WESTERN MAGNESIUM CORPORATION The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 , filed with theSecurities and Exchange Commission , orSEC , onFebruary 15, 2021 (the "2021 Form 10-K"). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and in "Part I, Item 1A-Risk Factors" in our 2021 Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should read "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" contained herein and in our 2021 Form 10-K. Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Financial information presented in this MD&A is presented inUnited States dollars ("$" or "US$"), unless otherwise indicated. The information about us provided in this MD&A, including information incorporated by reference, may contain "forward-looking statements" and certain "forward-looking information" as defined under applicableUnited States securities laws and Canadian securities laws. All statements, other than statements of historical fact, made by us that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements, including, but not limited to, statements preceded by, followed by or that include words such as "may", "will", "would", "could", "should", "believes", "estimates", "projects", "potential", "expects", "plans", "intends", "anticipates", "targeted", "continues", "forecasts", "designed", "goal", or the negative of those words or other similar or comparable words and includes, among others, information regarding: our ability to become profitable and generate cash in our operating activities; our need for substantial additional financing to operate our business and difficulties we may face acquiring additional financing on terms acceptable to us or at all; our significant indebtedness and significant restrictions on our operations; our ability to construct and operate our planned magnesium research and development pilot plant and obtain necessary permits and authorizations to construct and operate the facility; the impact of global climate change on our ability to conduct future operations; our lack of a diversified portfolio of assets; our dependence on key inputs, suppliers and skilled labor for the production of magnesium; our ability to attract and retain key personnel; growth-related risks, including capacity constraints and pressure on our internal systems and controls; the adverse consequences of litigation we are currently involved in and litigation we may face from time to time; risk related to the protection of our intellectual and our exposure to infringement or misappropriation claims by third parties; risks related to competition; risks related to our lack of internal controls over financial reporting and their effectiveness; increased costs we are subject to as a result of being a public company inCanada andthe United States ; and other events or conditions that may occur in the future.
34 Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as at the date they are made and are based on information currently available and on the then current expectations of the party making the statement and assumptions concerning future events, which are subject to a number of known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements, including, but not limited to, risks and uncertainties described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and in "Part I, Item 1A-Risk Factors" in our 2021 Form 10-K. Although we believe that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements, because no assurance can be given that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to the risks described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and in "Part I, Item 1A-Risk Factors" in our 2021 Form 10-K. Consequently, all forward-looking statements made in this MD&A and other documents, as applicable, are qualified by such cautionary statements, and there can be no assurance that the anticipated results or developments will actually be realized or, even if realized, that they will have the expected consequences to or effects on us. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that we and/or persons acting on its behalf may issue. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required under securities legislation. We are on a fiscal year, as such the three-month period endingJuly 31, 2022 is our third quarter and the three-month period endingJuly 31 is referred to as the "three months" or "third quarter". The nine-month period endingJuly 31 is referred to as the "nine months" or "year-to-date". The fiscal year endedOctober 31, 2021 is referred to as "Fiscal 2021" and the coming fiscal year endingOctober 31, 2022 is referred to as "Fiscal 2022". Overview of the Business
We are a reporting issuer inCanada and inthe United States . We are listed for trading on theTSX Venture Exchange (the "TSXV") under the symbol "WMG". Our common stock is also traded inthe United States on the OTCQB tier of the OTC Markets (the "OTCQB") under the symbol "MLYF" and inGermany on theFrankfurt Stock Exchange under the symbol "3WM". We have developed proprietary magnesium production technology with the aim of becoming a premier low-cost producer of green primary magnesium metal. We are in the final stages of construction and commencing test production of magnesium at a research and development pilot plant in metropolitanVancouver, British Columbia , Canada. We have commenced testing at this facility in the last calendar quarter of 2021, and our proprietary continuous reactor has begun operation and has produced magnesium metal under our target temperature and pressure in the second calendar quarter of 2022. The remainder of the equipment is undergoing final checks which will allow the plant to enter the demonstration phase. Our proprietary technology utilizes a continuous silicothermic process that is expected to produce high grade magnesium with low labor and energy costs while generating minimal waste and toxic by-products. 35 In addition, we own a 100% interest in 81 unpatented lode mining claims totaling approximately 1,673 acres (the "Tami Mosi Mining Claim"), four unpatented lode mining claims totaling approximately 10 acres located in theMoor Mining District in Elco County,Nevada and a 100% interest in three patented mining claims located in the Pinto mining district ofNevada totaling approximately 296 acres (the "Silverado Mining Claim"). We do not plan on commencing extraction of minerals at this time from any mining claims we hold because we have identified alternative sources of supply of dolomite and ferrosilicon, the primary raw materials used to produce pure magnesium. We may in the future, however, commence extraction of minerals from the Tami Mosi Mining Claim if we are unable to purchase raw materials from the alternative sources we have identified at commercially reasonable rates. In addition, we do not consider our mining claims to be material to our business or financial condition. Corporate History
We were incorporated under the Company Act (British Columbia ) onMarch 24, 1966 as "Ft.Lauderdale Resources Inc. " We changed our name toAmcorp Industries Inc. onJuly 20, 1990 , toMolycor Gold Corporation onMay 17, 1996 , toNevada Clean Magnesium Inc. onApril 16, 2012 and toWestern Magnesium Corporation onMay 14, 2019 . OnMay 14, 2019 , we discontinued from the jurisdiction of the Business Corporations Act (British Columbia ) and domesticated under the General Corporation Law of theState of Delaware under the name "Western Magnesium Corporation ." In connection with the name change, we also changed our stock symbol to "WMG" on the TSXV. We have two wholly-owned subsidiaries:Western Magnesium Corp. , incorporated in theState of Nevada inthe United States which owns our mining claims in theSchell Creek Range located southeast ofEly, Nevada and manages the Company'sNevada properties; andWestern Magnesium Canada Corp. , incorporated onMay 3, 2019 inBritish Columbia, Canada which manages our Canadian operations.
In 2006, we acquired the Silverado Mining Claim. During the year endedOctober 31, 2013 , an impairment was recorded on this claim for$412,793 reducing its book value to$1 .
In 2009, we acquired 27 mining claims totaling approximately 1,744 acres on property located southeast ofBeaverdell, British Columbia (the "Beaverdell Mining Claim"). During the year endedOctober 31, 2013 , an impairment was recorded on this claim for$335,133 reducing its book value to$1 . During the year endedOctober 31, 2020 , we sold our interest in the Beaverdell Mining Claim for$50,000 and recognized a gain on sale of$37,156 . OnOctober 9, 2006 , we acquired the Tami Mosi Mining Claim. OnMay 1, 2009 , an Initial Resource Estimate was completed byNorm Tribe & Associates, Ltd. OnJune 11, 2010 , a Phase 1 Process Development Study for Exploitation of the Tami Mosi Mining Claim was completed byHaze Research, Inc. OnAugust 3, 2011 , an updated resource estimate was completed by Tetra Tech, Inc. ("Tetra Tech"), onSeptember 15, 2011 a Preliminary Economic Assessment and Technical Report of theTami-Mosi Magnesium Project was completed by Tetra Tech and amended onJuly 4, 2014 . OnApril 4, 2017 , we completed construction of a bench scale test furnace that employed our proprietary continuous silicothermic process and inOctober 2017 , we successfully completed furnace preparations - a major milestone in the testing of our bench scale pilot furnace. InNovember 2017 , we completed "proof of concept" in the production of magnesium metal from our bench scale test furnace. The metal produced was a result from a partial test charge being conducted in order to identify any operational deficiencies in the furnace prior to a full charge test of dolime material. InJanuary 2018 , we received a final assay report assessing the purity of the raw magnesium metal produced from our bench scale pilot furnace test program. In accordance withASTM International standard ASTM E1479-16, the testing was analyzed via inductively coupled plasma (ICP). This unrefined magnesium metal was found to have a very good metal purity capable of producing ASTM B92 grade metal with minimal treatment. No impurities were found which would impact food grade applications. 36
In
InDecember 2018 , our technical team produced a magnesium ingot from dolomite obtained from the Tami Mosi Mining Claim. This accomplishment completed the proof-of-concept stage allowing us to develop a pilot magnesium furnace based on the bench scale furnace. Plan of Operations In order to complete construction and testing at our planned research and development pilot plant, the following are the key milestones that we expect to achieve over the next 12 months following the date of this Quarterly Report
on Form 10-Q:
? Commission the plant and complete final training of operations staff;
? Commence metal production under various scenarios to ensure sufficient data is
collected;
? Begin the request for proposal process for commercial engineering, procurement
and construction management ("EPCM") firm;
? Select EPCM firm;
? Review all pilot data with chosen EPCM firm and validate proposed required
operational scenarios; and
? Begin geotechnical assessments of proposed full-scale magnesium production
facility in Harrison County, Ohio .
