to be the component with the best evidence of fair value. The balance, if any, is allocated to the attached warrants. Costs directly identifiable with share capital financings are charged against share capital.
If the subscription is not funded upon issuance, the Company records a receivable as a contra account to shareholders’ equity.
Basic earnings per share is calculated by dividing the net earnings for the period by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive common shares. The number of shares included is computed using the treasury stock method. As certain instrument can be exchanged for common shares of the Company, they are considered potentially dilutive and are included in the calculation of the company’s diluted net earnings per share if they have a dilutive impact in the period.
| (q) | Leases |
At inception of a contract, the company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset on the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term. Judgment is applied to determine the lease term where a renewal option exists. Right-of-use assets are depreciated using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. In addition, the right-of-use assets may be reduced by impairment losses or adjusted for certain remeasurements of the lease liability.
The company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of twelve months or less. The lease payments are recognized as an expense when incurred over the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the company’s incremental borrowing rate. Lease payments include fixed payments, and variable payments that are based on an index or rate.
| 16 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Cash payments for the principal portion of the lease liability are presented within the financing activities section and the interest portion of the lease liability is presented within the operating activities section of the statement of cash flows. Short-term lease payments and variable lease payments not included in the measurement of the lease liability are presented within the operating activities section of the statement of cash flows.
(r) First-time Adoption of IFRS
These Financial Statements for the quarter ended September 30, 2022, are the first the Company has prepared in accordance with IFRS. The Company previously prepared its financial statements, up to and including December 31, 2021, in accordance with accounting principles generally accepted in the United States (“US GAAP”).
Accordingly, the Company has prepared financial statements that comply with IFRS applicable as at September 30, 2022, together with the comparative period data for the year ended December 31, 2021. In preparing the financial statements, the Company’s opening statement of financial position was prepared as at January 1, 2021, the Company’s date of transition to IFRS. This note explains the principal adjustments made by the Company in restating its US GAAP financial statements.
Exemptions applied
IFRS 1 allows first-time adopters certain exemptions from the retrospective application of certain requirements under IFRS. The Company has applied the following exemptions:
IFRS 3 Business Combinations has not been applied to either acquisitions of subsidiaries that are considered businesses under IFRS, or acquisitions of interests in associates and joint ventures that occurred before January 1, 2021. Use of this exemption means that the US GAAP carrying amounts of assets and liabilities, that are required to be recognized under IFRS, are their deemed cost at the date of the acquisition. After the date of the acquisition, measurement is in accordance with IFRS. Assets and liabilities that do not qualify for recognition under IFRS are excluded from the opening IFRS statement of financial position. The Company did not recognize any assets or liabilities that were not recognized under US GAAP or exclude any previously recognized amounts as a result of IFRS recognition requirements.
The Company has not restated contracts that were completed before January 1, 2021, under IFRS 15 “Revenue from Contracts with Customers”. A completed contract is a contract for which the Company has transferred all of the goods and services identified in accordance with US GAAP.
The Company assessed all contracts existing at January 1, 2021 to determine whether a contract contains a lease based upon the conditions in place as at January 1, 2021 in accordance with IFRS 16 “Leases”. Lease liabilities were measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate at January 1, 2021. Right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statement of financial position immediately before January 1, 2021. The lease payments associated with leases for which the lease term ends within 12 months of the date of transition to IFRS and leases for which the underlying asset is of low value have been recognized as an expense on either a straight-line basis over the lease term or another systematic basis. The transition to IFRS 16 did not result in any material impact on the Company’s financial position as at December 31, 2021 and 2020, or operation results for the nine months ended September 30, 2021, and therefore, no adjustment has been proposed accordingly.
| 17 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
IFRS 1 allows an entity that used full cost accounting under its previous GAAP to elect, at the time of adoption to IFRS, to measure oil and gas assets in the development and production phases by allocating the amount determined under the entity’s previous GAAP for those assets to the underlying assets pro rata using a reasonable method as of that date. The costs of development and production assets have been separately recorded by the Company for each group of assets.
As the Company elected the oil and gas assets IFRS 1 exemption, the asset retirement obligation (“ARO”) exemption available to full cost entities was also elected. This exemption allows for the re-measurement of ARO on IFRS transition with the offset to accumulated deficit.
The Company has elected the IFRS 1 exemption that allows the Company an exemption from applying IFRS 2 “Share-Based Payments” to equity instruments which vested and settled before the Company’s transition date to IFRS.
The Company has elected the IFRS 1 exemption that allows the Company an exemption from applying IFRS 9 “Financial Instruments” to financial instruments that were derecognized before the date of transition to IFRS on January 1, 2021.
