FORTEM RESOURCES INC. Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements made in this Form 10-Q include statements about: ? our beliefs regarding the future of our competitors; ? our future capital expenditures; ? our future exploration programs and results; and ? our expectation that we will be able to raise capital when we need it.
Assumptions in respect of forward-looking statements have been made regarding, among other things:
? volatility in market prices for oil and natural gas;
? volatility in exchange rates;
? liabilities inherent in oil and natural gas operations;
? changes or fluctuations in production levels;
? unexpected adverse weather conditions;
? stock market volatility and market valuation of our common shares;
? uncertainties associated with estimating oil and natural gas reserves;
? competition for, among other things, capital, acquisitions of reserves,
undeveloped lands and skilled personnel;? incorrect assessments of the value of exploration and development programs;
? geological, technical, drilling, production and processing problems;
? changes in legislation, including changes in tax laws, royalty rates and
incentive programs relating to the oil and natural gas industry; and
? our ability to raise capital.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors" and the risks set out below, any of which may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation:
? we may be unable to raise sufficient funds to execute our business plan;
? we have a limited operating history;
? we are dependent on a small management team;
? we may be unable to manage any growth;
? market conditions or operation impediments may hinder our access to natural
gas and oil markets or delay our production;
? risks inherent in the oil and gas industry;
? competition for, among other things, capital and skilled personnel; and
? other factors discussed under the section entitled "Risk Factors",
any of which may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws ofthe United States andCanada , we do not intend to update any of the forward-looking statements to conform these statements
to actual results. 15
Our financial statements are stated in
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our",
"Company" and "Fortem" mean our company,
Recent Developments
Effective at the opening on
On
OnSeptember 23, 2019 , the Company entered into a non-binding term sheet with an arm's length party (the "Farmee"), pursuant to which the parties agreed to farm-out a portion of the Rolling Rock Property, and to establish a joint venture, subject to the entry of a definitive transaction agreement. Pursuant to the term sheet, the Farmee will commit up to$15,000,000 (the "Commitment Amount") in up to ten tranches (each, a "Tranche") in exchange for a 100% operating interest in certain wells located on the Rolling Rock Property (the "Operating Interest"). Upon full payout of the Commitment Amount, the Company will be entitled to a 20% interest in the income generated from the Farmee's activities, which interest shall be increased to 25% following a 2.0x return of capital of the Farmee's investment (the "Carry Structure"). The Operating Interest will be conveyed to the Farmee upon the execution of the Definitive Agreement for the Obligation Tranche and upon affirmative election by the Farmee to proceed with any Subsequent Tranche. A subsidiary of the Farmee, in collaboration with the Company and Rolling Rock, is anticipated to be the operator upon formation of the joint venture in regards to the participating wells. All costs related to the wellbores subsequent to re-entry, including plugging and abandonment costs, will be borne in proportion to the carry structure at the time of commencement of wellbore operations. No additional midstream fees are to be charged by the Company, Rolling Rock, any related party or affiliate thereof to the Farmee that are in excess of, or including a margin on top of the necessary operating expenses incurred to gather, compress, process, dehydrate, treat, and/or transport gas to sale. The joint venture and all gas produced as a direct result of the Farmee, the Company and Rolling Rock's activities will have primary service that takes precedent over any third party gas produce from the subject wells.
Compeer Oil and Gas Operations
As ofMay 31, 2020 , we have incurred$393,376 in exploration costs to drill, complete and equip the Test Well. We also recorded$32,255 in asset retirement obligations related to the future plugging and abandonment of the Test Well.
