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EX-32.2 - Fortem Resources Inc.ex32-2.htm
EX-32.1 - Fortem Resources Inc.ex32-1.htm
EX-31.2 - Fortem Resources Inc.ex31-2.htm
EX-31.1 - Fortem Resources Inc.ex31-1.htm
EX-14.1 - Fortem Resources Inc.ex14-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended: February 29, 2020

 

or

 

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

 

For the transition period from __________________to __________________

 

Commission file number: 000-52645

 

FORTEM RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

Nevada   20-4119257
State or other jurisdiction of   (I.R.S. Employer
incorporation or organization   Identification No.)

 

Suite 820, 906 12th Avenue S.W.

Calgary, Alberta, Canada T2R 1K7

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (403) 241-8912

 

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

 

Title of Each Class   Trading Symbol(s)   Name of each Exchange on which registered
Nil   N/A   N/A

 

Securities registered pursuant to Section 12(g) of the Act

 

Common Stock, par value $0.001 per share
(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [  ]

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ]   Smaller reporting company [X]
      Emerging growth company [  ]

 

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

 

Indicated by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [  ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

43,329,489 shares of common stock at a price of $3.49 per share for an aggregate market value of $151,219,917.

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of July 20, 2020, there were 122,571,156 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Not Applicable

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 3
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 13
ITEM 1B. UNRESOLVED STAFF COMMENTS 20
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. MINE SAFETY DISCLOSURES 26
   
PART II 27
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 27
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 54
ITEM 9A. CONTROLS AND PROCEDURES 54
ITEM 9B. OTHER INFORMATION 55
   
PART III 56
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 56
ITEM 11. EXECUTIVE COMPENSATION 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 64
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 65
   
PART IV 66
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 66
   
SIGNATURES 70

 

2
 

 

PART I

 

ITEM 1. BUSINESS

 

Forward-Looking Statements

 

This annual report on Form 10-K 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-K 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 of the United States and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

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Our financial statements are stated in United States Dollars (US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.

 

In this annual report, unless otherwise specified, all references to “common shares” refer to the common shares in our capital stock.

 

As used in this annual report on Form 10-K, the terms “we”, “us” “our”, the “Company” and “Fortem” mean Fortem Resources Inc. and its wholly-owned subsidiaries, Colony Energy, LLC, Black Dragon Energy, LLC, Rolling Rock Resources, LLC, and City of Gold, LLC, unless otherwise specified.

 

Recent Developments

 

Effective at the opening on August 23, 2018, shares of our common stock were approved for trading on the TSX Venture Exchange in Canada under the symbol “FTM”. We were approved for listing as a Tier 2 Oil and Gas Reserves Issuer.

 

On August 23, 2018, we appointed Konstantine Vatskalis, Sandra Perry, William Via and Brett Matich as directors of the Company and Robert DaCunha resigned as a director of the Company. The Company’s board of directors was comprised of Marc Bruner, Michael Caetano, Konstantine Vatskalis, Sandra Perry, William Via and Brett Matich.

 

On September 26, 2018, we entered into an asset purchase agreement (the “Agreement”) with a major Canadian oil and gas company to purchase a 100% working interest in three heavy oil leases (the “Oil Leases”) covering a total of 20,719 hectares (51,200 acres) of heavy oil in north central Alberta (the “Transaction”). The rights to the Oil Leases, cover heavy oil of 12-16 API located near the top of the Viking formation to the base of the Woodbend Group.

 

The acquisition of the Oil Leases complements the Company’s existing land holdings of 12,800 acres directly adjacent to and to the south of the Oil Leases. Upon completion of the Transaction, we will own over 62,000 acres of which 48,000 is contiguous land containing extensive heavy oil deposits within the main producing horizon, the Wabiskaw formation, along with a secondary horizon, namely the McMurray formation.

 

As consideration for the Oil Leases, we agreed to pay a purchase price of CDN$3,000,000 plus applicable GST, CDN$200,000 of which was paid as an initial deposit upon the execution of the Agreement. The closing of the Transaction was expected to occur on November 15, 2018 with an option to extend the closing date 60 days upon payment of an additional deposit of CDN$100,000. In November 2018, the Company exercised the option and extended the closing of the Transaction to January 14, 2019 with a payment of CDN$100,000. The Company and the vendor subsequently entered into an extension agreement whereby the closing date of the Transaction was extended to a date on or before February 19, 2020 and a total deposit of CDN$500,000 has been paid. During the year ended February 29, 2020, the Agreement was in default and the Company wrote off the deposit of CDN$500,000.

 

On July 2, 2019, Sandra Perry resigned as a director of our Company.

 

On September 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.

 

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Compeer Oil and Gas Operations

 

As of February 29, 2020, we have incurred $383,228 in exploration costs to drill, complete and equip the Test Well. We also recorded $32,310 in asset retirement obligations related to the future plugging and abandonment of the Test Well.

 

As at July 20, 2020, it is too early to provide stabilized production forecasts.

 

Colony Energy

 

On April 7, 2017, we entered into and closed two Membership Interest Purchase Agreements with three vendors to acquire all the membership interests of Colony Energy, LLC (“Colony Energy”), a Nevada 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 northern Alberta.

 

The Company intends to develop the Godin 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.

 

Colony Energy is a party to a Petroleum, Natural Gas and General Rights Conveyance dated as of March 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 dated April 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

 

On April 12 2017, we entered into and closed a Membership Interest Purchase Agreement (the “Black Dragon MPA”) with two vendors to acquire all membership interest of Black Dragon Energy, LLC (“Black Dragon”), a Nevada 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 and Emery 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 effective March 1, 2017 (the “Black Dragon PSA”) between an arm’s length vendor and Black Dragon.

 

On August 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 until December 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 original US$2.7 million based upon the following revised payment schedule:

 

  $100,000 as a non-refundable deposit within 5 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 US$1.5 million raised by our 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 Black Dragon Cash Consideration is required to be paid in full no later than December 31, 2018 (later extended to the 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 $900,000 on or before September 1, 2017, $900,000 on or before March 1, 2018 and $800,000 on or before September 1, 2018.

 

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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 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.

 

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. The Black Dragon Third Amendment has the effect of postponing certain payments relating to the Moenkopi formation under the Black Dragon PSA until October 1, 2019.

 

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 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 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 Fifth Amendment”), which amended the terms of the Black Dragon PSA. The Black Dragon Fifth Amendment has the effect of:

 

  postponing payment of the remaining US$3.8 million owed under the Black Dragon 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 US$3.8 million to November 1, 2020;
     
  extending the “Obligation Deadline” for drilling obligations to A November 1, 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.

 

6
 

 

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.

 

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 August 17, 2017, we entered into a second amendment to purchase and sale agreement (the “Rolling Rock Amendment”), which amended the terms of the Rolling Rock PSA.

 

The Rolling Rock Amendment had the effect of postponing certain payments relating to the Mancos formation under the Rolling Rock PSA until December 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);

 

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  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 $1.5 million raised by our 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 $1.3 million on or before September 1, 2017, $500,000 on or before March 1, 2018 and $500,000 on or before September 1, 2018; and
     
  after payment of the Rolling Rock Cash Consideration, an additional payment of $300,000 (the “Workover Funds”) to the vendor which is payable by an amount 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 are paid in full.

 

On August 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.

 

On May 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 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 fourth amendment to purchase and sale agreement (the “Rolling Rock Fourth Amendment”), which amended the terms of the Rolling Rock PSA. The Rolling Rock Fourth Amendment has the effect of postponing certain payments relating to the Mancos formation under the Rolling Rock PSA until October 1, 2019.

 

On May 16, 2019, but effective as of March 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 until May 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.

 

On May 22, 2020, but effective as of March 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 until August 1, 2020.

 

On July 18, 2020, but effective as of March 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 US$5.3 million owed under the Rolling Rock 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;

 

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  extending payment of an additional US$300,000 as the Workover Funds on or before November 1, 2020 (which Workover Funds are separate from and in addition to the cash consideration of US$5.3 million);
     
  extending the outside date of full payment of the remaining US$5.3 million to November 1, 2020 (the “Rolling Rock Payment Deadline”);
     
  extending the “Obligation Deadline” for drilling obligations to November 1, 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.

 

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 July 1, 2019, 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 without any additional encumbrances.

 

City of Gold

 

On May 17, 2017, we acquired 100% of the membership interest in City of Gold, LLC, a Nevada limited liability company, from two Nevada limited liability companies pursuant to a Membership Interest Purchase Agreement dated as of May 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 after City 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 of Asia Pacific Mining Limited (Asia Pacific) and its rights under a binding financing and option agreement (the Option Agreement) with Asia Pacific and an individual named Nyi Nyi Lwin. City of Gold, LLC’s only liabilities consist of three demand notes for an aggregate of $1,500,000.