We estimate that the costs to complete this work will be approximately
$8,000,000 . We have commenced testing of the pilot reactor in the last calendar
quarter of 2021, and our proprietary continuous reactor has begun operation and
has produced magnesium metal under our target temperature and pressure in the
second calendar quarter of 2022. Continuous demonstration phase operation will
take place throughout the fourth calendar quarter of 2022 and the first calendar
quarter of 2023.
Following completion of our magnesium research and development pilot plant, we intend to construct a full-scale magnesium production facility with expected capacity to produce 100,000 metric tons per year that will be scalable for greater production levels located on 122 acre property located inHarrison County, Ohio . The proposed plant will be adjacent to the future home of a modern mixed fuels power plant which is expected to provide power to our planned magnesium production plant. The proposedHarrison County, Ohio location is close to a dolomite supply and has an infrastructure of rail and highway that is capable of transporting our magnesium finished product to industries acrossthe United States . Our plans will require a significant amount of additional capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." We have no current plans to extract minerals from any of our mining claims.
Magnesium and Its Production
Magnesium is the lightest and strongest of the structural metals, just one-fourth the weight of steel, two-fifths the weight of titanium, and two-thirds the weight of aluminum. Magnesium has multiple industrial and consumer applications. Magnesium ingots are a prime raw material input for the production of titanium and aluminum alloys and magnesium alloys. Magnesium powder and granules are used to remove sulfur in the production of steel. Due to their unique light weight and high strength properties, magnesium alloys are used in a variety of aircraft and automobile parts, as well as in electronic equipment such as computers, cameras and cellular phones. 37 Most magnesium produced globally comes from natural minerals such as dolomite and magnesite in the form of magnesium carbonate. It can also be found in seawater and in salt lakes brines or underground mineral salt deposits. Magnesium can be produced through several different methods including the electrolytic process or thermal-reduction as practiced in the most commonly
used Pidgeon process. The electrolytic process involves the electrolysis of molten magnesium chloride which produces molten magnesium and chlorine. The metal is cast into ingots for further processing as needed and the chlorine by product may be sold for use in the production of polymers such as polyvinyl chloride pipe (PVC). In the thermal-reduction method, calcined magnesium containing ores (magnesite and dolomite) are broken down into fine powder and mixed with reducing agents and catalyst agent. The mixture is heated in a vacuum chamber producing magnesium vapors which later condense into crystals. The crystals are then melted, refined and poured into ingots for further processing. The Pidgeon process, using ferrosilicon as a catalyst, is most commonly used for production of magnesium as its operation is relatively easy and has a low capital cost. The traditional process using horizontal retorts is high in energy consumption and has low productivity.
Selected Financial Information
The following table summarizes our consolidated financial information as atJuly 31, 2022 andOctober 31, 2021 . The selected consolidated financial information set out below may not be indicative of our future performance. July 31, 2022 October 31, 2021 $ $ Total assets 5,797,763 4,513,512 Current liabilities 7,440,511 10,891,270 Non-current liabilities 195,813 392,280 Shareholders' deficit (1,838,561 ) (6,770,038 ) Accumulated deficit (67,190,772 ) (52,129,621 ) Working capital deficiency (6,642,252 ) (9,657,316 ) Results of Operations
For the three months ended July 31, 2022 ("Q3 2022"), the Company recorded net
loss of $1,295,865 ($0.00 per common share), as compared to $3,784,435 ($0.01
per common share) for the same period in the preceding year ("Q3 2021"). The
decrease of $2,488,570 in net loss in Q3 2022 compared to Q3 2021 was
attributable primarily to a non-cash gain of $2,784,793 in non-operating items
including the change in fair value of derivative liability and warrant liability
and loss on recognition of debt host liability, partially offset by an increase
of $296,223 in operating expenses. On a year-to-date basis, net loss for the
nine months ended July 31, 2022 ("YTD 2022") was $15,061,151 ($0.03 per common
share), as compared to $6,338,823 ($0.02 per common share) for the same period
in the preceding year ("YTD 2021"). The increase of $8,722,328 in net loss in
YTD 2022 compared to YTD 2021 was due primarily to a non-cash loss of $4,274,563
in non-operating items, and an increase of $4,447,765 in operating expenses.
38
The following table summarizes our results of operations for Q3 2022 and YTD
2022, compared to the same periods in the preceding year. The selected
consolidated financial information set out below may not be indicative of our
future performance.
Three Months Ended Nine Months Ended
July 31, July 31,
2022 2021 2022 2021
$ $ $ $
Operating expenses (3,132,896 ) (2,836,673 ) (9,855,482 ) (5,407,717 )
Other income (expense) 1,837,031 (947,762 ) (5,205,669 ) (931,106 )
Net loss (1,295,865 ) (3,784,435 ) (15,061,151 ) (6,338,823 )
Net loss per share (0.00 ) (0.01 ) (0.03 ) (0.02 )
Three Months Ended
Operating Expenses Operating expenses were$3,132,896 for Q3 2022, as compared to$2,836,673 for Q3 2021. The increase of$296,223 in operating expenditures was due primarily to increases in interest, salaries and benefits, and office and general, partially offset by a decrease in stock-based compensation. The variances were primarily comprised of:
Interest (Q3 2022 -
The Company incurred interest expense of$372,295 during Q3 2022, as compared to$28,242 during Q3 2021. OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of theJune 2021 Convertible Debenture from a hybrid financial instrument to a convertible debt instrument with a beneficial conversion feature. The Company allocated the intrinsic value of the beneficial conversion feature of theJune 2021 Convertible Debenture capped at the face value of$1,500,000 to additional paid-in capital and recognized a debt discount of the same amount to be amortized as interest expense over the period from issuance date to maturity date using the effective interest method. During the quarter endedApril 30, 2022 , the Company also allocated the intrinsic value of the beneficial conversion feature of theApril 2022 Convertible Debenture of$240,000 to additional paid-in capital and recognized a debt discount of the same amount to be amortized as interest expense until its maturity. The increase of$344,053 in interest during Q3 2022 was attributable primarily to the interest expense of$213,948 from the amortization of the debt discount on partial conversion of theJune 2021 Convertible Debenture during the period.
Salaries and benefits (Q3 2022 -
The Company incurred expenses for salaries and benefits of$1,151,045 during Q3 2022, as compared to$809,253 during Q3 2021, representing an increase of$341,792 . This was due mainly to increased personnel headcount as the Company has set up its new headquarters and management team inMcLean, Virginia close to theWashington DC metropolitan area and its continued effort in the buildout of its research and development pilot plant. As atJuly 31, 2022 , the Company had 30 employees including 9 senior management members. As atJuly 31, 2021 , the Company had 22 employees including 5 senior management members. Certain senior management members' salaries were also adjusted to be in line with industry
standards. 39
Office and general (Q3 2022 -
The Company incurred office and general expenses of$266,407 during Q3 2022, as compared to$23,794 during Q3 2021. The increase of$242,613 in office and general expenses was attributable primarily to directors' and officers' and corporate liability insurance of$216,734 incurred in Q3 2022, as compared to$2,589 incurred in Q3 2021, for increased coverage as the Company planned for up-listing in the US.