As at
Colony Energy OnApril 7, 2017 , we entered into and closed two Membership Interest Purchase Agreements with three vendors to acquire all the membership interests ofColony Energy, LLC ("Colony Energy"), aNevada limited liability company. Colony Energy holds a 100% interest in and to certain petroleum, natural gas and general rights, including Alberta Crown Petroleum and Oil Leases, in 20 contiguous sections totaling 12,960 acres located in the Godin area of northernAlberta . The Company intends to develop theGodin Project in three phases beginning with a four well vertical, followed by a four section pad development of 10 wells per pad/per section. Phase 3 is intended to be the full development of 20 sections. In consideration for the acquisition of Colony Energy, we issued an aggregate of 21,000,000 shares of our common stock to the three vendors on the closing date and agreed to issue an additional 3,000,000 shares on a post-closing basis with 1,000,000 shares to be issued to one of the vendors on the first (issued), second and third anniversaries of the closing date. 16 Colony Energy is a party to a Petroleum, Natural Gas andGeneral Rights Conveyance dated as ofMarch 31, 2017 with an arm's length vendor and the principal shareholder thereof, pursuant to which the vendor is entitled to receive certain milestone payments from Colony Energy in the aggregate amount of up to$210,000 as partial consideration for the original purchase of the oil and gas assets described above. Pursuant to a Milestone Payment Addendum datedApril 7, 2017 , we agreed that if Colony Energy fails to make timely payment of any milestone payment and does not remedy such failure within 30 days after receipt of written notice from the vendor, the vendor may elect to: (i) have Colony Energy re-convey the purchased assets to the vendor; or (ii) receive 250,000 shares of our common stock, with such re-conveyance or issuance of shares to be in full and final satisfaction of all obligations to make any further milestone payment. Black Dragon
OnApril 12 2017 , we entered into and closed a Membership Interest Purchase Agreement (the "Black Dragon MPA") with two vendors to acquire all membership interest ofBlack Dragon Energy, LLC ("Black Dragon"), aNevada limited liability company. Black Dragon has the right to acquire a 75% working interest in and to certain leases, hydrocarbons, wells, agreements, equipment, surface rights agreements and assignable permits totaling approximately 165,000 acres (258 sections) at an 80% net revenue interest located in the Moenkopi formation of the Carbon andEmery Counties,Utah . In consideration for the acquisition of Black Dragon, we issued an aggregate of 20,000,000 shares of our common stock to the two vendors on the closing date and paid$100,000 prior to the closing as a non-refundable deposit. Black Dragon's sole asset consists of the rights and obligations arising from a Purchase and Sale Agreement dated effectiveMarch 1, 2017 (the "Black Dragon PSA") between an arm's length vendor and Black Dragon. OnAugust 17, 2017 , we entered into a first amendment to purchase and sale agreement (the "Black Dragon Amendment"), which amended the terms of the Black Dragon PSA. The Black Dragon Amendment had the effect of postponing certain payments relating to the Moenkopi Formation under the Black Dragon PSA untilDecember 31, 2018 while providing for the flexibility of earlier payments in the discretion of our Company. In consideration for the postponement of such payments, we have agreed to certain additional interim payments and stock consideration as set forth below. Under the Black Dragon Amendment, we agreed to pay the vendor cash consideration totaling$3.9 million (the "Black Dragon Cash Consideration") rather than the originalUS$2.7 million based upon the following revised payment schedule:
?$100,000 as a non-refundable deposit within 10 business days of closing (completed and unchanged); and
? the balance of the Black Dragon Cash Consideration by payment to the vendor of
an amount equal to 12.5% of any funds received by our Company from any equity,
debt or convertible financing thereof (each, a "Financing") upon the closing
of each Financing until such amount is paid. Notwithstanding the foregoing:
(a) the first
payment to the vendor if such amount is received prior to our listing on a
stock exchange; and (b) the full Black Dragon Cash Consideration is required
to be paid in full no later than
Black Dragon Payment Deadline as described below) regardless of the amount of
funds paid in connection with one or more Financings. This change modified the
original requirement to pay
on or before March 1, 2018 and $800,000 on or before September 1, 2018 .
In addition to revising the Black Dragon Cash Consideration as set out above, we
have agreed to: (a) issue 250,000 common shares of the Company to the vendor on
or prior to September 1, 2017 (issued on September 1, 2017 ); and (b) pay the
vendor an additional $25,000 every sixty days commencing September 1, 2017 until
such time as the Black Dragon Cash Consideration is paid in full.
On May 28, 2018 , we entered into a second amendment to purchase and sale
agreement (the "Black Dragon Second Amendment"), which amended the terms of the
Black Dragon PSA. The Black Dragon Second Amendment has the effect of postponing
certain payments relating to the Moenkopi formation under the Black Dragon PSA
until August 1, 2019 , provided that, if the shares of common stock of our
company were not listed on the TSX Venture Exchange on or before August 1, 2018 ,
the payment deadline was to remain December 31, 2018 .