 

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Under the Option Agreement, Asia Pacific and Nyi Nyi Lwin have agreed to grant to City of Gold, LLC the option (the “Option”) to purchase 100% of the ownership interest in a wholly-owned subsidiary of Asia Pacific (the “Project Subsidiary”) which, in turn, owns 100% of the rights to the City of Gold mineral exploration project located in Myanmar 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 Asia Pacific for a purchase price of $500,000 on or prior to March 2, 2017 (completed);
     
  Subscription of 976,753 units of Asia Pacific for a purchase price of $500,000 on or prior to March 16, 2017 (completed);
     
  Subscription of 976,753 units of Asia Pacific for a purchase price of $500,000 on or prior to April 28, 2017 (completed); and
     
  Subscription of 2,930,261 units of Asia Pacific for a purchase price of $1,500,000 (the “Final Funding Tranche”), due within 60 days of issuance of an exploration license for the City of Gold Project by the Government of Myanmar (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 the City 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 the City 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 the City of Gold Project for the long term. If circumstances warrant, we intend to exercise the Option by transferring the City of Gold Project into a subsidiary (“Spinco”) with the aim of completing a “spin-off” transaction of its anticipated 70% interest in Spinco 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.

 

Once 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, which City 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 of Spinco are to be listed. To exercise the Option, Asia Pacific has agreed to transfer the Project Subsidiary to Spinco for an exercise price consisting of $7,000,000 in cash and 30% of the issued and outstanding share capital of Spinco (calculated on a fully diluted basis, excluding up to 10% in stock options, but including shares Spinco 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. Although City of Gold, LLC has the right to select Spinco, 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 and Asia 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 of Gold Project at this time.

 

Competition

 

The petroleum and natural gas industry is highly competitive. Numerous independent oil and gas companies, oil and gas syndicates and major oil and gas companies actively seek out and bid for oil and gas properties as well as for the services of third party providers, such as drilling companies, upon which we rely. A substantial number of our competitors have longer operating histories and substantially greater financial and personnel resources than we do, and have demonstrated the ability to operate through industry cycles.

 

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Some of our competitors not only explore for, produce and market petroleum and natural gas, but also carry out refining operations and market the resultant products on a worldwide basis which may provide them with additional sources of capital. Larger and better capitalized competitors may be in a position to outbid us for particular prospect rights. These competitors may also be better able to withstand sustained periods of unsuccessful drilling. Larger competitors may be able to absorb the burden of any changes in laws and regulations more easily than we can, which would adversely affect our competitive position.

 

Petroleum and natural gas producers also compete with other suppliers of energy and fuel to industrial, commercial and individual customers. Competitive conditions may be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the governments and/or their agencies and other factors which are out of our control including, international political conditions, terrorism, overall levels of supply and demand for oil and gas, and the markets for synthetic fuels and alternative energy sources.

 

To better deal with the competition, we target high potential exploration properties which are too small for our largest competitors. We rely upon the technical experience of our officers and engineers to select those properties on which our exploration expertise provides a differentiating advantage.

 

Customers

 

There are no contracts obligating our company to provide a fixed quantity of oil and gas to any party.

 

Regulation

 

The exploration, production and sale of oil and gas are extensively regulated by governmental authorities. Applicable legislation is under constant review for amendment or expansion. These efforts frequently result in an increase in the regulatory burden on companies in our industry and consequently an increase in the cost of doing business and decrease in profitability. Numerous governmental departments and agencies are authorized to, and have, issued rules and regulations imposing additional burdens on the oil and gas industry that often are costly to comply with and carry substantial penalties for non-compliance. Production operations are affected by changing tax and other laws relating to the petroleum industry, constantly changing administrative regulations and possible interruptions or termination by government authorities.

 

Oil and gas mineral rights may be held by individuals, corporations or governments having jurisdiction over the area in which such mineral rights are located. As a general rule, parties holding such mineral rights grant licenses or leases to third parties to facilitate the exploration and development of these mineral rights. The terms of the leases and licenses are generally established to require timely development. Notwithstanding the ownership of mineral rights, the government of the jurisdiction in which mineral rights are located generally retains authority over the drilling and operation of oil and gas wells.

 

Each province and the federal government of Canada have legislation and regulations governing land tenure, royalties, production rates and taxes, environmental protection and other matters under their respective jurisdictions. The royalty regime is a significant factor in the profitability of oil and natural gas production. Royalties payable on production from lands other than Crown lands are determined by negotiations between the parties. Crown royalties are determined by government regulation and are generally calculated as a percentage of the value of the gross production with the royalty rate dependent in part upon prescribed reference prices, well productivity, geographical location, field discovery date and the type and quality of the petroleum product produced. From time to time, the governments of Canada and Alberta have established incentive programs such as royalty rate reductions, royalty holidays, tax credits and drilling royalty credits. These incentives are for the purpose of encouraging oil and natural gas exploration or enhanced recovery projects. These incentives generally increase cash flow.

 

Effective January 1, 2009, oil sands royalties in Alberta are calculated using a sliding scale for royalty rates ranging from 1% to 9% pre-payout and 25% to 40% post-payout depending on the world oil price. Project “payout” refers to the point in which we earn sufficient revenues to recover all of the allowed costs for the project plus a return allowance. The base royalty starts at 1% and increases for every dollar the world oil price, as reflected by the WTI, is priced above $55 per barrel, to a maximum of 9% when oil is priced at $120 per barrel or greater. The net royalty starts at 25% and increases for every dollar oil is priced above $55 per barrel to 40% when oil is priced at $120 or higher.

 

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The exploration and development of oil and gas properties is subject to various United States federal, state and local governmental regulations. Our company may, from time to time, be required to obtain licenses and permits from various governmental authorities in regards to the exploration of our property interests. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.

 

Environmental Considerations

 

The oil and natural gas industry is subject to environmental laws and regulations pursuant to United States and Canadian local, state, provincial and federal legislation. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced or utilized in association with certain oil and gas industry operations. In addition, legislation requires that well and facility sites be monitored, abandoned and reclaimed to the satisfaction of provincial authorities. A breach of such legislation may result in the imposition of fines and penalties. Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages as well as administrative, civil and criminal penalties. Accordingly, we could be liable or could be required to cease production on properties if environmental damage occurs. Although we maintain insurance coverage, the costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could occur that result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations. We maintain commercial property and general liability insurance coverage on the properties we operate. We also maintain operators extra expense insurance which provides coverage for well control incidents specifically relating to regaining control of a well, seepage, pollution, clean-up and containment. No coverage is maintained with respect to any fine or penalty required to be paid due to a violation of the regulations set out by the federal and provincial regulatory authorities. We are committed to meeting our responsibilities to protect the environment and anticipate making increased expenditures of both a capital and expense nature as a result of the increasingly stringent laws relating to the protection of the environment.

 

Alberta’s new climate change regulation, effective July 1, 2007, requires Alberta facilities that emit more than 100,000 tonnes of greenhouse gases a year to reduce emissions intensity by 12 per cent. Companies have four choices to meet their reductions: (1) they can make operating improvements to their operations that will result in greenhouse gas emission reductions; (2) purchase Alberta based offset credits; (3) contribute to the Climate Change and Emissions Management Fund; and (4) purchase or use emission performance credits, also called EPCs, these credits are generated by facilities that have gone beyond the 12% mandatory intensity reduction. EPCs can be banked for future use or sold to other facilities that need to meet the reduction target.

 

On June 18, 2009, the Canadian government passed the new Environmental Enforcement Act (“EEA”). The EEA was created to strengthen and amend nine existing Statutes that relate to the environment and to enact provisions respecting the enforcement of certain Statutes that relate to the environment. The EEA amends various enforcement, offence, penalty and sentencing provisions to deter offenders from committing offences under the EEA by setting minimum and maximum fines for serious offences. The EEA also gives enforcement officers new powers to investigate cases and grants courts new sentencing authorities that ensure penalties reflect the seriousness of the pollution and wildlife offences. The EEA also expands the authority to deal with environmental offenders by: (1) specifying aggravating factors such as causing damage to wildlife or wildlife habitat, or causing damage that is extensive, persistent or irreparable; (2) providing fine ranges that are higher for corporate offenders than for individuals; (3) doubling fine ranges for repeat offenders; (4) authorizing the suspension and cancellation of licenses, permits or other authorizations upon conviction; (5) requiring corporate offenders to report convictions to shareholders; and (6) mandating the reporting of corporate offences on a public registry.

 

The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under United States federal, state and local laws and regulations relating primarily to the protection of human health and the environment. Additionally, we may incur expenditures related to compliance with such laws, and may incur costs in connection with the remediation of any environmental contamination. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

 

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Research and Development Expenditures

 

Other than seismic, engineering, geochemical and geophysical programs capitalized in connection with our oil and gas concessions, we have devoted no substantial efforts to research and development within the last two fiscal years.

 

Employees

 

As at July 20, 2020, we have three executive officers and no full-time employees. However, we use consultants and contractors to provide us, among other things, with executive management and accounting services, and technical engineering support.

 

Subsidiaries

 

As at July 20, 2020, we have 4 wholly owned subsidiaries, Colony Energy, LLC, Black Dragon Energy, LLC, Rolling Rock Resources, LLC, and City of Gold, LLC.