Stock-based compensation [Q3 2022 -
Stock-based compensation fluctuated depending on timing of option grant. During Q3 2022, the Company recorded stock-based compensation of$32,539 upon the vesting of stock options of certain employees. OnDecember 30, 2020 , the Company approved the grant of an aggregate 15,650,000 stock options to certain directors, officers, employees and consultants. However, these options exceeded the maximum allowed under the Company's stock option plan. OnJune 11, 2021 , the Company received shareholders' approval on the amendment to the Company's stock option plan to increase the number of common shares reserved for issuance under such plan and rectified the grant of these options. Accordingly, the Company recognized stock-based compensation of$1,057,013 in Q3 2021. This resulted in a non-cash variance of$1,024,474 between the two reporting periods. Other Income (Expense) Other income was$1,837,031 for Q3 2022, as compared to other expense of$947,762 for Q3 2021. The positive variance of$2,784,793 in other income (expense) was non-cash and was due to the gain in the change in fair value of warrant liability in Q3 2022, and the loss in the change in fair value of derivative liability and the loss on recognition of debt host liability in Q3 2021. The variances were comprised of:
Change in fair value of warrant liability (Q3 2022 -
OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of its outstanding warrants and broker warrants denominated in Canadian dollar as derivative liability measured at fair value through other income (expense) in the Company's consolidated statements of loss and comprehensive loss at the end of each reporting period. The Company issued common share purchase warrants denominated in Canadian dollar on conversion of theJuly 2021 Convertible Debenture and recognized additional derivative liability of$67,155 in Q3 2022. For Q3 2022, the Company recognized a non-cash gain of$1,904,186 on re-measurement of its derivative liability of warrants and broker warrants. There was no warrant liability in Q3 2021.
Change in fair value of derivative liability [Q3 2022 - $nil; Q3 2021 -
(
For Q3 2022, the Company had no hybrid financial instrument which comprised of a debt host liability and an embedded derivative liability requiring remeasurement at fair value through other income (expense) in the Company's consolidated statements of loss and comprehensive loss at the end of each reporting period. For Q3 2021, the Company recognized a non-cash loss of$806,853 on re-measurement of itsJuly 2020 Convertible Debenture,June 2021 Convertible Debenture andJuly 2021 Convertible Debenture.
Loss on recognition of debt host liability [Q3 2022 - $nil; Q3 2021 -
(
On issuance date of theJune 2021 Convertible Debenture in Q3 2021, its embedded derivative liability was valued at$1,646,600 which exceeded the face value of the note itself of$1,500,000 , the fair value of the debt host liability was then determined to be$1 , with an immediate loss of$140,909 on recognition of the debt host liability during Q3 2021. 40
Nine Months EndedJuly 31, 2022 Compared to Nine Months EndedJuly 31, 2021
Operating Expenses
Operating expenses were$9,855,482 for YTD 2022, as compared to$5,407,717 for YTD 2021. The increase of$4,447,765 in operating expenditures was due primarily to increases in legal and professional fees, salaries and benefits, and interest, partially offset by a decrease in stock-based compensation. The variances were primarily comprised of:
Legal and professional fees (YTD 2022 -
The Company incurred legal and professional fees of$1,897,719 for YTD 2022, as compared to$545,234 for YTD 2021. The significant increase of$1,352,485 in legal and professional fees was attributable mainly to litigations discussed elsewhere in this Quarterly Report on Form 10-Q, the Company's registration of its Common Stock with theUS Securities and Exchange Commission and other securities related matters, the setup of the new headquarter and management team inMcLean, Virginia close to theWashington DC metropolitan area,U.S. site selection and government incentives advance strategies, as well as for audit and valuation services rendered during YTD 2022.
Salaries and benefits (YTD 2022 -
The Company incurred expenses for salaries and benefits of$3,347,884 for YTD 2022, as compared to$2,176,185 for YTD 2021, representing an increase of$1,171,699 . This was due mainly to increased personnel headcount as the Company has set up its new headquarters and management team inMcLean, Virginia close to theWashington DC metropolitan area and its continued effort in the buildout of its research and development pilot plant. As atJuly 31, 2022 , the Company had 30 employees including 9 senior management members. As atJuly 31, 2021 , the Company had 22 employees including 5 senior management members. Certain senior management members' salaries were also adjusted to be in line with industry standards.
Interest (YTD 2022 -
The Company incurred interest expense of$1,021,443 during YTD 2022, as compared to$64,576 during YTD 2021. OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of theJune 2021 Convertible Debenture from a hybrid financial instrument to a convertible debt instrument with a beneficial conversion feature. The Company allocated the intrinsic value of the beneficial conversion feature of theJune 2021 Convertible Debenture capped at the face value of$1,500,000 to additional paid-in capital and recognized a debt discount of the same amount to be amortized as interest expense over the period from issuance date to maturity date using the effective interest method. During the quarter endedApril 30, 2022 , the Company also allocated the intrinsic value of the beneficial conversion feature of theApril 2022 Convertible Debenture of$240,000 to additional paid-in capital and recognized a debt discount of the same amount to be amortized as interest expense until its maturity. The increase of$956,867 in interest in YTD 2022 was attributable primarily to the interest expense of$814,717 from the amortization of the debt discount on partial conversion of theJune 2021 Convertible Debenture during the period. 41
Stock-based compensation [YTD 2022 -
In YTD 2022, the Company recorded stock-based compensation of$466,368 upon the grant of 1,250,000 stock options to an officer and certain employees, and the vesting of stock options of certain employees. In YTD 2021, the Company recorded$1,057,013 in stock-based compensation on stock options granted to certain directors, officers, employees and consultants. This resulted in a non-cash variance of$590,645 between the two reporting periods. The adoption of our 2021 Equity Incentive Plan which was approved by our shareholders during Fiscal 2021 is intended to promote our long-term financial interests and growth by attracting and retaining management and other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of our business. Moreover, our 2021 Equity Incentive Plan aims to align the interests of eligible participants with those of our shareholders through opportunities for increased equity-based
ownership in our company. Other Income (Expense)
Other expense was$5,205,669 for YTD 2022, as compared to$931,106 for YTD 2021. The negative variance of$8,722,328 in other expense was non-cash and was due mainly to the reclassification of warrants and broker warrants as derivative liability and the subsequent fair value re-measurement, and the accounting treatment of its convertible debentures resulted from the Company's functional currency change. The variances were comprised of:
Change in fair value of warrant liability [YTD 2022 - (
OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of its outstanding warrants and broker warrants denominated in Canadian dollar as derivative liability measured at fair value through other income (expense) in the Company's consolidated statements of loss and comprehensive loss at the end of each reporting period. The Company issued common share purchase warrants denominated in Canadian dollar on conversion of theJuly 2021 Convertible Debenture and recognized additional derivative liability of$67,155 in Q3 2022. For YTD 2022, the Company recognized a net non-cash loss of$5,223,759 on reclassification, new recognition and re-measurement of its derivative liability of warrants and broker warrants. There was no warrant liability in YTD 2021.
Change in fair value of derivative liability [YTD 2022 -
OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of theJuly 2021 Convertible Debenture from a convertible debt instrument with a beneficial conversion feature to a hybrid financial instrument comprised of a debt host liability and an embedded derivative liability. The debt host liability of the convertible note will be amortized at cost, with the embedded derivative liability measured at fair value through other income (expense) in the Company's consolidated statements of loss and comprehensive loss at the end of each reporting period. For YTD 2022, the Company recognized a non-cash gain of$359,643 on re-measurement and conversion of itsJuly 2021 Convertible Debenture on its conversion onApril 22, 2021 . For YTD 2021, the Company recognized a non-cash loss$790,197 on re-measurement of itsJuly 2020 Convertible Debenture,June 2021 Convertible Debenture andJuly 2021 Convertible Debenture.
