MMEX Resources Corp: Form 10-Q for the period ended Jan 31, 2021

The following discussion and analysis constitute forward-looking statements for purposes of the Securities Act and the Exchange Act and as such involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words "expect", "estimate", "anticipate", "predict", "believes", "plan", "seek", "objective" and similar expressions are intended to identify forward-looking statements or elsewhere in this report. Important factors that could cause our actual results, performance or achievement to differ materially from our expectations are discussed in detail in Item 1 above. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by such factors. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Notwithstanding the foregoing, we are not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the Exchange Act as long as our stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto.

Overview

Business Plan

MMEX Resources Corporation was formed as a Nevada corporation in 2005. The current management team lead an acquisition of the Company (then named Management Energy, Inc.) through a reverse merger completed in 2010 and thereafter changed the Company’s name to MMEX Mining Corporation. In 2016, the Company changed its name to MMEX Resources Corporation to reflect the change in its business plan to an energy focus in the Americas.

The Company is a development-stage company focusing on the acquisition, development and financing of oil, gas, refining and infrastructure projects in Texas and South America, recently announcing it intends to develop solar energy to power multiple planned projects producing hydrogen and ultra-low sulfur fuels combined with carbon dioxide (CO2) capture in Texas.

Current Business Operations and Strategy

Since 2016, the focus of our business plan was to build crude oil distillation units and refining facilities (“CDU’s”) in the Permian Basin in West Texas.

The Company has revised its business plan moving MMEX to clean energy use and production. The Company plans to contribute to the clean energy solution by providing solar power to produce hydrogen with carbon capture, and for the transition to the hydrogen economy by producing hydrogen along with ultra-low sulfur transportation fuels in the interim.

MMEX has entered preliminary understandings with third parties to develop potentially two separate technologies - one utilizing natural gas and the other using the Permian light crudes and condensates. The Company is negotiating with a European co-developer partner to develop and finance a hydrogen and gas to liquids project at the MMEX Pecos County, Texas site to produce hydrogen, ultra-low sulfur diesel and gasoline with carbon capture and storage employing steam methane reformer technology with the abundant natural gas supplies in the immediate area as the feedstock.

29

Table of Contents

Additionally, MMEX is in discussions regarding a second parallel plant in Pecos County with a separate technology provider, to utilize the light crude oil and condensates from the Permian Basin to produce finished products of ultra-low sulfur diesel, renewable diesel and gasoline.

Completion of these projects will require substantial financial resources. In addition, there are licensing and permitting requirements that must be obtained to complete the projects. There is no assurance that MMEX will be successful in securing such resources. If these resources are secured, the construction timeline from the date of financing for each individual project is estimated to be 15 to 18 months before reaching commercial operation for each project.

Through January 31, 2021, we have had no revenues and have reported continuing losses from operations.

Results of Operations

Revenues

We have not yet begun to generate revenues.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses decreased to $183,325 for the three months ended January 31, 2021 from $191,236 for the three months ended January 31, 2020 and decreased to $553,356 for the nine months ended January 31, 2020 from $736,655 for the nine months ended January 31, 2020. The decreases resulted from lower salaries, travel and other expenses associated with securing debt financing and administrative activities of our refinery project due to limitations on funding during the current fiscal year.

Refinery Start-Up Costs

Our refinery start-up costs decreased to $37,700 for the three months ended January 31, 2021 from $43,467 for the three months ended January 31, 2020 and decreased to $128,385 for the nine months ended January 31, 2021 from $182,406 for the nine months ended January 31, 2020. We expense the direct costs incurred prior to opening our proposed crude oil refinery in Pecos County, Texas, including acquisition of refinery rights, planning, design and permitting. The decreases resulted in reduced levels due to financing constraints. The levels of spending on the development of our refinery will vary from period to period based on availability of financing.

Depreciation and Amortization Expense

Our depreciation and amortization expense results from the depreciation of refinery land improvements and amortization of refinery land easements and totaled to $8,718 for the three months ended January 31, 2021 and 2020, and $26,156 and $25,943 for the nine months ended January 31, 2021 and 2020, respectively.

30

Table of Contents

Other Income (Expense)

Our interest expense includes interest accrued on debt, amortization of debt discount and penalties assessed on debt. Interest expense totaled $206,522 and $245,823 for the three months ended January 31, 2021 and 2020, respectively, and $931,665 and $1,468,027 for the nine months ended January 31, 2021 and 2020, respectively. The decreases in interest expense are due to a lower level of new non-related party convertible debt in the current fiscal year, resulting in less amortization of debt discount to interest expense and, to a lesser extent, reduced debt through conversions to common stock, partially offset by an increase in loan penalties.