 

Intellectual Property

 

We do not own any intellectual property.

 

ITEM 1A. RISK FACTORS

 

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this report in evaluating our company and its business before purchasing shares of our company’s common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. You could lose all or part of your investment due to any of these risks.

 

Risks Related to Our Company

 

We have a history of losses and this trend may continue and may negatively impact our ability to achieve our business objectives.

 

We have experienced net losses since inception, and expect to continue to incur substantial losses for the foreseeable future. Our accumulated deficit was $107,033,456 as at February 29, 2020. We may not be able to generate significant revenues in the future. As a result, our management expects our business to continue to experience negative cash flow for the foreseeable future and cannot predict when, if ever, our business might become profitable. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations.

 

We have a limited operating history, which may hinder our ability to successfully meet our objectives.

 

We have a limited operating history upon which to base an evaluation of our current business and future prospects. We do not have an established history of operating producing properties or locating and developing properties that have oil and gas reserves. As a result, the revenue and income potential of our business is unproven. In addition, because of our limited operating history, we have limited insight into trends that may emerge and affect our business. Errors may be made in predicting and reacting to relevant business trends and we will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets. We may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.

 

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Our operations and proposed exploration activities will require significant capital expenditures for which we may not have sufficient funding and if we do obtain additional financing, our existing shareholders may suffer substantial dilution.

 

We intend to make capital expenditures far in excess of our existing capital resources to develop, acquire and explore oil and gas properties. We intend to rely on funds from operations and external sources of financing to meet our capital requirements to continue acquiring, exploring and developing oil and gas properties and to otherwise implement our business plan. We plan to obtain additional funding through the debt and equity markets, but we can offer no assurance that we will be able to obtain additional funding when it is required or that it will be available to us on commercially acceptable terms, if at all. In addition, any additional equity financing may involve substantial dilution to our then existing shareholders.

 

The successful implementation of our business plan is subject to risks inherent in the oil and gas business, which if not adequately managed could result in additional losses.

 

Our oil and gas operations are subject to the economic risks typically associated with exploration and development activities, including the necessity of making significant expenditures to locate and acquire properties and to drill exploratory wells. In addition, the availability of drilling rigs and the cost and timing of drilling, completing and, if warranted, operating wells is often uncertain. In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, development and, if warranted, production activities to be unsuccessful. This could result in a total loss of our investment in a particular well. If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs will be charged against earnings as impairments.

 

In addition, market conditions or the unavailability of satisfactory oil and gas transportation arrangements may hinder our access to oil and gas markets and delay our production. The availability of a ready market for our prospective oil and gas production depends on a number of factors, including the demand for and supply of oil and gas and the proximity of reserves to pipelines and other facilities. Our ability to market such production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, in most cases owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells for lack of a market or a significant reduction in the price of oil or gas or because of inadequacy or unavailability of pipelines or gathering system capacity. If that occurs, we would be unable to realize revenue from those wells until arrangements are made to deliver such production to market.

 

Our future performance is dependent upon our ability to identify, acquire and develop oil and gas properties, the failure of which could result in under use of capital and losses.

 

Our future performance depends upon our ability to identify, acquire and develop additional oil and gas reserves that are economically recoverable. Our success will depend upon our ability to acquire working and revenue interests in properties upon which oil and gas reserves are ultimately discovered in commercial quantities, and our ability to develop prospects that contain proven oil and gas reserves to the point of production. Without successful acquisition and exploration activities, we will not be able to develop additional oil and gas reserves or generate revenues. We cannot provide you with any assurance that we will be able to identify and acquire additional oil and gas reserves on acceptable terms, or that oil and gas deposits will be discovered in sufficient quantities to enable us to recover our exploration and development costs or sustain our business.

 

The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities, and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In addition, no assurance can be given that our exploration and development activities will result in the discovery of additional reserves. Our operations may be curtailed, delayed or cancelled as a result of lack of adequate capital and other factors, such as lack of availability of rigs and other equipment, title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties, or unusual or unexpected formations, pressures and or work interruptions. In addition, the costs of exploitation and development may materially exceed our initial estimates.

 

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We have a very small management team and the loss of any member of our team may prevent us from implementing our business plan in a timely manner.

 

We have three executive officers and a limited number of additional consultants upon whom our success largely depends. We do not maintain key person life insurance policies on our executive officers or consultants, the loss of which could seriously harm our business, financial condition and results of operations. In such an event, we may not be able to recruit personnel to replace our executive officers or consultants in a timely manner, or at all, on acceptable terms.

 

Future growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

 

We may experience rapid growth in our operations, which will place a significant strain on our management, administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we must continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute upon our business plan.

 

Market conditions or operation impediments may hinder our access to natural gas and oil markets or delay our production.

 

The marketability of production from our properties depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing facilities. This dependence is heightened where this infrastructure is less developed. Therefore, if drilling results are positive in certain areas of our oil and gas properties, a new gathering system would need to be built to handle the potential volume of gas produced. We might be required to shut in wells, at least temporarily, for lack of a market or because of the inadequacy or unavailability of transportation facilities. If that were to occur, we would be unable to realize revenue from those wells until arrangements were made to deliver production to market.

 

Our ability to produce and market natural gas and oil is affected and also may be harmed by:

 

  the lack of pipeline transmission facilities or carrying capacity;
  government regulation of natural gas and oil production;
  government transportation, tax and energy policies;
  changes in supply and demand; and
  general economic conditions.

 

We might incur additional debt in order to fund our exploration and development activities, which would continue to reduce our financial flexibility and could have a material adverse effect on our business, financial condition or results of operations.

 

If we incur indebtedness, the ability to meet our debt obligations and reduce our level of indebtedness depends on future performance. General economic conditions, oil and gas prices and financial, business and other factors affect our operations and future performance. Many of these factors are beyond our control. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our current or future debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and performance at the time we need capital. We cannot assure you that we will have sufficient funds to make such payments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we might have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.

 

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Our properties and/or future properties might not produce, and we might not be able to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.

 

Although we have reviewed and evaluated our properties in a manner consistent with industry practices, such review and evaluation might not necessarily reveal all existing or potential problems. This is also true for any future acquisitions made by us. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or part of those problems, and we may assume environmental and other risks and liabilities in connection with the acquired properties.

 

If we or our operators fail to maintain adequate insurance, our business could be materially and adversely affected.

 

Our operations are subject to risks inherent in the oil and gas industry, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, earthquakes and other environmental risks. These risks could result in substantial losses due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage, and suspension of operations. We could be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition and results of operations.

 

Any prospective drilling contractor or operator which we hire will be required to maintain insurance of various types to cover our operations with policy limits and retention liability customary in the industry. We also have acquired our own insurance coverage for such prospects. The occurrence of a significant adverse event on such prospects that is not fully covered by insurance could result in the loss of all or part of our investment in a particular prospect which could have a material adverse effect on our financial condition and results of operations.

 

Our business could be materially and adversely affected as a result of the COVID-19 coronavirus

 

Our Company faces risks related to health epidemics and other outbreaks of communicable diseases, which could significantly disrupt its operations and may materially and adversely affect its business and financial conditions. Our business could be adversely impacted by the effects of the coronavirus or other epidemics. In December 2019, a novel strain of the coronavirus emerged in China and the virus has now spread to several other countries, including Canada and the United States., and infections have been reported globally. The extent to which the coronavirus impacts our business, including its operations and the market for its securities, will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. In particular, the continued spread of the coronavirus globally could materially and adversely impact our business including without limitation, employee health, workforce productivity, increased insurance premiums, limitations on travel, the availability of industry experts and personnel, restrictions to its drill program and/or the timing to process drill and other metallurgical testing, and other factors that will depend on future developments beyond our control, which may have a material and adverse effect on the its business, financial condition and results of operations. There can be no assurance that our personnel will not be impacted by these pandemic diseases and ultimately see its workforce productivity reduced or incur increased medical costs / insurance premiums as a result of these health risks. In addition, a significant outbreak of coronavirus could result in a widespread global health crisis that could adversely affect global economies and financial markets resulting in an economic downturn that could have an adverse effect on the demand for precious metals and our future prospects.

 

The oil and gas industry is highly competitive, and we may not have sufficient resources to compete effectively.

 

The oil and gas industry is highly competitive. We compete with oil and natural gas companies and other individual producers and operators, many of which have longer operating histories and substantially greater financial and other resources than we do, as well as companies in other industries supplying energy, fuel and other needs to consumers. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulation in the jurisdictions in which we do business and handle longer periods of reduced prices for oil and gas more easily than we can. Our competitors may be able to pay more for oil and gas leases and properties and may be able to define, evaluate, bid for and purchase a greater number of leases and properties than we can. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.

 

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Complying with environmental and other government regulations could be costly and could negatively impact our production.

 

Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues. Such laws and regulations may, among other potential consequences, require that we acquire permits before commencing drilling and restrict the substances that can be released into the environment with drilling and production activities.