On August 16, 2018 , but effective as of March 1, 2017 , we entered into a third
amendment to purchase and sale agreement (the "Black Dragon Third Amendment"),
which amended the terms of the Black Dragon PSA.
17
On May 16, 2019 , but effective as of March 1, 2017 , we entered into a fourth
amendment to purchase and sale agreement (the "Black Dragon Fourth Amendment"),
which amended the terms of the Black Dragon PSA. The Black Dragon Fourth
Amendment has the effect of postponing certain payments relating to the Moenkopi
formation under the Black Dragon PSA until May 1, 2020 .
In consideration of the various extensions provided for under the Black Dragon
Fourth Amendment, the Company has agreed to issue 300,000 common shares to the
vendor at a deemed price of $1.50 per common share.
On May 22, 2020 , but effective as of March 1, 2017 , we entered into a fifth
amendment to purchase and sale agreement (the "Black Dragon Fifth Amendment"),
which amended the terms of the Black Dragon PSA. The Black Dragon Fifth
Amendment has the effect of postponing certain payments relating to the Moenkopi
formation under the Black Dragon PSA until August 1, 2020 .
On July 18, 2020 , but effective as of March 1, 2017 , we entered into a sixth
amendment to purchase and sale agreement (the "Black Dragon Sixth Amendment"),
which amended the terms of the Black Dragon PSA. The Black Dragon Sixth
Amendment has the effect of:
? postponing payment of the remaining
PSA relating to the Moenkopi Formation until receipt of the proceeds of one or
more financings by the Company, in which case the Company must pay 12.5% of
the proceeds of each financing close until payment in full;
? extending the outside date of full payment of the remaining
? extending the "Obligation Deadline" for drilling obligations to
2020;
? requiring the Company to re-enter and perform workover operations reasonably
aimed at cleaning out the bore of the Wellington Flats Well and restoring that
well to production on or prior to November 1, 2020 ; and
? extending the deadline for bond replacement to November 1, 2020 .
Carry Obligation
Under the Black Dragon PSA, and in addition to the cash consideration, Black
Dragon has agreed to pay all costs and expenses incurred on the assets with
respect to any and all exploration, development and production during the carry
period. The "Carry Period" continues until the later of either (i) the date that
Black Dragon pays the full cash consideration set out above or (ii) the date
that Black Dragon pays all costs and expenses for the drilling, logging, testing
and completion two new wells, each well with a horizontal leg extending at least
2,000' in the target zone within the Moenkopi formation (the "Two Obligation
Wells"). Black Dragon is required to drill to completion or cause to be drilled
to completion (or plugging and abandonment) the Two Obligation Wells on or
before November 1, 2020 , failing which, Black Dragon's right to earn any
assignment in and to the assets will terminate immediately. For each vertical
well drilled to 200 feet below the top of the Kaibab formation through
completion (or plugging or abandonment) within a Federal Unit, the obligation
deadline will be amended to the later of (i) the current obligation deadline or
(ii) 6 months from the date the rig that drilled such vertical well to total
depth has been removed from the wellsite.
Within 10 business days after the later of Black Dragon paying the cash
consideration in full or Black Dragon meeting in full its carry obligation, the
vendor will convey to Black Dragon an undivided 75% of the Vendor's right, title
and interest in and to the assets, at an 80% Net Revenue Interest in the assets
as further described in the Black Dragon PSA.
On August 24, 2017 , our company indirectly acquired a 75% interest in additional
oil and gas leases in the Moenkopi formation covering a total of 3,852.41 acres.
The leases were also acquired at the SITLA auction (the "State of Utah School
and Institutional Trust Lands Administration ") and are in the region covered by
an Area of Mutual Interest defined under the Black Dragon PSA, which
incorporates a form of joint operating agreement that will govern the joint
ownership of the newly acquired leases.
18
Rolling Rock
On April 17, 2017 , we entered into and closed a Membership Interest Purchase
Agreement with two vendors to acquire 100% membership interest of Rolling Rock
Resources, LLC ("Rolling Rock"), a Nevada limited liability company. Rolling
Rock has the right to acquire a 50% working interest in and to certain leases,
hydrocarbons, wells, agreements, equipment, surface rights agreements and
assignable permits totaling approximately 101,888 acres (160 sections) at an 80%
net revenue interest located in the Mancos formation in the Southern Uinta
Basin , Utah .