We reported losses on derivative liabilities of $69,837 and $800,734 for the three months ended January 31, 2021 and 2020, respectively, and $961,778 for the nine months ended January 31, 2020. We reported a gain on derivative liabilities of $1,219,856 for the nine months ended January 31, 2021. We have identified the variable conversion feature of certain convertible notes payable as derivatives. We estimate the fair value of the derivatives using multinomial lattice models that value the warrants based on a probability weighted cash flow model using projections of the various potential outcomes. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility and management’s estimates of various potential equity financing transactions. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

We reported gains on extinguishment of liabilities of $6,563 and $8,555 for the three months and nine months ended January 2020, respectively, related to the issuance of our common shares in payment of accrued expenses. Where shares of our common stock are issued in extinguishment of liabilities, we record the value of the shares issued at the current market price, which at times may differ from the book value of the debt, resulting in a gain or loss on extinguishment of liabilities. We reported no gain or loss on extinguishment of liabilities for the three months and six months ended January 31, 2021.

Net Loss

As a result of the above, we reported net losses of $506,102 and $1,283,415 for the three months ended January 31, 2021 and 2020, respectively, and net losses of $419,706 and $3,366,254 for the nine months ended January 31, 2021 and 2020, respectively.

Non-Controlling Interest in Income of Consolidated Subsidiaries

Currently, we have no activity in our consolidated subsidiaries. Non-controlling interest in income of consolidated subsidiaries was $0 for all periods presented

Net Loss Attributable to the Company

Because we had no non-controlling interest in income of consolidated subsidiaries, net loss attributed to the Company was the same as net loss.

31

Table of Contents

Liquidity and Capital Resources

Working Capital

As of January 31, 2021, we had current assets of $57,558, comprised of cash, and current liabilities of $6,340,843, resulting in a working capital deficit of $6,283,285. Included in our current liabilities as of January 31, 2021 are derivative liabilities of $1,438,231, which we do not anticipate will require the payment of cash. As further discussed in the notes to our condensed consolidated financial statements, we have substantial debt that is in default. Substantially all convertible debt as of January 31, 2021 is currently redeemable only through conversion to shares of our common stock according to the terms of the underlying debt agreements.

Sources and Uses of Cash

Our sources and uses of cash for the nine months ended January 31, 2021 and 2020 were as follows:

We used net cash of $264,272 in operating activities for the nine months ended January 31, 2021 as a result of our net loss of $419,706 and non-cash gain of $1,219,856, partially offset by non-cash expenses totaling $307,601, decrease in prepaid expenses and other current assets of $23,145, and increases in accounts payable of $138,960, accrued expenses of $620,805 and accounts payable and accrued expenses – related party of $284,779.

We used net cash of $626,903 in operating activities for the nine months ended January 31, 2020 as a result of our net loss of $3,366,254 and non-cash gain of $8,555, partially offset by non-cash expenses totaling $2,239,646, decrease in prepaid expenses and other current assets of $33,400, and increases in accounts payable of $159,084, accrued expenses of $226,372 and accounts payable and accrued expenses – related party of $89,404.

Net cash used in investing activities for the nine months ended January 31, 2020 was $10,540, comprised of the purchase of property and equipment. We had no net cash provided by or used in investing activities for the nine months ended January 31, 2021.

Net cash provided by financing activities for the nine months ended January 31, 2021 was $255,000, comprised of proceeds from convertible notes payable of $75,000, proceeds from convertible notes payable - related party of $20,000, proceeds from PPP loans of $150,000 and proceeds from an SBA express bridge loan of $10,000.

Net cash provided by financing activities for the nine months ended January 31, 2020 was $583,800, comprised of proceeds from convertible notes payable of $365,300 and proceeds from convertible notes payable – related party of $318,500, partially offset by repayments of convertible notes payable of $100,000.

32

Table of Contents

Going Concern Uncertainty

Our financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have incurred continuous losses from operations, have an accumulated deficit of $43,877,513 and a total stockholders’ deficit of $5,801,497 at January 31, 2021, and have reported negative cash flows from operations since inception. In addition, we do not currently have the cash resources to meet our operating commitments for the next twelve months, and we expect to have ongoing requirements for capital investment to implement our business plan. Finally, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which we operate.

Since inception, our operations have primarily been funded through private debt and equity financing, and we expect to continue to seek additional funding through private or public equity and debt financing. The ongoing Covid-19 worldwide pandemic has negatively impacted capital markets adding to the difficulty of raising either debt or equity financing.

Our ability to continue as a going concern is dependent on our ability to generate sufficient cash from operations to meet our cash needs and/or to raise funds to finance ongoing operations and repay debt. However, there can be no assurance that we will be successful in our efforts to raise additional debt or equity capital and/or that our cash generated by our operations will be adequate to meet our needs. These factors, among others, raise substantial doubt that we will be able to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company's ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Capital Resources

We have not generated any revenues or operating cash flows. As a result, we have significant short-term cash needs. Our principal source of operating capital has been provided from the issuance of convertible notes payable and proceeds from two PPP loans. During the nine months ended January 31, 2021 we received net proceeds of $75,000 from the issuance of a convertible note payable, $20,000 from the issuance of a convertible note payable – related party and proceeds from a second PPP loan of $150,000. We also received proceeds from an SBA express bridge loan of $10,000. The total of these amounts of $255,000 is significantly lower than net cash provided by financing activities of $583,800 for the prior year nine-month period.

In December 2020, the maturity date of all GS convertible notes was extended to August 31, 2021, and subsequently on February 22, 2021 the maturity date was extended to December 31, 2021. GS also loaned the Company $80,000, with net proceeds to the Company of $75,000 after an original issue discount of $5,000.