Loss on recognition of debt host liability [YTD 2022 - (
OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of theJuly 2021 Convertible Debenture from a convertible debt instrument with a beneficial conversion feature to a hybrid financial instrument. The embedded derivative liability was valued at$421,095 (CA$529,400) which exceeded the face value of the note itself of$79,542 (CA$100,000), the debt host liability was then assigned a face value of$1 , with an immediate loss of$341,553 (CA$429,400) on recognition of the debt host liability during YTD 2022. On issuance date of theJune 2021 Convertible Debenture in Q3 2021, its embedded derivative liability was valued at$1,646,600 which exceeded the face value of the note itself of$1,500,000 , the fair value of the debt host liability was then determined to be$1 , with an immediate loss of$140,909 on recognition of the debt host liability during YTD 2021. 42
Components of our Results of Operations
Operating Expenses
Operating expenses consist of general and administrative, research and development, business development, stock-based compensation, interest and accretion, and depreciation and amortization.
General and administrative expenses primarily include salaries and benefits, legal and professional fees, consulting, management, travel expenses, investor relations, shareholder communications, regulatory fees, facilities and rent, computer system and software, and office and other general and administrative expenses.
Research and development expenses include engineering expenses which are in relation to the design and modeling of the magnesium pilot plant facility and the magnesium furnace reactor, as well as the commercialization of our technology, and due diligence expenses which pertain to those incurred in the potential acquisition of a smelter site for magnesium metal production.
Business development expenses include expenses in relation to
Stock-based compensation on stock options issued to directors, officers and employees is measured at the fair value on the date of grant and expensed over the vesting period. For stock options issued to consultants, the fair value is periodically re-measured until the counterparty performance is complete.
Interest and accretion relate to convertible debt instruments, right-of-use assets, and other general vendor accounts.
Depreciation and amortization includes recognition of depreciation of property, plant and equipment and right-of-use assets over their depreciable lives.
Other Income (Expense) Other income (expense) consists of non-cash change in fair value of derivative liability of convertible debentures, warrants and broker warrants, and non-cash loss on recognition of debt host liability. Working Capital Deficiency The calculation of working capital deficiency provides additional information and is not defined under GAAP. We define working capital deficiency as current assets less current liabilities. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP. This information is intended to provide investors with information about our liquidity. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure. 43
Liquidity and Capital Resources
As ofJuly 31, 2022 andOctober 31, 2021 , we had total current liabilities of$7,440,511 and$10,891,270 , respectively, and current assets of$798,259 and$1,233,954 , respectively, to meet our current obligations. As ofJuly 31, 2022 , we had a working capital deficiency of$6,642,252 , an increase of working capital of$3,015,064 as compared toOctober 31, 2021 , driven primarily by non-cash items including the reclassification of warrants and broker warrants as derivative liability resulted from the Company's functional currency change and the periodic re-measurement at fair value through other income (expense) in the Company's consolidated statements of loss and comprehensive loss, partly offset by a decrease in derivative liability due to reclassifications of convertible debentures also resulted from the Company's functional currency change. OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of its outstanding warrants and broker warrants denominated in Canadian dollar as derivative liability measured at fair value through other income (expense) at the end of each reporting period. As atJuly 31, 2022 , the derivative liability of warrants and broker warrants were valued at$57,080 (October 31, 2021 - $nil) and $nil (October 31, 2021 - $nil), respectively. OnNovember 1, 2021 , the Company's functional currency change resulted in the reclassification of theJune 2021 Convertible Debenture from a hybrid financial instrument accounted for in accordance with ASU 815-15 to a convertible debt instrument with a beneficial conversion feature accounted for in accordance with ASU 470-20. The value of the embedded derivative liability of$7,449,700 was reclassified to additional paid-in capital. The Company's functional currency change also resulted in the reclassification of theJuly 2021 Convertible Debenture from a convertible debt instrument with a beneficial conversion feature accounted for in accordance with ASU 470-20 to a hybrid financial instrument accounted for in accordance with ASU 815-15. Fair value adjustments were made to the embedded derivative liability of theJuly 2021 Convertible Debenture on conversion date ofApril 22, 2022 , resulting in a value of $nil. We have a history of operating losses. We have not yet achieved profitable operations and expect to incur further losses. We have funded our operations primarily from equity and debt financing. As ofJuly 31, 2022 , cash generated from financing activities was not sufficient to fund operations and, in particular, to fund our growth strategy in the short-term or long-term. As a result, we raised additional funds from equity and debt financing transactions during YTD 2022 and Fiscal 2021 as discussed below under "Recent Financing Transactions." The primary need for liquidity is to fund working capital requirements of the business, including operational and business development expenses, develop and construct our planned research and development pilot magnesium production facility and the capital expenditures associated with that project. The primary source of liquidity has primarily been private financing transactions. The ability to fund operations, to make planned capital expenditures, to execute on the development and operation of our planned research and development pilot facility, to develop a full-scale commercial magnesium production facility and to make scheduled debt and rent payments and to repay or refinance indebtedness depends on our ability to raise funds from debt and/or equity financing which is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. There can be no assurance that additional financing will be available to us when needed or at all, or obtained on commercially reasonable terms acceptable to us. As ofJuly 31, 2022 , there have not been any meaningful impact or disruptions to our operations as a result of the COVID-19 pandemic. We continue to assess the impact of COVID-19 on an ongoing basis. 44 Recent Financing Transactions
OnSeptember 10, 2020 , we announced a non-brokered private placement of up to 53,846,154 units priced atCAD$0.13 per unit (the "Unit") for an aggregate offering of up toCAD$7,000,000 (the "September 2020 Private Placement"). Each Unit is comprised of one share of our common stock and one common share purchase warrant exercisable atCAD$0.19 per share for a period of one year from the date of issuance. OnNovember 20, 2020 , we closed the first tranche of theSeptember 2020 Private Placement of 5,599,171 Units for gross proceeds of$556,876 (CAD$727,892 ). OnJanuary 15, 2021 , we closed the second tranche of theSeptember 2020 Private Placement consisting of 7,337,914 Units for gross proceeds of$749,435 (CAD$953,930 ). OnJanuary 29, 2021 , we closed the third tranche of theSeptember 2020 Private Placement consisting of 5,382,303 Units for gross proceeds of$547,496 (CAD$699,699 ). OnMarch 24, 2021 , we closed the fourth tranche of this offering and issued 6,554,172 Units for gross proceeds of$678,270 (CAD$852,042 ). OnApril 27, 2021 , we closed the fifth and final tranche of this offering and issued 851,395 Units for gross proceeds of$89,237 (CAD$110,681 ). We closed an aggregate 25,724,955 Units for aggregate gross proceeds of$2,621,314 (CAD$3,344,244 ) and incurred aggregate share issue costs of$195,614 in connection to this offering. OnMay 5, 2021 , we announced a non-brokered private placement priced atCAD$0.13 per unit (the "Unit") to raise gross proceeds of up toCAD$3,000,000 (the "May 2021 Private Placement"). Each Unit in this offering consists of one share of our common stock and one common share purchase warrant exercisable at a price ofCAD$0.19 per share for a period of one year from the date of issuance. OnMay 28, 2021 , we closed the first tranche of theMay 2021 Private Placement issuing 5,223,420 Units for gross proceeds of$561,844 (CAD$679,044 ). OnJune 17, 2021 , we closed the second and final tranche of this offering consisting of 17,853,506 Units for gross proceeds of$1,880,687 (CAD$2,320,956 ). We closed at the maximum offering and issued an aggregate 23,076,926 Units for aggregate gross proceeds of$2,442,531 (CAD$3,000,000 ). We incurred aggregate share issue costs of$154,336 in connection with this offering. OnMay 18, 2021 , we issued 1,360,959 common shares on the conversion of theJuly 2020 Convertible Debenture including conversion of accrued interest and 263,973 common shares valued at$26,286 in transaction costs. OnJune 7, 2021 , we received final approval from the TSX-V for an agreement withIndustrial Surplus Supplies Ltd. ("ISL"), pursuant to which ISL will build a prototype internally heated testing lab furnace for the testing of a magnesium production process. We issued 1,538,461 common shares at a price ofCAD$0.24 per share with a total fair value of$305,832 (CAD$369,231 ) for equipment. OnJune 15, 2021 , we closed a non-brokered private placement of an unsecured convertible note in the principal amount of$1,500,000 (the "June 2021 Convertible Debenture"). TheJune 2021 Convertible Debenture bears interest at 12% per annum and matures onDecember 10, 2022 . TheJune 2021 Convertible Debenture is convertible into 15,000,000 units, where each unit consists of (I) one share of our common stock, (ii) one-half of one Class A common stock purchase warrant, with each whole warrant being exercisable at a price of$0.13 untilJune 10, 2026 , and (iii) one-half of one Class B common stock purchase warrant, with each whole warrant being exercisable at a price of$0.19 untilJune 10, 2026 (collectively, the "Class A and B Warrants"). In addition, the conversion price for accrued interest is the greater of (i)$0.10 and (ii) the minimum conversion price permitted by theTSX Venture Exchange at the time of conversion (should our common stock then be listed on such exchange). 45 Under the terms of theJune 10, 2021 Securities Purchase Agreement we entered into as part of the offering of theJune 2021 Convertible Debenture (the "2021 Securities Purchase Agreement"), we agreed to use commercially reasonable efforts to file a registration statement with theSEC byAugust 14, 2021 , covering the public resale of the shares of common stock underlying such debenture and, upon its conversion, the Class A and ClassB Warrants issuable upon such conversion (the "Underlying Shares"), and to use our best efforts to cause the registration statement to be declared effective onOctober 13, 2021 . In addition, we agreed to provide the holder to theJune 2021 Convertible Debenture certain piggy-back registration rights if we do not have an effective registration statement covering the Underlying Shares and we propose to file any registration statement under the Securities Act with respect to our common stock. We will pay all costs associated with the registration statements, other than underwriting commissions and discounts. OnDecember 13, 2021 , our Form 10 Registration Statement filed with theSEC was declared effective.
