UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a – 16 OR 15d –
16 UNDER THE
THE SECURITIES EXCHANGE ACT OF 1934
For the month of July, 2015
Commission File No. 0-53646
Eagleford Energy Corp.
(Translation of Registrant’s name into
English)
1 King Street West, Suite 1505
Toronto, Ontario, Canada M5H 1A1 |
(Address of principal executive office)
Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40F.
Form 20-F x Form
40-F ¨
Indicate by check mark if the registrant is
submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes ¨ No
x
Indicate by check mark if the registrant is
submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes ¨ No
x
TABLE OF CONTENTS
1 Eagleford
Energy Corp. Unaudited Interim Condensed Consolidated Financial Statements for the Three and Nine Months Ended May 31, 2015 as
filed on Sedar on July 29, 2015.
2 Eagleford
Energy Corp. Management’s Discussion and Analysis for the Three and Nine Months Ended May 31, 2015 as filed on Sedar on July
29, 2015.
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: July 30, 2015 |
EAGLEFORD ENERGY CORP. |
|
|
|
|
By: |
/s/ James Cassina |
|
Name: James Cassina |
|
Title: President |
(Formerly: Eagleford Energy
Inc.)
Interim Condensed Consolidated
Financial Statements
For the Three and Nine
Months Ended May 31, 2015
(Unaudited)
(Expressed in Canadian
Dollars)
Notice of No Auditor Review
of
Interim Condensed Consolidated
Financial Statements
Under National Instrument
51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements they must be
accompanied by a notice indicating that the interim financial statements have not been reviewed by an auditor. The accompanying
unaudited interim consolidated financial statements of Eagleford Energy Corp. (the “Company”) have been prepared by
and are the responsibility of the management of the Company. The Company's independent auditor has not performed a review of these
unaudited interim condensed consolidated financial statements in accordance with standards established by the Canadian Institute
of Chartered Accountants.
Consolidated Statements of Financial Position | |
| | |
| |
(Expressed in Canadian Dollars) | |
| | |
| |
Unaudited | |
May 31, 2015 | | |
August 31, 2014 | |
| |
| | |
| |
Assets | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash | |
$ | 12,239 | | |
$ | 103,215 | |
Trade and other receivables | |
| 29,426 | | |
| 157,121 | |
Marketable securities (Note 19) | |
| 252,624 | | |
| - | |
Total current assets | |
| 294,289 | | |
| 260,336 | |
Non-current assets | |
| | | |
| | |
Restricted cash (Note 20) | |
| 31,163 | | |
| - | |
Exploration and evaluation assets (Note 6) | |
| 847,051 | | |
| 5,036,592 | |
Total non-current assets | |
| 878,214 | | |
| 5,036,592 | |
| |
| | | |
| | |
Total Assets | |
$ | 1,172,503 | | |
$ | 5,296,928 | |
| |
| | | |
| | |
Liabilities and Shareholders' Equity (Deficiency) | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Trade and other payables | |
$ | 1,864,427 | | |
$ | 1,483,775 | |
Shareholders' loans (Note 9 and 10) | |
| 1,172,673 | | |
| 981,834 | |
Loans payable (Note 9) | |
| 187,827 | | |
| - | |
Secured convertible note (Note 10 and 11) | |
| 475,755 | | |
| - | |
Derivative liabilities (Note 11) | |
| 5,040,566 | | |
| 1,094,392 | |
Deferred revenue (Note 6) | |
| - | | |
| 177,804 | |
Provisions (Note 7(a)) | |
| 11,563 | | |
| 11,768 | |
Total current liabilities | |
| 8,752,811 | | |
| 3,749,573 | |
Non-current liabilities | |
| | | |
| | |
Derivative liabilities (Note 11) | |
| - | | |
| 4,231,015 | |
Provisions (Note 7(a)) | |
| 86,868 | | |
| 35,775 | |
Total non-current liabilities | |
| 86,868 | | |
| 4,266,790 | |
| |
| | | |
| | |
Total liabilities | |
| 8,839,679 | | |
| 8,016,363 | |
| |
| | | |
| | |
Shareholders' equity (deficiency) | |
| | | |
| | |
Share capital (Note 8 (a)) | |
| 9,072,181 | | |
| 9,072,181 | |
Share purchase warrants (Note 8 (b)) | |
| 801,079 | | |
| 1,970,968 | |
Share purchase options (Note 8 (d)) | |
| 272,553 | | |
| 170,972 | |
Contributed surplus (Note 8 (e)) | |
| 3,106,441 | | |
| 1,389,898 | |
Foreign currency translation reserve | |
| 695,899 | | |
| 4,692 | |
Accumulated deficit | |
| (21,615,329 | ) | |
| (15,328,146 | ) |
Total shareholders' equity (deficiency) | |
| (7,667,176 | ) | |
| (2,719,435 | ) |
| |
| | | |
| | |
Total Liabilities and Shareholders' Equity (Deficiency) | |
$ | 1,172,503 | | |
$ | 5,296,928 | |
Going Concern (Note 1) | |
| | | |
| | |
Related Party Transactions and Balances (Note 9) | |
| | | |
| | |
Committments and Contingencies (Note 14) | |
| | | |
| | |
Dissolution of Subsidiary (Note 15) | |
| | | |
| | |
Subsequent Events (Note 18) | |
| | | |
| | |
The accompanying notes are
an integral part of these interim condensed consolidated financial statements
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss |
(Expressed in Canadian Dollars) |
Unaudited |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
May 31, | | |
May 31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
| | | |
| | | |
| | | |
| | |
Natural gas sales, net of royalties | |
$ | 11,904 | | |
$ | 22,116 | | |
$ | 37,264 | | |
$ | 45,473 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses | |
| | | |
| | | |
| | | |
| | |
Operating costs | |
| 7,442 | | |
| 4,406 | | |
| 17,500 | | |
| 10,295 | |
Depletion and accretion | |
| 462 | | |
| 476 | | |
| 930 | | |
| 2,116 | |
General and administrative | |
| 80,223 | | |
| 64,730 | | |
| 324,812 | | |
| 244,380 | |
Interest | |
| 73,884 | | |
| 23,985 | | |
| 202,333 | | |
| 112,714 | |
Accretion of convertible secured note (Note 10) | |
| 327,793 | | |
| - | | |
| 475,755 | | |
| - | |
(Gain) loss on derivative liabilities (Note 11) | |
| 738,652 | | |
| (38,964 | ) | |
| 250,701 | | |
| 58,821 | |
(Gain) loss on foreign exchange | |
| (2,876 | ) | |
| (63,810 | ) | |
| 286,136 | | |
| 99,614 | |
Stock based compensation (Note 8 (d)) | |
| - | | |
| - | | |
| 84,520 | | |
| - | |
Stock based compensation-non employees (Note 8 (d)) | |
| - | | |
| - | | |
| 28,173 | | |
| - | |
Gain on settlement of litigation (Note 17 and 19) | |
| (120,125 | ) | |
| - | | |
| (120,125 | ) | |
| - | |
Unrealized loss on marketable securities (Note 19) | |
| 53,518 | | |
| - | | |
| 53,518 | | |
| - | |
Impairment loss on exploration and evaluation assets (Note 6 and 15) | |
| 4,720,194 | | |
| 1,315,276 | | |
| 4,720,194 | | |
| 1,315,276 | |
Marketing and public relations | |
| - | | |
| (14,250 | ) | |
| - | | |
| (14,250 | ) |
| |
| 5,879,167 | | |
| 1,291,849 | | |
| 6,324,447 | | |
| 1,828,966 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (5,867,263 | ) | |
| (1,269,733 | ) | |
| (6,287,183 | ) | |
| (1,783,493 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income (loss) | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation | |
| (17,235 | ) | |
| (309,817 | ) | |
| 691,207 | | |
| (198,194 | ) |
Total other comprehensive income (loss) | |
| (17,235 | ) | |
| (309,817 | ) | |
| 691,207 | | |
| (198,194 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss and comprehensive loss | |
$ | (5,884,498 | ) | |
$ | (1,579,550 | ) | |
$ | (5,595,976 | ) | |
$ | (1,981,687 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share, basic and diluted | |
$ | (0.212 | ) | |
$ | (0.098 | ) | |
$ | (0.227 | ) | |
$ | (0.143 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding, basic and diluted (Note 8 (c))* | |
| 27,671,541 | | |
| 12,913,907 | | |
| 27,671,541 | | |
| 12,486,599 | |
| |
| | | |
| | | |
| | | |
| | |
*Reflects the August 25, 2014 one-for-ten stock consolidation (Note 8 (a)) | |
| | | |
| | |
Comparative figures (Note 16) | |
| | | |
| | | |
| | | |
| | |
The accompanying notes are
an integral part of these interim condensed consolidated financial statements
Interim Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficiency) |
(Expressed in Canadian Dollars) |
(Unaudited) |
| |
| | |
| | |
| | |
| | |
| | |
FOREIGN | | |
| | |
TOTAL | |
| |
| | |
| | |
| | |
| | |
| | |
CURRENCY | | |
| | |
SHARE- | |
| |
SHARE | | |
| | |
SHARE | | |
SHARE | | |
CONTRI- | | |
TRANS- | | |
| | |
HOLDERS' | |
| |
CAPITAL | | |
SHARE | | |
PURCHASE | | |
PURCHASE | | |
BUTED | | |
LATION | | |
ACCUMULATED | | |
EQUITY | |
| |
Number of | | |
CAPITAL | | |
WARRANTS | | |
OPTIONS | | |
SURPLUS | | |
RESERVE | | |
DEFICIT | | |
(DEFICIENCY) | |
| |
Shares* | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | | |
$ | |
Balance, August 31, 2013 | |
| 12,262,517 | | |
| 7,050,350 | | |
| 1,422,526 | | |
| 170,972 | | |
| 506,200 | | |
| 204,657 | | |
| (9,212,561 | ) | |
| 142,144 | |
Foreign currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (198,194 | ) | |
| - | | |
| (198,194 | ) |
Warrants exercised | |
| 651,904 | | |
| 306,405 | | |
| (78,238 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| 228,167 | |
Warrants expired | |
| - | | |
| - | | |
| (174,399 | ) | |
| - | | |
| 174,399 | | |
| - | | |
| - | | |
| - | |
Net loss for the peroid | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,783,493 | ) | |
| (1,783,493 | ) |
Balance, May 31, 2014 | |
| 12,914,421 | | |
| 7,356,755 | | |
| 1,169,889 | | |
| 170,972 | | |
| 680,599 | | |
| 6,463 | | |
| (10,996,054 | ) | |
| (1,611,376 | ) |
Derivative warrants expired | |
| - | | |
| - | | |
| - | | |
| - | | |
| 709,299 | | |
| - | | |
| - | | |
| 709,299 | |
Issuance of units as debt settlement | |
| 14,757,120 | | |
| 1,715,426 | | |
| 801,079 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,516,505 | |
Foreign currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,771 | ) | |
| - | | |
| (1,771 | ) |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,332,092 | ) | |
| (4,332,092 | ) |
Balance, August 31, 2014 | |
| 27,671,541 | | |
| 9,072,181 | | |
| 1,970,968 | | |
| 170,972 | | |
| 1,389,898 | | |
| 4,692 | | |
| (15,328,146 | ) | |
| (2,719,435 | ) |
Stock options expired | |
| - | | |
| - | | |
| - | | |
| (11,112 | ) | |
| 11,112 | | |
| - | | |
| - | | |
| - | |
Warrants expired | |
| - | | |
| - | | |
| (1,169,889 | ) | |
| - | | |
| 1,169,889 | | |
| - | | |
| - | | |
| - | |
Derivative warrants expired | |
| - | | |
| - | | |
| - | | |
| - | | |
| 535,542 | | |
| - | | |
| - | | |
| 535,542 | |
Stock based compensation | |
| - | | |
| - | | |
| - | | |
| 112,693 | | |
| - | | |
| - | | |
| - | | |
| 112,693 | |
Foreign currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 691,207 | | |
| - | | |
| 691,207 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,287,183 | ) | |
| (6,287,183 | ) |
Balance,
May 31, 2015 | |
| 27,671,541 | | |
| 9,072,181 | | |
| 801,079 | | |
| 272,553 | | |
| 3,106,441 | | |
| 695,899 | | |
| (21,615,329 | ) | |
| (7,667,176 | ) |
*Reflects the August 25, 2014
one-for-ten stock consolidation (Note 8 (a))
Comparative figures (Note 16)
The accompanying notes
are an integral part of these interim condensed consolidated financial statements
Interim Condensed Consolidated Statements of Cash Flows | |
| | |
| |
For the Nine Months ended May 31, | |
| | |
| |
(Expressed in Canadian Dollars) | |
| | |
| |
Unaudited | |
2015 | | |
2014 | |
| |
| | |
| |
Cash
provided by (used in) Operating activities | |
| | | |
| | |
Net loss | |
$ | (6,287,183 | ) | |
$ | (1,783,493 | ) |
Items not involving cash: | |
| | | |
| | |
Depletion and accretion | |
| 930 | | |
| 2,116 | |
Loss on derivative liabilities (Note 11) | |
| 250,701 | | |
| 58,821 | |
Accetion of secured convertible note (Note 10) | |
| 475,755 | | |
| - | |
Decomissioning obligations, net | |
| (205 | ) | |
| - | |
Stock based compensation (Note 8 (d)) | |
| 112,693 | | |
| - | |
Gain on settlement of litigation (Note 17) | |
| (120,125 | ) | |
| - | |
Unrealized loss on marketable securities (Note 17 and 19) | |
| 53,518 | | |
| - | |
Impairment loss on exploration and evaluation assets (Note 6 and 15) | |
| 4,720,194 | | |
| 1,315,276 | |
Net changes in non-cash working capital (Note 13) | |
| 330,633 | | |
| 503,503 | |
Net cash used in operating activities | |
| (463,089 | ) | |
| 96,223 | |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Additions to exploration and evaluation assets, net of recoveries (Note 6) | |
| 47,152 | | |
| (193,531 | ) |
Restricted cash (Note 20) | |
| (31,163 | ) | |
| - | |
Net cash used in investing activities | |
| 15,989 | | |
| (193,531 | ) |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Shareholders' loans, net | |
| 190,841 | | |
| 30,144 | |
Loans payable | |
| 187,824 | | |
| - | |
Secured note payable, net | |
| - | | |
| 53,776 | |
Net cash provided by financing activities | |
| 378,665 | | |
| 83,920 | |
| |
| | | |
| | |
Decrease in cash for the period | |
| (68,435 | ) | |
| (13,388 | ) |
Effect of exchange rate changes on cash | |
| (22,541 | ) | |
| 23,347 | |
Cash, beginning of period | |
| 103,215 | | |
| 196,837 | |
Cash, end of period | |
$ | 12,239 | | |
$ | 206,796 | |
Supplemental Cash Flow Information and Non Cash Transactions (Note 13) | |
| | | |
| | |
Comparative figures (Note 16) | |
| | | |
| | |
The accompanying notes are
an integral part of these interim condensed consolidated financial statements
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
| 1. | Nature of Business and Going Concern |
Eagleford Energy Corp. (“Eagleford”
or the “Company”) was amalgamated under the Business Corporations Act (Ontario) on November 30, 2009. The principal
activities of the Company consist of exploration, development and production of petroleum and natural gas properties. In addition,
the Company holds a 0.3% net smelter return royalty on 8 mining claim blocks located in Red Lake, Ontario which is carried on the
consolidated statement of financial position at $Nil. The company's registered office is 1 King Street West, Suite 1505, Toronto,
Ontario, M5H 1A1. The Company’s common shares trade on the OTC Markets (OTCQB) under the symbol EGFDF.
These unaudited interim condensed
consolidated financial statements have been prepared in accordance with International Financial Reporting Standards applicable
to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business,
as they come due for the foreseeable future. The Company is in the process of exploring and developing its oil and gas properties
and has not yet realized profitable operations. The Company requires additional financing for its working capital and for the costs
of exploration and development of its oil and gas properties.
Due to continuing operating
losses, the Company's continuance as a going concern is dependent upon its ability to obtain adequate financing and to reach profitable
levels of operation. The Company will continue to seek additional forms of debt or equity financing, or other means of funding
its operations, however, there is no assurance that it will be successful in doing so or that funds will be available on terms
acceptable to the Company or at all. The ability of the Company to arrange such financing in the future will depend in part upon
the prevailing capital market conditions as well as the business performance of the Company.
The Company has accumulated
significant losses and negative cash flows from operations in recent years which raise doubt as to the validity of the going concern
assumption. The Company has a working capital deficiency of $8,458,522 (August 31, 2014: $3,489,237) and an accumulated deficit
of $21,615,329 (August 31, 2014: $15,328,146). These material uncertainties may cast significant doubt upon the entity’s
ability to continue as a going concern. Accordingly, the consolidated financial statements do not give effect to adjustments, if
any that would be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize
its assets and liquidate its liabilities in other than the normal course of business and at amounts that may differ from those
shown in the accompanying consolidated financial statements.
During the year ended August
31, 2014, the Company entered into two separate Joint Development Agreements on the Matthews Lease and received cash of $340,811
and the payment of certain obligations under the Matthews Lease. During fiscal 2014, the Company extinguished debt of $1,408,737
through the issuance of share capital. During the nine month period ended May 31, 2015, the Company received $200,773 for the payment
of certain obligations under the Matthews Lease.
Statement of Compliance
The unaudited interim condensed
consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”)
issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the IFRS Interpretations
Committee (“IFRIC”). These unaudited interim condensed consolidated financial statements have been prepared in accordance
with International Accounting Standard 34, Interim Financial Reporting. Accordingly, they do not include all of the information
required for full annual financial statements required by IFRS as issued by the IASB and interpretations issued by IFRIC. These
unaudited interim condensed consolidated financial statements of the Company were approved by the Board of Directors on July 29,
2015.
