Annual report pursuant to Section 13 and 15(d)

Disposition of Bow Energy Ltd., A Related Party

Disposition of Bow Energy Ltd., A Related Party
12 Months Ended
Dec. 31, 2018
Disposal Group, Not Discontinued Operation, Disposal Disclosures [Abstract]  
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 father of Zel C. Khan, 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, the Company 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 Mr. Chaudhary and 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 is wholly-owned by Bow (which entity’s subsidiaries own certain PCSs 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 survived for six months following the closing) and closing conditions. The Company canceled the Blue Sky Shares following the closing and returned such shares to the status of authorized but unissued shares of common stock.


The total consideration received for the sale of Bow is summarized as follows:


Cash   $ 100,000  
Shares returned to treasury (70,807,417 shares at $0.07 per share)     4,956,519  
Fair value of retained non-controlling interest (20% of $4,683,893 net liabilities of BEIH)    

Total consideration received   $ 5,056,519  


(1)Initially recognized at $0 as the entity is in a net liability position.


The fair value of the 70,807,417 common shares returned as part of the consideration paid for Bow was determined on the closing price of the stock on August 31, 2018, which was $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 $0 and is accounted for using the equity method. During the year ended December 31, 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 December 31, 2018 is $0.


The total loss on acquisition and disposition of Bow is summarized as follows:


Total consideration paid for the acquisition of Bow   $ 34,607,088  
Total consideration received for the disposition of Bow     (5,056,519 )
Change in net assets of Bow during the ownership period     (231,015 )
Loss on acquisition and disposition of Bow   $ 29,319,554