| 18 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Reconciliation of financial position as at January 1, 2021 (date of transition to IFRS)
| Notes | US GAAP | Effect of Transition to IFRS | IFRS | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||
| Account receivables | ||||||||||||||||
| Prepaid expenses and deposits | ||||||||||||||||
| Total current assets | ||||||||||||||||
| Oil and gas properties, net | (1), (5) | ( | ) | |||||||||||||
| Exploration and evaluation assets | (1 | ) | ||||||||||||||
| Property and equipment, net | ||||||||||||||||
| Restricted cash | ||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | |||||||||||||
| Loans payable - current | ||||||||||||||||
| Lease liability - current | ||||||||||||||||
| Total current liabilities | ||||||||||||||||
| Asset retirement obligation | (2 | ) | ||||||||||||||
| Loans payable | ||||||||||||||||
| Convertible debt | ||||||||||||||||
| Derivative liability | ||||||||||||||||
| Lease liability | ||||||||||||||||
| Total liabilities | ||||||||||||||||
| Stockholders’ deficiency: | ||||||||||||||||
| Common stock | ||||||||||||||||
| Additional paid-in capital | (3 | ) | ( | ) | ||||||||||||
| Share premium | (3 | ) | ||||||||||||||
| Stock subscriptions and stock to be issued | ||||||||||||||||
| Warrant and option reserve | (3 | ) | ||||||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||||||
| Total stockholders’ deficiency | ( | ) | ( | ) | ( | ) | ||||||||||
| Total liabilities and stockholders’ deficiency | $ | $ | $ | |||||||||||||
| 19 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Reconciliation of financial position as at December 31, 2021
| Notes | US GAAP | Effect of Transition to IFRS | IFRS | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||
| Accounts receivable | ||||||||||||||||
| Prepaid expenses and deposits | ||||||||||||||||
| Total current assets | ||||||||||||||||
| Oil and gas properties, net | (1), (2), (5) | ( | ) | |||||||||||||
| Exploration and evaluation assets | (1 | ) | ||||||||||||||
| Property and equipment, net | ||||||||||||||||
| Restricted cash | ||||||||||||||||
| Total assets | $ | $ | ( | ) | $ | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | |||||||||||||
| Loans payable | ||||||||||||||||
| Lease liability | ||||||||||||||||
| Total current liabilities | ||||||||||||||||
| Asset retirement obligation | (2 | ) | ||||||||||||||
| Loans payable | ||||||||||||||||
| Derivative liability | ||||||||||||||||
| Lease liability | ||||||||||||||||
| Total liabilities | ||||||||||||||||
| Stockholders’ equity (deficiency): | ||||||||||||||||
| Common stock | ||||||||||||||||
| Additional paid-in capital | (3), (4) | ( | ) | |||||||||||||
| Share premium | (3), (4) | |||||||||||||||
| Notes and amounts receivable for equity issued | ( | ) | ( | ) | ||||||||||||
| Warrant and option reserve | (3 | ) | ||||||||||||||
| Shares to be cancelled | ||||||||||||||||
| Obligation to Issue Shares | ||||||||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||||||
| Total stockholders’ equity (deficiency) | ( | ) | ( | ) | ||||||||||||
| Total liabilities and stockholders’ equity (deficiency) | $ | $ | ( | ) | $ | |||||||||||
| 20 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
Reconciliation of operation results for the nine months ended September 30, 2021
| Notes | US GAAP | Effect of Transition to IFRS | IFRS | |||||||||||||
| Revenue | ||||||||||||||||
| Oil and natural gas sales | $ | $ | $ | |||||||||||||
| Cost and expenses | ||||||||||||||||
| Production | ||||||||||||||||
| Depletion | (5 | ) | ||||||||||||||
| Depreciation | ||||||||||||||||
| Accretion of asset retirement obligation | (2 | ) | ( | ) | ||||||||||||
| Investor relations | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total expenses | ( | ) | ||||||||||||||
| Loss before other income (expenses) | ( | ) | ( | ) | ||||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Finance cost | ( | ) | ( | ) | ||||||||||||
| Foreign exchange loss | ( | ) | ( | ) | ||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Loss on debt extinguishment | (4 | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of derivative liability | ||||||||||||||||
| Total other expenses | ||||||||||||||||
| Net loss for the period | $ | ( | ) | $ | $ | ( | ) | |||||||||
| Loss per share | $ | ( | ) | $ | $ | ( | ) | |||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Other comprehensive loss | ||||||||||||||||
| Foreign currency translation adjustments | $ | ( | ) | $ | $ | ( | ) | |||||||||
| Comprehensive loss | $ | ( | ) | $ | $ | ( | ) | |||||||||
Notes to the reconciliations
The reconciling items between US GAAP and IFRS presentation have no significant effect on the cash flows generated. Therefore, a reconciliation of cash flows has not been presented above.
| 21 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 2. | Summary of Significant Accounting Policies (continued) |
| (1) | Exploration and evaluation assets (“E&E assets”) |
An adjustment has been made to reclassify the presentation of the Company’s Bulgarian property as exploration and evaluation assets as it is not a property under development or production, in accordance with IFRS.
| (2) | Asset retirement obligation |
Under
US GAAP, the ARO was discounted at a rate of
As
a result of the change in discount rate, the ARO accretion expense decreased by $
| (3) | Option reserve and share premium |
Under US GAAP, share-based payments were presented as additional paid-in capital. Upon transition to IFRS, a reclassification adjustment has been made to separately present the amount related to share-based compensation of $. The remaining additional paid-in capital has been reclassified to share premium.
| (4) | Loss on convertible debt extinguishment |
Under
US GAAP, when conversion features have been bifurcated from the conversion debt host and accounted for as liabilities, no equity conversion
feature remains in the debt instrument. The liabilities for the debt and the conversion feature are extinguished in exchange for common
shares, the difference between the carrying value of the liabilities and the fair value of the common shares ae recorded as a gain or
loss. IFRS requires the entity to derecognize the liability component and recognize it as equity on conversion of a convertible instrument
and no gain or loss is recognized. As a result of the difference between the two accounting standards, for the nine months ended September
30, 2021, the loss on debt extinguishment decreased by $
| (5) | Depletion |
The
Company is depleting its oil and gas properties over the proved reserves. IFRS requires an entity to include the estimated future costs
to develop the reserves in the calculation of depletion. The calculation of depletion under US GAAP did not include the estimated future
development costs as the Company applied Electronic Code of Federal Regulation Title 17 Section 210.4-1, Financial accounting and reporting
for oil and gas producing activities pursuant to the Federal securities laws and the Energy Policy and Conservation Act of 1975, to exclude
the estimated future expenditures associated with a major development. As a result, oil and gas properties, net, increased by $
| 22 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
3. Restricted Cash
The
restricted cash relates to drilling bonds provided to the General Directorate of Petroleum Affairs (the “GDPA”) for the exploration
licenses due to Turkish Petroleum Law. The amounts are for
4. Amounts Receivable
| September 30, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Accounts receivable | $ | $ | $ | |||||||||
| GST receivable | ||||||||||||
| Interest receivable | ||||||||||||
| Due from related parties | ||||||||||||
| Other | ||||||||||||
| $ | $ | $ | ||||||||||
5. Oil and Gas Properties
| SASB | Cendere | Total | ||||||||||
| December 31, 2020 | $ | $ | $ | |||||||||
| Expenditures | ||||||||||||
| Depletion | ( | ) | ( | ) | ( | ) | ||||||