Basis of Preparation
The policies applied in these
unaudited interim condensed consolidated financial statements are based on IFRS issued and outstanding as of the date the Board
of Directors approved the statements. The same accounting policies and methods of computation are followed in these unaudited interim
condensed consolidated financial statements as compared with the most recent annual consolidated financial statements as at and
for the year ended August 31, 2014. Any subsequent changes to IFRS that are given effect in the Company’s annual consolidated
financial statements for the year ending August 31, 2015 could result in restatement of these unaudited condensed interim consolidated
financial statements.
Principles of Consolidation
Subsidiaries are all entities
controlled by the Company. Control exists when the Company is exposed to, or has rights to variable returns from its involvement
with the entity and has the ability to affect these returns through its power over the entity. The financial statements of the
subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control
ceases. Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions,
are eliminated in preparing the consolidated financial statements.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
The unaudited interim condensed
consolidated financial statements include the accounts of Eagleford, the legal parent, together with its wholly-owned subsidiaries,
1354166 Alberta Ltd. a company operating in the province of Alberta, Canada (“1354166 Alberta”), Eagleford Energy,
Zavala Inc. a Nevada company (“Zavala Inc.”), EEZ Operating Inc., a Texas company incorporated May 12, 2015 (“EEZ
Operating”) and Dyami Energy Inc. (“Dyami”) which was dissolved effective April 3, 2014 by filing a Certificate
of Termination of a Domestic Entity with the Secretary of State, Texas (see Note 15).
| 3. | Significant Accounting Policies |
These unaudited interim condensed
consolidated financial statements were prepared using the same accounting policies and methods as those described in our consolidated
financial statements for the year ended August 31, 2014. These unaudited interim condensed consolidated financial statements are
prepared in compliance with International Accounting Standard 34, Interim Financial Reporting (IAS 34). Accordingly, certain
information and disclosure normally included in annual financial statements prepared in accordance with International Reporting
Standards have been omitted or condensed. These unaudited interim condensed consolidated financial statements should be read in
conjunction with our consolidated financial statements as at and for the year ended August 31, 2014.
| 4. | Recent Accounting Pronouncements and Recent Adopted
Accounting Standards |
Recent Issued
Accounting Pronouncements
The following standards,
amendments and interpretations, which may be relevant to the Company have been introduced or revised by the IASB:
(i) On July 24, 2014, the
IASB issued the complete IFRS 9 (IFRS 9 (2014). In November 2009, the IASB issued the first version of IFRS 9, Financial Instruments
(IFRS 9 (2009) and subsequently issued various amendments in October 2010, (IFRS 9 Financial Instruments (2010) and November 2013
(IFRS 9 Financial Instruments (2013). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January
1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods
is not required and is only permitted if information is available without the use of hindsight. The Company intends to adopt IFRS
9 effective September 1, 2018.
(ii) In May 2014, the IASB
issued IFRS 15 Revenue from Contracts with Customers, which supersedes IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13
Customer Loyalty Programmes, and IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers,
and SIC 31 Revenue – Barter Transactions Involving Advertising Services. IFRS 15 establishes a comprehensive five-step framework
for the timing and measurement of revenue recognition. The Company intends to adopt IFRS 15 effective September 1, 2017.
The Company has not yet begun
the process of assessing the impact that the new and amended standards will have on its consolidated financial statements.
Recent Adopted
Accounting Standards
The following standards,
amendments and interpretations have been adopted by the Company as of September 1, 2014. There were no material impacts on the
consolidated financial statements as a result of the adoption of these standards, amendments and interpretations: (i) IFRIC 21
Levies.
The Company’s reportable and geographical
segments are Canada and the United States. The accounting policies used for the reportable segments are the same as the Company’s
accounting policies. For the purposes of monitoring segment performance and allocating resources between segments, the Company’s
executive officer monitors the tangible, intangible and financial assets attributable to each segment.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
All assets are allocated to reportable segments.
The following tables show information regarding the Company’s reportable segments.
| |
Three Months Ended | | |
Nine Months Ended | |
| |
Canada | | |
United States | | |
Total | | |
Canada | | |
United States | | |
Total | |
May 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net revenue | |
$ | 11,904 | | |
| - | | |
$ | 11,904 | | |
$ | 37,264 | | |
| - | | |
$ | 37,264 | |
Net loss | |
$ | 1,092,188 | | |
| 4,775,075 | | |
$ | 5,867,263 | | |
$ | 1,513,575 | | |
| 4,773,608 | | |
$ | 6,287,183 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
May 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net revenue | |
$ | 22,116 | | |
| - | | |
$ | 22,116 | | |
$ | 45,473 | | |
| - | | |
$ | 45,473 | |
Net(income) loss | |
$ | (58,320 | ) | |
| 1,328,053 | | |
$ | 1,269,733 | | |
$ | 351,474 | | |
| 1,432,019 | | |
$ | 1,783,493 | |
| |
Canada | | |
United States | | |
Total | |
As at May 31, 2015 | |
| | | |
| | | |
| | |
Total Assets | |
$ | 280,046 | | |
| 892,457 | | |
$ | 1,172,503 | |
Total Liabilities | |
$ | 8,105,160 | | |
| 734,519 | | |
$ | 8,839,679 | |
| |
| | | |
| | | |
| | |
As at August 31, 2014 | |
| | | |
| | | |
| | |
Total Assets | |
$ | 179,888 | | |
| 5,117,040 | | |
$ | 5,296,928 | |
Total Liabilities | |
$ | 6,991,287 | | |
| 1,025,076 | | |
$ | 8,016,363 | |
| 6. | Exploration and Evaluation Assets |
Cost | |
| | |
Balance August 31, 2013 | |
$ | 6,535,278 | |
Additions, net | |
| 113,578 | |
Change in decommissioning obligation estimates | |
| 7,225 | |
Disposal of decommissioning obligations, Matthews Lease JDA | |
| (26,426 | ) |
Impairment of Murphy Lease | |
| (1,675,749 | ) |
Foreign exchange | |
| 82,686 | |
Balance August 31, 2014 | |
$ | 5,036,592 | |
Additions, net | |
| 331,425 | |
Deferred revenue | |
| (378,577 | ) |
Change in decommissioning obligation estimates | |
| (11,300 | ) |
Impairment of Matthews Lease | |
| (4,720,194 | ) |
Foreign exchange | |
| 589,105 | |
Balance May 31, 2015 | |
$ | 847,051 | |
The Company’s exploration
and evaluation assets are located in Texas, USA. As at May 31, 2015, the Company recorded an impairment of $4,720,194 on its Matthews
Lease (year ended August 31, 2014 an impairment of $1,675,749 was recorded on the Murphy Lease ($1,315,276 net of foreign currency
translation gain of $301,884 and write off of decommissioning obligations of $58,589).
Matthews Lease, Zavala County,
Texas
During the year ended August
31, 2013, the Company, Dyami Energy and OGR Energy Corporation, the Lessees, were litigating a dispute with the Lessors of the
Matthew’s property. During the last quarter of fiscal year August 2013, the Company and the Lessors agreed to resolve the
litigation and continue with the development of the Matthew’s property. In order to comply with certain State legal requirements,
it was deemed necessary by the Lessors counsel to continue with the development through a newly executed lease document and the
Company formed, Zavala Inc. a new wholly owned subsidiary to execute the new lease. The new lease was signed effective September
1, 2013 and the first of two payments of US$150,000 were paid to the Lessors upon signing the new lease as required initial pre-payment
of anticipated production royalties along with a continuing development obligation under the lease to complete the previously drilled
Matthews #1H horizontal well or drill a new well on the Matthews property no later than March 30, 2014. On September 1, 2013, the
Matthews lease was renewed by the Company through Zavala Inc. and based on the concept of faithful representation under IAS 8,
the carrying value of the Matthew’s lease by Dyami Energy was considered to be the value for Zavala Inc. as this arrangement
is simply a reorganization in substance.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
On December 3, 2013, (amended
January 21, 2014) the Company entered into a Joint Development Agreement with Stratex Oil and Gas Holdings, Inc. (“Stratex”)
(the “Stratex JDA”) to further develop the Matthews Lease. Under the terms of the Stratex JDA, Stratex acted as operator
and upon Stratex delivering i) US$150,000 to the lessors of the Matthews Lease on behalf of Zavala Inc., ii) delivering US $150,000
to the Company; and iii) commencing a hydraulic fracture of the Matthews #1H not later than March 31, 2014, Stratex earned a 66.67%
working interest before payout (50% working interest after payout) in the Matthews #1H well and a 50% working interest in the 2,629
acre Matthews Lease (see Note 17).
On April 11, 2014, the Company
entered into a further Joint Development Agreement (“JDA2”) with Stratex and Quadrant Resources LLC, (“Quadrant”)
for the development of the San Miguel formation on the Matthews Lease. Pursuant to the terms of the JDA2, upon satisfaction
of certain conditions including the Phase 1 Work Program and the cash consideration described below, Quadrant could earn an undivided
66.67% before payout and a 50% working interest after payout to the base of the San Miguel formation of the Matthews Lease by i)
drilling 3 new wells and reworking 5 wells at its sole cost and expense by June 30, 2015 (the “Phase I Work Program”);
ii) deliver US$100,000 to the Company upon execution of the JDA2 (paid); and iii) deliver US$65,000 to the Company on each of July
8, 2014; October 6, 2014 , January 5, 2015 and April 6, 2015. The Company recorded the cash payments and the payment of certain
obligations under the Matthews Lease by Quadrant totaling US$303,712 (CDN$378,577) at May 31, 2015, as a reduction in exploration
and evaluation assets. Under the terms of the JDA2 Quadrant was required to complete the Phase I Work Program and pay the Company
cash consideration totaling US$360,000 by June 30, 2015, which it did not and accordingly the JDA2 expired without Quadrant earning
any interest in the development area.
Effective March 31, 2015,
the Company entered into a settlement agreement with Stratex and Quadrant pursuant Stratex assigned all of its rights, title and
interest in, to and under the Matthews Lease and the JDA, to the Company and Quadrant. EEZ Operating is the operator of the Matthews
Lease (see Note 17).
On July 2, 2015, the 2629
acre Matthews Lease was terminated according to its terms and the Company is currently assessing the number of acres to be held
by production. The Company estimates that approximately 400 acres (representing approximately 15% of the total 2,629 lease acres)
will be held by production (100% working interest and 75% revenue interest) and accordingly the Company has written down the lease
to 15% of its carrying costs and recorded an impairment of exploration and evaluation assets of $4,720,194. The royalties payable
under the Matthews Lease are 25%.
Murphy Lease, Zavala County,
Texas
Subsequent to September 1,
2013 and the continuing development of the Matthews lease, Dyami Energy continued its development efforts with the Murphy lease.
A tentative joint venture agreement with Stratex was reached but did not materialize and efforts to develop the Murphy lease were
not successful. The Company had solicited lenders and investors in an attempt to obtain debt/equity financings as a means to improve
Dyami Energy’s financial situation. Despite the Company’s attempts, these efforts were unsuccessful and management
determined that it could no longer fund the Murphy operations, hence the lease was considered impaired and an impairment loss was
recorded by Dyami Energy during the third quarter of fiscal 2014 (see Note 15).
On March 6, 2014, the Company
filed a Certificate of Termination of a Domestic Entity with the Secretary of State, Texas for its wholly-owned subsidiary Dyami
Energy and effective April 3, 2014, Dyami Energy was dissolved. All prior obligations with respect to the Matthew’s and Murphy’s
lease on the books of Dyami Energy prior to its dissolution were recorded by the Company.
| |
Decommissioning Provisions (Note a) | | |
Other Provisions (Note b) | | |
Total Provisions | |
Balance, August 31, 2013 | |
$ | 119,742 | | |
$ | 178,553 | | |
$ | 298,295 | |
Accretion expense | |
| 961 | | |
| - | | |
| 961 | |
Change in estimates | |
| 7,225 | | |
| - | | |
| 7,225 | |
Disposals | |
| (26,426 | ) | |
| - | | |
| (26,426 | ) |
Reductions | |
| - | | |
| (169,196 | ) | |
| (169,196 | ) |
Dissolution of subsidiary (see Note 16) | |
| (58,589 | ) | |
| | | |
| (58,589 | ) |
Foreign exchange | |
| 4,630 | | |
| (9,357 | ) | |
| (4,727 | ) |
Balance, August 31, 2014 | |
| 47,543 | | |
| - | | |
| 47,543 | |
Additions | |
| 56,093 | | |
| - | | |
| 56,093 | |
Accretion expense | |
| 930 | | |
| - | | |
| 930 | |
Change in estimates | |
| (11,300 | ) | |
| - | | |
| (11,300 | ) |
Obligations settled | |
| (205 | ) | |
| - | | |
| (205 | ) |
Foreign exchange | |
| 5,370 | | |
| - | | |
| 5,370 | |
Balance,
May 31, 2015 | |
$ | 98,431 | | |
$ | - | | |
$ | 98,431 | |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
| a) | Decommissioning Obligations |
The Company’s decommissioning
obligations result from its ownership interests in petroleum and natural gas assets including well sites, gathering systems and
processing facilities. The total decommissioning obligation is estimated based on the Company’s net ownership interest in
all wells and facilities, estimated costs to reclaim and abandon these wells and facilities, and the estimated timing of the costs
to be incurred in future years. The Company has estimated the net present value of decommissioning obligations to be $98,431 ($11,563
current and $86,868 long term) at May 31, 2015 (August 31, 2014: $11,768 current and $35,775 long term) based on an undiscounted
total future liability of $112,656 (August 31, 2014: $60,629). These payments are expected to be incurred between 2015 and 2031.
The discount factor, being the risk free rate related to the liability is 2.25% (August 31, 2014: 2.57%).
On January 28, 2014 a vendor
of Dyami Energy received a summary judgment against Dyami Energy in the amount of $169,196 plus interest at a rate of 18% per annum
from September 17, 2012 until paid and legal fees of $21,178 and interest at a rate of 5% per annum from the date of judgment until
paid (District Court of Zavala County, Texas Case No. 13-02-12941-ZCV). During 2013 the full amount of the provision was recorded
together with legal fees and interest and transferred to trade and other payables.
| 8. | Share Capital and Reserves |
The Company filed Articles of Amendment effective
August 25, 2014 consolidating the common shares of Eagleford Energy Inc., on the basis of one (1) common share for every ten (10)
common shares and changing its name to Eagleford Energy Corp. The stock consolidation has been applied retrospectively for all
periods presented.
Authorized:
Unlimited number of common
shares at no par value
Unlimited non-participating,
non-dividend paying, voting redeemable preference shares
Issued:
The following table sets
out the changes in common shares during the respective periods:
Common Shares | |
Number* | | |
Amount | |
Balance August 31, 2013 | |
| 12,262,517 | | |
| 7,050,350 | |
Warrants exercised (Note 8 (b) (a)) | |
| 651,904 | | |
| 306,405 | |
Debt settlement (Note 8 (b) (c)) | |
| 14,757,120 | | |
| 1,715,426 | |
Balance
August 31, 2014 and May 31, 2015 | |
| 27,671,541 | | |
$ | 9,072,181 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
8 (b) Share
Purchase Warrants
The following table sets
out the changes in warrants during the respective periods:
| |
May 31, 2015 | | |
August 31, 2014 | |
Warrants | |
Number of Warrants* | | |
Weighted
Average Price* | | |
Number of Warrants* | | |
Weighted Average Price* | |
Outstanding, beginning of period | |
| 9,293,560 | | |
$ | 0.18 | | |
| 4,020,095 | | |
$ | 0.40 | |
Warrants exercised (Note (a)) | |
| - | | |
| | | |
| (651,904 | ) | |
$ | 0.35 | |
Warrants expired (Note (b)) | |
| - | | |
| | | |
| (1,453,191 | ) | |
$ | 0.35 | |
Warrants issued (Note (c)) | |
| - | | |
| | | |
| 7,378,560 | | |
$ | 0.10 | |
Warrants expired (Note (d)) | |
| (1,915,000 | ) | |
$ | 0.50 | | |
| - | | |
| - | |
Balance,
end of period | |
| 7,378,560 | | |
$ | 0.10 | | |
| 9,293,560 | | |
$ | 0.18 | |
* Reflects the August 25,
2014 one-for-ten stock consolidation
(a) Effective February
27, 2014, 651,904 common share purchase warrants were exercised at $0.35 expiring February 27, 2014 for settlement of cash advances
of $228,167. The amount allocated to warrants based on relative fair value using the Black-Scholes option pricing model was $78,238
(see Note 9).
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
(b) On February 5, 2014,
200,000 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants based on relative fair value
using the Black-Scholes option pricing model was $24,000 with a corresponding increase to contributed surplus. On February 25,
2014, 80,052 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants based on relative fair
value using the Black-Scholes option pricing model was $9,606 with a corresponding increase to contributed surplus. On February
27, 2014, 1,173,139 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants based on relative
fair value using the Black-Scholes option pricing model was $140,793 with a corresponding increase to contributed surplus.
(c) Effective August 30,
2014, the Company converted shareholders’ loans and interest due in the aggregate amount of $1,180,570 through the issuance
of a total of 14,757,102 units in the capital of the Company at a price of $0.08 per unit. Each unit is comprised of one (1) common
share and one half of one (1/2) common share purchase warrant. Each full warrant entitles the holder to purchase one (1) common
share at an exercise price of CDN$0.10 until August 30, 2017.The fair value of the units ($2,516,505) was allocated to common shares
$1,715,426 and warrants $801,079 based on their relative fair values and $1,335,935 was recorded as a loss on settlement of debt
in the consolidated statement of operations and comprehensive loss. The warrant component was valued using a Binomial Lattice model
whereas the fair value of the common share component was based on the current market value of the company’s stock (see Note
10 and 11).
(d) On January 24, 2015, 600,000
common share purchase warrants exercisable at $0.50 expired. The amount allocated to warrants based on relative fair value using
the Black-Scholes option pricing model was $507,038 with a corresponding increase to contributed surplus. On February 17, 2015,
1,315,000 common share purchase warrants exercisable at $0.50 expired. The amount allocated to warrants based on relative fair
value using the Black-Scholes option pricing model was $662,851 with a corresponding increase to contributed surplus.