In addition to certain covenants contained in the 2021 Securities Purchase Agreement, the terms of the Convertible Debenture contain certain negative covenants by us, including:
? other than certain permitted indebtedness, enter into, create, incur, assume,
guarantee or suffer to exist any indebtedness for borrowed money of any kind,
including, but not limited to, a guarantee, on or with respect to any of our
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;
? other than certain permitted liens, enter into, create, incur, assume or
suffer to exist any liens of any kind, on or with respect to any of our
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;
? amend our charter documents, including, without limitation, our certificate of
incorporation and bylaws, in any manner that materially adversely affects any
rights of the Convertible Debenture Holder (notwithstanding the foregoing, we
are entitled to proceed with the amendments to the charter documents as set
out in our proxy materials for our shareholder meeting to be held in 2021);
? repay, repurchase or offer to repay, repurchase or otherwise acquire more than
a de minimis number of shares of our common stock or common stock equivalents
other than as to the Underlying Shares;
? redeem, defease, repurchase, repay or make any payments in respect of, by the
payment of cash or cash equivalents (in whole or in part, whether by way of
open market purchases, tender offers, private transactions or otherwise), all
or any portion of any of our indebtedness (other than the Convertible
Debentures if on a pro-rata basis), whether by way of payment in respect of
principal of (or premium, if any) or interest on, such indebtedness, in any
case unless such indebtedness or interest is due and payable in accordance
with the initial terms of such debt prior to any default thereunder;
? declare or make any dividend or other distribution of our assets or rights to
acquire our assets to holders of shares of our common stock, preferred stock,
or any other equity security by way of return of capital or otherwise
including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction;
? sell or offer to sell any securities with non-fixed or floating price
features, issue any common stock or common stock equivalents at a price lower
than the conversion price herein then in effect, or issue any equity or debt
instruments with anti-dilution provisions; or
? enter into any agreement with respect to any of the foregoing.
46
In the event we issue or sell any common stock or common stock equivalents with terms that the purchaser then holding outstandingJune 2021 Convertible Debenture (the "Convertible Debenture Holder") or the Class A and B Warrants reasonably believes are more favorable to such holder than are the terms of theJune 2021 Convertible Debenture or the Class A and B Warrants (the "MFN Securities "), then upon notice to us by such holder within five trading days after notice to such holder by us, we will use commercially reasonable efforts to obtain the approval of the TSX-V and any additional required regulatory approval to amend the terms of theJune 2021 Convertible Debenture or the Class A and B Warrants as required, as the case may be, so as to give such holder the benefit of such more favorable terms or conditions. If we fail to obtain such regulatory approvals and the approval of the TSX-V, then absent such approval we are forbidden to issue theMFN Securities .
The conversion price of the
In addition, if, at any time while theJune 2021 Convertible Debenture is outstanding, we, directly or indirectly, effect any merger or consolidation of our company with or into another person or engage in a "Fundamental Transaction" as defined in theJune 2021 Convertible Debenture, the Convertible Debenture Holder shall have the right to receive, for each conversion share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the number of shares of our Common Stock of the successor or acquiring corporation or us, if we are the surviving corporation, and any additional consideration (the "Alternate Consideration") receivable as a result of such Fundamental Transaction by a holder of the number of shares of our Common Stock for which theJune 2021 Convertible Debenture is convertible immediately prior to such Fundamental Transaction. In addition, the conversion price will be subject to certain adjustments so that the economic value of such shares and such conversion price are protected and which is reasonably satisfactory in form and substance to the Convertible Debenture Holder. Alternatively, the Convertible Debenture Holder may demand that we redeem theJune 2021 Convertible Debenture at a rate equal to 125% of the principal and interest due thereon, to be paid in full contemporaneously with consummation of the Fundamental Transaction. We granted the investors certain rights of first refusal on our future offerings for so long as theJune 2021 Convertible Debenture or the Class A and B Warrants are outstanding.