| Change in ARO estimate | ( | ) | ( | ) | ||||||||
| December 31, 2021 | ||||||||||||
| Expenditures | ||||||||||||
| Depletion | ( | ) | ( | ) | ( | ) | ||||||
| Change in ARO estimate | ( | ) | ( | ) | ( | ) | ||||||
| Foreign currency translation change | ( | ) | ( | ) | ||||||||
| September 30, 2022 | $ | $ | $ | |||||||||
Turkey
Cendere oil field
The
primary asset of PPE Turkey is the Cendere onshore oil field, which is located in South East Turkey having a total of 25 wells. The Cendere
Field was first discovered in 1988. Oil production commenced during 1990. The operator of the Cendere Field is TPAO. The Company’s
interest is
| 23 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 5. | Oil and Gas Properties (continued) |
The South Akcakoca Sub-Basin (“SASB”)
The
Company owns offshore production licenses called the South Akcakoca Sub-Basin (“SASB”). The Company now owns a
Bakuk gas field
The
Company also owns a
6. Exploration & Evaluation Asset
| Unproven properties | ||||
| Bulgaria | ||||
| December 31, 2020 | ||||
| Foreign currency translation change | ( | ) | ||
| December 31, 2021 | $ | |||
| Foreign currency translation change | ||||
| September 30, 2022 | ||||
Bulgaria
The
Company holds a
| 24 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
7. Property and Equipment
| Right-of-use asset | Leasehold improvements | Other equipment | Motor Vehicles |
Furniture | Total | |||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Disposals | ( | ) | ( | ) | ||||||||||||||||||||
| Foreign currency translation change | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation change | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| September 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
8. Loans Payable
| As at | September 30, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Unsecured,
interest bearing loans at | $ | $ | $ | |||||||||
| Unsecured,
interest bearing loans at | ||||||||||||
| Unsecured,
interest bearing loan at | ||||||||||||
| Unsecured,
interest bearing loan at | ||||||||||||
| Unsecured,
interest bearing loan at | ||||||||||||
| Unsecured,
interest bearing loan at | ||||||||||||
| Unsecured,
interest bearing loan at | ||||||||||||
| Non-interest bearing loans | ||||||||||||
| Total loans payable | ||||||||||||
| Current portion of loans payable | ( | ) | ( | ) | ( | ) | ||||||
| Long-term portion of loans payable | $ | $ | $ | |||||||||
| (1) |
| (2) |
| (3) |
| 25 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 8. | Loans Payable (continued) |
| (4) |
| (5) |
| (6) |
9. Leases
The Company leases certain assets under lease agreements. On January 1, 2020, the Company entered into a one-year lease for office space, which the Company elected the short-term lease measurement and recognition exemption.
On January 3, 2020, the Company entered into a five-year lease for an office space in Turkey.
As
of September 30, 2022, the Company’s lease had a remaining lease terms of
Lease
liabilities are measured at the commencement date based on the present value of future lease payments. As the Company’s lease did
not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement
date in determining the present value of future payments. The Company used a discount rate of
| 26 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 9. | Leases (continued) |
| Lease liability | September 30, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Beginning balance | $ | $ | $ | |||||||||
| Additions, cost | ||||||||||||
| Interest expense | ||||||||||||
| Lease payments | ( | ) | ( | ) | ( | ) | ||||||
| Foreign exchange impact | ( | ) | ( | ) | ( | ) | ||||||
| Ending balance | $ | $ | $ | |||||||||
As at September 30, 2022, the Company’s lease liability is as follows:
| Lease liability | September 30, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Current portion of operating lease liability | $ | $ | $ | |||||||||
| Long-term portion of operating lease liability | ||||||||||||
| $ | $ | $ | ||||||||||
Future minimum lease payments to be paid by the Company as a lessee as of September 30, 2022 are as follows:
| Operating lease commitments and lease liability | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total future minimum lease payments | ||||
| Discount | ( | ) | ||
| Total | $ | |||
10. Notes and Amounts Receivable for Equity Issued
| September 30, 2022 | ||||
| Notes receivable | $ | |||
| Amounts receivable | * | |||
| $ | ||||
| * |
During the year ended December 31, 2021, the Company entered into agreements with certain warrant and option holders for the following notes receivables as consideration for the exercise of warrants and options:
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
| 27 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 10. | Notes and Amounts Receivable for Equity Issued (continued) |
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with the CFO of the Company with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with the CEO of the Company with a principal sum of $
On
July 31, 2021, the Company entered into a promissory note agreement with the CEO of the Company with a principal sum of $
On
November 10, 2021, the Company entered into a promissory note agreement with the CEO of the Company with a principal sum of $
On
November 10, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
November 10, 2021, the Company entered into a promissory note agreement with a principal sum of $
On
November 10, 2021, the Company entered into a promissory note agreement with a director of the Company with a principal sum of $
| 28 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 10. | Notes and Amounts Receivable for Equity Issued (continued) |
See summary table below for terms specific to the promissory note.
| # of Securities exercised | Principal | Maturity date | Interest rate | |||||||||||
| Current | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | * | $ | ||||||||||||
| * |
The following is a continuity of the Company’s promissory note receivable:
| Notes Receivable | ||||
| Balance, January 1, 2021 | $ | |||
| Additions | ||||
| Repayments | ( | ) | ||
| Accrued interest | ||||
| Foreign exchange loss on revaluation | ( | ) | ||
| Balance, December 31, 2021 | $ | |||
| Repayments (See Note 17) | ( | ) | ||
| Balance, September 30, 2022 | $ | |||
During
the nine months ended September 30, 2022, the accrued interest income totaled $
| 29 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
11. Asset Retirement Obligations
The following is a continuity of the Company’s asset retirement obligations:
| September 30, 2022 | December 31, 2021 | |||||||
| Balance at the beginning of period | $ | $ | ||||||
| Accretion expense | ||||||||
| Change in estimate | ( | ) | ( | ) | ||||
| Balance at the end of period | $ | $ | ||||||
The
Company’s asset retirement obligations (ARO)result from its interest in oil and gas assets including well sites. The total ARO
is estimated based on the Company’s net ownership interest in all sites, estimated costs to reclaim and abandon these wells and
the estimated timing of the costs to be included in future years. The Company estimated the total undiscounted amount required to settle
the ARO as at September 30, 2022 is $
12. Convertible Debentures
On
September 30, 2019, the Company closed an unbrokered private placement of convertible debt, issuing $
As the September 30, 2019 convertible debt included an embedded conversion feature denominated in Canadian dollars other than the functional currency which was USD at the issuance of the convertible debt, the debt was determined to be a financial instrument comprising an embedded derivative representing the conversion feature with a residual host debt component. On initial recognition, the Company used the residual value method to allocate the principal amount of the debentures between the embedded derivative conversion feature and host debt components. The conversion feature was valued first with the residual allocated to the host debt component.