The following table summarizes
the outstanding warrants as at May 31, 2015 and August 31, 2014, respectively:
Number of Warrants* | | |
Exercise Price* | | |
Expiry Date | |
Weighted Average
Remaining Life (Years) | | |
Warrant Value ($) | |
| 7,378,560 | | |
$ | 0.10 | | |
August 30, 2017 | |
| 2.25 | | |
| 801,079 | |
Number of Warrants* | | |
Exercise Price* | | |
Expiry Date | |
Weighted Average
Remaining Life (Years) | | |
Warrant Value ($) | |
| 600,000 | | |
$ | 0.50 | | |
January 24, 2015 | |
| 0.40 | | |
$ | 507,038 | |
| 1,315,000 | | |
$ | 0.50 | | |
February 17, 2015 | |
| 0.47 | | |
| 662,851 | |
| 7,378,560 | | |
$ | 0.10 | | |
August 30, 2017 | |
| 3.00 | | |
| 801,079 | |
| 9,293,560 | | |
$ | 0.50 | | |
| |
| 2.47 | | |
| 1,970,968 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
| 8 (c) | Weighted Average Shares Outstanding |
The following table summarizes
the weighted average shares outstanding:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
May 31, | | |
May 31, | |
| |
2015(1) | | |
2014 (1) | | |
2015
(1) | | |
2014
(1) | |
Weighted Average Shares Outstanding Basic and Diluted* | |
| 27,671,541 | | |
| 12,913,907 | | |
| 27,671,541 | | |
| 12,486,599 | |
* Reflects the August 25,
2014 one-for-ten stock consolidation
| (1) | The effects of any potential dilutive instruments on loss per share are anti-dilutive and therefore
have been excluded from the calculation of diluted loss per share. |
| 8 (d) | Share Purchase Options and Stock Based Compensation |
The Company has a stock option
plan to provide incentives for directors, officers, employees and consultants of the Company. The maximum number of shares, which
may be set aside for issuance under the stock option plan, is 20% of the issued and outstanding common shares of the Company on
a rolling basis.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
The following table is a
summary of the status of the Company’s stock options and changes during the period:
| |
Number | | |
Weighted Average | |
| |
of Options* | | |
Exercise Price | |
Balance, August 31, 2014 and 2013 | |
| 105,000 | | |
$ | 1.64 | |
Granted | |
| 1,000,000 | | |
| 0.12 | |
Expired | |
| (5,000 | ) | |
| 1.64 | |
Balance,
May 31, 2015 | |
| 1,100,000 | | |
$ | 0.25 | |
* Reflects the August 25,
2014 one-for-ten stock consolidation
The following table is a
summary of the Company's stock options outstanding and exercisable at May 31, 2015 and August 31, 2014, respectively:
Options Outstanding | | |
Options Exercisable | |
Exercise Price | | |
Number of Options* | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Life
(Years) (1) | | |
Number of Options* | | |
Weighted Average Exercise Price | |
$ | 1.60 | | |
| 100,000 | | |
$ | 0.15 | | |
| 1.75 | | |
| 100,000 | | |
$ | 0.15 | |
$ | 0.12 | | |
| 1,000,000 | | |
$ | 0.11 | | |
| 4.55 | | |
| 1,000,000 | | |
$ | 0.11 | |
| | | |
| 1,100,000 | | |
$ | 0.25 | | |
| 4.21 | | |
| 1,100,000 | | |
$ | 0.25 | |
Options Outstanding | | |
Options Exercisable | |
Exercise Price | | |
Number of Options* | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Life
(Years) (1) | | |
Number of Options* | | |
Weighted Average Exercise Price | |
$ | 1.60 | | |
| 100,000 | | |
$ | 1.60 | | |
| 2.50 | | |
| 1,00,000 | | |
$ | 1.60 | |
$ | 2.50 | | |
| 5,000 | | |
$ | 2.50 | | |
| 0.16 | | |
| 5,000 | | |
$ | 2.50 | |
| | | |
| 105,000 | | |
$ | 1.64 | | |
| 2.39 | | |
| 105,000 | | |
$ | 1.64 | |
* Reflects the August 25,
2014 one-for-ten stock consolidation
(1) In October 2012, the
Optionee passed away and pursuant to the terms of the option agreement had a period of twelve
(12) months after the date of such death before the expiry of the option.
Stock Based Compensation
On November 12, 2014, the
Company granted options to purchase 750,000 common shares to directors of the Company. These options are exercisable at $0.12 per
share, vest immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of $84,520.
Stock Based Compensation
– Non Employees
On November 12, 2014, the
Company granted options to purchase 250,000 common shares to a consultant of the Company. These options are exercisable at $0.12
per share, vest immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of
$28,173.
The fair value of the stock
options granted were estimated on the date of the grant using the Black Scholes option pricing model with the following weighted
average assumptions used:
| |
November 12, 2014 | |
Weighted average fair value per option | |
$ | 0.12 | |
Weighted average risk free interest rate | |
| 1.54 | % |
Forfeiture rate | |
| 0 | % |
Weighted average expected volatility | |
| 287.49 | % |
Expected life (years) | |
| 5 | |
Dividend yield | |
| Nil | |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Contributed surplus transactions
for the respective periods are as follows:
| |
Amount | |
Balance, August 31, 2013 | |
$ | 506,200 | |
Warrants expired | |
| 174,399 | |
Derivative warrants expired | |
| 709,299 | |
Balance, August 31, 2014 | |
$ | 1,389,898 | |
Stock options expired | |
| 11,112 | |
Warrants expired | |
| 1,169,889 | |
Derivative warrants expired | |
| 535,542 | |
Balance,
May 31, 2015 | |
$ | 3,106,441 | |
| 9. | Related Party Transactions and Balances |
The following transactions
with individuals related to the Company arose in the normal course of business have been accounted for at the exchange amount
being the amount agreed to by the related parties, which approximates the arm’s length equivalent value.
Compensation of Key Management
Personnel
The remuneration of directors
and other members of key management personnel during the periods set out were as follows:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
May 31, | | |
May 31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Short term employee benefits (1) | |
$ | 37,500 | | |
$ | 18,750 | | |
$ | 112,500 | | |
$ | 56,250 | |
Stock based compensation expense (2) | |
| - | | |
| - | | |
| 84,520 | | |
| - | |
| |
$ | 37,500 | | |
$ | 18,750 | | |
$ | 197,020 | | |
$ | 56,250 | |
The following balances owing
to James Cassina, the President of the Company are included in trade and other payables and are unsecured, non-interest bearing
and due on demand:
| |
May
31, 2015 | | |
August 31, 2014 | |
Short term employee benefits (1) | |
$ | 393,750 | | |
$ | 281,250 | |
| |
$ | 393,750 | | |
$ | 281,250 | |
| (1) | The Company accrues
management fees for the President of the Company at a rate of $12,500 per month commencing
September 1, 2014. |
| (2) | On November 12,
2014, the Company granted options to purchase 750,000 common shares to three directors
of the Company. These options are exercisable at $0.12 per share, vest immediately and
expire on November 11, 2019 (see Note 8 (d)). |
At May 31, 2015, the amount
of directors’ fees included in trade and other payables was $21,000 (August 31, 2014: $19,200).
At May 31, 2015, the Company
had a promissory note payable to the President of the Company of $10,000 (August 31, 2014: $Nil). For the period ended May 31,
2015, the Company recorded interest on the promissory note of $586 (May 31, 2014: $19,507). At May 31, 2015, included in trade
and other payables is interest payable of $104,826 (August 31, 2014: $91,727). The note is due on demand and bears interest at
10% per annum. Interest is payable annually on the anniversary date of the note. Effective February 27, 2014, 651,904 common share
purchase warrants expiring February 27, 2014, were exercised by the President of the Company at $0.35, for settlement of cash
advances of $228,167. On August 30, 2014 the Company issued 1,628,700 units at $0.08 per unit as full settlement of a promissory
note payable to the President of US$120,000 (see Notes 8 (b) (a) (c) and Note 10).
At May 31, 2015, the Company
had a note payable to Core Energy Enterprises Inc. (“Core”) of US$249,250 (August 31, 2014: US$249,250). For the period
ended May 31, 2015, the Company recorded interest on the promissory note of $23,238 (May 31, 2014: $Nil). At May 31, 2015, included
in trade and other payables, is interest of $23,238 (August 31, 2014: $Nil). The note is due on demand and bears interest at 10%
per annum. Interest is payable annually on the anniversary date of the note. At May 31, 2015, Core advanced the Company US$28,500
on terms yet to be determined. The President of the Company is a major shareholder, officer and a director of Core (see Note 18).
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
At May 31, 2015, the Company
had shareholders’ loans payable of US$655,000. (August 31, 2014: US $655,000). For the period ended May 31, 2015, the Company
recorded interest of $61,067(May 31, 2014: $116,440) on the shareholders’ loans payable. At May 31, 2015, included in trade
and other payables, is interest of $61,290 (August 31, 2014: $269). The notes are payable on demand and bear interest at 10% per
annum. Interest is payable annually on the anniversary date of the notes. On August 30, 2014, the Company issued 13,128,420 units
at $0.08 per unit as full settlement of promissory notes payable of US$529,250, $250,000 and interest payable of $225,614 (see
Note 8 (b) (c)).
At May 31, 2015, the Company
had, loans payable of US$121,000 and $37,000 to 1288131 Alberta Ltd. (August 31, 2014: $Nil). During the period ended May 31,
2015, the Company recorded interest on the loans payable of $12,245. At May 31, 2015, included in trade and other payables, is
interest of $12,245 (August 31, 2014: $Nil). The loans are payable on demand and bear interest at 10% per annum. Colin McNeil
a director of the Company is also an officer, director and shareholder of 1288131 Alberta Ltd.
At May 31, 2015, the Company
had a 10% per annum, secured convertible note payable to Benchmark Enterprises LLC (“Benchmark”) with a face value
of US$1,216,175. (August 31, 2014: US$1,216,175) (the “Note”). Benchmark is a shareholder of the Company. For the
nine months ended May 31, 2015, the Company recorded interest on the Note of $113,386 (May 31, 2014: $78,028). At May 31, 2015,
included in trade and other payables is interest of $113,386 (August 31, 2014: $Nil) (see Note 10 and 11).
| 10. | Secured Note Payable and
Shareholder Loans |
Secured Note Payable
At August 31, 2014, the
Company exchanged a secured note payable to Benchmark with a carrying value of $1,322,347 (US$1,216,175) for a secured convertible
note payable to Benchmark with a face value of $1,322,347 (US$1,216,175) (the “Note”). The Note has an interest rate
of 10% and is due on the earliest to occur of: (a) August 31, 2015; (b) the closing of any subsequent financing or series of financings
by the Company that results in gross proceeds of an aggregate amount equal to or greater than US$4,400,000, excluding conversion
of any existing debt into equity; (c) the date of a sale by the Company of all of the shares in the capital stock of Zavala Inc.
held by the Company from time to time; (d) the closing of a merger, reorganization, take-over or other business combination which
results in a change of control of the Company or Zavala Inc.; or (e) an event of default.
In the event that the Company
closes any subsequent financing or series of financings that results in gross proceeds to the Company of an aggregate amount equal
to or greater than US$2,000,000, excluding conversion of any existing debt into equity of the Company, the Company shall allocate
US$0.50 of every US$1.00 exceeding the US$2,000,000 raised from such financing to repay the Note. The Note is secured by all of
the assets of the Company and Zavala Inc. The Company may, in its sole discretion, prepay any portion of the principal amount
upon seven days’ notice. Benchmark has the option at any time while the Note is outstanding to convert any unpaid principal
and accrued interest into conversion units. A conversion unit is comprised of one (1) common share and one (1) common share purchase
warrant entitling the holder to acquire a common share of the Company at a price equal to a 15% premium to the price of the common
share acquired under the conversion unit. The price of the conversion unit is the lessor of a price equal to the 30-day VWAP of
the Company as of the date of conversion, less 20% (as adjusted for any stock splits, combinations or similar events) or eight
United States Cents (US$0.08) per share the (“Conversion Unit”).
Accounting Considerations
The Company has accounted
for this transaction as an exchange of debt instruments. Under IAS 39 “Financial Instruments: Recognition and Measurement”,
an exchange between an existing borrower and lender of debt instruments with substantially different terms or substantial modification
of the terms of an existing financial liability of part thereof is accounted for as an extinguishment. Since the new debt instrument
has a conversion option, the terms are considered substantially different and therefore gives rise to extinguishment accounting.
Further, the Company analyzed the conversion unit under IAS 39 and determined that it meets the definition of an embedded derivative.
Since both components of the Conversion Unit (the common share component and warrant component) contain a variable exercise/conversion
price, the Conversion Unit meets the definition of a financial liability under IAS 32 “Financial Instruments: Presentation”.
As a result, the Conversion Unit is a derivative liability that requires fair value measurement each period.
Based on the previous conclusions,
the Company allocated the old note first to the derivative component at its fair value with the residual allocated to the host
debt contract, as follows:
| |
Allocation | |
Promissory note (old debt instrument) | |
$ | 1,322,247 | |
Derivative liability (conversion unit) | |
| (4,000,100 | ) |
Loss on exchange of debt instruments | |
| 2,677,753 | |
| |
$ | - | |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
The Note will be accreted
up to its face value of $1,322,347 (US$1,216,175) over the life of Note based on an effective interest rate. For the nine months
ended May 31, 2015, the Company recorded accretion on the note in the amount of $475,755. The carrying value of the note as at
May 31, 2015 is $475,755. For the nine months ended May 31, 2015, the Company recorded interest on the Note of $110,367 (see Note
11).
Shareholder Loans
Effective August 30, 2014,
the Company converted shareholders’ loans and interest due in the aggregate amount of $1,180,570 through the issuance of
a total of 14,757,102 units in the capital of the Company at a price of $0.08 per unit. Each unit is comprised of one (1) common
share and one half of one (1/2) common share purchase warrant. Each full warrant entitles the holder to purchase one (1) common
share at an exercise price of CDN$0.10 until August 30, 2017. The fair value of the units ($2,516,505) was allocated to common
shares $1,715,426 and warrants $801,079 based on their relative fair values and $1,335,935 was recorded as loss on settlement
of debt. The original terms of the debt did not include settlement by the issuance of equity instruments (see Note 9).
Accounting Considerations
The Company has accounted
for this transaction as an extinguishment of debt instruments for equity instruments under the guidance of IFRIC Interpretation
19 “Extinguishing Financial Liabilities with Equity Instruments”. IFRIC 19 addresses the accounting of when the terms
of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish
all or part of the financial liability. It states that if a debtor issues equity instruments to a creditor to extinguish all or
part of a financial liability, those equity instruments are 'consideration paid' in accordance with IAS 39.41. Accordingly, the
debtor should derecognise the financial liability fully or partly. IFRIC 19 further states that the debtor recognises in profit
or loss the difference between the carrying amount of the financial liability (or part) extinguished and the fair value of the
equity instruments issued. As result, the Company recorded a loss on extinguishment in the amount of $1,335,935 in profit and
loss which is the difference of the fair value of the equity instruments ($2,516,505) and the carrying value of the debt instruments
($1,180,570).
The warrant component was
valued using a Binomial Lattice model whereas the fair value of the common share component was based on the current market value
of the company’s stock. The fair value of the conversion unit ($2,516,505) was allocated to the common stock component ($1,715,426)
and warrant component ($801,079) based on their relative fair values. Significant assumptions utilized in the Binomial Lattice
process are as follows for the warrant component of the conversion unit as of August 30, 2014:
| |
August 30, 2014 | |
Market value on valuation date | |
$ | 0.16 | |
Contractual exercise rate | |
$ | 0.092 | |
Term (years) | |
| 5.00
Years | |
Expected market volatility | |
| 196.97 | % |
Risk free rate using zero coupon US Treasury Security rate | |
| 0.94 | % |
| 11. | Derivative Financial Liabilities |
Derivative Warrant Liabilities
The Company has warrants issued with an exercise
price in US dollars which are different from the functional currency of the Company (Canadian Dollars) and accordingly the warrants
are treated as a financial liability and the fair value movement during the period is recognized in the profit or loss.
The following table set out the changes in
derivative warrant liabilities during the respective periods:
| |
Number
of Warrants* | | |
Fair
Value Assigned
$ | | |
Average
Exercise Price
US $ | |
As at August 31, 2013 | |
| 914,761 | | |
| 1,976,883 | | |
| 4.06 | |
Warrants expired | |
| (170,923 | ) | |
| (709,299 | ) | |
| | |
Change in fair value estimates | |
| - | | |
| 57,723 | | |
| - | |
As at August 31, 2014 | |
| 743,838 | | |
| 1,325,307 | | |
| 4.06 | |
Warrants expired | |
| (217,500 | ) | |
| (535,542 | ) | |
| | |
Change in fair value estimates | |
| - | | |
| 197,990 | | |
| | |
As
at May 31, 2015 | |
| 526,338 | | |
| 987,755 | | |
| 5.80 | |
* Reflects the August 25,
2014 one-for-ten consolidation
On August 31, 2014, 170,923
warrants exercisable at US$5.00 expired and the fair value measured using the Black-Scholes option pricing model of $709,299 was
recorded as an increase to contributed surplus.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
On April 13, 2015, 187,500
and 30,000 warrants exercisable at US$5.00 and US$2.50, respectively expired and the fair value measured using the Black-Scholes
option pricing model of $535,542 was recorded as an increase to contributed surplus.