 

Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. Prior to commencement of drilling operations, we may secure limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost. Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs.

 

The costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

 

Shortages of rigs, equipment, supplies and personnel could delay or otherwise adversely affect our cost of operations or our ability to operate according to our business plans.

 

If drilling activity increases in Alberta, Canada, Utah or the United States generally, a shortage of drilling and completion rigs, field equipment and qualified personnel could develop. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increasing number of active rigs in service and could increase sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail our exploration and development operations, which could in turn harm our operating results.

 

We will be required to replace, maintain or expand our reserves in order to prevent our reserves and production from declining, which would adversely affect cash flows and income.

 

In general, production from natural gas and oil properties declines over time as reserves are depleted, with the rate of decline depending on reservoir characteristics. If we are not successful in our exploration and development activities, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is highly dependent upon our ability to economically find, develop or acquire reserves in commercial quantities.

 

To the extent cash flow from operations is reduced, either by a decrease in prevailing prices for natural gas and oil or an increase in exploration and development costs, and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired. Even with sufficient available capital, our future exploration and development activities may not result in additional proved reserves, and we might not be able to drill productive wells at acceptable costs.

 

The oil and gas exploration and production industry historically is a cyclical industry and market fluctuations in the prices of oil and gas could adversely affect our business.

 

Prices for oil and gas tend to fluctuate significantly in response to factors beyond our control. These factors include:

 

  weather conditions;
  economic conditions, including demand for petroleum-based products;
  actions by OPEC, the Organization of Petroleum Exporting Countries;
  political instability in the Middle East and other major oil and gas producing regions;
  governmental regulations, both domestic and foreign;
  domestic and foreign tax policy;
  the pace adopted by foreign governments for the exploration, development, and production of their national reserves;
  the price of foreign imports of oil and gas;
  the cost of exploring for, producing and delivering oil and gas;

 

17
 

 

  the discovery rate of new oil and gas reserves;
  the rate of decline of existing and new oil and gas reserves;
  available pipeline and other oil and gas transportation capacity;
  the ability of oil and gas companies to raise capital;
  the overall supply and demand for oil and gas; and
  the availability of alternate fuel sources.

 

Changes in commodity prices may significantly affect our capital resources, liquidity and expected operating results. Price changes will directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.

 

Changes in commodity prices may also significantly affect our ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and the exploration and development of projects. We expect that commodity prices will continue to fluctuate significantly in the future.

 

Our ability to produce oil and gas from our properties may be adversely affected by a number of factors outside of our control which may result in a material adverse effect on our business, financial condition or results of operations.

 

The business of exploring for and producing oil and gas involves a substantial risk of investment loss. Drilling oil and gas wells involves the risk that the wells may be unproductive or that, although productive, the wells may not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic if water or other deleterious substances are encountered that impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. There can be no assurance that oil and gas will be produced from the properties in which we have interests. In addition, the marketability of oil and gas that may be acquired or discovered may be influenced by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas, gathering systems, pipelines and processing equipment, market fluctuations in oil and gas prices, taxes, royalties, land tenure, allowable production and environmental protection. We cannot predict how these factors may affect our business.

 

We may be unable to retain our leases and working interests in our leases, which would result in significant financial losses to our company.

 

Our properties are held under oil and gas leases. If we fail to meet the specific requirements of each lease, such lease may terminate or expire. We cannot assure you that any of the obligations required to maintain each lease will be met. The termination or expiration of our leases may harm our business. Our property interests will terminate unless we fulfill certain obligations under the terms of our leases and other agreements related to such properties. If we are unable to satisfy these conditions on a timely basis, we may lose our rights in these properties. The termination of our interests in these properties may harm our business. In addition, we will need significant funds to meet capital requirements for the exploration activities that we intend to conduct on our properties.

 

Our Godin project is complex undertakings and may not be completed at our estimated cost or at all.

 

We, through our wholly owned subsidiary Colony Energy, LLC, 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 Northern Alberta. The Godin project is complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment.

 

18
 

 

Risks Related to Our Common Stock

 

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.

 

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a significant portion of our operations have been and will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new properties and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

 

The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.

 

If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

 

Our articles of incorporation, as amended, authorize the issuance of up to 750,000,000 shares of common stock with a par value of $0.001. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.

 

Trading of our stock may be restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.

 

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

 

19
 

 

The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.

 

Our common stock currently trades on a limited basis on OTCQB operated by the OTC Markets Group and TSX Venture Exchange. Trading of our stock through OTCQB and TSX Venture Exchange is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

 

Item 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. PROPERTIES

 

Executive Offices and Registered Agent

 

Our operational office is located at Suite 1020, 909 11th Avenue, S.W., Calgary, Alberta Canada T2R 0E7. Our administrative office is located at Suite 1588, 609 Granville Street, Vancouver, British Columbia, Canada V7Y 1G5.

 

Property

 

Reserves

 

The following table discloses our gross and net proved reserves with the totals itemized as per Canada and the United States, estimated using forecast prices and costs, by product type. “Forecast prices and costs” means future prices and costs that are generally accepted as being a reasonable outlook of the future, or fixed or currently determinable future prices or costs to which we are bound.

 

20
 

 

   Oil   Natural Gas     
   Light/Medium Crude   Heavy Crude   Tight Oil   Solution Gas   Conventional   Total BOE 
   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Share 
   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net 
CATEGORY  Mstb   Mstb   Mstb   Mstb   Mstb   Mstb   MMCF   MMCF   MMCF   MMCF   Mboe   Boe 
                                                 
PDNP                                                            
PUD                                                            
TP                                                            
PB   66.4    59.1    27208.7    23399.5                                  27275.1    23458.6 
P+P   66.4    59.1    27208.7    23399.5                                  27275.1    23458.6 
POSS   0    0    49546.2    42609.8                                  49546.2    42609.8 
P+P+P   66.4    59.1    76754.9    66009.3                                 76821.3    66068.4 

 

Canada Volumes in Metric Units

 

    Oil     Natural Gas        
    Light/Medium Crude     Heavy Crude     Tight Oil     Solution Gas     Conventional     Total BOE  
    W.I. Co. Share     W.I. Co. Share     W.I. Co. Share     W.I. Co. Share     W.I. Co. Share     W.I. Share  
    Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net     Gross     Net  
CATEGORY   E3m3     E3m3     E3m3     E3m3     E3m3     E3m3     E6m3     E6m3     E6m3     E6m3     Mboe     Boe  
                                                                         
PDNP                                                                                                
PUD                                                                                                
TP                                                                                                
PB     10.6       9.4       4325.7       3720.1                                                       4336       3729.5  
P+P     10.6       9.4       4325.7       3720.1                                                       4336       3729.5  
POSS     0       0       7877.0       6774.20                                                       7877       6774.2  
P+P+P     10.6       9.4       12202.7       10494.3                                                       12213.3       10503.7  

 

21
 

 

United States Volumes in Imperial Units

 

   Oil   Natural Gas     
   Light/Medium Crude   Heavy Crude   Tight Oil   Solution Gas   Conventional   Total BOE 
   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Share 
   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net 
CATEGORY  Mstb   Mstb   Mstb   Mstb   Mstb   Mstb   MMCF   MMCF   MMCF   MMCF   Mboe   Boe 
                                                             
PDNP                       197.8    168.1                        197.8    168.1 
PUD                       189.0    160.6                        189.0    160.6 
TP                       386.8    328.7                        386.8    328.7 
PB                       1350.2    1147.7                        1350.2    1147.7 
P+P                       1737.0    1476.4                        1737.0    1476.4 
POSS                       25943.9    22052.4                        25943.9    22052.4 
P+P+P                      27680.9    23528.8                      27680.9    23528.8 

 

United States Volumes in Metric Units

 

   Oil   Natural Gas     
   Light/Medium Crude   Heavy Crude   Tight Oil   Solution Gas   Conventional   Total BOE 
  

W.I. Co. Share

   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Co. Share   W.I. Share 
   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net 
CATEGORY  E3m3   E3m3   E3m3   E3m3   E3m3   E3m3   E6m3   E6m3   E6m3   E6m3   Mboe   Boe 
                                                 
PDNP                       31.4    26.7                        31.4    26.7 
PUD                       30.0    25.5                        30.0    25.5 
TP                       61.4    52.2                        61.4    52.2 
PB                       214.7    182.4                        214.7    182.4 
P+P                       276.1    234.6                        276.1    234.6 
POSS                       4124.6    3505.9                        4124.6    3505.9 
P+P+P                   4400.7    3740.5                    4400.7    3740.5 

 

The following table discloses, in the aggregate, the net present value of our future net revenue attributable to the reserves categories in the previous table, estimated using forecast prices and costs, before and after deducting future income tax expenses, and calculated without discount and using discount rates of 0 percent, 5 percent, 10 percent, 15 percent and 20 percent.