On
initial recognition the Company recognized a derivative liability of $
The fair value of the conversion features was determined based on the Black-Scholes Option Pricing Model using the following weighted average assumptions:
| 2020 | ||||
| Risk-free interest rate | % | |||
| Expected life (years) | ||||
| Expected volatility | % | |||
| Dividend yield | % | |||
| 30 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 12. | Convertible Debentures (continued) |
On
July 1, 2020, the Company amended the conversion price of the convertible debentures. Under the amended terms, they are convertible any
time during the term of the debenture into units (each unit consists of one share and one warrant; each warrant can acquire one share
at an exercise price of $ CAD per share, or approximately US$
On
September 15, 2020, debt in the principal amount of $
On
March 8, 2021, the Company amended the terms of the convertible debentures such that any warrants issued with the units upon the conversion
of the debentures is exercisable at US$
On
March 8, 2021, the debt in the principal amount of $
On
March 30, 2021, the debt in the principal amount of $
A continuity of convertible debt and the embedded derivative conversion feature for the nine months ended September 30, 2022 is as follows:
| Host debt instrument | Embedded
conversion feature | Total | ||||||||||
| Balance, December 31, 2020 | ||||||||||||
| Accretion | ||||||||||||
| Conversion | ( | ) | ( | ) | ( | ) | ||||||
| Balance, December 31, 2021 & September 30, 2022 | $ | $ | $ | |||||||||
| 13. | Common Stock |
The Company has an unlimited number of common shares authorized with a par value of $ CAD per share. As at September 30, 2022, common shares were issued and outstanding (December 31, 2021 - ).
For the nine months ended September 30, 2022
On
March 15, 2022, the Company issued units at $ CAD per unit for gross proceeds of $ CAD ($ USD) pursuant
to the closing of a non-brokered private placement. Each unit comprises one common share and one half of one share purchase warrant.
Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering.
As the fair value of the common shares on the same date exceeded the issuance price, no residual value was assigned to the warrants.
Cash finder’s fee of $ CAD ($ USD) were paid and finder’s warrants were issued with a fair value
of $
| 31 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
On
March 16, 2022, the Company issued units at $ CAD per unit for gross proceeds of $ CAD ($ USD) pursuant
to the closing of a non-brokered private placement. Each unit comprises one common share and one half of one share purchase warrant.
Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering.
As the fair value of the common shares on the same date exceeded the issuance price, no residual value was assigned to the warrants.
Cash finder’s fee of $ CAD ($ USD) were paid and finder’s warrants were issued with a fair value of $
On March 17, 2022, the Company closed a non-brokered private placement financing, by issuing units at $ CAD per unit for proceeds of $ CAD ($ USD). Each unit comprises one common share and one half of one share purchase warrant. Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering.
In concurrence with the non-brokered private placement on March 17, 2022, the Company:
| ● | issued shares, of which relate to the vesting of restricted stock units granted in 2021 and relating to the granting and vesting of restricted stock units during the period ended September 30, 2022. The value of the restricted stock units granted during the period ended September 30, 2022 is $ CAD ($ USD). $ of the share-based compensation was recorded in the prior year. The share-based compensation for the nine months ended September 30, 2022 totaled $; | |
| ● | issued units for prepaid services valued at $ CAD ($ USD). During the nine months ended September 30, 2022, $ ($ USD) was expensed and included in investor relations on the consolidated statement of loss and comprehensive loss; and | |
| ● | issued units at a fair value of $ CAD per unit for debt settlement of $ CAD ($ USD) with no loss or gain recognized. |
On
March 18, 2022, the Company issued units at $ CAD per unit for gross proceeds of $ CAD ($ USD) pursuant
to the closing of a non-brokered private placement. Each unit comprises one common share and one half of one share purchase warrant.
Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering.
As the fair value of the common shares on the same date exceeded the issuance price, no residual value was assigned to the warrants.
Cash finder’s fee of $ CAD ($ USD) was paid and finder’s warrants were issued with a fair value of
$
On
March 24, 2022, the Company issued units at $ CAD per unit for gross proceeds of $ CAD ($ USD) pursuant
to the closing of a non-brokered private placement. Each unit comprises one common shares and one half of one share purchase warrant.
Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering.
As the fair value of the common shares on the same date exceeded the issuance price, no residual value was assigned to the warrants.
Cash finder’s fee of $ CAD ($ USD) was paid and finder’s warrants were issued with a fair value of
$
| 32 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
On March 28, 2022, the Company issued units at $ CAD per unit for gross proceeds of $ CAD ($ USD) pursuant to the closing of a non brokered private placement. Each unit comprises one common shares and one half of one share purchase warrant. Each whole warrant entitles the holder to purchase one common share for $ CAD for two years from the date of the closing of the offering. As the fair value of the common shares on the same date exceeded the issuance price, no residual value was assigned to the warrants. Cash finder’s fee of $ CAD ($ USD) were paid and finder’s warrants were issued with a fair value of $ CAD ($ USD). The finder’s warrants have the same terms as the warrants attached to the units.
