Item 1.01 Entry into a Material Definitive Agreement
On April 12, 2017, our company entered into and closed a Membership Interest Purchase Agreement (the
MPA
) with Blue Phoenix Energy, LLC and Pacific Petroleum, LLC, whereby Blue Phoenix and Pacific Petroleum sold and transferred all of the outstanding membership interest of Black Dragon, LLC to our company in consideration for the pre-closing payment of US$100,000 as a non-refundable deposit and the issuance of an aggregate of 20 million common shares in the capital of our company, with 10 million shares issued to Blue Phoenix and 10 million issued to Pacific Petroleum.
Black Dragons sole asset consists of the rights and obligations arising from a Purchase and Sale Agreement dated effective March 1, 2017 (the
PSA
) between WEM Dragon, LLC (the
Seller
) and Black Dragon. Pursuant to the terms of the MPA, the parties may rescind the transactions, including the issuance of common shares thereunder, upon mutual agreement in the event that Black Dragon elects to terminate the PSA on or before April 17, 2017 due to the assertion by Black Dragon of one or more title defects as determined in accordance with the PSA. In the event that Black Dragon elects such termination and the parties have made certain closing deliveries under the MPA, such closing deliverables will be returned to the providing party and the closing under the MPA will be deemed not to have occurred (except for the payment of US$100,000 which was paid prior to closing on a non-refundable basis).
In consideration for the assignment of the assets from the Vendor to Black Dragon, Black Dragon has agreed to pay the Vendor a purchase price consisting of a cash component and a carry obligation as further set forth below. The assets to be conveyed by the Vendor to Black Dragon (the
Assets
) include certain leases, hydrocarbons, wells, agreements, equipment, surface rights agreements and assignable permits all as further set out in the PSA.
Cash Consideration
Under the PSA, Black Dragon has agreed to pay the Vendor cash consideration totalling US$2.7 million based upon the following schedule:
·
US$100,000 as a non-refundable deposit within 10 business days of closing (completed);
·
US$900,000 on or before September 1, 2017;
·
US$900,000 on or before March 1, 2018; and
·
US$800,000 on or before September 1, 2018.
However, if Black Dragon pays a total of US$2.4 million on or before September 1, 2017, the parties have agreed that the cash consideration above will be deemed to have been paid in full.
Carry Obligation
Under the 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 February 28, 2019, failing which, Black Dragons right to earn any assignment in and to the assets will terminate immediately. For each vertical well drilled to 200 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.
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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 Vendors right, title and interest in and to the assets, or a 80% net revenue interest in the assets as further described in the PSA. Except for a breach of any other representation or warranty of the Vendor, and as a due diligence right, Black Dragons sole and exclusive remedy with respect to any matter that constitutes a title defect will be to withdraw from the PSA on or before April 17, 2017 without cost or penalty and the PSA will be considered terminated, provided that the initial payment of US$100,000 will be non-refundable.
Joint Operating Agreement
The parties have agreed that the interests of the parties in the assets will be subject to the terms of a Joint Operating Agreement (the
JOA
), to the extent that all or any portion of the assets or interests related thereto are not subject to a third party operating agreement. Black Dragon will be designated as the operator under the JOA, subject only to its removal or resignation under the terms of the JOA or for good cause as determined in the PSA.
Additional Payments
On or before September 1, 2017, Black Dragon is required to pay WEM Dragon US$102,000 for rental, minimum royalty, option payments and shut-in royalty payments due on the leases through December 31, 2018.
The description of the PSA and the terms thereunder are qualified in their entirety by the full text of the agreement, a copy of which is attached hereto as Exhibit 10.1.
General
We issued shares to one U.S. person (as that term is defined in Regulation S of the Securities Act of 1933) relying on Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act of 1933. We issued shares to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(a)(2) of the Securities Act of 1933.
Except as disclosed in this Item 1.01, we are not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of our company.