 

CANADA  Net Present Value of Future Cash Flow 
   BEFORE TAX 
Reserve Category  0.00%   5.00%   10.00%   15.00%   20.00% 
   MM$C   MM$C   MM$C   MM$C   MM$C 
Total Proved   0    0    0    0    0 
Total Probable   694.8    542.6    429.4    343.9    248.4 
Total Proved + Probable   694.8    542.6    429.4    343.9    278.4 
Total Possible   1335.0    931.1    662.5    480.1    353.5 
Total Proved + Prob. + Poss.   2029.8    1473.7    1091.9    824.0    631.9 

 

22
 

 

UTAH – Moenkopi  Net Present Value of Future Cash Flow 
   BEFORE TAX 
Reserve Category  0.00%   5.00%   10.00%   15.00%   20.00% 
   MM$C   MM$C   MM$C   MM$C   MM$C 
Total Proved   8.6    6.6    5.3    4.3    3.5 
Total Probable   30.2    22.9    17.9    14.4    11.7 
Total Proved + Probable   38.8    29.5    23.2    18.7    15.2 
Total Possible   588.1    431.7    326.8    253.9    201.2 
Total Proved + Prob. + Poss.   626.9    461.2    350.0    272.6    216.4 

 

The following two tables provide additional information regarding the future net revenue attributable to total proved reserves outlined in the previous table. This table discloses, in the aggregate, certain elements of our future net revenue attributable to our proved reserves and our proved plus probable reserves, estimated using forecast prices and costs, and calculated without discount.

 

Effective: March 1, 2020

 

Reserve
Category
  CANADA Undiscounted Company Share Cash Flow 
   Revenue  

Royalties/

Burdens

   Op. Costs   Abandonment  

Net. Op.

Income

   Capital Costs   BT Cash Flow 
   MM$CDN   MM$CDN   MM$CDN   MM$CDN   MM$CDN   MM$CDN   MM$CDN 
Total Proven   0    0    0    0    0    0    0 
Total Probable   1469.4    205.6    458.2    2.6    803.0    108.1    694.8 
Total Proved + Probable   1469.4    205.6    458.2    2.6    803.0    108.1    694.8 
Total Possible   2679.4    375.1    831.5    4.6    1468.1    133.2    1335.0 
Total Proved + Prob. + Poss.   4148.8    580.7    1289.7    7.2    2271.1    241.3    2029.8 

 

Reserve
Category
  Moenkopi Utah Undiscounted Company Share Cash Flow 
   Revenue  

Royalties/

Burdens

   Op. Costs   Abandonment  

Net. Op.

Income

   Capital Costs   BT Cash Flow 
    MM$CDN    MM$CDN    MM$CDN    MM$CDN    MM$CDN    MM$CDN    MM$CDN 
Total Proven   18.6    2.8    5.1    .3    10.4    1.8    8.6 
Total Probable   64.9    9.7    17.8    .3    37.4    7.2    30.2 
Total Proved + Probable   83.5    12.5    22.9    .6    47.8    9.0    38.8 
Total Possible   1249.1    177.3    337.0    4.8    718.9    131.1    588.1 
Total Proved + Prob. + Poss.   1332.6    189.8    359.9    5.4    766.7    140.1    626.9 

 

This table discloses, by production group, the net present value of our future net revenue attributable to our proved and our proved plus probable reserves, before deducting future income tax expenses, estimated using forecast prices and costs, and calculated using a 10 percent discount rate.

 

Effective: March 1, 2020

 

CANADA

 

Reserve

 

Production

  Product Net Revenue   Unit Value 
Category  Group   MM$CDN    $CDN/unit 
Total Proved  Light Oil   0    0 
   Heavy Oil   0    0 
   Total   0    0 
Total Proved + Prob.  Light Oil   1.4    21.08 
   Heavy Oil   1335.0    26.97 
   Total   1336.4      
Total Proved + Prob. + Poss.  Light Oil   1.4    21.08 
   Heavy Oil   2028.4    26.45 
   Total   2029.8      

 

Moenkopi UNITED STATES

 

      Product Net Revenue   Unit Value 
Reserves Category  Production Group  MM$US   $US/unit 
Total Proved  Light Oil   8.6    22.28 
   Total   8.6    22.28 
Total Proved + Prob.  Light Oil   38.8    22.34 
   Total   38.8    22.34 

 

When used in this report, “Bbls” means barrels of oil. We also use a number of terms when describing reserves. “Proved reserves” are the quantities of oil that, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible. We provide information on two types of proved reserves - developed and undeveloped. “Proved developed reserves” are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. “Proved undeveloped reserves” are reasonably certain reserves in drilling units immediately adjacent to the drilling unit containing a producing well as well as areas beyond one offsetting drilling unit from a producing well.

 

Under SEC rules we are also permitted to provide information about probable and possible reserves. “Probable reserves” are additional reserves that are less certain to be recovered than proved reserves but which, in sum with proved reserves, are as likely as not to be recovered. “Possible reserves” are additional reserves that are less certain to be recovered than probable reserves. The various reserve categories have different risks associated with them. Proved reserves are more likely to be produced than probable reserves and probable reserves are more likely to be produced than possible reserves. Because of these risks, the different reserve categories should not be considered to be directly additive.

 

The term “Boe” may be misleading, particularly if used in isolation. A Boe conversion ratio of eight thousand cubic feet of natural gas to barrels of oil (8 Mcf: 1 Bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 8 Mcf :1 Bbl, utilizing a conversion ratio at 8 Mcf: 1 Bbl may be misleading as an indication of value.

 

It should not be assumed that the present worth of estimated future net revenue represents the fair market value of the reserves. There is no assurance that the escalating price and cost assumptions contained in the Apex 2017 Report will be attained and variances could be material. The reserve and revenue estimates set forth below are estimates only and the actual reserves and realized revenue may be greater or less than those calculated.

 

All reserve definitions comply with the applicable definitions of the rules of the SEC. The reserves were estimated using engineering and geological methods widely accepted in the oil and gas industry. The accuracy of the reserve estimates is dependent upon the quality of available data and upon independent geological and engineering interpretation of that data. For proved developed producing, the estimates considered to be definitive, using performance methods that utilize extrapolations of various historical data including oil and water production and pressure history. For other than proved producing, proved undeveloped reserves and probable and possible reserve estimates were made using volumetric methods.

 

Our policies regarding internal controls over reserve estimates require reserves to be in compliance with the SEC definitions and guidance and for reserves to be prepared under the supervision of our Chief Executive Officer. There was no conversion of undeveloped reserves to prove reserves during the fiscal year ended February 29, 2020.

 

23
 

 

2020 Price assumptions were used to determine cash flows in the non- fixed price tables.

 

Product  Oil   Moenkopi   Moenkopi   Oil   Godin   Compeer 
Item Type  Parent   Offset   Result   Parent   Result   Result 
Name  WTI   & Trans.   Oil   WCS   Oil   Oil 
Unit  US$/BBL   $US/BBL   US$/BBL   CDN$/BBL   CDN$/BBL   CDN$/BBL 
Jan – 20  $30.00    7   $23.00   $20.00   $20.00   $

40.00

 
Jan – 21  $40.00    7   $33.00   $35.00   $35.00   $

53.33

 
Jan – 22  $50.00    7   $43.00   $45.00   $45.00   $

66.67

 
Jan – 23  $52.50    7   $42.50   $50.00   $50.00   $

70.00

 
Jan – 24  $55.00    7   $48.00   $55.00   $55.00   $

73.33

 
Jan – 25  $57.50    7   $50.50   $57.00   $57.00   $

76.67

 
Jan – 26  $58.50    7   $51.50   $58.00   $58.00   $

78.00

 
Jan – 27  $60.00    7   $53.00   $59.00   $59.00   $

80.00

 
Jan – 28  $61.00    7   $54.00   $61.00   $61.00   $

81.33

 
Jan – 29  $62.00    7   $55.00   $62.00   $62.00   $

82.67

 
Jan – 30  $63.00    7   $56.00   $63.00   $63.00   $

84.00

 
Jan – 31  $64.00    7   $57.00   $64.00   $64.00   $

85.33

 
Jan – 30  $65,00    7   $58.00   $65.00   $65.00   $

86.68

 

 

Proved undeveloped reserves and Probable Reserves.

 

Canadian Assets

 

Compeer

 

As of March 1, 2020, we have modified the proven reserves in the Compeer property from proven non-producing to probable. No other categories of reserves were modified with the Compeer Property. One producing well was drilled, namely Big Lake Compeer 100/04-32-033-02W4/00 in the fiscal year ending February 28, 2013. The well was shut-in for most of 2019-20 as the market price was too low to justify operations. Production for the fiscal year was zero barrels. Fortem will workover the well in September of 2020.

 

Godin

 

As of March 1, 2020, we have seven sections of probable reserves within the Godin property to be developed, and thirteen sections of possible reserves to be developed within the Godin property. The Godin Property is a heavy oil asset subject to WCS (Western Canadian Select pricing).

