Quarterly report pursuant to Section 13 or 15(d)

Disposition of Bow Energy Ltd., A Related Party

v3.19.1
Disposition of Bow Energy Ltd., A Related Party
9 Months Ended
Sep. 30, 2018
Disposal Group, Not Discontinued Operation, Disposal Disclosures [Abstract]  
Disposition of Bow Energy Ltd., A Related Party

5. DISPOSITION OF BOW ENERGY LTD., A RELATED PARTY

 

Effective August 31, 2018, the Company entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“Blue Sky” and the “Exchange Agreement”). The President, Chief Executive Officer and 100% owner of Blue Sky is Ilyas Chaudhary, the Company’s Chief Executive Officer. As described above in Note 4, Mr. Chaudhary indirectly owns and controls BSIH, which controlled Bow prior to the acquisition of Bow as described in Note 4.

 

Pursuant to the Exchange Agreement, we exchanged 100% of the ownership of Bow, in consideration for:

 

  (a) 70,807,417 shares of the Company’s common stock owned and controlled by BSIH (the “Blue Sky Shares”);
  (b) $100,000 in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
  (c) the assumption of certain payables owed by Bow, including $730,000 owed under the terms of a Loan Agreement, as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow pursuant to the amendment to the Loan Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement);
  (d) 20% of BEIH, which was wholly-owned by Bow (which entity’s subsidiaries own certain PSCs and certain other participating assets), pursuant to an Assignment Agreement;
  (e) certain carry rights described in greater detail in the Exchange Agreement, providing for Blue Sky to carry the Company for up to the next $10 million of aggregate costs in BEIH and the PSC assets, with any profits from BEIH being distributed 80% to Bow and 20% to the Company, pursuant to a Petrolia Carry Agreement; and
  (f) a 3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which is wholly-owned by BEIH in the Bohorok, Indonesia PSC since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s share of the prior sunk cost of Bohorok, which royalty is evidenced by an Assignment of Petrolia Royalty).

 

The Exchange Agreement closed on August 31, 2018 and has an effective date of July 1, 2018. The Exchange Agreement contains customary and standard representations and warranties of the parties, indemnification obligations (which survive for six months following the closing) and closing conditions. The Company canceled the shares following the closing and returned such shares to the status of authorized but unissued shares of common stock. A total of 53,105,563 of the shares were cancelled during the three months ended September 30, 2018, and a total of 17,701,854 of the shares were cancelled in November 2018.

 

The gain on sale is summarized as follows:

 

Cash   $ 100,000  
Shares returned to treasury (70,807,417 shares at $0.07 per share)     4,956,519  
Total consideration received     5,056,519  
Less: Carrying value of net assets disposed     (1,376,743 )
Fair value of retained non-controlling interest (20% of $4,683,893 net liabilities of BEIH)     (1)
Gain on disposition of Bow Energy Ltd.   $ 3,679,776  

 

(1)Initially recognized at $nil as the entity is in a net liability position.

 

The fair value of the 70,807,417 common shares to be returned as part of the consideration paid for Bow was determined on the closing price of the stock on August 31, 2018 at $0.07 per share for a fair value of $4,956,519.

 

The retained non-controlling 20% interest in BEIH was initially recognized at fair value with a minimum value of $nil and is accounted for using the equity method. During the quarter ended September 30, 2018, the Company’s share of loss on its investment in BEIH was $11,247, which was not recorded against the carrying value as the investment is in a net liability position. The carrying value of the investment at September 30, 2018 is $nil.

 

The gain on disposition of Bow was recorded to offset the loss on acquisition of Bow incurred in the year.