In consideration for the acquisition of Rolling Rock, we issued an aggregate of
20,000,000 shares of our common stock to the two vendors on the closing date and
paid $100,000 prior to the closing as a non-refundable deposit.
Rolling Rock's sole asset consists of the rights and obligations arising from a
Purchase and Sale Agreement dated effective March 1, 2017 , as amended (together,
the "Rolling Rock PSA"), between an arm's length vendor and Rolling Rock. Upon
the satisfaction of the payments and obligations by Rolling Rock as set out
below, the vendor has agreed to convey certain leases and related assets (the
"Leases") to Rolling Rock. The Leases include certain leases, hydrocarbons,
wells, agreements, equipment, surface rights agreements and assignable permits
all as further set out in the Rolling Rock PSA.
On
The Rolling Rock Amendment had the effect of postponing certain payments relating to the Mancos formation under the Rolling Rock PSA untilDecember 31, 2018 while providing for the flexibility of earlier payments in the discretion of our Company. In consideration for the postponement of such payments, Rolling Rock agreed to certain additional interim payments and stock consideration
as set forth below.
Under the Rolling Rock Amendment, Rolling Rock has agreed to pay the vendor cash consideration totaling$3.6 million (the "Rolling Rock Cash Consideration") rather than the original$2.4 million based upon the following revised payment schedule: ?$100,000 as a non-refundable deposit within 5 business days of closing (completed and unchanged);
? the balance of the Rolling Rock Cash Consideration by payment to the vendor of
an amount equal to 12.5% of any funds received by our Company from any
Financing upon the closing of each Financing until such amount is paid.
Notwithstanding the foregoing: (a) the first
Company will be exempt from a 12.5% payment to the vendor if such amount is
received prior to our listing on a stock exchange; and (b) the full Rolling
Rock Cash Consideration is required to be paid in full no later than December
31, 2018 (later extended to the Rolling Rock Payment Deadline as described
below) regardless of the amount of funds paid in connection with one or more
Financings. This change modified the original requirement to pay
on or before
? after payment of the Rolling Rock Cash Consideration, an additional payment of
equal to 12.5% of any funds received by our company from any Financing until
the Workover Funds are paid in full.
In addition to revising the Rolling Rock Cash Consideration as set out above, we
have agreed to: (a) issue 250,000 common shares of the Company to the vendor on
or prior to September 1, 2017 (issued on September 1, 2017 ); and (b) pay the
vendor an additional $25,000 every sixty days commencing September 1, 2017 until
such time as the Rolling Rock Cash Consideration and the Workover Funds arepaid in full. OnAugust 24, 2017 , our company indirectly acquired an undivided 75% interest in additional oil and gas leases in the Mancos formation covering a total of 2,313.09 acres. The leases were acquired at a SITLA auction. Pursuant to the Rolling Rock PSA, the parties have agreed to enter into a joint operating agreement covering the new leases, which are outside the AMI (Area of Mutual Interest) of their original joint venture lease holdings. Based on a separate transaction, our company and the vendor have acquired an additional 5,174 acres in the Mancos formation and hold a 50/50 partnership, which is part of the AMI and its original agreement. 19 OnMay 28, 2018 , we entered into a third amendment to purchase and sale agreement (the "Rolling Rock Third Amendment"), which amended the terms of the Rolling Rock PSA. The Rolling Rock Third Amendment had the effect of postponing certain payments relating to the Mancos formation under the Rolling Rock PSA untilAugust 1, 2019 , provided that, if the shares of common stock of our company were not listed on theTSX Venture Exchange on or beforeAugust 1, 2018 , the payment deadline was to remainDecember 31, 2018 . OnAugust 16, 2018 , but effective as ofMarch 1, 2017 , we entered into a fourth amendment to purchase and sale agreement (the "Rolling Rock Fourth Amendment"), which amended the terms of the Rolling Rock PSA. OnMay 16, 2019 , but effective as ofMarch 1, 2017 , we entered into a fifth amendment to purchase and sale agreement (the "Rolling Rock Fifth Amendment"), which amended the terms of