We may prepay and satisfy theJune 2021 Convertible Debenture so long as an event of default has not occurred, upon 20 days' prior written notice received by us to the holder, by paying 125% of the amounts owed on theJune 2021 Convertible Debenture, including all principal, interest and other fees. The holder of this debenture may, however, convert all or a portion of the debenture during the 20 day notice period. TheJune 2021 Convertible Debenture is not exercisable if the number of shares to be issued to the holder upon such exercise, together with all other shares then owned by the holder and our affiliates, would result in the holder beneficially owning more than 9.99% of our outstanding common stock. The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to us. Class A and ClassB Warrants Upon conversion of theJune 2021 Convertible Debenture, we will issue the Class A and B Warrants. The holders may exercise the Class A and B Warrants on a cashless basis at any time that there is not an effective registration statement covering the underlying shares of common stock and the volume weighted average price of our common stock is greater than the exercise price at the time of exercise. The Class A and ClassB Warrants are not exercisable, however, if the number of shares to be issued to the holder upon such exercise, together with all other shares then owned by the holder and our affiliates, would result in the holder beneficially owning more than 9.99% of our outstanding common stock. The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to us. 47 The exercise price of the Class A and ClassB Warrants is subject to proportional adjustment in the event of stock splits, recapitalizations and similar corporate events. In addition, the exercise price are each subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the exercise price then in effect, or issue options, warrants or other securities convertible or exchange for shares of our common stock at an exercise price less than the exercise price then in effect. If any of these events should occur, the exercise price each will be reduced to the lowest price at which these securities were issued or are exercisable. In addition, if, at any time while the Class A and ClassB Warrants are outstanding, we engage in a Fundamental Transaction, the exercise price thereof is subject to adjustment similar to the adjustment as provided for in theJune 2021 Convertible Debenture. In addition, we may not enter into a Fundamental Transaction unless the holders of our common stock receive securities of an entity that is listed on a stock exchange inCanada orthe United States , or cash, equal to the Black Scholes value of the remaining unexercised portion of the Class A and ClassB Warrants on the date of the consummation of such Fundamental Transaction. OnJuly 15, 2021 , we closed a non-brokered private placement of an unsecured convertible note in the principal amount of$79,542 (CAD$100,000 , the "July 2021 Convertible Debenture"). The note bears interest at 12% per annum and is due on the date that is one year following the closing date. The note is convertible into common shares of the Company at the price ofCAD$0.12 per share and will have warrants exercisable for a price ofCAD$0.20 for a period of two years. Any accrued but unpaid interest will be payable on the earlier of the maturity date and the date of conversion in cash or common shares. No finder's fees were paid in connection with this offering. OnJuly 16, 2021 , we closed a non-brokered private placement and issued 4,350,000 units at a price ofCAD$0.20 per unit (the "Unit") for gross proceeds of$690,860 (CAD$870,000 , the "July 2021 Private Placement"). Each Unit in this offering consists of one share of our common stock and one common share purchase warrant exercisable at a price ofCAD$0.30 per share for a period of one year from the date of issuance. We incurred aggregate share issue costs of$48,319 in connection with this offering. OnAugust 11, 2021 , we closed a non-brokered private placement and issued 3,827,601 units at a price ofCAD$0.55 ($0.44 ) per unit (the "Unit") for gross proceeds of$1,683,336 (CAD$2,105,180 , the "August 2021 Private Placement"). Each Unit in this offering consists of one share of our common stock and one common share purchase warrant exercisable at a price ofCAD$0.65 ($0.52 ) per share for a period of eighteen months from the date of issuance. We incurred aggregate share issue costs of$124,923 , and an additional$8,444 in the following fiscal year, in connection with this offering. During the fiscal year endedOctober 31, 2021 , upon the exercise of common share purchase warrants we issued an aggregate 1,964,901 common shares at a price ofCAD$0.05 per share for gross proceeds of$77,896 (CAD$98,245 ), an aggregate 1,931,450 common shares at a price ofCAD$0.19 per share for gross proceeds of$292,890 (CAD$366,976 ), and an aggregate 3,118,618 common shares at a price ofCAD$0.21 per share for gross proceeds of$516,735 (CAD$654,910 ). Upon exercise,$4,291 (CAD$5,333 ) previously recorded in additional paid-in capital was reclassified to share capital. 48 During the fiscal year endedOctober 31, 2021 , upon the exercise of stock options we issued an aggregate 2,000,000 common shares at a price ofCAD$0.05 per share for gross proceeds of$80,058 (CAD$100,000 ), an aggregate 200,000 common shares at a price ofCAD$0.11 per share for gross proceeds of$17,456 (CAD$22,000 ), an aggregate 300,000 common shares at a price ofCAD$0.12 per share for gross proceeds of$29,096 (CAD$36,000 ), an aggregate 100,000 common shares at a price ofCAD$0.13 per share for gross proceeds of$10,315 (CAD$13,000 ), and an aggregate 30,000 common shares at a price ofCAD$0.16 per share for gross proceeds of$3,809 (CAD$4,800 ). Upon exercise,$121,932 (CAD$152,218 ) previously recorded in additional paid-in capital was reclassified to share capital.
Pursuant to an agreement entered onAugust 29, 2018 and which was approved by the TSX-V onSeptember 12, 2018 , a company controlled bySam Ataya , a director and officer of our Company, is eligible to receive up to 5% of the issued and outstanding common shares of the Company as atAugust 28, 2018 for up to$5 million raised. The agreement was amended onJanuary 2, 2019 , extending the term from six months to three years and six months. During the fiscal year endedOctober 31, 2021 , the commitment was met. OnNovember 3, 2021 , the Company issued 9,163,425 common shares at a price ofCAD$0.65 per share for a fair value of$4,796,832 (CAD$5,956,226 ) as share issue costs. OnNovember 4, 2021 , we issued 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . OnDecember 13, 2021 , we issued 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . OnJanuary 20, 2022 , we issued a further 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . Each Class A Warrant is exercisable at a price of$0.13 untilJune 10, 2026 and each ClassB Warrant is exercisable at a price of$0.19 untilJune 10, 2026 . We incurred aggregate share issue costs of$1,361 . OnNovember 26, 2021 , we closed a non-brokered private placement and issued 1,375,499 units at a price of$0.55 per unit (the "Unit") for gross proceeds of$756,524 (the "November 2021 Private Placement"). Each Unit in this offering consists of one share of our common stock and one common share purchase warrant exercisable at a price of$0.75 per share for a period of one year from the date of issuance. We incurred aggregate share issue costs of$26,656 in connection with this offering.
During the three months endedJanuary 31, 2022 , upon the exercise of common share purchase warrants we issued an aggregate 15,159,448 common shares at a price ofCAD$0.19 per share for gross proceeds of$2,279,136 (CAD$2,880,295 ), 200,000 common shares at a price ofCAD$0.05 per share for gross proceeds of$7,830 (CAD$10,000 ), and 30,000 common shares at a price ofCAD$0.30 per share for gross proceeds of$6,981 (CAD$9,000 ). We issued a total of 15,389,448 common shares for gross proceeds of$2,293,946 (CAD$2,899,295 ). A total of 2,428,363 warrants expired unexercised. OnMarch 10, 2022 , we issued 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . OnApril 27, 2022 , we issued a further 2,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 2,000,000 common shares, 1,000,000 Class A Warrants and 1,000,000 ClassB Warrants . Each Class A Warrant is exercisable at a price of$0.13 untilJune 10, 2026 and each ClassB Warrant is exercisable at a price of$0.19 untilJune 10, 2026 . OnApril 14, 2022 , we entered into a securities purchase agreement (the "2022 Securities Purchase Agreement") and closed a non-brokered private placement of an unsecured convertible note in the principal amount of$2,000,000 (the "April 2022 Convertible Debenture"). The note bears interest at 15% per annum and matures onOctober 14, 2023 . TheApril 2022 Convertible Debenture is convertible into 6,666,667 units, where each unit consists of one share of the Company' common stock and one common stock purchase warrant exercisable at a price of$0.40 per share for a period of five years from the date of issuance. 