The following tables set
out the number of derivative warrant liabilities outstanding at May 31, 2015 and August 31, 2014 respectively:
Number
of Warrants* | | |
Exercise
Price US
($)* | | |
Expiry Date | |
Weighted
Average Remaining
Life (Years) | | |
Fair
Value CDN
($) | |
| 91,250 | | |
| 5.00 | | |
July 20, 2015 | (1) |
| 0.14 | | |
| 153,179 | |
| 14,600 | | |
| 2.50 | | |
July 20, 2015 | (1) |
| 0.14 | | |
| 41,230 | |
| 250,000 | | |
| 5.00 | | |
August 7, 2015 | (1) |
| 0.19 | | |
| 420,128 | |
| 40,000 | | |
| 2.50 | | |
August 7, 2015 | (1) |
| 0.19 | | |
| 108,128 | |
| 112,490 | | |
| 5.00 | | |
September 25, 2015 | (1) |
| 0.32 | | |
| 207,992 | |
| 17,998 | | |
| 2.50 | | |
September 25, 2015 | (1) |
| 0.32 | | |
| 57,098 | |
| 526,338 | | |
| | | |
| |
| 0.21 | | |
| 987,755 | |
* Reflects the August 25,
2014 one-for-ten consolidation
Number
of Warrants* | | |
Exercise
Price US
($)* | | |
Expiry
Date | |
Weighted
Average Remaining
Life (Years) | | |
Fair
Value CDN
($) | |
| 187,500 | | |
| 5.00 | | |
April 13, 2015 | (1) |
| 0.62 | | |
| 365,474 | |
| 30,000 | | |
| 2.50 | | |
April 13, 2015 | (1) |
| 0.62 | | |
| 99,420 | |
| 91,250 | | |
| 5.00 | | |
July 20, 2015 | (1) |
| 0.88 | | |
| 133,431 | |
| 14,600 | | |
| 2.50 | | |
July 20, 2015 | (1) |
| 0.88 | | |
| 35,915 | |
| 250,000 | | |
| 5.00 | | |
August 7, 2015 | (1) |
| 0.93 | | |
| 365,964 | |
| 40,000 | | |
| 2.50 | | |
August 7, 2015 | (1) |
| 0.93 | | |
| 94,188 | |
| 112,490 | | |
| 5.00 | | |
September 25, 2015 | |
| 1.07 | | |
| 181,178 | |
| 17,998 | | |
| 2.50 | | |
September 25, 2015 | |
| 1.07 | | |
| 49,737 | |
| 743,838 | | |
| | | |
| |
| 0.70 | | |
| 1,325,307 | |
* Reflects the August 25,
2014 one-for-ten consolidation
Derivative Unit Liabilities
The following tables summarize
the components of the Company’s derivative unit liabilities and linked common shares as at May 31, 2015 and August 31, 2014:
| |
May 31, 2015 | | |
August 31, 2014 | |
The financings giving rise to derivative unit liabilities: | |
Indexed Shares | | |
Fair Values | | |
Indexed Shares | | |
Fair Values | |
Conversion unit (1 common share and 1 common share purchase
warrant) | |
| 22,481,347 | | |
$ | 4,052,811 | | |
| 15,202,188 | | |
$ | 4,000,100 | |
The following table summarizes
the effects on our loss associated with changes in the fair values of our derivative units liabilities for the periods ended May
31, 2015:
The financings giving rise to derivative unit liabilities: | |
Three Months
Ended May 31, 2015 | | |
Nine Months Ended May 31, 2015 | |
Conversion unit (1 common share and 1
common share purchase warrant) | |
$ | 742,059 | | |
$ | 52,711 | |
At August 31, 2014 the Company
issued a Secured Convertible Note with a face value $1,322,347 (US$1,216,175) which gave rise to a derivative financial instrument.
The Note embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of
economic risks and characteristics. Additionally these features met the definition of a financial liability under IAS 32 “Financial
Instruments: Presentation”. These terms and features consist of the Conversion Unit which is comprised of one (1) common
share and one (1) common share purchase warrant entitling the holder to acquire a common share of the Company at a price equal
to a 15% premium to the price of the common share acquired under the Conversion Unit (see Note 10).
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Current accounting principles
that are provided in IAS 32 and IAS 39 require derivative financial instruments to be classified in liabilities and carried at
fair value with changes recorded in profit and loss. The Company has selected the Monte Carlo Simulations valuation technique
to fair value the common share component of the conversion unit because it believes that this technique is reflective of all significant
assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving common
share components. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption
behaviors in addition to traditional inputs for option models such as market trading volatility and risk free rates.
The Company has selected
Binomial Lattice to fair value the warrant component of the conversion unit because it believes this technique is reflective of
all significant assumption types market participants would likely consider in transactions involving warrants. Significant inputs
and results arising from the Monte Carlo Simulations process are as follows for the common share component contained in the conversion
unit as at May 31, 2015 and August 31, 2014:
| |
May 31, 2015 | |
August 31, 2014 |
Underlying price on valuation date* | |
$0.2217 | |
$0.3090 |
Contractual conversion rate | |
$0.07 | |
$0.08 |
Contractual term to maturity | |
0.25 Years | |
1.00 Years |
Implied expected term to maturity | |
0.185 Years | |
0.613 Years |
Market volatility: | |
| |
|
Range of volatilities | |
176.85% - 350.72% | |
78.41% - 269.09% |
Equivalent volatility | |
263.79% | |
181.25% |
Contractual interest rate | |
10.0% | |
10.0% |
Equivalent market risk adjusted interest rate | |
10.00% | |
10.00% |
Equivalent credit risk adjusted yield | |
3.62% | |
3.45% |
*The underlying price of
the common share component of the conversion unit is the sum of the market price on the valuation date and the fair value of the
warrant component derived from the binomial lattice model.
Significant assumptions
utilized in the Binomial Lattice process are as follows for the warrant component of the conversion unit as at May 31, 2015 and
August 31, 2014:
| |
May 31, 2015 | |
August 31, 2014 |
Market value on valuation date | |
$0.11 | |
$0.16 |
Contractual exercise rate | |
$0.092 | |
$0.092 |
Term (years) | |
4.25 Years | |
5.00 Years |
Expected market volatility | |
176.48% | |
179.21% |
Risk free rate using zero coupon US Treasury Security rate | |
1.49% | |
1.63% |
12. Financial
Instruments and Concentration of Risks
The Company has classified its financial instruments
as follows:
Financial Instrument | |
Category | |
Measurement method |
Cash | |
Fair value through profit or loss | |
Fair value |
Marketable securities | |
Fair value through profit or loss | |
Fair value |
Derivative liabilities | |
Fair value through profit or loss | |
Fair value |
Trade and other receivables | |
Loans and receivables | |
Amortized cost |
Trade and other payables | |
Other financial liabilities | |
Amortized cost |
Provisions | |
Other financial liabilities | |
Amortized cost |
Secured note payable and shareholders’ loans | |
Other financial liabilities | |
Amortized cost |
The types of risk exposure
and the ways in which such exposures are managed are as follows:
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Credit Risk
Credit risk is primarily
related to the Company’s receivables from joint venture partners and the risk of financial loss if a partner or counterparty
to a financial instrument fails to meet its contractual obligations. Receivables from joint venture partners are normally collected
within one to three months of the joint venture bill being issued to the partner. The Company historically has not experienced
any collection issues with its joint venture partners to date. The Company attempts to mitigate the risk from joint venture receivables
by obtaining partner approval of significant capital expenditures prior to expenditure. The Company establishes an allowance for
doubtful accounts as determined by management based on their assessed collectability; therefore, the carrying amount of trade
and other receivables generally represents the maximum credit exposure. The Company believes that its counterparties currently
have the financial capacity to settle outstanding obligations in the normal course of business.
Concentration risks exist
in cash because significant balances are maintained with one financial institution. The risk is mitigated because the financial
institution is an international bank.
The Company’s maximum
exposure to credit risk is as follows:
| |
May 31, 2015 | | |
August 31, 2014 | |
Cash | |
$ | 12,239 | | |
$ | 103,215 | |
Trade and other receivables | |
| 29,426 | | |
| 157,121 | |
Balance | |
$ | 41,665 | | |
$ | 260,336 | |
Liquidity Risk
The Company monitors its
liquidity position regularly to assess whether it has the funds necessary to fulfill planned exploration commitments on its oil
and gas properties or that viable options are available to fund such commitments from new equity issuances or alternative sources
such as farm-out agreements. However, as an exploration company at an early stage of development and without significant internally
generated cash flow, there are inherent liquidity risks, including the possibility that additional financing may not be available
to the Company, or that actual exploration expenditures may exceed those planned. The current uncertainty in global markets could
have an impact on the Company’s future ability to access capital on terms that are acceptable to the Company. The Company
has so far been able to raise the required financing to meet its obligations however, there can be no assurance that it will continue
to do so in the future.
The following table illustrates the contractual
maturities of financial liabilities:
May 31, 2015 | |
Payments Due by Period | |
| |
Total | | |
Less than 1 year | | |
1-3 years | | |
4-5 years | | |
After 5 years | |
Trade and others payables | |
$ | 1,864,427 | | |
$ | 1,864,427 | | |
| - | | |
| - | | |
| - | |
Shareholders’ loans (1) | |
| 1,172,673 | | |
| 1,172,673 | | |
| - | | |
| - | | |
| - | |
Loans Payable (1) | |
| 187,827 | | |
| 187,827 | | |
| | | |
| | | |
| | |
Total | |
$ | 3,224,927 | | |
$ | 3,224,927 | | |
| - | | |
| - | | |
| - | |
August 31, 2014 | |
Payments Due by Period | |
| |
Total | | |
Less than 1 year | | |
1-3 years | | |
4-5 years | | |
After 5 years | |
Trade and others payables | |
$ | 1,483,775 | | |
$ | 1,483,775 | | |
| - | | |
| - | | |
| - | |
Shareholders’ loans (1) | |
| 981,834 | | |
| 981,834 | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 2,465,609 | | |
$ | 2,465,609 | | |
| - | | |
| - | | |
| - | |
| (1) | Translated at current exchange rate. |
Market Risk
Market risk represents the
risk of loss that may impact the Company’s financial position, results of operations, or cash flows due to adverse changes
in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other
relevant market or price risks. The Company does not use derivative financial instruments or derivative commodity instruments
to mitigate this risk.
The oil and gas industry
is exposed to a variety of risks including the uncertainty of finding and recovering economic reserves, the performance of hydrocarbon
reservoirs, securing markets for production, commodity prices, interest rate fluctuations, potential damage to or malfunction
of equipment and changes to income tax, royalty, environmental or other such factors.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Market events and conditions
in recent years including oil and gas supply and demand, disruptions in the international credit markets and other financial systems
and the deterioration of global economic conditions have caused significant volatility to commodity prices. These conditions contributed
to a loss of confidence in the broader U.S. and global credit and financial markets. Notwithstanding various actions by governments,
concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other
financial institutions contributed to the broader credit markets to further deteriorate and stock markets to decline. These factors
have negatively impacted company valuations and may impact the performance of the global economy going forward. Although economic
conditions improved, the recovery has been slow in various sectors including in Europe and the United States and has been impacted
by various ongoing factors including sovereign debt levels and high levels of unemployment which continue to impact commodity
prices and to result in volatility in the stock market.
The Company mitigates these
risks by:
| • | utilizing competent, professional consultants as support
to management, |
| • | reviewing available petrophyisical analysis of prospects, |
| • | focusing on a limited number of core properties. |
Commodity price risk is
the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices
for petroleum and natural gas are impacted by world economic events that affect the levels of supply and demand. The Company believes
that movement in commodity prices that are reasonably possible over the next twelve month period may have a significant impact
on the Company as all its oil properties are still in a development stage.
Commodity Price Sensitivity
The following table summarizes
the sensitivity of the fair value of the Company’s risk management position for the periods ended May 31, 2015 and 2014
to fluctuations in natural gas prices, with all other variables held constant. When assessing the potential impact of these price
changes, the Company believes that 10% volatility is a reasonable measure. Fluctuations in natural gas prices potentially could
have resulted in unrealized gains (losses) impacting net income as follows:
| |
2015 | | |
2014 | |
| |
Increase 10% | | |
Decrease 10% | | |
Increase 10% | | |
Decrease 10% | |
Net revenue | |
$ | 42,140 | | |
$ | 32,388 | | |
$ | 51,403 | | |
$ | 39,543 | |
Net loss | |
$ | (6,282,307 | ) | |
$ | (6,292,059 | ) | |
$ | (1,777,563 | ) | |
$ | (1,789,423 | ) |
The Company is exposed to
the fluctuations in foreign exchange rates. The prices received by the Company for the production of natural gas and natural gas
liquids are primarily determined in reference to United States dollars but are settled with the Company in Canadian dollars. The
Company’s cash flow for commodity sales will therefore be impacted by fluctuations in foreign exchange rates.
The Company operates in
Canada and a portion of its expenses are incurred in U.S. dollars. A significant change in the currency exchange rates between
the Canadian dollar relative to US dollar could have an effect on the Company’s financial instruments. The Company does
not hedge its foreign currency exposure. The following assets and liabilities are denominated in US dollars at May 31, 2015 and
2014:
| |
May 31, 2015 | | |
May 31, 2014 | |
Cash | |
$ | - | | |
$ | 133,094 | |
Restricted cash | |
| 25,000 | | |
| - | |
Trade and other receivables | |
| 11,426 | | |
| 25,164 | |
Exploration and evaluation assets | |
| 679,544 | | |
| 2,798,944 | |
Prepaid expenses and deposits | |
| 1,614 | | |
| - | |
Trade and other payables | |
| (897,306 | ) | |
| (513,197 | ) |
Provisions | |
| (69,690 | ) | |
| (31,574 | ) |
Derivative liabilities | |
| (4,530,469 | ) | |
| (1,873,290 | ) |
Shareholders’ loans | |
| (932,750 | ) | |
| (1,553,500 | ) |
Secured convertible note | |
| (384,588 | ) | |
| (960,000 | ) |
Loan payable | |
| (121,000 | ) | |
| - | |
Net assets denominated in US$ | |
$ | (6,218,219 | ) | |
$ | (2,074,360 | ) |
Net asset CDN dollar equivalent at period end (1) | |
$ | (7,751,010 | ) | |
$ | (2,254,207 | ) |
| (1) | Translated at the exchange rate in effect at May 31, 2015 $1.2465
(May 31, 2014 $1.0867) |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
The following table shows
the estimated sensitivity of the Company’s total comprehensive loss for the periods set out from a change in the U.S dollar
exchange rate in which the Company has exposure with all other variables held constant.
| | |
May 31, 2015 | | |
May 31, 2014 | |
| | |
Increase | | |
Decrease | | |
Increase | | |
Decrease | |
Percentage change in US Dollar | | |
In total comprehensive loss from a change in % in the US Exchange Rate ($) | | |
In total comprehensive loss from a change in % in the US Exchange Rate ($) | |
| 5 | % | |
| (483,082 | ) | |
| 483,082 | | |
| (122,482 | ) | |
| 122,482 | |
| 10 | % | |
| (966,164 | ) | |
| 966,164 | | |
| (244,965 | ) | |
| 244,965 | |
| 15 | % | |
| (1,449,245 | ) | |
| 1,449,245 | | |
| (367,447 | ) | |
| 367,447 | |
| 20 | % | |
| (1,932,327 | ) | |
| 1,932,327 | | |
| (489,929 | ) | |
| 489,929 | |
Interest rate risk refers to the risk that
the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest
rates. The majority of the Company’s debt is short-term in nature with fixed rates. Based on management's knowledge and
experience of the financial markets, the Company believes that the movements in interest rates that are reasonably possible over
the next twelve month period will not have a significant impact on the Company.
| (iv) | Fair Value of Financial Instruments |
The Company’s financial instruments
included on the consolidated statement of financial position as at May 31, 2015 and August 31, 2014, are comprised of cash, marketable
securities, derivative liabilities, trade and other receivables, trade and other payables, loans payable, shareholders’
loans and provisions.
The Company classifies the fair value of financial
instruments measured at fair value according to the following hierarchy based on the amount of observable inputs used to value
the instrument.
Level 1 – Quoted prices are available
in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions
occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than
quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the
reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility
factors, which can be substantially observed or corroborated in the marketplace.
Level 3 – Valuations in this level are
those with inputs for the asset or liability that are not based on observable market data.
| |
May 31, 2015 | | |
August 31, 2014 | |
Financial Instrument Classification | |
Carrying Value $ | | |
Fair Value $ | | |
Carrying Value $ | | |
Fair Value $ | |
Fair value through profit or loss: | |
| | |
| | |
| | |
| |
Cash | |
| 12,239 | | |
| 12,239 | | |
| 103,215 | | |
| 103,215 | |
Marketable securities | |
| 252,624 | | |
| 252,624 | | |
| | | |
| | |
Derivative liabilities | |
| 5,040,566 | | |
| 5,040,566 | | |
| 5,325,407 | | |
| 5,325,407 | |
Loans and receivables: | |
| | | |
| | | |
| | | |
| | |
Trade and other receivables | |
| 29,426 | | |
| 29,426 | | |
| 157,121 | | |
| 157,121 | |
Other financial liabilities: | |
| | | |
| | | |
| | | |
| | |
Trade and other payables | |
| 1,864,427 | | |
| 1,864,427 | | |
| 1,483,775 | | |
| 1,483,775 | |
Loans payable | |
| 187,827 | | |
| 187,827 | | |
| - | | |
| - | |
Shareholders’ loans | |
| 1,172,673 | | |
| 1,172,673 | | |
| 981,834 | | |
| 981,834 | |
Provisions (short and long term) | |
| 98,431 | | |
| 98,431 | | |
| 47,543 | | |
| 47,543 | |
Cash, marketable securities
and derivative liabilities are stated at fair value (Level 1 measurement). The carrying value of trade and other receivables,
trade and other payables, secured note payable, shareholders’ loans and provisions approximate their fair value due to the
short-term maturity of these financial instruments (Level 3 measurement).
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Capital Management
The Company’s objectives
when managing capital are to ensure the Company will have sufficient financial capacity, liquidity and flexibility to funds its
operations, growth and ongoing exploration and development commitments on its oil and gas interests. The Company is dependent
on funding these activities through debt and equity financings and joint venture arrangements. Due to long lead cycles of the
Company’s exploration and development activities, the Company’s capital requirements currently exceed its operational
cash flow generated. As such the Company is dependent upon future financings in order to maintain its flexibility and liquidity
and may from time to time be required to issue equity, issue debt, adjust capital spending or obtain additional farm-in arrangements.