 

United States Assets

 

From the testing of the Wellington Flats 15-1811E well, it was decided that Section 18 had proven reserves in the TXS. Half of the section was deemed proven developed and the other half proven undeveloped. Surrounding Section 18 there were six sections that were deemed probable reserves in the TXS. The remaining land has been grouped within Contingent Resource categories for the TXS, the Sinbad and the Torrey A & B formations.

 

There were no material changes in proved undeveloped reserves that occurred during the year ended February 29, 2020, including proved undeveloped reserves converted into proved developed reserves.

 

We have no proved undeveloped reserves in individual fields or countries that remain undeveloped for five years or more.

 

Oil and gas production, production prices and production costs.

 

During the year ended February 29, 2020, we have not had any oil sales or production.

 

24
 

 

Drilling and other exploratory and development activities.

 

The number of net productive and dry exploratory wells drilled was one productive (but non-producing at this time) well in the Compeer area of eastern Alberta, Canada in the fiscal year ended February 29, 2020. There was no previous drilling or exploratory activities.

 

Present activities.

 

There are no current drilling activities.

 

Delivery commitments.

 

We have no oil or gas delivery commitments.

 

Oil and gas properties, wells, operations, and acreage.

 

Canadian Assets

 

Compeer – We have one well on 160 developed acres. We have 2,378 gross acres and 2,260 net undeveloped acres at Compeer.

 

Godin – We have twenty sections (~12,800 acres) of undeveloped acres at Godin with an ownership of 100%.

 

United States Assets

 

Black Dragon - Moenkopi – We own a 75 percent joint venture working interest and are the operator in which holds 150,178 (net acres) of land in the Unita Basin of Utah.

 

Rolling Rock - We own a 75 percent interest in a joint venture containing 130,942 (65,471 net) acres of land (as of February 29, 2020). We place a value on the land of $1,527,729 on our land interests at this time. We are in the process of having a valuation of hydrocarbon potential carried out. As of the effective date of the valuation of hydrocarbons was not complete. Therefore no value of hydrocarbon potential is available as of our year end for the Mancos Project.

 

25
 

 

ITEM 3. LEGAL PROCEEDINGS

 

Other than as disclosed below, we know of no material pending legal proceedings to which our company or our subsidiary is a party or of which any of our properties, or the properties of our subsidiary, is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

 

We know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder is a party adverse to our company or our subsidiary or has a material interest adverse to our company or our subsidiary.

 

We were subject to the following claims:

 

Court/Registry   Date Instituted   Principal Parties   Description of Claim
Court of Queen’s Bench of Alberta   July 23, 2013   Plaintiff: Baker Hughes Canada Company; Defendant: Fortem Resources Inc., also known as Big Lake Energy Ltd.  

A Statement of Claim was filed July 23, 2013, whereby the Plaintiff is suing the Defendant for the sum of CAD$281,267.68 representing the amount owing for oil-field services and equipment, including cementing and fishing products and services provided by the Plaintiff.

 

In December 2015, the Company reached a settlement agreement for a total of $149,784 (CAD$200,000) in eight equal monthly installments of $18,723 (CAD$25,000) starting February 1, 2016. Upon receipt of the final installment, the vendor agreed to discontinue the claim and provide a release to the Company. The Company only made one instalment payment of CAD$25,000 applied against the original claim and the settlement agreement was defaulted. As a result, there was a balance owing of CAD$256,267 as at February 29, 2020.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

26
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market information

 

Our common stock is quoted on OTC Markets Group’s OTCQB under the trading symbol “FTMR”. Effective at the opening on August 23, 2018, shares of our common stock have been approved for trading on the TSX Venture Exchange in Canada under the symbol “FTM.”

 

Set forth below are the range of high and low bid quotations for our common stock from the OTCQB and high and low closing prices for our common stock from the TSX Venture Exchange for the periods indicated. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions:

 

 

OTCQB

(U.S. dollars)

  

TSX Venture

Exchange*

(Canadian dollars)

 
Quarter Ended  High   Low   High   Low 
February 29, 2020  $1.25   $0.85   $2.10   $2.10 
November 30, 2019  $1.58   $0.99   $2.10   $2.10 
August 31, 2019  $1.68   $1.27   $2.48   $2.10 
May 31, 2019  $2.24   $1.54   $1.50   $2.75 
February 28, 2019  $2.55   $2.01   $3.30   $2.75 
November 30, 2018  $3.95   $1.84   $5.50   $2.89 
August 31, 2018  $3.49   $2.22   $4.15   $3.90 
May 31, 2018  $3.75   $2.01    N/A    N/A 

 

On July 16, 2019, the Company’s common shares ceased trading on the TSX Venture Exchange pursuant to a cease trade order (“CTO”) issued by the Alberta Securities Commission (“ASC”).

 

Transfer Agent

 

Our shares of common stock are issued in registered form. The transfer agent and registrar for our common stock is Transhare Corporation, located at 2849 Executive Suite 200, Clearwater, Florida 33762. The co-transfer agent for our common stock is TSX Trust Company, located at 650 West Georgia Street, Suite 2700, Vancouver, British Columbia V6B 4N9, Canada.

 

Holders of Common Stock

 

As of July 20, 2020, there were approximately 75 holders of record of our common stock. As of such date, 122,571,156 shares were issued and outstanding.

 

Dividends

 

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

  we would not be able to pay our debts as they become due in the usual course of business; or
  our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution.

 

27
 

 

Securities authorized for issuance under equity compensation plans.

 

The following table summarizes certain information regarding our equity compensation plans as at February 29, 2020:

 

Plan category 

Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights

(a)

  

Weighted-average exercise
price of outstanding
options, warrants and
rights

(b)

  

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))

(c)

 
Equity compensation plans approved by security holders   Nil     N/A    Nil 
Equity compensation plans not approved by security holders(1)   2,000,000   $0.10    7,777,115 
Total   2,000,000   $0.10    7,777,115 

 

(1) Effective August 23, 2018, our board of directors approved the 2018 Stock Option Plan, pursuant to which we may grant stock options to purchase up to 9,777,115 shares of our common stock. The purpose of the 2018 Stock Option is to retain the services of valued key employees and consultants of our company and such other persons as our board of directors select, and to encourage such persons to acquire a greater proprietary interest in our company, thereby strengthening their incentive to achieve the objectives of our stockholders, and to serve as an aid and inducement in the hiring of new employees and to provide an equity incentive to consultants and other persons selected by our board of directors.

 

Recent sales of unregistered securities

 

Since the beginning of our fiscal year ended February 29, 2020, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a quarterly report on Form 10-Q or in a current report on Form 8-K.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report on Form 10-K.

 

28
 

 

General

 

We are focused on the acquisition, exploration, and development of oil and gas properties in the United States and Canada. As of February 29, 2020 we did not have any revenue from commercial production.

 

Results of Operations

 

Years Ended February 29, 2020 and February 28, 2019

 

The following summary of our results of operations should be read in conjunction with our audited financial statements for the years ended February 29, 2020 and February 28, 2019 which are included herein:

 

   February 29, 2020   February 28, 2019 
Revenue  $-   $- 
Expenses   (1,380,589)   (1,377,152)
Net Loss  $(67,961,387)  $(1,549,470)

 

Revenues

 

During the years ended February 29, 2020 and February 28, 2019, we did not generate any revenues from commercial production.

 

Expenses

 

Expenses increased slightly during the year ended February 29, 2020 to $1,380,589 as compared to $1,377,152 during the year ended February 28, 2019.

 

The table below details the changes in major expenditures for the year ended February 29, 2020 as compared to the corresponding year ended February 28, 2019:

 

Expenses   Increase / Decrease in Expenses  

Explanation for Change

Consulting fees   Decrease of $239,293  

Decrease in the current period as consulting fees related to the oil and gas properties in Canada and US are capitalized in fiscal 2020.

 

Management fees   Decrease of $85,000  

Decreased due to lower management fees paid to the CEO.

 

Office, travel and general expenses   Increase of $50,771  

Increased due to more corporate activities, higher insurance costs, marketing, and travel expenses for site visits and marketing.

 

Professional fees   Increase of $273,501   Increased in the current year as more professional services were used for corporate filings, accounting, and professional services.

 

For the year ended February 29, 2020, we recorded an full cost pool ceiling test write down as a result of the impairment and transfer of $66,278,600 of unevaluated costs to the full cost amortization base as a result of the decline in oil prices, along with a $64,475,824 accelerated depreciation charge related to impaired unevaluated properties. In addition, the Company wrote off the investment of $1,500,000 in Asia Pacific.

 

29
 

 

Liquidity and Capital Resources

 

Working Capital

 

   At February 29, 2020   At February 28, 2019 
Current assets  $100,853   $129,661 
Current liabilities   3,321,545    1,290,159 
Working capital deficit  $(3,220,692)  $(1,160,498)

 

We had cash of $13,022 and a working capital deficit of $3,220,692 as of February 29, 2020 compared to cash of $35,171 and a working capital deficit of $1,160,498 as of February 28, 2019.