33

Table of Contents

On February 22, 2021, the Company and GS entered into a Sixth Amendment to Promissory Notes pursuant to which:

1. The Company instructed its transfer agent to create an additional reserve of 1.5 billion common shares for issuance upon conversion of outstanding GS convertible notes;

2. GS terminated the prior pledge by Maple and BNL of shares of Series A preferred stock of the Company and instructed its counsel to dismiss with prejudice an outstanding judgment executed by the parties; and

3. The maturity dates of all convertible notes payable to GS were extended to the earlier of (i) December 31, 2021 or (ii) the consummation by the Company of an equity or equity-based financing providing net proceeds to the Company sufficient to retire the outstanding indebtedness of the Company to GS;

Currently, all of our authorized shares of common stock are either issued or reserved for issuance of outstanding warrants, stock options and convertible notes payable. Therefore, no common shares are available for share issuances other than those shares included in the reserves established for debt holders. The lack of authorized shares currently limits our ability to raise capital through convertible debt financing

We have recently revised our business plan moving MMEX to clean energy use and production. The Company plans to contribute to the clean energy solution by providing solar power to produce hydrogen with carbon capture, and for the transition to the hydrogen economy by producing hydrogen along with ultra-low sulfur transportation fuels in the interim.

MMEX has entered preliminary understandings with third parties to develop potentially two separate technologies - one utilizing natural gas and the other using the Permian light crudes and condensates. The Company is negotiating with a European co-developer partner to develop and finance a hydrogen and gas to liquids project at the MMEX Pecos County, Texas site to produce hydrogen, ultra-low sulfur diesel and gasoline with carbon capture and storage employing steam methane reformer technology with the abundant natural gas supplies in the immediate area as the feedstock.

Additionally, MMEX is in discussions regarding a second parallel plant in Pecos County with a separate technology provider, to utilize the light crude oil and condensates from the Permian Basin to produce finished products of ultra-low sulfur diesel, renewable diesel and gasoline.

Completion of these projects will require substantial financial resources. In addition, there are licensing and permitting requirements that must be obtained to complete the projects. There is no assurance that MMEX will be successful in securing such resources. If these resources are secured, the construction timeline from the date of financing for each individual project is estimated to be 15 to 18 months before reaching commercial operation for each project.

Current and Future Impact of Covid-19

The Covid-19 pandemic continues to have a material negative impact on capital markets. Without a current source of revenue, we are currently dependent on debt or equity financing to fund our operations and execute our business plan. We believe that the impact on capital markets of Covid-19 may make it more costly and more difficult for us to access these sources of funding. In April 2020 and January 2021, the Company received loan proceeds of $167,900 and $150,000, respectively, in connection with the Paycheck Protection Program (“PPP”) of the United States Small Business Administration (“SBA”) and the CARES Act implemented in response to the Covid-19 pandemic. The loan may be forgiven pursuant to the provisions of the Act.

34

Table of Contents

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies

Our results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For further information on our significant accounting policies see the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended April 30, 2020 filed with the SEC and Note 2 to our condensed consolidated financial statements included in this quarterly report. There were no changes to our significant accounting policies during the nine months ended January 31, 2021. The following is a description of those significant accounting policies that involve estimates and judgment by management.

Derivative liabilities

The Company has issued warrants and stock options, certain of which contain anti-dilution provisions that have been identified as derivatives. In addition, the Company has identified the conversion feature of convertible notes payable as derivatives. As of January 31, 2021, the number of warrants or common shares to be issued under these agreements is indeterminate; therefore, the Company concluded that the equity environment is tainted and all additional warrants, stock options and convertible debt are included in the value of the derivatives. We estimate the fair value of the derivatives using multinomial lattice models that value the derivative liabilities based on a probability weighted cash flow model using projections of the various potential outcomes. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility and management’s estimates of various potential equity financing transactions. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

Fair value of financial instruments

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and ASC 825, Financial Instruments, the FASB establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, prepaid expense and other current assets, accounts payable, accrued expenses and notes payable reported on the accompanying consolidated balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.

35

Table of Contents

An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value using a hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy prioritized the inputs into three levels that may be used to measure fair value:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in markets that are not active.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Our derivative liabilities are measured at fair value on a recurring basis and estimated as follows:

Our derivative liabilities are measured at fair value on a recurring basis and estimated as follows:

(a) Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Securities Exchange Act”) is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

36

Table of Contents

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our condensed consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended. Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in 2013 Internal Control-Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:

1. As of January 31, 2021, we did not maintain effective controls over the control environment. Specifically, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

2. As of January 31, 2021, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

3. As of January 31, 2021, we did not establish a formal written policy for the approval, identification and authorization of related party transactions.

4. As of January 31, 2021, we had no full-time employees with the requisite expertise in the key functional areas of finance and accounting. As a result, there is a lack of proper segregation of duties necessary to ensure that all transactions are accounted for accurately and in a timely manner.

Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of January 31, 2021, based on the criteria established in "2013 Internal Control-Integrated Framework" issued by the COSO.

(b) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

37

Table of Contents