The Company manages the
capital structure and makes adjustments to it in light of changes in economic conditions, availability of capital and the risk
characteristics of any underlying assets in order to meet current and upcoming obligations. Current plans for the development
commitments of the Company’s Texas lease include seeking debt or equity financing or seeking additional farm-in arrangements.
The board of directors does
not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management
and favorable market conditions to sustain future development of the business. As at May 31, 2015 and August 31, 2014 and the
Company considered its capital structure to comprise of shareholders equity and long-term debt.
Management reviews its capital
management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
There were no changes in the Company’s capital management plan during the period ended May 31, 2015. The Company is not
subject to any externally imposed restrictions on its capital requirements.
| 13. | Supplemental cash flow information and Non-Cash Transactions |
The following table summarizes
the non-cash transactions for the periods set out:
| |
Nine Months Ended | |
Non-cash transactions | |
May 31, 2015 | | |
May 31, 2014 | |
Stock options expired | |
$ | 11,112 | | |
| - | |
Warrants expired | |
| 1,169,889 | | |
| (174,399 | ) |
Derivative warrants expired | |
| 535,542 | | |
| | |
Warrants exercised for settlement of cash advances | |
| - | | |
| 228,167 | |
Royalties paid on Matthews Lease JDA | |
| - | | |
| (167,715 | ) |
Disposal of decommissioning obligations | |
| - | | |
| 26,426 | |
The following table summarizes
the changes in non-cash working capital for the periods set out:
| |
Nine Months Ended | |
Changes in non-cash working capital | |
May 31, 2015 | | |
May 31, 2014 | |
Trade and other receivables | |
$ | 127,785 | | |
$ | 4,486 | |
Trade and other payables | |
| 380,652 | | |
| 232,052 | |
Deferred revenue | |
| (177,804 | ) | |
| 108,670 | |
Prepaid expenses and deposits | |
| - | | |
| 158,295 | |
Net change | |
$ | 330,633 | | |
$ | 503,503 | |
| 14. | Commitments and Contingencies |
The Company has certain commitments on its
Lease located in Zavala County, Texas, USA (see Note 6).
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
15. Dissolution of Dyami Energy LLC
During the year ended August
31, 2013, the Company, Dyami Energy and OGR Energy Corporation, the Lessees, were litigating a dispute with the Lessors of the
Matthew’s property. During the last quarter of fiscal year August 2013, the Company and the Lessors agreed to resolve the
litigation and continue with the development of the Matthew’s property. In order to comply with certain State legal requirements,
it was deemed necessary by the Lessors counsel to continue with the development through a newly executed lease document and the
Company formed, Zavala Inc. a new wholly owned subsidiary to execute the new lease. The new lease was signed effective September
1, 2013 and the first of two payments of US$150,000 were paid to the Lessors upon signing the new lease as required initial pre-payment
of anticipated production royalties along with a continuing development obligation under the lease to complete the previously
drilled Matthews #1H horizontal well or drill a new well on the Matthews property no later than March 30, 2014. On September 1,
2013, the Matthews lease was renewed by the Company through Zavala Inc. and based on the concept of faithful representation under
IAS 8, the carrying value of the Matthew’s lease by Dyami Energy was considered to be the value for Zavala Inc. as this
arrangement is simply a reorganization in substance.
Subsequent to September
1, 2013 and the continuing development of the Matthews lease, Dyami Energy continued its development efforts with the Murphy lease.
A tentative joint venture agreement with Stratex was reached but did not materialize and efforts to develop the Murphy lease were
not successful. The Company had solicited lenders and investors in an attempt to obtain debt/equity financings as a means to improve
Dyami Energy’s financial situation. Despite the Company’s attempts, these efforts were unsuccessful and management
determined that it could no longer fund the Murphy operations, hence the lease was considered impaired and an impairment loss
was recorded by Dyami Energy during the third quarter. On March 6, 2014, the Company filed a Certificate of Termination of a Domestic
Entity with the Secretary of State, Texas for its wholly-owned subsidiary Dyami Energy and effective April 3, 2014, Dyami Energy
was dissolved. All prior obligations with respect to the Matthew’s and Murphy’s lease on the books of Dyami Energy
prior to its dissolution were recorded by the Company.
The Company’s investment
in Dyami Energy has been deconsolidated from the Company’s consolidated financial statements as at the effective date, and
presented on the consolidated statements of operations and comprehensive loss and the consolidated statements of cash flows as
an impairment of the net assets and liabilities on dissolution of subsidiary.
The following table presents the effect of
the dissolution of Dyami Energy on the consolidated financial statements of the Company at April 3, 2014:
| |
April 3, 2014 | |
Exploration and evaluation assets – Murphy lease | |
$ | (1,675,749 | ) |
Provisions | |
| 58,589 | |
Foreign currency translation reserve | |
| 301,884 | |
Net assets and liabilities | |
$ | (1,315,276 | ) |
The comparative unaudited
interim condensed consolidated statement of shareholders’ equity (deficiency), the comparative unaudited interim condensed
consolidated statement of financial position as at May 31, 2014, and the comparative unaudited interim condensed consolidated
statement of operations and comprehensive loss for the three and nine months ended May 31, 2014 have been revised primarily to
reflect revisions made to the accounting treatment for the de-consolidation of Dyami Energy effective April 3, 2014. The accounting
treatment for the comparative period May 31, 2014, is now consistent with the accounting treatment in the audited consolidated
financial statements for the year ended August 31, 2014 (see Note 15). The effect of the changes are summarized as follows:
Unaudited Interim
Condensed Consolidated Statement of Shareholders’ Equity (Deficiency)
| |
Nine Months Ended May 31, 2014 | |
| |
As previously filed | | |
As adjusted | |
| |
$ | | |
$ | |
Deficit, August 31, 2013 | |
| 9,212,561 | | |
| 9,212,561 | |
Net loss for the period | |
| 5,303,475 | | |
| 1,783,493 | |
Deficit, May 31, 2014 | |
| 14,516,036 | | |
| 10,996,054 | |
| |
| | | |
| | |
Exploration and Evaluation Reserve, August 31, 2013 | |
| - | | |
| - | |
Matthews Lease revaluation | |
| 3,046,802 | | |
| - | |
| |
| 3,046,802 | | |
| - | |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Unaudited Interim
Condensed Consolidated Statement of Operations and Comprehensive Loss
| |
Three Months Ended May 31, 2014 | | |
Nine Months Ended May 31, 2014 | |
| |
As previously filed | | |
As adjusted | | |
As previously filed | | |
As adjusted | |
| |
$ | | |
$ | | |
$ | | |
$ | |
| |
| | | |
| | | |
| | | |
| | |
Depletion and accretion | |
| 284 | | |
| 476 | | |
| 628 | | |
| 2,116 | |
General and administrative | |
| 57,552 | | |
| 64,730 | | |
| 184,108 | | |
| 244,380 | |
Interest | |
| 18,782 | | |
| 23,985 | | |
| 58,397 | | |
| 112,714 | |
Impairment loss on exploration and evaluation assets, net | |
| - | | |
| 1,315,276 | | |
| - | | |
| 1,315,276 | |
Loss from discontinued operations | |
| 4,847,831 | | |
| - | | |
| 4,951,335 | | |
| - | |
Net loss for the period | |
| 4,789,715 | | |
| 1,269,733 | | |
| 5,303,475 | | |
| 1,783,493 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation | |
| (7,934 | ) | |
| (309,817 | ) | |
| 103,690 | | |
| (198,194 | ) |
Revaluation of the Matthews Lease | |
| 3,046,802 | | |
| - | | |
| 3,046,802 | | |
| - | |
Total other comprehensive income (loss) | |
| 3,038,868 | | |
| (309,817 | ) | |
| 3,150,492 | | |
| (198,194 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss and comprehensive loss | |
| 1,750,847 | | |
| 1,579,550 | | |
| 2,152,983 | | |
| 1,981,687 | |
Loss per share, basic and diluted | |
$ | 0.371 | | |
$ | 0.098 | | |
$ | 0.425 | | |
$ | 0.143 | |
Also, certain
comparative figures have been reclassified to conform to current period presentation.
On or about September 30, 2014, Stratex filed
a petition against Zavala Inc. in the District Court of Zavala County, Texas seeking breach of contract and actual damages of
US$152,293 for Zavala Inc.’s alleged non-payment of its proportionate share of minimum royalties due under the Matthews
Lease. Zavala Inc., disputed the claim citing US$300,000 paid by the Company was to be credited against the minimum royalties
which Stratex had failed to do. Zavala Inc. paid the US$152,293 under protest and filed a Response and Cross Notice of Default
against Stratex (Cause No.: 14-09-13290-ZCV). Effective March 31, 2015, the Company entered into a settlement agreement with Stratex
and Quadrant pursuant to which the Company is entitled to receive US$25,000 in cash and 1,333,333 common shares of Stratex and
Stratex shall assign all of its rights, title and interest in, to and under the Matthews Lease and JDA, to the Company and Quadrant.
To date, the Company has received 1,333,000 common shares of Stratex and the assignment of the Matthews lease (see Note 19).
On or about October 27, 2014, the Company
filed a statement of claim in the Ontario Superior Court of Justice against Alan Gaines, a former director of the Company for
breach of fiduciary duty to the Company relating to Gaines role in the Company contracting with Stratex (Court File No.: 65-14-514935).
Effective March 25, 2015, the Company entered into a settlement agreement with Gaines under which Gaines transferred to the Company
1,200,000 common shares and 1,200,000 common share purchase warrants of Stratex exercisable at US$0.15 per until December 31,
2018 (see Note 19).
Subsequent to the period ended May 31, 2015,
the President through Core Energy Enterprises Inc. advanced the Company CDN$21,000 and US$117,536 on terms yet to be determined.
At each financial reporting
period, the Company estimates the fair value of investments which are held-for-trading, based on quoted closing bid prices at
the consolidated statements of financial position date or the closing bid price on the last day the security traded if there were
no trades at the consolidated statements of financial position date and such valuations are reflected in the consolidated financial
statements. The resulting values for unlisted securities whether of public or private issuers, may not be reflective of the proceeds
that could be realized by the Company upon their disposition. The fair value of the securities at May 31, 2015 was $252,624. For
the three and nine months ended May 31, 2015, the Company recorded an unrealized loss on marketable securities of $53,518 (2014
$Nil).
| |
May 31, 2015 | |
Investment in quoted company security | |
$ | 252,624 | |
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended May 31, 2015 and 2014
(Expressed In Canadian Dollars)
(Unaudited)
Effective March 25, 2015,
the Company entered into a settlement agreement with Gaines and received 1,200,000 common shares and 1,200,000 common share purchase
warrants of Stratex exercisable at US$0.15 per expiring December 31, 2018. The 1,200,000 common shares and warrants were recorded
at their fair value of $120,125 in marketable securities with a corresponding gain on settlement of litigation, in the unaudited
interim condensed consolidated statement of operations and comprehensive loss (see Note 17).
Effective March 31, 2015, the Company entered
into a settlement with Stratex and received 1,333,333 common shares of Stratex as repayment of the disputed minimum royalty amount
of US$152,293 and recorded the fair value of CDN$186,017 in marketable securities and a corresponding decrease in exploration
and evaluation assets (see Note 17).
The Company has a cash deposit of US$25,000
with the Texas Railroad Commission to cover any potential liabilities relating to its wells in Zavala County, Texas.
(Formerly: Eagleford Energy Inc.)
Management’s Discussion and Analysis
For the Three and Nine Months Ended
May 31, 2015
1 King Street West, Suite
1505, Toronto, ON, Canada Telephone: 416 364 4039, Facsimile: 416 364-8244
OVERVIEW
Eagleford Energy Corp. (“Eagleford”
or the “Company”) is amalgamated under the laws of the Province of Ontario. The Company's business focus consists
of acquiring, exploring and developing oil and gas interests. The recoverability of the amount shown for these properties is dependent
upon the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete
exploration and development, and future profitable production or proceeds from disposition of such property. The Company’s
oil and gas interests are located in Alberta, Canada and Zavala County, Texas. In addition the Company holds a 0.3% net
smelter return royalty on 8 mining claim blocks located in Red Lake, Ontario which is carried on the consolidated balance sheets
at $Nil. The Company filed Articles of Amendment effective August 25, 2014 consolidating its common shares on the basis of one
(1) common share for every ten (10) common shares and changed its name to Eagleford Energy Corp. The address of the registered
office is 1 King Street West, Suite 1505, Toronto, Ontario, M5H 1A1. Eagleford’s common shares trade on the OTC Markets
(OTCQB) under the symbol EGFDF.
The Company’s Unaudited Interim Condensed
Consolidated Financial Statements for the three and nine months ended May 31, 2015 and 2014 include the accounts of Eagleford,
the legal parent, together with its wholly-owned subsidiaries, 1354166 Alberta Ltd. an Alberta operating company (“1354166
Alberta”), Eagleford Energy, Zavala Inc. a Nevada company (“Zavala Inc.”) and EEZ Operating Inc., a Texas corporation
incorporated on May 12, 2015 (“EEZ Operating”). All Intercompany balances and transactions have been eliminated on
consolidation. On March 6, 2014, the Company filed a Certificate of Termination of a Domestic Entity with the Secretary of State,
Texas for its wholly-owned subsidiary Dyami Energy and Dyami Energy was dissolved effective April 3, 2014. The Company’s
investment in Dyami Energy was deconsolidated from the Company’s Unaudited Interim Condensed Consolidated Financial Statements
as at the effective date.
Our Canadian public filings can be accessed
and viewed via the System for Electronic Data Analysis and Retrieval (“SEDAR”) at www.sedar.com. Readers can also
access and view our Canadian public insider trading reports via the System for Electronic Disclosure by Insiders at www.sedi.ca.
Our U.S. public filings are available at the public reference room of the U.S. Securities and Exchange Commission (“SEC”)
located at 100 F Street, N.E., Room 1580, Washington, DC 20549 and at the website maintained by the SEC at www.sec.gov.
The following Management’s Discussion
and Analysis of Eagleford should be read in conjunction with the Company’s Unaudited Interim Condensed Consolidated Financial
Statements for the three and nine months ended May 31, 2015 and notes thereto.
The Company’s Unaudited Interim Condensed
Consolidated Financial Statements for the three and nine months ended May 31, 2015 were prepared using the same accounting policies
and methods of computation as those described in our Consolidated Financial Statements for the year ended August 31, 2014. Any
subsequent changes to IFRS that are given effect in the Company’s annual consolidated financial statements for the year
ending August 31, 2015 could result in restatement of the unaudited condensed interim consolidated financial statements
The unaudited interim condensed consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued
by the International Accounting Standards Board (“IASB”) and interpretations issued by the IFRS Interpretations Committee
(“IFRIC”). These unaudited interim condensed consolidated financial statements have been prepared in accordance with
International Accounting Standard 34, Interim Financial Reporting. Accordingly, they do not include all of the information required
for full annual financial statements required by IFRS as issued by the IASB and interpretations issued by IFRIC.
The Unaudited Interim Condensed Consolidated
Financial Statements should be read in conjunction with our Consolidated Financial Statements for the year ended August 31, 2014.
All amounts herein are presented in Canadian dollars, unless otherwise noted.
This Management’s Discussion and Analysis
is dated July 29, 2015 and has been approved by the Board of Directors of the Company.
FORWARD LOOKING STATEMENTS
This Management’s Discussion and
Analysis contains certain forward-looking statements, including management’s assessment of future plans and operations,
and capital expenditures and the timing thereof, that involve substantial known and unknown risks and uncertainties, certain of
which are beyond the Company’s control. Such risks and uncertainties include, without limitation, risks associated with
oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity
prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability
to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability
to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United
States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and
regulations) and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified
personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of
companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory
authorities. The Company’s actual results, performance or achievements could differ materially from those expressed in,
or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated
by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds,
that the Company will derive there from. Readers are cautioned that the foregoing list of factors is not exhaustive. All subsequent
forward-looking statements, whether written or oral, attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this Management
Discussion and Analysis are made as at the date of this Management Discussion and Analysis and the Company does not undertake
any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information,
future events or otherwise, except as may be required by applicable securities laws.
Non-IFRS Measurements – Certain
measures in this Management’s Discussion and Analysis do not have any standardized meaning as prescribed by IFRS including
"Operating net back" are considered Non-IFRS measures. Therefore, these measures may not be comparable to similar measures
presented by other issuers. These measures are common with the oil and gas industry and have been described and presented in this
Management’s Discussion and Analysis in order to provide shareholders and potential investors with additional information
regarding the company's liquidity and its ability to generate funds to finance its operations. These terms are commonly used in
the oil and gas industry and are therefore presented here to provide balances comparable to other oil and gas production companies.
GLOSSARY OF ABBREVIATIONS
Bbl |
barrel |
Bbl/d |
barrels per
day |
Boe |
barrels of oil
equivalent (1) |
Boe/d |
barrels of oil
equivalent per day |
Mcf |
1,000 cubic
feet of natural gas |
Mcf/d |
1,000 cubic feet of natural gas per
day |
(1) Boe
conversion ratio of 6 Mcf: 1Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead. Disclosure provided herein in respect of Boes may be misleading, particularly
if used in isolation.
The following table sets forth certain standard
conversions between Standard Imperial Units and the International System of units (or metric units).
To Convert From | |
To | |
Multiply By | |
| |
| |
| |
Mcf | |
Cubic metres | |
| 28.174 | |
Cubic metres | |
Cubic feet | |
| 35.494 | |
Bbls | |
Cubic metres | |
| 0.159 | |
Cubic metres | |
Bbls | |
| 6.292 | |
Feet | |
Metres | |
| 0.305 | |
Metres | |
Feet | |
| 3.281 | |
Miles | |
Kilometers | |
| 1.609 | |
Kilometers | |
Miles | |
| 0.621 | |
Acres (Alberta) | |
Hectares | |
| 0.405 | |
Hectares (Alberta) | |
Acres | |
| 2.471 | |
OVERALL PERFORMANCE
Natural gas sales, net of royalties for the
nine months ended May 31, 2015 decreased by $8,209 to $37,264 compared to $45,473 for the nine month period ended May 31, 2014.