 

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 ended February 29, 2020, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

 

Cash Flows

 

   Year   Year 
   ended   ended 
   February 29,   February 28, 
   2020   2019 
Cash used in operating activities  $(841,308)  $(1,241,180)
Cash provided by financing activities   1,343,912    1,993,737 
Cash used in investing activities   (524,753)   (894,281)
Change in cash  $(22,149)  $(141,724)

 

Cash Used in Operating Activities

 

Our cash used in operating activities for the year ended February 29, 2020, compared to our cash used in operating activities for the year ended February 28, 2019, decreased by $399,872, primarily due to decreased used of cash in general and administrative expenses from operations in the current year.

 

30
 

 

Cash Provided by Financing Activities

 

Our cash provided by financing activities for the year ended February 29, 2020, compared to our cash provided by financing activities for the year ended February 28, 2019, decreased by $649,825 mainly due to the CTO that prohibited us to issue shares for cash.

 

Cash Used in Investing Activities

 

Our cash used in investing activities for the year ended February 29, 2020, compared to our cash used in investing activities for the year ended February 28, 2019, decreased by $369,528 due to a decrease in expenditures on oil and gas properties.

 

Outstanding Shares, Options, Warrants and Convertible Securities

 

As of July 20, 2020, we have 122,571,156 shares of common stock outstanding, 2,000,000 stock options outstanding and no warrants outstanding.

 

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 audited financial statements and information for the year ended February 29, 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 revenues to date and have incurred a net loss of $67,961,387 during the year ended February 29, 2020, and $107,033,456 from inception (July 9, 2004) through February 29, 2020. 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.

 

Application of Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to carrying values of oil and gas properties and investments, the assumptions used to record asset retirement obligations, the assumptions used to determine the fair value of derivative financial assets and liabilities, and valuation of share-based payments.

 

The process of estimating carrying value of oil and gas properties and unproven properties is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given property may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that the Company’s reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. Where impairment indicators are present, the Company uses the probable reserves to prepare a value estimate using a discounted cash flow (“DCF”) model over the estimated production life and discount rates commensurate with estimated risks associated with those cash flows.

 

31
 

 

Foreign Currency Translation

 

The Company’s functional currency is the United States Dollar. The Company’s equity and debt financings as well as the majority of the Company’s expenses and acquisitions are denominated in US dollars.

 

Foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the period. Related translation adjustments are reported as a separate component of stockholders’ equity (deficiency), whereas gains or losses resulting from foreign currency transactions are included in the results of operations.

 

Oil and Gas Properties

 

The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool on a country-by country basis. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.

 

The capitalized costs included in the full cost pool are subject to a “ceiling test”, which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized.

 

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations. The Company’s oil and gas properties are under development with minimal production to date. Accordingly, no amortization is being recorded.

 

Asset Retirement Obligations

 

The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until the Company settles the obligation.

 

Equipment

 

Equipment is recorded at cost and amortized on a straight line basis over 20 years.

 

Deferred Income Taxes

 

The Company recognizes deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. The Company records a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, the Company is required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results.

 

32
 

 

In addition to considering forecasts of future taxable income, the Company is also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of the Company’s deferred tax assets, namely the reversal of existing deferred tax liabilities, the carry back of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets.

 

Environmental Expenditures

 

Oil and gas activities are subject to extensive federal and state environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites.

 

Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Expenditures that have future economic benefits are capitalized. Liabilities for expenditures of a non-capital nature are recorded when an environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.

 

Impairment of Long-Term Assets

 

The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas interests accounted for under the full cost method where proved reserve assets are subject to a ceiling test and unproved reserve assets are reviewed for impairment indicators and, where such indicators are present, prepares a DCF to determine value, as described above, are excluded from this requirement.

 

Loss per share

 

We present both basic and diluted earnings (loss) per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Diluted EPS figures are equal to those of basic EPS for each period since we have incurred losses since inception.

 

Share-Based Payments

 

The Company follows the fair value recognition provisions in ASC 718, Stock Compensation (“ASC 718”) and the provisions of ASC 505 (“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense recognized during the year includes compensation expense for all share-based payments based on a grant date fair value estimated in accordance with the provisions in the FASB guidance for stock compensation. The grant date is the date at which an employer and employee reach a mutual understanding of the key terms and conditions of a share based payment award.

 

Derivative Financial Instruments

 

The Company evaluates the financial instruments such as convertible notes to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

 

Recently issued accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update changes the fair value measurement disclosure requirements. It summarizes the key provisions including the new, eliminated, and modified disclosure requirements. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the timing of adoption and impact of this new standard on the Company’s consolidated financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

33
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED FEBRUARY 29, 2020

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 35
   
CONSOLIDATED BALANCE SHEETS 36
   
CONSOLIDATED STATEMENTS OF OPERATIONS 37
   
CONSOLIDATED STATEMENTS OF CASH FLOWS 38
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 39
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40

 

34
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Directors of

Fortem Resources Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Fortem Resources Inc. (the “Company”), as of February 29, 2020 and February 28, 2019, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years ended February 29, 2020 and February 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Fortem Resources Inc. as of February 29, 2020 and February 28, 2019, and the results of its operations and its cash flows for the years ended February 29, 2020 and February 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company’s auditor since 2018.

 

  “DAVIDSON & COMPANY LLP”
   
Vancouver, Canada Chartered Professional Accountants

 

July 20, 2020

 

 

35
 

 

FORTEM RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)        

 

   February 29, 2020   February 28, 2019 
   $   $ 
ASSETS          
Current assets          
Cash   13,022    35,171 
Receivables   18,925    12,221 
Prepaid expenses and deposit (Note 7)   20,514    69,753 
Due from related parties (Note 7)   48,392    12,516 
Total current assets   100,853    129,661 
           
Deposit (Note 5)   43,517    43,498 
Equipment (Note 4)   47,526    51,090 
Investment in Asia Pacific Mining Ltd. (Note 3)   -    1,500,000 
Deferred acquisition costs (Note 13)   -    229,994 
Right to the acquisition of mineral exploration project (Note 3)   1    1 
Oil and gas properties, full cost method (Note 5)   76,935,275    140,881,572 
Total assets   77,127,172    142,835,816 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities (Note 6)   1,684,901    1,172,602 
Due to related parties (Note 7)   113,094    40,354 
Related party loan payable (Note 7)   57,261    57,261 
Notes payable (Note 8)   1,466,289    19,942 
Total current liabilities   3,321,545    1,290,159 
           
Long term notes payable (Note 9)   532,319    500,000 
Asset retirement obligation (Note 10)   32,310    29,272 
Deferred tax liability (Notes 5 and 17)   16,215,677    16,215,677 
Total liabilities   20,101,851    18,035,108 
           
Stockholders’ equity          
Share capital (Note 11)          
Authorized:          
750,000,000 common shares, par value $0.001 per share          
Issued and outstanding:          
122,571,156 common shares (122,071,156 at February 28, 2019)   122,570    122,070 
Additional paid in capital   160,719,464    160,533,964 
Obligation to issue shares (Note 5)   3,600,000    3,600,000 
Accumulated other comprehensive loss   (383,257)   (383,257)
Accumulated deficit   (107,033,456)   (39,072,069)
Total stockholders’ equity   57,025,321    124,800,708 
Total stockholders’ equity and liabilities   77,127,172    142,835,816 

 

Nature and Continuance of Operations (Note 1), Subsequent Events (Note 18)

 

The accompanying notes are an integral part of these consolidated financial statements

 

36
 

 

FORTEM RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US dollars)

 

   For the year ended 
   February 29, 2020   February 28, 2019 
   $   $ 
         
General and administrative expenses          
Accretion of asset retirement obligation (Note 10)   2,975    2,736 
Consulting   61,894    301,187 
Depreciation (Note 4)   3,564    3,564 
Investor relations   41,180    37,961 
Management fees   215,000    300,000 
Office, travel and general   464,235    413,464 
Professional fees   591,741    318,240 
           
Loss from operations   (1,380,589)   (1,377,152)
           
Foreign exchange gain (loss)   38,236    (5,187)
Gain on settlement of debt (Note 6)   27,227    4,058 
Interest income   876    17,761 
Interest expense   (291,419)   (83,690)
Loss on write off of loan receivable (Note 12)   -    (105,260)
Loss on write off of investment (Note 3)   (1,500,000)   - 
Loss on write off of deferred acquisition costs (Note 13)   (379,894)   - 
Loss on write down of oil and gas properties (Note 5)   (64,475,824)   - 
    (66,580,798)   (172,318)
           
Loss and comprehensive loss for the year   (67,961,387)   (1,549,470)
           
Basic and diluted loss per share   (0.55)   (0.01)
           
Weighted average number of basic and diluted common shares outstanding   122,562,959    120,566,476 

 

The accompanying notes are an integral part of these consolidated financial statements

 

37
 

 

FORTEM RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in US dollars)

 