On
March 1, 2022, the Company entered into a consulting agreement with a third party. Pursuant to the consulting agreement, the Company
would issue common shares for the consulting services received in March 2022. As at September 30, 2022, the common shares have
not been issued and the fair value of $
On
April 8, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for
cash proceeds of $ CAD (US$). As a result, $
On
April 8, 2022, the Company issued common shares for the exercise of options at $ CAD (approximately US$) for cash
proceeds of $ CAD (US$). As a result, $
On
May 26, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for
cash proceeds of $ CAD (US$). As a result, $
On
May 26, 2022, the Company issued common shares for the exercise of options at $ CAD (approximately US$) for cash
proceeds of $ CAD (US$). As a result, $
On
June 3, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for
cash proceeds of $ CAD (US$). As a result, $
On
June 14, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for cash
proceeds of $ CAD (US$). As a result, $
On June 14, 2022, the Company issued common shares for the exercise of options at $ CAD (approximately US$) for cash proceeds of $ CAD (US$). Common shares were issued in error. As a result, $ was recorded in shares to be cancelled, and $ was transferred from option reserves to common stock and share premium.
On June 29, 2022, the Company completed a short form prospectus, issuing units of the Company at a price of $ CAD (approximately US$) per unit for aggregate gross proceeds of up to $ CAD (approximately US$). Each unit consists of one common share of the Company and one half of one common share purchase warrant. Each warrant will be exercisable to purchase one common share of the Company at an exercise price of $ CAD (approximately USD$) until June 29, 2025. A value of $ CAD was allocated to each warrant based on the residual method.
| 33 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
Cash
finder’s fee of $ CAD ($ USD) were paid and finder’s warrants were issued with a fair value of
$
On
July 18, 2022, the Company issued common shares for the exercise of warrants at $ for prepaid services valued
at $
On
July 18, 2022, the Company issued common shares for the exercise of options at $ CAD (approximately US$) for cash
proceeds of $ CAD (US$). As a result, $
On July 18, 2022, the Company issued common shares pursuant to the exercise of options at $ CAD (approximately US$). In lieu of cash, debt in the amount of $ CAD (US$) was settled. Pursuant to the issuance, $ CAD (US$) was transferred from option reserves to common stock and share premium.
On July 18, 2022, the Company issued common shares pursuant to the exercise of options at $ CAD (approximately US$). In lieu of cash, debt owed to the equity holder was settled in the amount of $ CAD (US$). Pursuant to the issuance, $ CAD (US$) was transferred from option reserves to common stock and share premium.
On August 18, 2022, the Company entered into a settlement agreement with the former Chief Financial Officer of the Company upon resignation, whereupon the Company will issue/pay:
| ● | common shares with a fair value of $ (not issued as at September 30, 2022); |
| ● | $ |
| ○ | $ |
| ○ | $ |
| ○ | $ |
| ● |
RSUs with a fair value of $ |
| ● |
RSUs with a fair value of $ |
On
September 1, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$)
for cash proceeds of $ CAD (US$). As a result, $
On September 2, 2022, the Company issued common shares for the exercise of warrants at $ for cash proceeds of $.
On
September 7, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for
cash proceeds of $ CAD (US$). As a result, $
On September 7, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for cash proceeds of $ CAD (US$).
| 34 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
On September 20, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$) for cash proceeds of $ CAD (US$).
On
September 21, 2022, the Company issued common shares for the exercise of warrants at $ CAD (approximately US$)
for cash proceeds of $ CAD (US$). As a result, $
On September 29, 2022, stock options were exercised at $ CAD (approximately US$) for cash proceeds of $ CAD (US$). As at September 30, 2022, common shares had not been issued.
For the nine months ended September 30, 2021
On March 8, 2021, the Company closed a non-brokered private placement financing for aggregate gross proceeds of $ CAD (approximately US$) (the “March Offering”). Under the March Offering, the Company issued an aggregate of units, at a price of $ CAD per unit (approximately US$ per unit). Each unit was comprised of one Common Share and one-half of one share purchase warrant. Each warrant entitles the holder to purchase one Common Share at a price of $ CAD (approximately $) for a period of 30 months from the closing date.
On March 8, 2021, the Company settled a total of $ CAD (US$) in outstanding debt through the issuance to a creditor of units, at a price of $ CAD (US$) per unit. Each unit issued in the Debt Settlement consists of one Common Share and one warrant under the same terms as the March Offering.
On March 8, 2021, the Company closed a private placement for aggregate proceeds of $ (the “US Private Placement”). Under the US Private Placement, the corporation issued an aggregate of units at a price of $ per unit. Each unit was comprised of one Common Share and one-half of one share purchase warrant. Each warrant entitles the holder to purchase one Common Share at a price of $ for a period of 30 months from the closing date.
On
March 8, 2021, convertible debt in the principal amount of $
On
March 30, 2021, convertible debt in the principal amount of $
On March 30, 2021, the Company granted restricted share units which vested immediately. In connection with the grant, Common Shares with a fair value of $ were issued.
On March 30, 2021, the Company issued Common Shares for the exercise of warrants at $ for gross proceeds of $.
| 35 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
On March 30, 2021, the Company issued Common Shares for the exercise of options at $ for gross proceeds of $. In addition, the Company also issued Common Shares for the exercise of options. In lieu of cash, the Company settled $ of outstanding debt.
On
March 30, 2021, the Company issued Common Shares for the exercise of warrants at $ CAD (approximately US$), with
a fair value of $
On March 30, 2021, the Company issued Common Shares with a fair value of $ for services provided.
On
March 30, 2021, the Company issued Common Shares with a fair value of $ to settle debt of $
On April 16, 2021, the Company issued Common Shares for the exercise of warrants at $ CAD (approximately US$). In lieu of cash, debt in the amount of $ CAD (US$) was settled.
On April 16, 2021, the Company issued Common Shares with a fair value of $ for services provided.
On April 16, 2021, the Company issued Common Shares with a fair value of $ to settle accounts payable in the same amount.
On April 16, 2021, the Company issued Common Shares with a fair value of $ to settle debt in the amount of $. A loss of $ was recognized pursuant to the issuance.
On April 28, 2021, the Company issued Common Shares at $ CAD (approximately US$) per share for gross proceeds of $ CAD (US$) relating to the exercise of warrants.
On April 28, 2021, the Company issued Common Shares at $ CAD (approximately US$) per share for gross proceeds of $ CAD (US$) relating to the exercise of options.
On
April 28, 2021, the Company issued Common Shares with a fair value of $
On June 28, 2021, the Company issued Common Shares for the exercise of warrants at prices ranging from $ CAD - $ CAD (approximately US$ – US$) for gross proceeds of $ CAD (US$). On September 8, 2021, the remaining common shares were issued.