Net loss for the nine months ended May 31, 2015 was $6,287,183 compared to a net loss of $1,783,493 for the nine months ended
May 31, 2014. The increase in net loss during the nine month period ended 2015 was primarily related to an impairment of exploration
and evaluation assets in the amount of $4,720,194 compared to $1,315,276 in 2014, an increase in the accretion of a secured note
payable of $475,755 versus $Nil in 2014, an increase in loss on derivative liabilities of $191,880 to $250,701 versus $58,821
in 2014, an increase in loss on foreign exchange of $186,522 to $286,136 compared to a loss of $99,614 for the same nine month
period ended May 31, 2014 and an increase in general and administrative costs of $80,432 to $324,812 compared to $244,380 for
the same nine month period in 2014.
For the nine months ended May 31, 2015, the
Company recorded net additions of $331,425 to exploration and evaluation assets and an impairment of exploration and evaluation
assets in the amount of $4,720,194 related to its interest in the Matthews Lease, Texas.
During the nine months ended May 31, 2015,
the Company received related party advances of US$149,500 and $47,000.
As part of the Company’s oil and gas
development program, management of the Company anticipates further development expenditures to define reserves and extract hydrocarbons.
Amounts expended on future exploration and development is dependent on the nature of future opportunities evaluated by the Company
and cash calls from joint venture participants. Any expenditure which exceeds available cash will be required to be funded by
additional share capital or debt issued by the Company, or by other means. The Company’s long-term profitability will depend
upon its ability to successfully implement its business plan.
The Company’s past primary source of
liquidity and capital resources has been proceeds from the issuance of share capital, shareholders’ loans and cash flow
from oil and gas operations.
RISK AND UNCERTAINTIES
There have been no material changes during
the nine months ended May 31, 2015 to the risks and uncertainties as identified in the Management Discussion and Analysis for
the year ended August 31, 2014.
The following table illustrates the contractual
maturities of financial liabilities:
May 31, 2015 | |
Payments Due by Period | |
| |
Total | | |
Less than 1 year | | |
1-3 years | | |
4-5 years | | |
After 5 years | |
Trade and others payables | |
$ | 1,864,427 | | |
$ | 1,864,427 | | |
| - | | |
| - | | |
| - | |
Shareholders’ loans (1) | |
| 1,172,673 | | |
| 1,172,673 | | |
| - | | |
| - | | |
| - | |
Loans Payable (1) | |
| 187,827 | | |
| 187,827 | | |
| | | |
| | | |
| | |
Total | |
$ | 3,224,927 | | |
$ | 3,224,927 | | |
| - | | |
| - | | |
| - | |
August 31, 2014 | |
Payments Due by Period | |
| |
Total | | |
Less than 1 year | | |
1-3 years | | |
4-5 years | | |
After 5 years | |
Trade and others payables | |
$ | 1,483,775 | | |
$ | 1,483,775 | | |
| - | | |
| - | | |
| - | |
Shareholders’ loans (1) | |
| 981,834 | | |
| 981,834 | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 2,465,609 | | |
$ | 2,465,609 | | |
| - | | |
| - | | |
| - | |
| (1) | Translated at
current exchange rate. |
Capital Management
The Company’s objectives when managing
capital are to ensure the Company will have sufficient financial capacity, liquidity and flexibility to funds its operations,
growth and ongoing exploration and development commitments on its oil and gas interests. The Company is dependent on funding these
activities through debt and equity financings and joint venture arrangements. Due to long lead cycles of the Company’s exploration
and development activities, the Company’s capital requirements currently exceed its operational cash flow generated. As
such the Company is dependent upon future financings in order to maintain its flexibility and liquidity and may from time to time
be required to issue equity, issue debt, adjust capital spending or obtain additional farm-in arrangements.
The Company manages the capital structure
and makes adjustments to it in light of changes in economic conditions, availability of capital and the risk characteristics of
any underlying assets in order to meet current and upcoming obligations. Current plans for the development commitments of the
Company’s Texas lease include seeking debt or equity financing or seeking additional farm-in arrangements.
The board of directors does not establish
quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management and favorable
market conditions to sustain future development of the business. As at May 31, 2015 and August 31, 2014 and the Company considered
its capital structure to comprise of shareholders equity and long-term debt.
Management reviews its capital management
approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were
no changes in the Company’s capital management plan during the period ended May 31, 2015. The Company is not subject to
any externally imposed restrictions on its capital requirements.
RESULTS OF OPERATIONS
Historical | |
For the Three
Months Ended | | |
For the Nine months
Ended | |
Production | |
May
31, | | |
May
31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Natural gas – mcf/d | |
| 60 | | |
| 59 | | |
| 53 | | |
| 50 | |
Historical Prices | |
| | | |
| | | |
| | | |
| | |
Natural Gas - $/mcf | |
$ | 2.73 | | |
$ | 5.92 | | |
$ | 3.42 | | |
$ | 4.35 | |
Royalties costs - $/mcf | |
$ | 0.52 | | |
$ | 1.56 | | |
$ | 0.81 | | |
$ | 1.01 | |
Production costs - $/mcf | |
$ | 1.23 | | |
$ | 0.86 | | |
$ | 1.17 | | |
$ | 0.76 | |
Net back - $/mcf | |
$ | 0.98 | | |
$ | 3.50 | | |
$ | 1.44 | | |
$ | 2.58 | |
Operations | |
| | | |
| | | |
| | | |
| | |
Revenue, net of royalties | |
$ | 11,904 | | |
$ | 22,116 | | |
$ | 37,264 | | |
$ | 45,473 | |
Net loss | |
$ | (5,867,263 | ) | |
$ | (1,269,733 | ) | |
$ | (6,287,183 | ) | |
$ | (1,783,493 | ) |
Loss per share, basic and diluted | |
$ | (0.212 | ) | |
$ | (0.098 | ) | |
$ | (0.227 | ) | |
$ | (0.143 | ) |
Production Volume
For the three months ended May 31, 2015, average
natural gas sales volumes remained relatively consistent at 60 mcf/d compared to 59 mcf/d for the same period in 2014. Total production
volume for the three months ended May 31, 2015 was 5,391 mcf compared to 5,072 mcf for the same three month period in 2014.
For the nine months ended May 31, 2015, average
natural gas sales volumes were up slightly to 53 mcf/d compared to 50 mcf/d for the same period in 2014. Total production volume
for the nine months ended May 31, 2015 was 14,264 mcf compared 13,621 mcf for the same three month period in 2014.
Commodity Prices
For the three months ended May 31, 2015, average
natural gas prices received per mcf decreased by 54% to $2.73 compared to $5.92 for the three months ended May 31, 2014.
For the nine months ended May 31, 2015, average
natural gas prices received per mcf decreased 22% to $3.42 compared to $4.35 for the nine months ended May 31, 2014.
The decrease in average natural gas prices
received for the three and nine month periods was attributed to a reduction in commodity prices.
Natural Gas Sales, Net of
Royalties | |
For the Three
Months Ended | | |
For the Nine months
Ended | |
| |
May
31, | | |
May
31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Natural gas sales | |
$ | 14,702 | | |
$ | 30,038 | | |
$ | 48,754 | | |
$ | 59,297 | |
Royalties | |
| (2,798 | ) | |
| (7,922 | ) | |
| (11,490 | ) | |
| (13,824 | ) |
Revenue, net of royalties | |
$ | 11,904 | | |
$ | 22,116 | | |
$ | 37,264 | | |
$ | 45,473 | |
Natural gas sales for the three months ended
May 31, 2015, decreased by $15,336 to $14,702 compared to $30,038 for the three months ended May 31, 2014 as a result of lower
commodity prices received.
Natural gas sales for the nine months ended
May 31, 2015, decreased by $10,543 to $48,754 compared to $59,297 for the nine months ended May 31, 2014. The decrease in sales
during the nine month period in 2015 was primarily attributed to lower commodity prices.
Royalties for the three months ended May 31,
2015, were $2,798 versus $7,922 for the comparable three month period in 2014.
Royalties for the nine months ended May 31,
2015, were $11,490 versus $13,824 for the comparable nine month period in 2014. The decrease in royalties for the three and nine
months ended May 31, 2015 compared to those periods in 2014 is attributed to changes in production volume and commodity prices.
Natural gas sales, net of royalties for the
three months ended May 31, 2015, decreased by $10,212 to $11,904 compared to $22,116 for the same three month period in 2014.
Natural gas sales, net of royalties for the
nine months ended May 31, 2015, decreased by $8,209 to $37,264 compared to $45,473 for the nine month period ended May 31, 2014.
Operating Costs
For three months ended May 31, 2015, operating
costs were $7,442 up $3,036 compared to operating costs of $4,406 for the three months ended May 31, 2014.
For nine months ended May 31, 2015, operating
costs increased by $7,205 to $17,500 compared to operating costs of $10,295 for the nine months ended May 31, 2014.
The increase in operating costs for the three
and nine months ended May 31, 2015 was attributed to increases in gas processing charges and higher maintenance costs.
Depletion and Accretion
Depletion and accretion for the three months
ended May 31, 2015, remained relatively consistent at $462 compared to $476 for the three months ended May 31, 2014.
Depletion and accretion for the nine months
ended May 31, 2015, decreased by $1,186 to $930 compared to $2,116 for the nine months ended May 31, 2014.
The decrease in depletion and accretion for
the three and nine months ended May 31, 2015, was attributed to changes in decommissioning obligation estimates.
General and Administrative | |
For the Three
Months Ended | | |
For the Nine months
Ended | |
| |
May 31, | | |
May 31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Professional fees | |
$ | 6,245 | | |
$ | 8,142 | | |
$ | 82,953 | | |
$ | 63,796 | |
Head office costs | |
| 25,500 | | |
| 26,250 | | |
| 76,500 | | |
| 78,675 | |
Management fees | |
| 37,500 | | |
| 18,750 | | |
| 112,500 | | |
| 56,250 | |
Transfer and registrar costs | |
| 3,460 | | |
| 2,383 | | |
| 5,991 | | |
| 5,816 | |
Shareholders information | |
| - | | |
| 6,832 | | |
| 34,187 | | |
| 32,832 | |
Office and general costs | |
| 2426 | | |
| 1,773 | | |
| 5,589 | | |
| 4,511 | |
Directors fees | |
| - | | |
| 600 | | |
| 2,000 | | |
| 2,500 | |
Insurance | |
| 5,092 | | |
| - | | |
| 5,092 | | |
| - | |
Total | |
$ | 80,223 | | |
$ | 64,730 | | |
$ | 324,812 | | |
$ | 244,380 | |
General and administrative expenses for the
three months ended May 31, 2015, were $15,493 higher at $80,223 compared to $64,730 for the three months ended May 31, 2014. The
increase in expenses during 2015 was primarily attributed to an increase in management fees of $18,750 to $37,500 compared to
$18,750 for the same three month period in 2014 and an increase in insurance of $5,092 compared to $Nil in the same period in
2014.
General and administrative expenses for the
nine months ended May 31, 2015, were $80,432 higher at $324,812 compared to $244,380 for the nine months ended May 31, 2014. The
increase in expenses during 2015 was primarily attributed to an increase in professional fees of $19,157 to $82,953 compared to
$63,796 to an increase in management fees of $56,250 to $112,500 compared to $56,250 in the comparable period in 2014 and an increase
in insurance of $5,092 compared to $Nil in the same period in 2014.
Interest
For the three months ended May 31, 2015, the
Company incurred interest costs of $73,884, higher by $49,899 versus interest costs of $23,985 for the three months ended May
31, 2014.
For the nine months ended May 31, 2015, the
Company incurred interest costs of $202,333 representing an increase of $89,619 versus interest costs of $112,714 for the comparable
nine month period in 2014.
The increase in interest costs expensed during
the three and nine months ended May 31, 2015, was primarily attributed to decreases in interest capitalized as borrowing costs,
resulting from the impairment loss recorded on exploration and evaluation assets during the fourth quarter of fiscal 2014.
Accretion of Convertible Secured Note
For the three months ended May 31, 2015, the
Company recorded accretion on the secured convertible note in the amount of $327,793 compared to $Nil in the three month period
in 2014.
For the nine months ended May 31, 2015, the
Company recorded accretion on the secured convertible note in the amount of $475,755 compared to $Nil for the nine months ended
May 31, 2014.
At May 31, 2015, the Company had a secured
convertible note payable with a face value of US$1,216,175 (August 31, 2014: US$1,216,175) (the “Note”). The Note
will be accreted up to its face value over the life of Note based on an effective interest rate.
Gain (loss) on Derivative Liabilities
For the three and nine months ended
May 31, 2015, the Company recorded a loss on derivative liabilities of $738,652 and $250,701, respectively compared to
a (gain) loss on derivative liabilities of $(38,964) and $58,821 for the three and nine months ended May 31, 2014, respectively
as follows:
Derivative Warrant Liabilities
For the three months ended May 31, 2015, the
Company recorded a gain on derivative warrant liabilities of $3,407 compared to a gain of $38,964 for the three months ended May
31, 2014.
For the nine months ended May 31, 2015, the
Company recorded a loss on derivative warrant liabilities of $197,990 compared to a loss of $58,821 for the nine months ended
May 31, 2014.
The Company has warrants issued with an exercise
price in US dollars which is different to the functional currency of the Company (Canadian Dollars) and accordingly the warrants
are treated as a derivative financial liability and the fair value movement during the period is recognized in the consolidated
statement of operations.
Derivative Unit Liabilities
For the three months ended May 31, 2015, the
Company recorded a loss on derivative unit liabilities of $742,059 compared to $Nil for the three months ended May 31, 2014.
For the nine months ended May 31, 2015, the
Company recorded a loss on derivative unit liabilities of $52,711 compared to $Nil for the nine months ended May 31, 2014.
At, May 31, 2015, the Company had a secured
convertible note payable with a face value of US$1,216,175 (August 31, 2014: US$1,216,175) (the “Note”). The
Note has a conversion option at any time to convert any unpaid principal and accrued interest into conversion units. A conversion
unit is comprised of one (1) common share and one (1) common share purchase warrant entitling the holder to acquire a common share
of the Company at a price equal to a 15% premium to the price of the common share acquired under the conversion unit (the “Conversion
Unit”). Since both components of the Conversion Unit (the common share component and warrant component) contain a variable
exercise/conversion price, the Conversion Unit meets the definition of a financial liability that requires fair value measurement
each period.
Loss on Foreign Exchange
For the three months ended May 31, 2015, the
Company recorded a gain on foreign exchange of $2,876 compared to a gain of $63,810 for the same three month period in 2014.
For the nine months ended May 31, 2015, the
Company recorded a loss on foreign exchange of $286,136 compared to a loss of $99,614 for the same nine month period ended May
31, 2014.
These foreign exchange gains and losses are
attributed to the translation of monetary assets and liabilities not denominated in the functional currency of the Company.
Stock Based Compensation
For the three months ended May 31, 2015, the
Company recorded stock based compensation of $Nil compared to $Nil for the same period in 2014.
For the nine months ended May 31, 2015, the
Company recorded stock based compensation of $84,520 compared to $Nil for the same nine month period in 2014.
On November 12, 2014, the Company granted
options to purchase 750,000 common shares to directors of the Company. These options are exercisable at $0.12 per share, vest
immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of $84,520.
Stock Based Compensation-Non Employees
For the three months ended May 31, 2015, the
Company recorded stock based compensation for non-employees of $Nil compared to $Nil for the same period in 2014.
For the nine months ended May 31, 2015, the
Company recorded stock based compensation for non-employees of $28,173 compared to $Nil for the same nine month period in 2014.
On November 12, 2014, the Company granted
options to purchase 250,000 common shares to a consultant of the Company. These options are exercisable at $0.12 per share, vest
immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of $28,173.
Gain on Settlement of Litigation
For the three months ended May 31, 2015, the
Company recorded a gain on settlement of litigation in the amount of $120,125 compared to $Nil in the same three month period
in 2014.
For the nine months ended May 31, 2015, the
Company recorded a gain on settlement of litigation in the amount of $120,125 compared to $Nil in the same three month period
in 2014.
Effective March 25, 2015, the Company entered
into a settlement agreement with a former director of the Company and received 1,200,000 common shares and 1,200,000 common share
purchase warrants of Stratex Oil & Gas Holdings, Inc. (“Stratex”) exercisable at US$0.15 per expiring December
31, 2018. The 1,200,000 common shares and warrants were recorded at fair value of $120,125 and allocated to gain on settlement
of litigation and marketable securities.
Unrealized loss on marketable securities
For the three months ended May 31, 2015, the
Company recorded an unrealized loss on marketable securities in the amount of $53,518 compared to $Nil in the same three month
period in 2014.
For the nine months ended May 31, 2015, the
Company recorded an unrealized loss on marketable securities in the amount of $53,518 compared to $Nil in the same three month
period in 2014.
Effective March 25, 2015, the Company entered
into a settlement agreement with a former director of the Company and received 1,200,000 common shares and 1,200,000 common share
purchase warrants of Stratex exercisable at US$0.15 per expiring December 31, 2018. The 1,200,000 common shares and warrants were
recorded at fair value of $120,125 and allocated to marketable securities and gain on settlement of litigation.
Effective March 31, 2015, the Company entered
into a settlement with Stratex and received 1,333,333 common shares of Stratex as repayment of the disputed minimum royalty amount
of US$152,293 and recorded the fair value of CDN$186,017 in marketable securities and a corresponding decrease in exploration
and evaluation assets.
At each financial reporting period, the Company
estimates the fair value of investments which are held-for-trading, based on quoted closing bid prices at the consolidated statements
of financial position date or the closing bid price on the last day the security traded if there were no trades at the consolidated
statements of financial position date and such valuations are reflected in the consolidated financial statements.
Impairment of Exploration and Evaluation
Assets
For the three months ended May 31, 2015, the
Company recorded an impairment of exploration and evaluation assets in the amount of $4,720,194 compared to $1,315,276 for the
same three month period in 2014.