the Rolling Rock PSA. The Rolling Rock Fifth Amendment has the effect of postponing certain payments relating to the Mancos formation under the Rolling Rock PSA untilMay 1, 2020 . In consideration of the various extensions provided for under the Rolling Rock Fifth Amendment, the Company has agreed to issue 300,000 common shares to the vendor at a deemed price of$1.50 per common share. OnMay 22, 2020 , but effective as ofMarch 1, 2017 , we entered into a sixth amendment to purchase and sale agreement (the "Rolling Rock Sixth Amendment"), which amended the terms of the Rolling Rock PSA. The Rolling Rock Sixth Amendment has the effect of postponing certain payments relating to the Moenkopi formation under the Black Dragon PSA untilAugust 1, 2020 . OnJuly 18, 2020 , but effective as ofMarch 1, 2017 , we entered into a seventh amendment to purchase and sale agreement (the "Rolling Rock Seventh Amendment"), which amended the terms of the Rolling Rock PSA. The Rolling Rock Seventh Amendment has the effect of:
? postponing payment of the remaining
PSA relating to the Mancos Formation until receipt of the proceeds of one or
more financings by the Company, in which case the Company must pay 12.5% of
the proceeds of each financing close until payment in full;
? extending payment of an additional
before
addition to the cash consideration of
? extending the outside date of full payment of the remaining
? extending the "Obligation Deadline" for drilling obligations to
2020; and
? extending the deadline for bond replacement to November 1, 2020 .
Carry Obligation
Under the Rolling Rock PSA, and in addition to the cash consideration, Rolling
Rock has agreed to pay all costs and expenses incurred on the Leases with
respect to any and all exploration, development and production during the carry
period. The "Carry Period" continues until the later of either (i) the date that
Rolling Rock pays the full cash consideration set out above or (ii) the date
that Rolling Rock pays all costs and expenses for the drilling, logging, testing
and completion of three new wells in each of the three Federal Units, each well
with a horizontal leg extending at least 1,000' in the target zone within the
Mancos formation (the "Three Obligation Wells"). Rolling Rock is required to
drill to completion or cause to be drilled to completion (or plugging and
abandonment) the Three Obligation Wells on or before November 1, 2020 , failing
which, Rolling Rock's right to earn any assignment in and to the Leases will
terminate immediately. For each vertical well drilled to the top of the Dakota
formation through completion (or plugging or abandonment) within a Federal Unit,
the obligation deadline will be amended to the later of (i) the current
obligation deadline or (ii) 6 months from the date the rig that drilled such
vertical well to total depth has been removed from the wellsite.
20
The obligation well in the Grand Mancos Unit will be a vertical well drilled to
a depth sufficient to test the Granite Walsh formation within such Federal Unit.
For this well, completion (or plugging and abandonment) is expected to take
place no later than 2 months after the rig that drilled to total depth has been
removed from the wellsite and for a period of 6 months after completion of this
obligation well (or plugging and abandonment), and Rolling Rock will have the
exclusive option to purchase an additional 25% of the vendor's right, title and
interest in and to the leases with respect to the Granite Walsh formation within
the boundary of the Grand Mancos Unit for an additional payment of $10 million .
Within 10 business days after the later of Rolling Rock paying the cash
consideration in full or Rolling Rock meeting in full its carry obligation, the
vendor agreed to convey to Rolling Rock an undivided 75% of the vendor's right,
title and interest in and to the Leases, or a 80% net revenue interest in the
Leases as further described in the Rolling Rock PSA. Notwithstanding this
transfer, within 10 business days after the later of payment of $300,000 on or
before November 1, 2020 (which amount is in addition to the deposit and included
in the cash consideration set out above) and the replacement of the vendor's
bonds on or before November 1, 2020 , the vendor agreed to convey to Rolling Rock
an undivided 75% of the vendor's right, title and interest in and to the Cisco
Dome leases and related assets as further set out in the Rolling Rock PSA.