On
June 28, 2021, the Company issued Common Shares with a fair value of $
On June 28, 2021, the Company issued Common Shares with a fair value of $ to settle debt in the amount of $. A loss of $ was recognized pursuant to the issuance.
On June 28, 2021, the Company issued Common Shares at $ CAD (approximately US$) per share for gross proceeds of $ CAD (US$).
On July 20, 2021, the Company issued Common Shares at $ CAD (approximately US$) per share for gross proceeds of $ CAD (US$).
| 36 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 13. | Common Stock (continued) |
On
August 9, 2021, the Company issued shares, as a result of the exercise of warrants with exercise prices varying
from $ - $ CAD (US$ - $) for gross proceeds of $ CAD (US$). The shares issued include issued
to related parties where the Company entered into promissory note agreements with the related parties for total principal receivable
by the Company of $ CAD (US$). The notes bear interest at
On August 20, 2021, the Company issued shares, as a result of the exercise of warrants with exercise prices varying from $ - $ CAD (US$ - $) for gross proceeds of $ CAD (US$). shares were issued in error. On September 22, 2021, of the shares issued in error were cancelled. Subsequent to September 30, 2021, the remaining shares issued in error were cancelled.
On September 7, 2021, the Company issued shares, as a result of the exercise of warrants at $ CAD (approximately US$) for gross proceeds of $ CAD (US$). shares were issued pursuant to the exercise of warrants on June 28, 2021.
On
September 7, 2021, the Company issued Common Shares with a fair value of $
On
September 7, 2021, the Company issued Common Shares with fair value of $
| 14. | Stock Options |
The Incentive Plan authorizes the following types of awards:
| ● | incentive stock options and nonqualified stock options to purchase common stock at a set price per share; | |
| ● | stock appreciation rights (“SARs”) to receive upon exercise common stock or cash equal to the appreciation in value of a share of Common Stock; | |
| ● | restricted stock, which are shares of common stock granted subject to a restriction period and/or a condition which, if not satisfied, may result in the complete or partial forfeiture of the shares; | |
| ● | other stock-based awards, which provide for awards denominated in or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock of the Company, which may include performance shares or options and restricted stock units which provide for shares to be issued or cash to be paid upon the lapse of predetermined restrictions. |
Under the 2013 Plan, the maximum number of shares of authorized stock that may be delivered is % of the total number of shares of common stock issued and outstanding of the Company as determined on the applicable date of grant of an award under the 2013 Plan. Under the 2013 Plan, the exercise price of each option (or other stock-based award) shall not be less than the market price of the Company’s stock as calculated immediately preceding the day of the grant. The vesting schedule for each option or other stock-based award shall be specified by the Board of Directors at the time of grant. The maximum term of options or other stock-based award granted is ten years or such lesser time as determined by the Board of Directors at the time of grant.
| 37 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 14. | Stock Options (continued) |
| Number of options | Weighted
average exercise price | |||||||
| Outstanding, December 31, 2020 | ||||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Expired | ( | ) | ||||||
| Cancelled | ( | ) | ||||||
| Outstanding, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding, September 30, 2022 | $ | |||||||
| Outstanding | Exercise Price | Expiry Date | Vested | |||||||||
As at September 30, 2022, the weighted average remaining contractual life of outstanding stock options is years.
For
the nine months ended September 30, 2022, the Company recognized $ (2021 - $) in stock-based compensation expense for options
granted and vested. At September 30, 2022, the Company has $
During
the nine months ended September 30, 2022, options with exercise prices ranging from $ CAD - $ CAD (approximately $
- $ USD) were exercised for gross proceeds of $
The fair values for stock options granted have been estimated using the Black-Scholes option pricing model using the following weighted average assumptions:
| 2022 | 2021 | |||||||
| Risk-free interest rate | % | – | % | |||||
| Expected life (years) | ||||||||
| Expected volatility | % | - | % | |||||
| Dividend yield | % | % | ||||||
| Weighted average fair value per share | $ | |||||||
| 38 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
15. Warrants
A continuity of the Company’s outstanding share purchase warrants for the nine months ended September 30, 2022 and the year ended December 31, 2021 is presented below:
| Number
of warrants | Weighted average exercise price | |||||||
| Outstanding, December 31, 2020 | ||||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Expired | ( | ) | ||||||
| Outstanding, December 31, 2021 | $ | |||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding, September 30, 2022 | $ | |||||||
| Outstanding | Exercise Price | Expiry Date | ||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
| USD | ||||||||
As at September 30, 2022, the weighted average remaining contractual life of outstanding warrants is years.
As at December 31, 2021, the Company had warrants issued in connection with private placements, or debt settlements. The exercise price of such warrants was denominated in CAD other than the functional currency prior to January 1, 2022. As such the warrants were classified as derivate liabilities with a fair value of $. As a result of the change in functional currency of the Company to CAD on January 1, 2022, such warrants were reclassified to equity.
| 39 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 15. | Warrants (continued) |
Due
to the change in functional currency of the Company, warrants with a carrying value of $
The following is a continuity of the Company’s derivative warrant liability:
| Total | ||||
| Balance, January 1 and December 31, 2020 | $ | |||
| Issued during the period | ||||
| Extinguished during the period | ( | ) | ||
| Change in fair value of derivative | ( | ) | ||
| Balance, December 31, 2021 | $ | |||
| Effect of change in functional currency | ( | ) | ||
| Change in fair value of derivative | ||||
| Foreign currency translation | ( | ) | ||
| Balance, September 30, 2022 | $ | |||
In connection with the private placements in March, 2022, the Company issued warrants and finder’s warrants for a total number of (Note 13). As the fair value of the common shares on the closing dates of the private placements were greater than the unit subscription price, no residual value was assigned to any of the warrants. The fair values for finder’s warrants granted during the current period, have been estimated using the Black-Scholes option pricing model using the following assumptions:
| 2022 | ||||
| Risk-free interest rate | – % | |||
| Expected life (years) | ||||
| Expected volatility | % | |||
| Dividend yield | % | |||
| Share price | $ - $ CAD | |||
During
the nine months ended September 30, 2022,
| 40 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 16. | Restricted Stock Units |
During the nine months ended September 30, 2022, the Company granted (2021 – ) restricted stock units (“RSUs”) as consideration for management and consulting contracts. The RSUs were valued at $ (2021 - $) based on the fair market value of the closing price of the common stock of the Company at the grant date and are recognized over the vesting period. Within 30 days of vesting, the RSUs are exchanged for shares of common stock of the Company. Of the RSUs granted, vest immediately and RSUs granted to an officer of the Company vest as follows:
| ● | vest 90 days after appointment as officer of the Company; |
| ● | vest on the first day of the second year of employment as an officer of the Company; |
| ● | vest upon the successful completion of the Company’s phase A drilling program at the SASB gas field; and |
| ● | vest upon successful completion of at least an additional seven wells as part of the Company’s phase B drilling program at the SASB gas field. |
During the nine months ended September 30, 2022, common stock relating RSUs that vested during the year ended December 31, 2021, were issued (Note 13).