For the nine months ended May 31, 2015, the
Company recorded an impairment of exploration and evaluation assets in the amount of $4,720,194 compared to $1,315,276 for the
same three month period in 2014.
On July 2, 2015, the 2629 acre Matthews Lease
was terminated according to its terms and the Company is currently assessing the number of acres to be held by production. The
Company estimates that approximately 400 acres (representing approximately 15% of the total 2,629 lease acres) will be held by
production (100% working interest and 75% revenue interest) and accordingly, the Company has written down the lease to 15% of
its carrying costs and recorded an impairment of exploration and evaluation assets of $4,720,194.
For the periods ended May 31, 2014, the Company’s
investment in Dyami Energy had been deconsolidated from the Company’s Consolidated Financial Statements as at the effective
date, and presented as an impairment of the net assets and liabilities on dissolution of subsidiary in the amount of $1,315,276
(see Note 15 to the Unaudited Interim Condensed Consolidated Financial Statements).
Marketing and Public Relations
For the three months ended May 31, 2015, the
Company recorded a recovery in marketing and public relations in the amount of $Nil compared to a recovery of $14,250 for the
same period in 2014.
For the nine months ended May 31, 2015, the
Company recorded a recovery in marketing and public relations in the amount of $Nil compared to a recovery of $14,250 for the
same nine month period in 2014.
Net Loss
Net loss for the three months ended May 31,
2015, was $5,867,263 compared to a net loss of $1,269,733 for the three months ended May 31, 2014. The increase in net loss during
the three month period in 2015 was primarily related to an impairment of exploration and evaluation assets in the amount of $4,720,194
compared to $1,315,276 in 2014, an increase in loss on derivative liabilities of $738,652 versus a gain of $38,964 in 2014, an
increase in the accretion of a secured note payable of $327,723 versus $Nil in 2014. In addition during 2015, the Company incurred
additional increases in general and administrative costs, interest and recorded an unrealized loss on marketable securities.
Net loss for the nine months ended May 31,
2015, was $6,287,183 compared to a net loss of $1,783,493 for the nine months ended May 31, 2014. The decrease in net loss during
the nine month period ended 2015, was primarily related to an impairment of exploration and evaluation assets in the amount of
$4,720,194 compared to $1,315,276 in 2014, an increase in accretion of a secured note payable of $475,755 versus $Nil in 2014,
an increase in loss on derivative liabilities of $191,880 to $250,701 versus $58,821 in 2014, an increase in loss on foreign exchange
of $186,522 to $286,136 compared to a loss of $99,614 for the same nine month period ended May 31, 2014 and an increase in general
and administrative costs of $80,432 to $328,812 compared to $244,380 for the comparable period in 2014.
Foreign Currency Translation
For the three months ended May 31, 2015, the
Company incurred a loss on foreign currency translation of $17,235 versus a loss of $309,817 for the same three month period in
2014.
For the nine months ended May 31, 2015, the
Company incurred a gain on foreign currency translation of $691,207 versus a loss of $198,194 for the same nine month period ended
May 31, 2014.
These gains and losses are related to translation
differences between Zavala Inc., EEZ Operating and Dyami Energy’s US dollar functional currency converted into Canadian
dollars at the period end exchange rates, and the results operations converted at average rates of exchange for the period.
Net Loss and Comprehensive Loss
Net loss and comprehensive loss for the three
months ended May 31, 2015, was $5,884,498 compared to a net loss and comprehensive loss of $1,579,550 for the three months ended
May 31, 2014.
Net loss and comprehensive loss for the nine
months ended May 31, 2015, was $5,595,976 compared to a net loss and comprehensive loss of $1,981,687 for the nine months ended
May 31, 2014.
Loss per Share, Basic and Diluted
Basic and diluted loss per share for the three
months ended May 31, 2015, was $0.212 compared to basic and diluted loss per share of $0.098 for the same three month period ended
May 31, 2014.
Basic and diluted loss per share for the nine
months ended May 31, 2015, was $0.227 compared to basic and diluted loss per share of $0.143 for the same nine month period ended
May 31, 2014.
SUMMARY OF QUARTERLY RESULTS
The following tables reflect the summary of
quarterly results for the periods set out.
| |
2015 | | |
2015 | | |
2014 | | |
2014 | |
For the quarter
ending | |
May
31 | | |
February | | |
November
30 | | |
August
31 | |
Revenue, net of royalties | |
$ | 11,904 | | |
$ | 11,794 | | |
$ | 13,565 | | |
$ | 19,551 | |
Income (loss) for the period | |
$ | (5,867,263 | ) | |
$ | 256,686 | | |
$ | (676,605 | ) | |
$ | (4,332,092 | ) |
Income (loss) per share, basic | |
$ | (0.212 | ) | |
$ | 0.009 | | |
$ | (0.024 | ) | |
$ | (0.327 | ) |
Income (loss) per share, diluted | |
$ | (0.212 | ) | |
$ | 0.004 | | |
$ | (0.024 | ) | |
$ | (0.327 | ) |
Revenue, net of royalties for the four quarters
fluctuated as a result of changes in production volume and commodity prices. For the three month period ended May 31, 2015, the
Company recorded an impairment of exploration and evaluation assets of $4,720,194, a loss on derivative financial liabilities
of $738,652 and accretion of secured convertible note in the amount of $327,793. For the three month period February 28, 2015,
the Company record a gain on derivative liabilities of $751,502. During the quarter ended November 30, 2014, the Company recorded
a loss on derivative liabilities of $263,551 and stock based compensation expense of $112,693. During the quarter ended August
31, 2014, the company recorded a loss on derivative liabilities of $2,676,655 and loss on settlement of debt in the amount of
$1,335,935. Other changes in net loss during the quarters were primarily related to gain or loss on foreign exchange and the fair
value movement of derivative liabilities during the respective periods.
| |
2014 | | |
2014 | | |
2013 | | |
2013 | |
For the quarter
ending | |
May
31 | | |
February
29 | | |
November
30 | | |
August
31 | |
Revenue, net of royalties | |
$ | 22,116 | | |
$ | 9,754 | | |
$ | 13,603 | | |
$ | 171 | |
Loss for the period | |
$ | (1,269,733 | ) | |
$ | (401,602 | ) | |
$ | (112,159 | ) | |
$ | (3,557,922 | ) |
Loss per share, basic and diluted | |
$ | (0.098 | ) | |
$ | (0.032 | ) | |
$ | (0.009 | ) | |
$ | (0.034 | ) |
Revenue, net of royalties for the four quarters
fluctuated as a result of changes in production volume and commodity prices. During the quarter ended May 31, 2014, the Company
recorded an impairment loss on exploration and evaluation assets in the amount of $1,315,276. During the three months ended February
28, 2014, the Company recorded a loss on foreign exchange of $146,645. During the quarter ended August 31, 2013, the Company recorded
an impairment of exploration and evaluation assets in the amount of $2,690,568, an impairment of property and equipment of $168,954
and a loss on settlement of debt in the amount of $402,264. Other changes in net loss during the quarters were primarily related
to gain or loss on foreign exchange and the fair value movement of derivative liabilities during the respective periods.
CAPITAL EXPENDITURES
For the nine months ended May 31, 2015, the
Company recorded net additions to exploration and evaluation assets of $331,425 on its lease located in Zavala County, Texas (year
ended August 31, 2014: $113,578) (see Note 6 to the Unaudited Interim Condensed Consolidated Financial Statements).
The Company expects that its capital expenditures
will increase in future reporting periods as the Company incurs costs to explore and develop its oil and gas properties.
FINANCING ACTIVITIES
During the nine months ended May 31, 2015,
the Company received related party advances of US$149,500 and $47,000. During the year ended August 31, 2014, the Company issued
14,757,102 common shares as full settlement of shareholders’ loans and interest in the aggregate amount of $1,180,570).
LIQUIDITY AND CAPITAL RESOURCES
Cash as of May 31, 2015 was $12,239 (August
31, 2014: $103,215). The Company entered into Joint Development Agreements on the Matthews Lease and for the nine months ended
May 31, 2015 had received payments of certain obligations under the Matthews Lease of $200,773 (August 31, 2014: $340,811 cash
and payments of certain obligations).
For the year nine months ended May 31, 2015,
the primary use of funds was related to exploration and evaluation asset expenditures incurred on the Company’s Matthews
lease located in Zavala County, Texas and administrative expenses. The Company’s working capital deficiency at May 31, 2015
was $8,458,522 (August 31, 2014: $3,489,237).
Our current assets of $294,289 as at May 31,
2015, ($260,336 as of August 31, 2014) include the following items: cash $12,239 ($103,215 as of August 31, 2014); trade and other
receivables $29,426 ($157,121 as of August 31, 2014) and marketable securities $252,624 (August 31, 2014 $Nil).
Our current liabilities of $8,752,811 as of
May 31, 2015 ($3,749,573 as of August 31, 2014) include the following items: trade and other payables $1,864,427 ($1,483,775 as
of August 31, 2014); shareholders’ loans $1,172,673 ($981,834 as of August 31, 2014); loans payable of $187,827 ($Nil as
of August 31, 2014); secured convertible note $475,755 ($Nil as of August 31, 2014); derivative liabilities $5,040,566 ($1,094,392
as of August 31, 2014); deferred revenue $Nil ($177,804 as of August 31, 2014); and provisions $11,563 ($11,768 as of August 31,
2014).
At May 31, 2015, the Company had outstanding
the following common share purchase warrants: 7,378,560 warrants exercisable at $0.10 per share; 453,740 warrants exercisable
at US$5.00 per share; and 72,598 warrants exercisable at US$2.50. If any of these common share purchase warrants were exercised
it would generate additional capital for us.
Management of the Company recognizes that
cash flow from operations is not sufficient to develop its oil and gas operations or meet its working capital requirements. The
Company has liquidity risk which necessitates the Company to obtain debt financing, enter into joint venture arrangements, or
raise equity. There is no assurance the Company will be able to obtain the necessary financing in a timely manner.
The Company’s past primary source of
liquidity and capital resources has been proceeds from the issuance of share capital, shareholders’ loans and cash flow
from oil and gas operations. If the Company issued additional common shares from treasury it would cause the current shareholders
of the Company dilution.
Outlook and Capital Requirements
As part of our oil and gas development program,
we anticipate further expenditures to expand our existing portfolio of proved reserves. Amounts expended on future exploration
and development is dependent on the nature of future opportunities evaluated by us. Any expenditure which exceeds available cash
will be required to be funded by additional share capital or debt issued by us, or by other means. Our long-term profitability
will depend upon our ability to successfully implement our business plan.
PROVISIONS | |
Decommissioning
Provisions (Note a) | | |
Other Provisions
(Note b) | | |
Total Provisions | |
Balance, August 31, 2013 | |
$ | 119,742 | | |
$ | 178,553 | | |
$ | 298,295 | |
Accretion expense | |
| 961 | | |
| - | | |
| 961 | |
Change in estimates | |
| 7,225 | | |
| - | | |
| 7,225 | |
Disposals | |
| (26,426 | ) | |
| - | | |
| (26,426 | ) |
Reductions | |
| - | | |
| (169,196 | ) | |
| (169,196 | ) |
Dissolution of subsidiary | |
| (58,589 | ) | |
| | | |
| (58,589 | ) |
Foreign exchange | |
| 4,630 | | |
| (9,357 | ) | |
| (4,727 | ) |
Balance, August 31, 2014 | |
| 47,543 | | |
| - | | |
| 47,543 | |
Additions | |
| 56,093 | | |
| - | | |
| 56,093 | |
Accretion expense | |
| 930 | | |
| - | | |
| 930 | |
Change in estimates | |
| (11,300 | ) | |
| - | | |
| (11,300 | ) |
Obligations settled | |
| (205 | ) | |
| - | | |
| (205 | ) |
Foreign exchange | |
| 5,370 | | |
| - | | |
| 5,370 | |
Balance, May 31, 2015 | |
$ | 98,431 | | |
$ | - | | |
$ | 98,431 | |
| a) | Decommissioning
Obligations |
The Company’s decommissioning obligations
result from its ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing
facilities. The total decommissioning obligation is estimated based on the Company’s net ownership interest in all wells
and facilities, estimated costs to reclaim and abandon these wells and facilities, and the estimated timing of the costs to be
incurred in future years. The Company has estimated the net present value of decommissioning obligations to be $98,431 ($11,563
current and $86,868 long term) at May 31, 2015 (August 31, 2014: $11,768 current and $35,775 long term) based on an undiscounted
total future liability of $112,656 (August 31, 2014: $60,629). These payments are expected to be incurred between 2015 and 2031.
The discount factor, being the risk free rate related to the liability is 2.25% (August 31, 2014: 2.57%).
On January 28, 2014 a vendor of Dyami Energy
received a summary judgment against Dyami Energy in the amount of $169,196 plus interest at a rate of 18% per annum from September
17, 2012 until paid and legal fees of $21,178 and interest at a rate of 5% per annum from the date of judgment until paid (District
Court of Zavala County, Texas Case No. 13-02-12941-ZCV). During 2013 the full amount of the provision was recorded together with
legal fees and interest and transferred to trade and other payables.
SECURED NOTE PAYABLE AND SHAREHOLDER LOANS
Secured Note Payable
At August 31, 2014, the Company exchanged
a secured note payable to Benchmark with a carrying value of $1,322,347 (US$1,216,175) for a secured convertible note payable
to Benchmark with a face value of $1,322,347 (US$1,216,175) (the “Note”). The Note has an interest rate of 10% and
is due on the earliest to occur of: (a) August 31, 2015; (b) the closing of any subsequent financing or series of financings by
the Company that results in gross proceeds of an aggregate amount equal to or greater than US$4,400,000, excluding conversion
of any existing debt into equity; (c) the date of a sale by the Company of all of the shares in the capital stock of Zavala Inc.
held by the Company from time to time; (d) the closing of a merger, reorganization, take-over or other business combination which
results in a change of control of the Company or Zavala Inc.; or (e) an event of default.
In the event that the Company closes any subsequent
financing or series of financings that results in gross proceeds to the Company of an aggregate amount equal to or greater than
US$2,000,000, excluding conversion of any existing debt into equity of the Company, the Company shall allocate US$0.50 of every
US$1.00 exceeding the US$2,000,000 raised from such financing to repay the Note. The Note is secured by all of the assets of the
Company and Zavala Inc. The Company may, in its sole discretion, prepay any portion of the principal amount upon seven days’
notice. Benchmark has the option at any time while the Note is outstanding to convert any unpaid principal and accrued interest
into conversion units. A conversion unit is comprised of one (1) common share and one (1) common share purchase warrant entitling
the holder to acquire a common share of the Company at a price equal to a 15% premium to the price of the common share acquired
under the conversion unit. The price of the conversion unit is the lessor of a price equal to the 30-day VWAP of the Company as
of the date of conversion, less 20% (as adjusted for any stock splits, combinations or similar events) or eight United States
Cents (US$0.08) per share the (“Conversion Unit”).
Accounting Considerations
The Company has accounted for this transaction
as an exchange of debt instruments. Under IAS 39 “Financial Instruments: Recognition and Measurement”, an exchange
between an existing borrower and lender of debt instruments with substantially different terms or substantial modification of
the terms of an existing financial liability of part thereof is accounted for as an extinguishment. Since the new debt instrument
has a conversion option, the terms are considered substantially different and therefore gives rise to extinguishment accounting.
Further, the Company analyzed the conversion unit under IAS 39 and determined that it meets the definition of an embedded derivative.
Since both components of the Conversion Unit (the common share component and warrant component) contain a variable exercise/conversion
price, the Conversion Unit meets the definition of a financial liability under IAS 32 “Financial Instruments: Presentation”.
As a result, the Conversion Unit is a derivative liability that requires fair value measurement each period.
Based on the previous conclusions, the Company
allocated the old note first to the derivative component at its fair value with the residual allocated to the host debt contract,
as follows:
| |
Allocation | |
Promissory note (old debt instrument) | |
$ | 1,322,247 | |
Derivative liability (conversion unit) | |
| (4,000,100 | ) |
Loss on exchange of debt instruments | |
| 2,677,753 | |
| |
$ | - | |
The Note will be accreted up to its face value
of $1,322,347 (US$1,216,175) over the life of Note based on an effective interest rate. For the three and nine months nine months
ended May 31, 2015, the Company recorded accretion on the note in the amount of $327,793 and $475,755, respectively. The carrying
value of the note as at May 31, 2015 is $475,755. For the three and nine months ended May 31, 2015, the Company recorded interest
on the Note of $38,211 and $110,367.
Shareholder Loans
Effective August 30, 2014, the Company converted
shareholders’ loans and interest due in the aggregate amount of $1,180,570 through the issuance of a total of 14,757,102
units in the capital of the Company at a price of $0.08 per unit. Each unit is comprised of one (1) common share and one half
of one (1/2) common share purchase warrant. Each full warrant entitles the holder to purchase one (1) common share at an exercise
price of CDN$0.10 until August 30, 2017. The fair value of the units ($2,516,505) was allocated to common shares $1,715,426 and
warrants $801,079 based on their relative fair values and $1,335,935 was recorded as loss on settlement of debt. The original
terms of the debt did not include settlement by the issuance of equity instruments (see Related Party Transactions).
Accounting Considerations
The Company has accounted for this transaction
as an extinguishment of debt instruments for equity instruments under the guidance of IFRIC Interpretation 19 “Extinguishing
Financial Liabilities with Equity Instruments”. IFRIC 19 addresses the accounting of when the terms of a financial liability
are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of
the financial liability. It states that if a debtor issues equity instruments to a creditor to extinguish all or part of a financial
liability, those equity instruments are 'consideration paid' in accordance with IAS 39.41. Accordingly, the debtor should derecognise
the financial liability fully or partly. IFRIC 19 further states that the debtor recognises in profit or loss the difference between
the carrying amount of the financial liability (or part) extinguished and the fair value of the equity instruments issued. As
result, the Company recorded a loss on extinguishment in the amount of $1,335,935 in profit and loss which is the difference of
the fair value of the equity instruments ($2,516,505) and the carrying value of the debt instruments ($1,180,570).