49 TheApril 2022 Convertible Debenture may not be prepaid prior to maturity and contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the 2022 Securities Purchase Agreement or theApril 2022 Convertible Debenture. In event of default under theApril 2022 Convertible Debenture, the interest rate shall increase to the lesser of 20% per annum or the maximum rate permitted under applicable law until paid and the following "Mandatory Default Amount" shall be paid, if demanded by the purchaser: the sum of (a) the greater of (i) the outstanding principal amount of theApril 2022 Convertible Debenture divided by the conversion price on the date the Mandatory Default Amount is either (A) demanded (if demand or notice is required to create an event of default) or otherwise due or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded, (y) due, or (z) paid in full, whichever is highest, or (ii) 125% of the outstanding principal amount of theApril 2022 Convertible Debenture plus (b) all other amounts, costs, expenses and liquidated damages due in respect of theApril 2022 Convertible Debenture. Pursuant to the terms of the 2022 Securities Purchase Agreement, we also entered into a registration rights agreement datedApril 14, 2022 (the "2022 Registration Rights Agreement"). Pursuant to the terms of the 2022 Registration Rights Agreement, we agreed to prepare and file with theSEC a registration statement covering the resale of all shares issued or issuable upon conversion of theApril 2022 Convertible Debenture, upon exercise of the respective warrants of theApril 2022 Convertible Debenture, upon conversion of theJune 2021 Debenture, and upon exercise of the respective warrants of theJune 2021 Convertible Debenture. We agreed to file the registration statement with theSEC within 30 days followingApril 14, 2022 and to use best efforts to have the registration statement declared effective by theSEC within 60 days followingApril 14, 2022 if theSEC does not review it or byAugust 12, 2022 if theSEC reviews it. In the event we fail to file the registration statement or such registration statement is not declared effective within the time periods noted above or such registration statement is not kept effective while any of the securities registered pursuant to such registration statement, we will be obligated to pay the holder of the debentures a penalty in cash, in the amount of$20,000 on the date of such failure and on the 30th day of each month following such failure. The 2022 Registration Rights Agreement contains customary indemnification provisions. OnMay 25, 2022 , we filed a Form S-1 Registration Statement with theSEC . OnJuly 12, 2022 , the Company's Form S-1 Registration Statement filed with theSEC was declared effective. OnApril 22, 2022 , we issued a total of 933,333 common shares and 933,333 common share purchase warrants exercisable at a price ofCAD$0.20 for a period of two years on the conversion theJuly 2021 Convertible Debenture includingCAD$100,000 principal amount andCAD$12,000 accrued interest. During the three months endedApril 30, 2022 , upon the exercise of common share purchase warrants, we issued an aggregate 929,005 common shares at a price ofCAD$0.19 per share for gross proceeds of$929,005 (CAD$1,177,755 ), 2,082,025 common shares at a price ofCAD$0.05 per share for gross proceeds of$81,354 (CAD$104,101 ), and 30,960 common shares at a price ofCAD$0.30 per share for gross proceeds of$7,357 (CAD$9,288 ). A total of 3,191,933 warrants and 40,000 broker warrants expired unexercised. 50
During the three months endedApril 30, 2022 , we issued a total of 750,000 common shares on the exercise of stock options at a price ofCAD$0.05 per share for gross of$29,715 (CAD$37,500 ). Upon exercise,$22,203 previously recorded in additional paid-in capital was reclassified to share capital. OnApril 18, 2022 , we announced a non-brokered private placement priced at$0.25 per unit (the "Unit") to raise gross proceeds of up to$3,000,000 (the "April 2022 Private Placement"). Each Unit in this offering consists of one share of our common stock and one common share purchase warrant exercisable at a price of$0.45 per share for a period of one year from the date of issuance. OnMay 9, 2022 , we closed the first tranche of theApril 2022 Private Placement issuing 1,727,000 Units for gross proceeds of$431,750 . OnJune 3, 2022 , we closed the second and final tranche of this offering consisting of 740,000 Units for gross proceeds of$185,000 . We issued an aggregate 2,467,000 Units for aggregate gross proceeds of$616,750 . We incurred aggregate share issue costs of$23,182 in connection with this offering. OnJune 8, 2022 , we issued 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . OnJuly 13, 2022 , we issued a further 1,000,000 units on partial conversion of theJune 2021 Convertible Debenture, for a total of 1,000,000 common shares, 500,000 Class A Warrants and 500,000 ClassB Warrants . Each Class A Warrant is exercisable at a price of$0.13 untilJune 10, 2026 and each ClassB Warrant is exercisable at a price of$0.19 untilJune 10, 2026 . During the three months endedJuly 31, 2022 , upon the exercise of common share purchase warrants, we issued an aggregate 8,131,975 common shares at a price of CA$0.19 per share for gross proceeds of$1,205,077 (CA$1,545,075) and 800,000 common shares at a price of CA$0.05 per share for gross proceeds of$31,051 (CA$40,000). A total of 17,414,239 warrants and 13,725 broker warrants expired unexercised. During the three months endedJuly 31, 2022 , upon the exercise of stock options, we issued an aggregate 250,000 common shares at a price of CA$0.13 per share for gross proceeds of$25,340 (CA$32,500), 150,000 common shares at a price of CA$0.12 per share for gross proceeds of$13,853 (CA$18,000) and 600,000 common shares at a price of CA$0.05 per share for gross proceeds of$23,272 (CA$30,000). Upon exercise,$48,060 previously recorded in additional paid-in capital was reclassified to share capital. Cash Flows
Cash Used in Operating Activities
Net cash used in operating activities for the nine months endedJuly 31, 2022 and 2021, were as follows: Nine Months EndedJuly 31, 2022 2021 $ $
51
Cash Used in Investing Activities
Net cash used in investing activities for the nine months endedJuly 31, 2022 and 2021, were as follows: Nine Months EndedJuly 31, 2022 2021 $ $
Cash Flow from Financing Activities
Net cash provided by financing activities for the six months endedJuly 31, 2022 and 2021, were as follows: Nine Months EndedJuly 31, 2022 2021 $ $
Net Cash Provided by Financing Activities 7,800,103 6,133,785
Off-Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources. Contractual Obligations
As of
Payments Due by Period
Less than 1 1 - 3 3 - 5 More than 5
Total Year Years Years Years
$ $ $ $ $Lease obligations - premises 588,939 344,839 244,100
- -
Lease obligations - machines 22,222 13,781 7,886 555 -
Debt and interest obligations 3,345,929 895,518 2,450,411 - -
Total 3,957,090 1,254,138 2,702,397 555 -
Real Estate Option Agreement
Effective as ofAugust 4, 2021 , we entered into a Real Estate Option Agreement (the "Option") withHarrison County Community Improvement Corporation , an unrelated party (the "Seller"), to purchase a parcel of land comprising approximately 122 acres in theVillage of Cadiz ,Harrison County, Ohio (the "Property"). We are entitled to exercise the Option at any time up until its expiration onAugust 3, 2023 . The Option contains covenants, representations and warranties that are customary of real estate purchase and sale agreements including, but not limited to, completion of title work and a survey of the Property, an environmental audit, an engineering feasibility study of the Property, availability of certain utilities, obtaining permits, approval of the Option by our Board of Directors, our exercise of the Option and obtaining certain state and local economic incentives and tax abatements. 52
Transactions with Related Parties
Deposits held by related parties
Included in our current assets are the following amounts due from related
parties:
As of As of
July 31, 2022 October 31, 2021
$ $
Deposits held by a director and officer 349,338 291,481
Deposits held by an officer -
194,981
Deposits held by related parties 349,338 486,462
Due to related parties
Included in our current liabilities are the following amounts due to related
parties:
As of As of
July 31, 2022 October 31, 2021
$ $Wages payable to directors and officers 505,544
357,500
Benefits payable to directors and officers 725,261
539,209
Fees and expenses payable to directors and officers 290,029
127,878
Interest due to a shareholder - 2,230
Total due to related parties 1,520,834 1,026,817
Leases
We have entered into a sublease agreement with a company controlled bySam Ataya , a director and officer of our Company, for our Canadian office at580 Hornby Street , Suite 900,Vancouver, British Columbia , Canada V6C 3B6. The lease had a two-year term fromApril 1, 2021 toMarch 31, 2023 and required a monthly payment ofCAD$9,794 for a total ofCAD$235,056 . Scope of Work Agreement
Pursuant to an agreement entered onAugust 29, 2018 and which was approved by the TSX-V onSeptember 12, 2018 , a company controlled bySam Ataya , a director and officer of our Company, is eligible to receive up to 5% of the issued and outstanding common shares of the Company as atAugust 28, 2018 for up to$5 million raised. The agreement was amended onJanuary 2, 2019 , extending the term from six months to three years and six months. During Fiscal 2021, the commitment was met. OnNovember 3, 2021 , the Company issued 9,163,425 common shares at a price ofCAD$0.65 per share for a fair value of$4,796,832 (CAD$5,956,226 ) as share issue costs. 53
Recent Accounting Pronouncements
The following GAAP standards have been recently issued by theFinancial Accounting Standards Board (the "FASB"). We are assessing the impact of these new standards on our consolidated financial statements. We have elected to take advantage of the extended transition period allowed for emerging growth companies for complying with new or revised accounting guidance as allowed by Section 107 of the JOBS Act and Section 7(a)(2)(B) of the Securities Act. Pronouncements that are not applicable or where it has been determined do not have a significant impact on us have been excluded herein.