For the nine months ended September 30, 2022, the Company recognized $ (2021 - $) in stock-based compensation expense for RSUs granted and vested (Note 13). At September 30, 2022, the Company has $ (2021 - $) in unrecognized compensation expense related to RSUs.
As at September 30, 2022, the Company recorded an obligation to issue shares of $. This relates to an obligation to issue RSUs pursuant to terms set forth in contracts and agreements between the Company and various directors and officers of the Company (Note 17).
| Number
of restricted stock units | Weighted average fair value per award | |||||||
| Balance, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance, December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance, September 30, 2022 | ||||||||
| 17. | Related Party Transactions |
At
September 30, 2022, accounts payable and accrued liabilities included $
During
the nine months ended September 30, 2022, management fees and salaries of $
During
the nine months ended September 30, 2022, the Company issued (2021 - ) units with a fair value of $
| 41 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 17. | Related Party Transactions (Continued) |
During
the nine months ended September 30, 2022, the Company issued (2021 - ) common shares relating to the exercise of (2021
– ) warrants and (2021 – ) options held by related parties. As consideration, the Company entered into
promissory note agreements with the related parties for total principal receivable by the Company of $ (2021 - $
During
the nine months ended September 30, 2022, the Company paid the relative of a senior officer and director of the Company $
As
at September 30, 2022, notes receivable included $
Pursuant to agreements between the four directors and the Company, each of the four directors shall be granted fully vested RSUs upon each anniversary of the contract and three of the four directors shall be granted fully vested RSUs upon successful spudding of the first well by the Company. For three of the four directors, the amount of RSUs shall be indexed pro-rata to account for any dilution incurred by subsequent share issuance by the Company. As at September 30, 2022, each of the four directors is owed RSUs pursuant to the contract and three of the four directors are owed RSUs each for the successful spudding of the first well. For three of the four directors, an additional RSUs are owed each, pursuant to the dilution clause. The value of these RSUs is calculated to be $ which has been recorded as an obligation to issue shares as at September 30, 2022.
On September 2, 2020, the CEO signed an employment agreement with the Company in which the CEO shall receive:
| ● | fully vested RSUs upon the first anniversary of the agreement. The amount of RSUs shall be indexed pro-rata to account for any dilution incurred by subsequent share issuances by the Company; |
| ● | If during the term of the Agreement, the Company completes any cash financing of $, the Company shall issue fully vested RSUs and $ for each $ raised. |
| ● | Upon spudding of the first well by the Company, the Company shall grant fully vested RSUs and fully vested RSUs every anniversary of the spud date (Condition was met on September 15, 2022). This amount is indexed pro-rata to account for any dilution incurred by subsequent share issuances by the Company; and |
| ● | If during the term of the Agreement, the Company enters into any non-financing transaction, a cash bonus of US$ is owed upon the successful closing. |
As at September 30, 2022, an obligation to issue shares of $ exists relating to the vesting of RSUs owed to the CEO.
On July 15,2022, the CFO signed an employment agreement with the Company in which the CFO shall receive:
| ● | fully vested RSUs upon the first anniversary of the agreement; |
| ● | fully vested RSUs upon the second anniversary of the agreement; |
| ● | For each subsequent year, the number of RSUs is determined in context of the market price of the shares and in respect to the performance of the Company; |
| ● | A bonus of RSUs plus the sum of $ cash paid upon the successful completion of the Ccompany’s phase A drilling program at the SASB gas field; |
| ● | A bonus of RSUs plus the sum of $ cash paid upon the successful completion of at least an additional seven wells as part of the Company’s phase B drilling program at the SASB gas field; and |
| ● | A bonus of $ cash upon the executive arranging a credit line for SASB of at least $. |
As at September 30, 2022, an obligation to issue shares of $ exists relating to the vesting of RSUs owed to the CFO.
| 42 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 17. | Related Party Transactions (Continued) |
On July 15,2022, the COO signed an employment agreement with the Company in which the COO shall receive:
| ● | fully vested RSUs upon the first anniversary of the agreement; |
| ● | fully vested RSUs upon the second anniversary of the agreement; |
| ● | For each subsequent year, the number of RSUs is determined in context of the market price of the shares and in respect to the performance of the Company; |
| ● | A bonus of RSUs plus the sum of $ cash paid upon the successful completion of the company’s phase A drilling program at the SASB gas field; and |
| ● | A bonus of RSUs plus the sum of $ cash paid upon the successful completion of at least an additional seven wells as part of the Company’s phase B drilling program at the SASB gas field; |
As at September 30, 2022, an obligation to issue shares of $exists relating to the vesting of RSUs owed to the COO.