However, if Rolling Rock fails to timely meet any of its obligations under the
Rolling Rock PSA, after having taken assignment of the Cisco Dome leases and
assets, then, if the vendor elects in its sole discretion, Rolling Rock is
required to reassign the Cisco Dome leases and assets to the vendor withoutany additional encumbrances. City of Gold OnMay 17, 2017 , we acquired 100% of the membership interest inCity of Gold, LLC , aNevada limited liability company, from twoNevada limited liability companies pursuant to a Membership Interest Purchase Agreement dated as ofMay 17, 2017 . The Membership Interest Purchase Agreement provides for a total purchase price consisting of an aggregate of 30,000,000 common shares in the capital of our company. 15,000,000 of these shares were issued at closing (7,500,000 to each transferor); the other 15,000,000 shares are to be issued within ten Business Days afterCity of Gold, LLC earns the Option (as defined below).City of Gold, LLC's sole asset consists of 2,930,259 common shares and 2,930,259 share purchase warrants in the capital ofAsia Pacific Mining Limited ("Asia Pacific") and its rights under a binding financing and option agreement (the "Option Agreement") withAsia Pacific and an individual namedNyi Nyi Lwin .City of Gold, LLC's only liabilities consist of three demand notes for an aggregate of$1,500,000 . Under the Option Agreement,Asia Pacific andNyi Nyi Lwin have agreed to grant toCity of Gold, LLC the option (the "Option") to purchase 100% of the ownership interest in a wholly-owned subsidiary ofAsia Pacific (the "Project Subsidiary") which, in turn, owns 100% of the rights to the City of Gold mineral exploration project located inMyanmar which covers an area of approximately 465 square kilometers in close proximity to hydropower, water, and infrastructure to accommodate exploration and development of the property (the "City of Gold Project ").City of Gold, LLC will be granted the Option upon satisfaction of the following:
? Subscription of 976,753 units of
on or prior to
? Subscription of 976,753 units of
on or prior to
? Subscription of 976,753 units of
on or prior to
? Subscription of 2,930,261 units of
exploration license for the
(the "License").
Each share purchase warrant is exercisable for a term equal to the greater of two years from the closing of the Final Funding Tranche or 18 months from the issuance of the License at an exercise price of$0.51 for the first year and$1.02 for the second year.Asia Pacific utilized$500,000 of the initial three tranches towards an exploration program of theCity of Gold Project .Asia Pacific is required to use all proceeds for the Final Funding Tranche towards exploration of the Project Subsidiary's mining interests, including no less than$500,000 towards drilling theCity of Gold Project (the "Drilling Program"). Upon the closing of the Final Funding Tranche,City of Gold, LLC will have earned the Option. We anticipate that the normal course of receiving the License will take longer than 12 months. As a result, we do not anticipate commencing the Drilling Program or incurring additional expenses related to the project within the next 12 month period. We anticipate holding our interest in theCity of Gold Project for the long term. If circumstances warrant, we intend to exercise the Option by transferring theCity of Gold Project into a subsidiary ("Spinco") with the aim of completing a "spin-off" transaction of its anticipated 70% interest inSpinco under the plan of arrangement provisions in accordance with applicable securities and corporate laws in order to realize a benefit for our company and/or our stockholders. 21Once City of Gold, LLC has earned the Option, it will have the right to exercise the Option for a period of 120 days from completion of the Drilling Program, whichCity of Gold, LLC can extend for an additional 120 days if it can demonstrate that all conditions to exercise of the Option are complete other than approval from the applicable stock exchange upon which the shares ofSpinco are to be listed. To exercise the Option,Asia Pacific has agreed to transfer the Project Subsidiary toSpinco for an exercise price consisting of$7,000,000 in cash and 30% of the issued and outstanding share capital ofSpinco (calculated on a fully diluted basis, excluding up to 10% in stock options, but including sharesSpinco may have issued in order to raise the exercise price of$7,000,000 and an additional$5,000,000 in working capital). Half of the cash portion of the exercise price must be paid upon exercise of the Option; the balance is to be paid on the first anniversary of the exercise and is to be evidenced by a one-year secured term note. AlthoughCity of Gold, LLC has the right to selectSpinco ,Spinco must meet the following criteria: at exercise of the Option,Spinco must have less than$100,000 in liabilities and$5,000,000 or more in working capital andAsia Pacific will have the right to nominate 30% of its directors. Although we currently anticipate that the exercise of the Option will be structured as a "spin-off" transaction, we have the flexibility under the Option Agreement to structure the transaction in other ways provided the conditions to exercise are met. However, we anticipate that such a structure will result in the most efficient way to monetize our interest in the City
ofGold Project at this time. Results of Operations The following summary of our results of operations should be read in conjunction with our unaudited financial statements for the three months endedMay 31, 2020 and 2019 which are included herein: For the three months ended May 31, 2020 2019 Oil and gas sales $ - $ - Expenses $ 204,417 $ 451,879 Net loss$ (253,855 ) $ (476,309 ) Revenues
During the three months ended
Expenses
Expenses decreased during the three months ended
The table below details the changes in major expenditures for the three months endedMay 31, 2020 as compared to the corresponding three months ended May
31,
2019:
Increase /
Decrease in
Expenses Expenses Explanation for Change
Consulting Decrease of Decrease in the current period as consulting
fees $17,885 fees related to the oil and gas properties
in Canada and US are capitalized in fiscal
2021.