(i) In
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). ASU 2016-13 requires the measurement of current expected
credit losses for financial assets held at the reporting date based on
historical experience, current conditions and reasonable and supportable
forecasts. Adoption of ASU 2016-13 will require financial institutions and
other organizations to use forward-looking information to better formulate
their credit loss estimates. In addition, the ASU amends the accounting for
credit losses on available for sale debt securities and purchased financial
assets with credit deterioration. In
Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief
("ASU 2019-05"), which provides transition relief to entities adopting ASU
2016-13. As smaller reporting companies as defined by the
are effective for fiscal years beginning after
periods within those fiscal years, with early adoption permitted. The Company
is currently evaluating the effect of adoption of these updates on its
Financial Statements.
(ii) In
820): Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 adds, modifies, andremoves certain fair value measurement disclosure requirements. ASU 2018-13
is effective for fiscal years beginning after
interim periods within those fiscal years, with early adoption permitted.
Effective
no material impact or adjustment to its Financial Statements.
(iii) In
Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is
intended to simplify various aspects related to accounting for income
taxes. ASU 2019-12 removes certain exceptions to the general principles in
Topic 740 and also clarifies and amends existing guidance to improve
consistent application. ASU 2019-12 is effective for fiscal years beginning
after
with early adoption permitted. Effective
adopted the new standard. There was no material impact or adjustment to its
Financial Statements.
(iv) In
and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts
in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). ASU 2020-06
eliminates the beneficial conversion and cash conversion accounting models
for convertible instruments and supersedes the respective guidance within
ASC 470-20 and ASC 740-10-55-51, which will result in more instruments to
be accounted for as a single instrument rather than having their proceeds
allocated between liability and equity accounting units. As smaller
reporting companies as defined by the
Commission (the "SEC"), ASU 2020-06 is effective for fiscal years beginning
after
with early adoption permitted. The Company is currently evaluating the
effect of adopting these updates on its Financial Statements.
54
Critical Accounting Estimates
The preparation of our consolidated financial statements requires management to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in our consolidated financial statements are described below. Functional Currency
The functional currency of each entity of the Company is as follows:
Entity Functional CurrencyWestern Magnesium Corporation United States dollarsWestern Magnesium Corp. United States dollars
Western Magnesium Canada Corporation Canadian dollars ("CA$")
Significant changes in economic facts and circumstances have occurred inWestern Magnesium Corporation's operations which resulted in the change of its functional currency tothe United States dollar from the Canadian dollar effectiveNovember 1, 2021 . For both monetary and non-monetary assets and liabilities, translated balances at the end of the prior period become the new accounting basis. The rate on the date of change becomes the historical rate at which non-monetary assets and liabilities are translated in subsequent years. There is no effect on the cumulative translation adjustment on the consolidated basis. Previously recorded cumulative translation adjustments are not reversed. Effects of change in functional currency included the reclassifications of convertible debentures and warrants and broker warrants.
Estimated Useful Lives of Property Plant and Equipment
Depreciation of property, plant and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that consider factors such as economic and market conditions and the useful lives of assets.
Estimated Useful Lives of and Amortization of Intangible Assets
Amortization of intangible assets is recorded over their estimated useful lives which do not exceed any contractual periods, if any. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Consolidation Judgment is applied in assessing whether we exercise control and have significant influence over entities in which we directly or indirectly own an interest. We have control when we have the power over the subsidiary, have exposure or rights to variable returns, and have the ability to use our power to affect the returns. Significant influence is defined as the power to participate in the financial and operating decisions of the subsidiaries. Where we are determined to have control, these entities are consolidated. Additionally, judgment is applied in determining the effective date on which control was
obtained. 55 Stock-Based Compensation Valuation of stock-based compensation and warrants requires management to make estimates regarding the inputs for option pricing models, such as the expected life of the option, the volatility of our stock price, the vesting period of the option and the risk-free interest rate are used. Actual results could differ from those estimates. The estimates are considered for each new grant of stock options or warrants. Leases
We use the following policies to evaluate our leases:
Determining a lease: At contract inception, we review the facts and circumstances of the arrangement to determine if the contract is or contains a lease. We follow the guidance in ASU 2016-02, Leases (Topic 842), ASU 2018-11, Leases (Topic 842): Targeted Improvements, and ASU 2019-01, Leases (Topic 842): Codification Improvements to evaluate if:
? the contract has an identified asset;
? we have the right to obtain substantially all economic benefits from the
asset; and
? we have the right to direct the use of the underlying asset.
When determining if a contract has an identified asset, we consider both
explicit and implicit assets, and whether the vendor has the right to substitute
the asset. When determining if we have the right to direct the use of an
underlying asset, we consider if we have the right to direct how and for what
purpose the asset is used throughout the period of use and if we control the
decision-making rights over the asset.
Discount rate: At commencement, lease-related assets and liabilities are
measured at the present value of future lease payments over the lease term using
an incremental borrowing rate. As most of our leases do not provide an implicit
rate, we exercise judgment in determining the incremental borrowing rate based
on information available at the time the lease commences.
Rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses. We assess each contract individually and apply appropriate payments based on the terms of the agreement.
Renewal, purchase and termination options: Our lease terms may include options to extend or terminate the lease. We exercise judgment in determining the term of these leases when extension or termination options are present and include such options in the calculation of the lease terms when it is reasonably certain that we will exercise these options. Recognizing leases: We do not recognize leases with a contractual term of less than 12 months or low value leases on our financial statements. Lease payments are expensed on a straight-line basis over the lease terms.
Residual value guarantees, restrictions or covenants: Our lease agreements do not contain residual value guarantees, restrictions or covenants.
56
Other Estimates and Assumptions
Other estimates and assumptions where there are potential risk of material adjustments to assets and liabilities in future accounting periods include the recoverability of the carrying value of exploration and evaluation assets, fair value measurements for financial instruments, the recoverability and measurement of deferred tax assets and liabilities and contingent liabilities. Significant Judgments
The most significant judgments, apart from those involving estimates, in applying accounting policies in our consolidated financial statements include:
? the assessment of the Company's ability to continue as a going concern and
whether there are events or conditions that may give rise to substantial
doubt;
? whether there are indicators of impairment of the Company's exploration and
evaluation assets and other non-current assets;
? the classification of financial instruments; and
? determination of functional currency.
Financial Instruments and Financial Risk Management
Our financial instruments consist of cash, other receivables, deposits held by related parties, accounts payable, due to related parties, convertible debenture, and derivative liability.
The fair value of financial instruments is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of current financial instruments approximates their carrying values as long as they are short-term in nature or bear interest at market rates.
Financial instruments recorded at fair value are classified using a fair value hierarchy that prioritizes inputs used in determining the fair value and depending on the extent to which they are observable. The three levels of hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. from derived prices); and
Level 3 - Inputs for the asset or liability that are not based on observable market data.
There were no transfers between the levels during the reporting periods.
Financial Risk Management The Company's board of directors has the overall responsibility for the establishment and oversight of the Company's risk management framework. The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in response to the Company's activities. Management regularly monitors compliance with the Company's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. 57
In the normal course of operations, the Company is exposed to various risks such as interest rate, foreign exchange, commodity, credit, and liquidity. To manage these risks, management determines what activities must be undertaken to minimize potential exposure to risks. The objectives of the Company in managing risks are as follows: ? Maintaining sound financial condition; ? Financing operations; and ? Ensuring liquidity to all operations.
In order to satisfy these objectives, the Company has adopted the following policies:
? Recognize and observe the extent of operating risk within the business; and
? Identify the magnitude of the impact of market risk factors on the overall
risk of the business and take advantage of natural risk reductions that arise
from these relationships.
There have been no changes in risks that have arisen or how the Company manages
those risks during the nine months ended
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