On August 18, 2022, the Company entered into a settlement agreement with the former CFO of the Company upon resignation, whereupon the Company will issue/pay:
| ● | common shares with a fair value of $ (not issued as at September 30, 2022); |
| ● | $ in cash to be paid as follows: |
| ○ | $ paid upon execution of the agreement (Paid); |
| ○ | $ to be paid on or before January 31, 2023 (Unpaid); |
| ○ | $ to be paid on or before March 31, 2023 (Unpaid); |
| ● | RSUs with a fair value of $ for services rendered as a director (not issued as at September 30, 2022); |
| ● | RSUs with a fair value of $ for services rendered as an audit committee member (not issued as at September 30, 2022); |
As at September 30, 2022, an obligation to issue shares of $ exists relating to the common shares and RSUs owed to the former CFO.
| 18. | General and Administrative |
| For the nine months ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Salaries and compensation | $ | $ | ||||||
| Professional fees | ||||||||
| Office | ||||||||
| Filing and Transfer Fees | ||||||||
| Advertising | ||||||||
| Travel | ||||||||
| Penalties | ||||||||
| Bank charges and other | ||||||||
| $ | $ | |||||||
| 43 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 19. | Geographical Segment Information |
During the nine months ended September 30, 2022 and 2021, the Company’s operations were in the resource industry in Bulgaria, and Turkey with head offices in the United States and a satellite office in Sofia, Bulgaria. The Company’s operating segments included, a head office in Canada, oil and gas operations in Turkey and oil and gas properties located in Bulgaria.
| Canada | Turkey | Bermuda | Bulgaria | Total | ||||||||||||||||
| Revenue for the nine months ended September 30, | ||||||||||||||||||||
| 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Non-current assets as at | ||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| 20. | Capital Management |
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern to support its business plan, as well as to ensure that the Company is able to meet its financial obligations as they become due.
The basis for the Company’s capital structure is dependent on the Company’s expected business growth and changes in business environment. To maintain or adjust the capital structure, the Company may issue new shares through private placement, incur debt or return capital to members.
The Company is dependent upon external financings to fund activities. In order to carry future projects and pay administrative costs, the Company will utilize its existing working capital and raise additional funds as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company is not subject to externally imposed capital requirements.
| 21. | Financial Instruments and Risk Management |
The Company is exposed, through its operations, to the following financial risks:
| a) | Market risk |
| b) | Credit risk |
| c) | Liquidity risk |
The Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s objectives, policies, and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these Statements.
There have been no substantive changes in the Company’s exposure to financial instrument risks, its objectives, polices and processes for managing those risks or the methods used to measure them from previous reported periods unless otherwise stated in the note. The overall objective of management is to set policies that seek to reduce risk as far as possible without unduly affecting the Company’s competitiveness and flexibility. Further details regarding these policies are set out below.
| a) | Market risk |
Market risk is the risk of loss that may arise from changes in market factors such as foreign currency exchange, interest rates and equity price risk.
| 44 |
| 21. | Financial Instruments and Risk Management (continued) |
| (i) | Foreign currency risk: |
Foreign currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company and its subsidiaries are exposed to currency risk as it has transactions denominated in currencies that are different from their functional currencies. The Company does not hedge its exposure to fluctuations in foreign exchange rates.
As at September 30, 2022, the Company’s significant foreign exchange currency exposure on its financial instruments, expressed in USD was as follows:
If
the CAD strengthened or weakened against the USD by
| (ii) | Interest rate risk: |
Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. The interest earned on cash is insignificant and the Company does not rely on interest income to fund its operations. The Company has significant debt facilities, including convertible debt and promissory notes and loans payable. As the debt facilities are incurring a fixed rate of interest, the Company is not significantly exposed to interest rate risk.
| (iii) | Other price risk: |
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company does not hold equity investments in other entities and therefore is not exposed to a significant risk.
| b) | Credit risk |
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations.
The Company is subject to credit risk on its cash. The Company limits its exposure to credit loss on cash by placing its cash with a high-quality financial institution.
| c) | Liquidity risk |
Liquidity risk arises from the Company’s general and capital financing needs. The Company continuously monitors and reviews both actual and forecasted cash flows, and also matches the maturity profile of financial assets and liabilities, when feasible.
The table below summarizes the maturity profile of the Company’s contractual cashflows.
| As at September 30, 2022 | Less than 1 year | 1 - 2 years | Later than 2 years | Total | ||||||||||||
| Accounts payable | $ | $ | $ | $ | ||||||||||||
| Loans payable | ||||||||||||||||
| Lease liability | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| 45 |
TRILLION ENERGY INTERNATIONAL INC.
Notes to the Consolidated Interim Financial Statements
For the nine months ended September 30, 2022 and 2021
(Expressed in U.S. dollars)
(Unaudited)
| 21. | Financial Instruments and Risk Management (continued) |
| As at December 31, 2021 | Less than 1 year | 1 - 2 years | Later than 2 years | Total | ||||||||||||
| Accounts payable | $ | $ | $ | $ | ||||||||||||
| Loans payable | ||||||||||||||||
| Lease liability | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| 22. | Subsequent Events |
Subsequent
to September 30, 2022, the Company issued shares pursuant to the exercise of warrants ranging from $ - $
CAD (USD$ – $) for gross proceeds of $
Subsequent
to September 30, 2022, the Company issued shares and granted warrants pursuant to the exercise of broker
warrant units at $ CAD (USD$) for gross proceeds of $
Subsequent
to September 30, 2022, the Company issued shares pursuant to the exercise of options at $ CAD (approximately USD$)
for gross proceeds of $
Subsequent to September 30, 2022, the Company issued shares pursuant to the grant and immediate vesting of RSUs.
Subsequent to September 30, 2022, the Company granted broker warrants pursuant to the public offering completed in June 2022 of units of the Company at a price of $ CAD per unit. Each warrant entitles the holder to acquire one common share at an exercise price of $ for 36 months from the date of grant.
On October 21, 2022, the Company announced that it is electing to accelerate all Warrants issued during March 2021. The Warrants issued in March 2021 contain the following language: “In the event that company’s share prices close at a price of CAD $ per share for a period of 10 consecutive trading days on the Canadian Security Exchange, the Company may accelerate the term of the March 2021 Warrants to a period of 30 days following notice by providing notice to the warrant holders in writing or by news release.” (“the Notice”) On November 21, 2022, a total of warrants were accelerated pursuant to the Notice of which, were exercised and expired.
During November 2022, the Company commenced natural gas production from the South Akcakoca and Akcakoca-3 wells.
| 46 |