Management Decrease of Decrease due to change in CEO compensation.
fees $60,000
Office, travel Decrease of Decrease due to fewer corporate activities
and general $157,302 as a result of the COVID-19 pandemic.
expenses
Professional Decrease of Decrease in the current period as less
fees $15,891 professional services were used for
corporate filings, accounting, and
professional services.
22
Liquidity and Capital Resources
Working Capital
May 31, 2020 February 29, 2020
Current Assets $ 75,128 $ 100,853
Current Liabilities $ 4,050,750 $ 3,321,545
Working Capital (Deficiency)
As of
Due to the slowdown of the world economy as a result of the COVID-19 pandemic, we intend to decrease the level of operations. As a result, we estimate our general and administrative expense will be lower in fiscal 2021.
Our company's cash will not be sufficient to meet our working capital requirements for the next twelve month period. Our company plans to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the issuance of our equity securities. There is no assurance that our company will be able to obtain further funds required for our continued working capital requirements. The ability of our company to meet our financial liabilities and commitments is primarily dependent upon the continued financial support of our directors and shareholders, the continued issuance of equity to new shareholders, and our ability to achieve and maintain profitable operations.
There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration of our property interests, the identification of reserves sufficient enough to warrant development, successful development of our property interests and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited financial statements for the year endedFebruary 29, 2020 , our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors. Cash Flows Three months ended Three months endedMay 31, 2020 May 31, 2019
Net Cash Used in Operating Activities $ (58,555 ) $ (444,332 ) Net Cash Used in Investing Activities $ (13,262 ) $ (184,884 ) Net Cash Provided by Financing Activities $ 77,699 $
657,911
Net change in Cash $ 5,882 $ (28,695 )
Cash Used in Operating Activities
Our cash used in operating activities for the three months endedMay 31, 2020 , compared to our cash used in operating activities for the three months endedMay 31, 2019 , decreased by$385,777 , primarily due to decrease in general and administrative expenses.
Cash Used in Investing Activities
Our cash used in investing activities for the three months endedMay 31, 2020 , compared to our cash used in investing activities for the three months endedMay 31, 2019 , decreased by$171,622 due to lower expenditures on oil and gas properties and deferred acquisition costs. 23
Cash Provided by Financing Activities
Our cash provided by financing activities for the three months endedMay 31, 2020 , compared to our cash provided by financing activities for the three months endedMay 31, 2019 , decreased by$580,212 , due to lower notes payable financing completed in the current period. Contractual Obligations Our future contractual obligations as ofMay 31, 2020 consisted of the following: Payments due by period Less than 1 More than
Contractual Obligations Total Year 1-3 Years 3-5 Years 5 Years Note payable$ 1,996,651 $ 1,996,651 - - - Long term notes payable$ 112,683 $ - 112,683 - -
Outstanding Shares, Options, Warrants
As of
Off-Balance Sheet Arrangements
We have no 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 is material to our stockholders. Going Concern Our interim financial statements and information for the period endedMay 31, 2020 , have been prepared by our management on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We have generated no significant revenues to date and have incurred a net loss of$253,855 during the three month period endedMay 31, 2020 , and an accumulated deficit of$107,287,311 from inception. These factors raise substantial doubt about the ability of the Company to continue operating as a going concern. We cannot provide any assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional funds through the sale of debt and/or equity.
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