   For the year ended 
   February 29, 2020   February 28, 2019 
   $   $ 
         
Cash flows used in operating activities          
Loss for the year   (67,961,387)   (1,549,470)
Non-cash items          
Accretion of asset retirement obligation   2,975    2,736 
Depreciation   3,564    3,564 
Gain on settlement of debt   (27,227)   (4,058)
Loss on write off of deferred acquisition costs   379,894    - 
Loss on write off of investment   1,500,000      
Loss on write off of loan receivable   -    105,260 
Loss on write down of oil and gas properties   64,475,824    - 
Accrued management fees and expenses   230,538    - 
Interest income accrued   876    (16,268)
Interest expense   291,419    1,508 
Unrealized foreign exchange   (832)   7,077 
Changes in non-cash working capital items          
Receivables   (6,704)   (2,540)
Prepaid expenses and deposit   49,239    (33,947)
Accounts payable and accrued liabilities   220,513    244,958 
Cash used in operating activities   (841,308)   (1,241,180)
           
Cash flows used in investing activities          
Expenditures on oil and gas properties   (374,853)   (664,287)
Deferred acquisition costs   (149,900)   (229,994)
Cash used in investing activities   (524,753)   (894,281)
           
Cash flows from financing activities          
Issuance of share capital, net of issuance costs   -    1,242,332 
Proceeds from warrants exercised, net of issuance costs   186,000    909,479 
Proceeds from options exercised   -    30,000 
Share subscription receivable   -    200,000 
Notes payable   1,351,587    500,000 
Net proceeds from (repaid to) related parties   (193,675)   (888,074)
Cash provided by financing activities   1,343,912    1,993,737 
           
Change in cash   (22,149)   (141,724)
Cash, beginning of year   35,171    176,895 
Cash, end of year   13,022    35,171 
           
Non-cash transactions          
Oil and gas properties expenditures in accounts payable   1,096,875    288,067 
Common stock issued for oil and gas properties   -    1,800,000 

 

The accompanying notes are an integral part of these consolidated financial statements

 

38
 

 

FORTEM RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Expressed in US dollars)

 

   Share Capital   Additional   Obligation       Accumulated Other   Total 
   Number       Paid In   To Issue       Comprehensive   Stockholders’ 
   of Shares   Amount   Capital   Shares   Deficit   Loss   Equity 
       $   $   $   $   $   $ 
Balance, February 28, 2018   117,872,458    117,873    156,556,350    5,400,000    (37,522,599)   (383,257)   123,968,367 
                                    
Common stock issued for cash   625,000    625    1,241,707    -    -    -    1,242,332 
Common stock issued for oil and gas properties   1,000,000    1,000    1,799,000    (1,800,000)   -    -    - 
Options exercised   300,000    300    29,700    -    -    -    30,000 
Warrants exercised   2,273,698    2,272    907,207    -    -    -    1,109,479 
Loss for the year   -    -    -    -    (1,549,470)   -    (1,549,470)
Balance, February 28, 2019   122,071,156    122,070    160,533,964    3,600,000    (39,072,069)   (383,257)   124,800,708 
                                    
Warrants exercised   500,000    500    199,500    -    -    -    200,000 
Share issue costs   -    -    (14,000)   -    -    -    (14,000)
Loss for the year   -    -    -    -    (67,961,387)   -    (67,961,387)
Balance, February 29, 2020   122,571,156    122,570    160,719,464    3,600,000    (107,033,456)   (383,257)   57,025,321 

 

The accompanying notes are an integral part of these consolidated financial statements

 

39
 

 

FORTEM RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended February 29, 2020

(Expressed in US dollars)

 

1. NATURE AND CONTINUANCE OF OPERATIONS

 

Fortem Resources Inc. (the “Company”) was incorporated in the State of Nevada on July 9, 2004. The Company focuses its business efforts on the acquisition, exploration, and development of oil and gas properties.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of February 29, 2020, the Company has not achieved profitable operations, has incurred losses in developing its business, and further losses are anticipated. The Company has an accumulated deficit of $107,033,456.

 

The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and pay its liabilities when they come due. To date, the Company has funded operations through the issuance of capital stock and debt. Management plans to continue raising additional funds through equity or debt financings and loans from directors. There is no certainty that further funding will be available as needed. These factors raise substantial doubt about the ability of the Company to continue operating as a going concern. The ability of the Company to continue its operations as a going concern is dependent upon its ability to raise sufficient new capital to fund its operating commitments and ongoing losses and ultimately on generating profitable operations. The consolidated financial statements do not include any adjustments to be recorded to assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

 

On July 16, 2019, the Company’s common shares ceased trading on the TSX Venture Exchange pursuant to a cease trade order (“CTO”) issued by the Alberta Securities Commission (“ASC”).

 

The Company’s operations, financings, and assets have been negatively impacted by the CTO, falling oil prices and demand, the COVID-19 pandemic (Note 18) among other items.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States (“US GAAP’), and are expressed in United States dollars. The Company has not produced material revenues from its principal business to date.

 

Basis of Consolidation

 

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Colony Energy, LLC, (“Colony”) Black Dragon Energy, LLC, (“Black Dragon”) Rolling Rock Resources, LLC (“Rolling Rock”) and City of Gold, LLC (“City of Gold”). All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated upon consolidation.

 

Foreign Currency Translation

 

The Company’s functional currency is the United States Dollar. The Company’s equity and debt financings as well as the majority of the Company’s expenses and acquisitions are denominated in US dollars.

 

Foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the period. Related translation adjustments are reported as a separate component of stockholders’ equity (deficiency), whereas gains or losses resulting from foreign currency transactions are included in the results of operations.

 

40
 

 

FORTEM RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended February 29, 2020

(Expressed in US dollars)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to carrying values of oil and gas properties and rights to acquisition, the assumptions used to record asset retirement obligations, the assumptions used to determine the fair value of derivative financial assets and liabilities, and valuation of share-based payments.

 

The process of estimating carrying value of oil and gas properties and unproven properties is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. The data for a given property may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that the Company’s reserve estimates represent the most accurate assessments possible, subjective decisions, and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. Where impairment indicators are present, the Company uses the probable reserves to prepare a value estimate using a discounted cash flow (“DCF”) model over the estimated production life and discount rates commensurate with estimated risks associated with those cash flows.

 

Oil and Gas Properties

 

The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool on a country-by country basis. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.

 

The capitalized costs included in the full cost pool are subject to a “ceiling test”, which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized.

 

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations. The Company’s oil and gas properties are under development with minimal production to date. Accordingly, no amortization is being recorded.

 

Equipment

 

Equipment is recorded at cost and amortized on a straight line basis over 20 years.

 

41
 

 

FORTEM RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended February 29, 2020

(Expressed in US dollars)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Asset Retirement Obligations

 

The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until the Company settles the obligation.

 

Deferred Acquisition Costs

 

Deferred acquisition costs relate to costs capitalized on a pending transaction. Upon successful completion of the transaction, these costs will be transferred as part of the transaction, otherwise they will be written off to profit or loss.

 

Environmental Expenditures

 

Oil and gas activities are subject to extensive federal and state environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites.

 

Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Expenditures that have future economic benefits are capitalized. Liabilities for expenditures of a non-capital nature are recorded when an environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.

 

Impairment of Long-Term Assets

 

The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas interests accounted for under the full cost method where proved reserve assets are subject to a ceiling test and unproved reserve assets are reviewed for impairment indicators and, where such indicators are present, prepares a DCF to determine value.

 

Basic and Diluted Income (Loss) per Share

 

Earnings or loss per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted-average of all potentially dilutive shares of the common stock that were outstanding during the years presented. There were 2,000,000 (2019 – 2,750,000) potentially dilutive securities excluded from the calculation of diluted loss per share as their effect would be anti-dilutive.

 

The treasury stock method is used in calculating diluted EPS for potentially dilutive stock options and share purchase warrants, which assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants, would be used to purchase common shares at the average market price for the period.

 

Share-Based Payments

 

The Company follows the fair value recognition provisions in ASC 718, Stock Compensation (“ASC 718”) and the provisions of ASC 505 (“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense recognized during the year includes compensation expense for all share-based payments based on a grant date fair value estimated in accordance with the provisions in the FASB guidance for stock compensation. The grant date is the date at which an employer and employee reach a mutual understanding of the key terms and conditions of a share based payment award.

 

Deferred Income Taxes

 

The Company recognizes deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. The Company records a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, the Company is required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results.

 

42
 

 

FORTEM RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended February 29, 2020

(Expressed in US dollars)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Deferred Income Taxes (continued)

 

In addition to considering forecasts of future taxable income, the Company is also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of the Company’s deferred tax assets, namely the reversal of existing deferred tax liabilities, the carry back of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets.

 

Derivative Financial Instruments

 

The Company evaluates the financial instruments such as convertible notes to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update changes the fair value measurement disclosure requirements. It summarizes the key provisions including the new, eliminated, and modified disclosure requirements. This update is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the timing of adoption and impact of this new standard on the Company’s consolidated financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.

 

3. INVESTMENT AND RIGHTS IN ASIA PACIFIC MINING LTD.