The warrant component was valued using a Binomial
Lattice model whereas the fair value of the common share component was based on the current market value of the company’s
stock. The fair value of the conversion unit ($2,516,505) was allocated to the common stock component ($1,715,426) and warrant
component ($801,079) based on their relative fair values. Significant assumptions utilized in the Binomial Lattice process are
as follows for the warrant component of the conversion unit as of August 30, 2014:
| |
August 30, 2014 | |
Market value on valuation date | |
$ | 0.16 | |
Contractual exercise rate | |
$ | 0.092 | |
Term (years) | |
| 5.00
Years | |
Expected market volatility | |
| 196.97 | % |
Risk free rate using zero coupon US Treasury Security rate | |
| 0.94 | % |
DERIVATIVE LIABILITIES
For the three and nine months ended
May 31, 2015, the Company recorded a loss on derivative liabilities of $738,652 and $250,701, respectively compared to
a (gain) loss on derivative liabilities of $(38,964) and $58,821 for the three and nine months ended May 31, 2014, respectively.
Derivative Warrant Liabilities
The Company has warrants issued with an exercise
price in US dollars which are different from the functional currency of the Company (Canadian Dollars) and accordingly the warrants
are treated as a financial liability and the fair value movement during the period is recognized in profit or loss. The Company
recorded a gain on derivative warrant liabilities of $3,407 for the three months ended May 31, 2015 (May 31, 2014 gain: $38,964).
For the nine months ended May 31, 2015, the Company recorded a loss on derivative warrant liabilities of $197,900 (May 31, 2014:
$58,821).
The following table set out the changes in
derivative warrant liabilities during the respective periods:
| |
Number of
Warrants* | | |
Fair Value
Assigned $ | | |
Average Exercise
Price US $ | |
As at August 31, 2013 | |
| 914,761 | | |
| 1,976,883 | | |
| 4.06 | |
Warrants expired | |
| (170,923 | ) | |
| (709,299 | ) | |
| | |
Change in fair value estimates | |
| - | | |
| 57,723 | | |
| - | |
As at August 31, 2014 | |
| 743,838 | | |
| 1,325,307 | | |
| 4.06 | |
Warrants expired | |
| (217,500 | ) | |
| (535,542 | ) | |
| | |
Change in fair value estimates | |
| - | | |
| 197,990 | | |
| | |
As at May 31, 2015 | |
| 526,338 | | |
| 987,755 | | |
| 5.80 | |
* Reflects the August 25, 2014 one-for-ten consolidation
On August 31, 2014, 170,923 warrants exercisable
at US$5.00 expired and the fair value measured using the Black-Scholes option pricing model of $709,299 was recorded as an increase
to contributed surplus.
On April 13, 2015, 187,500 and 30,000 warrants
exercisable at US$5.00 and US$2.50, respectively expired and the fair value measured using the Black-Scholes option pricing model
of $535,542 was recorded as an increase to contributed surplus.
The following tables set out the number of
derivative warrant liabilities outstanding at May 31, 2015 and August 31, 2014, respectively:
Number of
Warrants* | | |
Exercise Price
US ($)* | | |
Expiry
Date | |
Weighted Average
Remaining Life (Years) | | |
Fair Value
CDN ($) | |
| 91,250 | | |
| 5.00 | | |
July 20, 2015 | |
| 0.14 | | |
| 153,179 | |
| 14,600 | | |
| 2.50 | | |
July 20, 2015 | |
| 0.14 | | |
| 41,230 | |
| 250,000 | | |
| 5.00 | | |
August 7, 2015 | |
| 0.19 | | |
| 420,128 | |
| 40,000 | | |
| 2.50 | | |
August 7, 2015 | |
| 0.19 | | |
| 108,128 | |
| 112,490 | | |
| 5.00 | | |
September 25, 2015 | |
| 0.32 | | |
| 207,992 | |
| 17,998 | | |
| 2.50 | | |
September 25, 2015 | |
| 0.32 | | |
| 57,098 | |
| 526,338 | | |
| | | |
| |
| 0.21 | | |
| 987,755 | |
* Reflects the August 25, 2014 one-for-ten consolidation
Number of
Warrants* | | |
Exercise Price
US ($)* | | |
Expiry
Date |
| |
Weighted Average
Remaining Life (Years) | | |
Fair Value
CDN ($) | |
| 187,500 | | |
| 5.00 | | |
April 13, 2015 (1 |
) | |
| 0.62 | | |
| 365,474 | |
| 30,000 | | |
| 2.50 | | |
April 13, 2015(1 |
) | |
| 0.62 | | |
| 99,420 | |
| 91,250 | | |
| 5.00 | | |
July 20, 2015(1 |
) | |
| 0.88 | | |
| 133,431 | |
| 14,600 | | |
| 2.50 | | |
July 20, 2015(1 |
) | |
| 0.88 | | |
| 35,915 | |
| 250,000 | | |
| 5.00 | | |
August 7, 2015(1 |
) | |
| 0.93 | | |
| 365,964 | |
| 40,000 | | |
| 2.50 | | |
August 7, 2015(1 |
) | |
| 0.93 | | |
| 94,188 | |
| 112,490 | | |
| 5.00 | | |
September 25, 2015 |
| |
| 1.07 | | |
| 181,178 | |
| 17,998 | | |
| 2.50 | | |
September 25, 2015 |
| |
| 1.07 | | |
| 49,737 | |
| 743,838 | | |
| | | |
|
| |
| 0.70 | | |
| 1,325,307 | |
* Reflects the August 25, 2014 one-for-ten consolidation
Derivative Unit Liabilities
The following tables summarize the components
of the Company’s derivative unit liabilities and linked common shares as at May 31, 2015 and August 31, 2014:
| |
May 31, 2015 | | |
August 31, 2014 | |
The financings giving rise to derivative unit liabilities: | |
Indexed Shares | | |
Fair Values | | |
Indexed Shares | | |
Fair Values | |
Conversion unit (1 common share and 1 common share purchase
warrant) | |
| 22,481,347 | | |
$ | 4,052,811 | | |
| 15,202,188 | | |
$ | 4,000,100 | |
The following table summarizes the effects on our loss associated
with changes in the fair values of our derivative units liabilities for the periods ended May 31, 2015:
The financings giving rise to derivative unit liabilities: | |
Three Months Ended May 31, 2015 | | |
Nine Months Ended
May 31, 2015 | |
Conversion unit (1 common share and 1 common share purchase
warrant) | |
$ | 742,059 | | |
$ | 52,711 | |
At August 31, 2014 the Company issued a Secured
Convertible Note with a face value $1,322,347 (US$1,216,175) which gave rise to a derivative financial instrument. The Note embodied
certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic risks and
characteristics. Additionally these features met the definition of a financial liability under IAS 32 “Financial Instruments:
Presentation”. These terms and features consist of the Conversion Unit which is comprised of one (1) common share and one
(1) common share purchase warrant entitling the holder to acquire a common share of the Company at a price equal to a 15% premium
to the price of the common share acquired under the Conversion Unit (see Note 10 to the Unaudited Interim Condensed Consolidated
Financial Statements).
Current accounting principles that are provided
in IAS 32 and IAS 39 require derivative financial instruments to be classified in liabilities and carried at fair value with changes
recorded in profit and loss. The Company has selected the Monte Carlo Simulations valuation technique to fair value the common
share component of the conversion unit because it believes that this technique is reflective of all significant assumption types,
and ranges of assumption inputs, that market participants would likely consider in transactions involving common share components.
Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition
to traditional inputs for option models such as market trading volatility and risk free rates.
The Company has selected Binomial Lattice
to fair value the warrant component of the conversion unit because it believes this technique is reflective of all significant
assumption types market participants would likely consider in transactions involving warrants. Significant inputs and results
arising from the Monte Carlo Simulations process are as follows for the common share component contained in the conversion unit
as at May 31, 2015 and August 31, 2014:
| |
May
31, 2015 | | |
August 31, 2014 | |
Underlying price on valuation date* | |
$ | 0.2217 | | |
$ | 0.3090 | |
Contractual conversion rate | |
$ | 0.07 | | |
$ | 0.08 | |
Contractual term to maturity | |
| 0.25
Years | | |
| 1.00
Years | |
Implied expected term to maturity | |
| 0.185
Years | | |
| 0.613
Years | |
Market volatility: | |
| | | |
| | |
Range of volatilities | |
| 176.85%
- 350.72 | % | |
| 78.41%
- 269.09 | % |
Equivalent volatility | |
| 263.79 | % | |
| 181.25 | % |
Contractual interest rate | |
| 10.0 | % | |
| 10.0 | % |
Equivalent market risk adjusted interest rate | |
| 10.00 | % | |
| 10.00 | % |
Equivalent credit risk adjusted yield | |
| 3.62 | % | |
| 3.45 | % |
*The underlying price of the common share
component of the conversion unit is the sum of the market price on the valuation date and the fair value of the warrant component
derived from the binomial lattice model.
Significant assumptions utilized in the Binomial
Lattice process are as follows for the warrant component of the conversion unit as at May 31, 2015 and August 31, 2014:
| |
May
31, 2015 | | |
August 31, 2014 | |
Market value on valuation date | |
$ | 0.11 | | |
$ | 0.16 | |
Contractual exercise rate | |
$ | 0.092 | | |
$ | 0.092 | |
Term (years) | |
| 4.25
Years | | |
| 5.00
Years | |
Expected market volatility | |
| 176.48 | % | |
| 179.21 | % |
Risk free rate using zero coupon US Treasury Security rate | |
| 1.49 | % | |
| 1.63 | % |
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
SEGMENTED INFORMATION
The Company’s reportable and geographical
segments are Canada and the United States. The accounting policies used for the reportable segments are the same as the Company’s
accounting policies. For the purposes of monitoring segment performance and allocating resources between segments, the Company’s
executive officer monitors the tangible, intangible and financial assets attributable to each segment.
All assets are allocated to reportable segments.
The following tables show information regarding the Company’s reportable segments.
| |
Three Months Ended | | |
Nine Months Ended | |
| |
Canada | | |
United
States | | |
Total | | |
Canada | | |
United
States | | |
Total | |
May 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net revenue | |
$ | 11,904 | | |
| - | | |
$ | 11,904 | | |
$ | 37,264 | | |
| - | | |
$ | 37,264 | |
Net loss | |
$ | 1,092,188 | | |
| 4,775,075 | | |
$ | 5,867,263 | | |
$ | 1,513,575 | | |
| 4,773,608 | | |
$ | 6,287,183 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
May 31, 2014 | |
| | | |
| | | |
| | | |
| | |
|
|
|
|
|
|
|
|
Net revenue | |
$ | 22,116 | | |
| - | | |
$ | 22,116 | | |
$ | 45,473 | | |
| - | | |
$ | 45,473 | |
Net(income) loss | |
$ | (58,320 | ) | |
| 1,328,053 | | |
$ | 1,269,733 | | |
$ | 351,474 | | |
| 1,432,019 | | |
$ | 1,783,493 | |
| |
Canada | | |
United
States | | |
Total | |
As at May 31, 2015 | |
| | | |
| | | |
| | |
Total Assets | |
$ | 280,046 | | |
| 892,457 | | |
$ | 1,172,503 | |
Total Liabilities | |
$ | 8,105,160 | | |
| 734,519 | | |
$ | 8,839,679 | |
| |
| | | |
| | | |
| | |
As at August 31, 2014 | |
| | | |
| | | |
| | |
Total Assets | |
$ | 179,888 | | |
| 5,117,040 | | |
$ | 5,296,928 | |
Total Liabilities | |
$ | 6,991,287 | | |
| 1,025,076 | | |
$ | 8,016,363 | |
SEASONALITY AND TREND INFORMATION
The Company’s oil and gas operations
is not a seasonal business, but increased consumer demand or changes in supply in certain months of the year can influence the
price of produced hydrocarbons, depending on the circumstances. Production from the Company’s oil and gas properties is
the primary determinant for the volume of sales during the year.
The level of activity in the oil and gas industry
is influenced by seasonal weather patterns. Wet weather and spring thaw may make the ground unstable. Consequently, municipalities
and provincial transportation departments enforce road bans that restrict the movement of rigs and other heavy equipment, thereby
reducing activity levels. Also, certain oil and gas properties are located in areas that are inaccessible except during the winter
months because of swampy terrain and other areas are inaccessible during certain months of year due to deer hunting season. Seasonal
factors and unexpected weather patterns may lead to declines in exploration and production activity and corresponding declines
in the demand for the goods and services of the Company.
The impact on the oil and gas industry from
commodity price volatility is significant. During low commodity price periods, acquisition costs drop, as do internally generated
funds to spend on exploration and development activities. With decreased demand, the prices charged by the various service suppliers
also decline. During periods of high prices, producers conduct active exploration programs. Increased commodity prices frequently
translate into very busy periods for service suppliers triggering premium costs for their services. Purchasing land and properties
similarly increase in price during these periods.
World oil and gas prices are quoted in United
States dollars and the price received by Canadian producers is therefore effected by the Canadian/U.S. dollar exchange rate, which
will fluctuate over time. Material increases or decreases in the value of the Canadian dollar may impact production revenues from
Canadian producers. Such increases or decreases may also impact the future value of such entities' reserves as determined by independent
evaluators.
RELATED PARTY TRANSACTIONS AND BALANCES
The following transactions with individuals
related to the Company arose in the normal course of business have been accounted for at the exchange amount being the amount
agreed to by the related parties, which approximates the arm’s length equivalent value.
Compensation of Key Management Personnel
The remuneration of directors and other members of key management
personnel during the periods set out were as follows:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
May 31, | | |
May 31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Short term employee benefits (1) | |
$ | 37,500 | | |
$ | 18,750 | | |
$ | 112,500 | | |
$ | 56,250 | |
Stock based compensation expense (2) | |
| - | | |
| - | | |
| 84,520 | | |
| - | |
| |
$ | 37,500 | | |
$ | 18,750 | | |
$ | 197,020 | | |
$ | 56,250 | |
The following balances owing to James Cassina,
the President of the Company are included in trade and other payables and are unsecured, non-interest bearing and due on demand:
| |
May
31, 2015 | | |
August 31, 2014 | |
Short term employee benefits (1) | |
$ | 393,750 | | |
$ | 281,250 | |
| |
$ | 393,750 | | |
$ | 281,250 | |
| (1) | The Company accrues management
fees for the President of the Company at a rate of $12,500 per month commencing September
1, 2014. |
| (2) | On November 12, 2014, the Company
granted options to purchase 750,000 common shares to three directors of the Company.
These options are exercisable at $0.12 per share, vest immediately and expire on November
11, 2019. |
At May 31, 2015, the amount of directors’
fees included in trade and other payables was $21,000 (August 31, 2014: $19,200).
At May 31, 2015, the Company had a promissory
note payable to the President of the Company of $10,000 (August 31, 2014: $Nil). For the period ended May 31, 2015, the Company
recorded interest on the promissory note of $586 (May 31, 2014: $19,507). At May 31, 2015, included in trade and other payables
is interest payable of $104,826 (August 31, 2014: $91,727). The note is due on demand and bears interest at 10% per annum. Interest
is payable annually on the anniversary date of the note. Effective February 27, 2014, 651,904 common share purchase warrants expiring
February 27, 2014, were exercised by the President of the Company at $0.35, for settlement of cash advances of $228,167. On August
30, 2014 the Company issued 1,628,700 units at $0.08 per unit as full settlement of a promissory note payable to the President
of US$120,000 (see Notes 8 (b) (a) (c) and Note 10 to the Unaudited Interim Condensed Consolidated Financial Statements).
At May 31, 2015, the Company had a note payable
to Core Energy Enterprises Inc. (“Core”) of US$249,250 (August 31, 2014: US$249,250). For the period ended May 31,
2015, the Company recorded interest on the promissory note of $23,238 (May 31, 2014: $Nil). At May 31, 2015, included in trade
and other payables, is interest of $23,238 (August 31, 2014: $Nil). The note is due on demand and bears interest at 10% per annum.
Interest is payable annually on the anniversary date of the note. At May 31, 2015, Core advanced the Company US$28,500 on terms
yet to be determined. The President of the Company is a major shareholder, officer and a director of Core (see Note 18 to the
Unaudited Interim Condensed Consolidated Financial Statements).
At May 31, 2015, the Company had shareholders’
loans payable of US$655,000. (August 31, 2014: US $655,000). For the period ended May 31, 2015, the Company recorded interest
of $61,067(May 31, 2014: $116,440) on the shareholders’ loans payable. At May 31, 2015, included in trade and other payables,
is interest of $61,290 (August 31, 2014: $269). The notes are payable on demand and bear interest at 10% per annum. Interest is
payable annually on the anniversary date of the notes. On August 30, 2014, the Company issued 13,128,420 units at $0.08 per unit
as full settlement of promissory notes payable of US$529,250, $250,000 and interest payable of $225,614 (see Note 8 (b) (c)) to
the Unaudited Interim Condensed Consolidated Financial Statements).
At May 31, 2015, the Company had, loans payable
of US$121,000 and $37,000 to 1288131 Alberta Ltd. (August 31, 2014: $Nil). During the period ended May 31, 2015 the Company recorded
interest on the loans payable of $12,245. At May 31, 2015, included in trade and other payables, is interest of $12,245 (August
31, 2014: $Nil). The loans are payable on demand and bear interest at 10% per annum. Colin McNeil a director of the Company is
also an officer, director and shareholder of 1288131 Alberta Ltd.
At May 31, 2015, the Company had a 10% per
annum, secured convertible note payable to Benchmark Enterprises LLC (“Benchmark”) with a face value of US$1,216,175.
(August 31, 2014: US$1,216,175) (the “Note”). Benchmark is a shareholder of the Company. For the nine months ended
May 31, 2015, the Company recorded interest on the Note of $113,386 (May 31, 2014: $78,028). At May 31, 2015, included in trade
and other payables is interest of $113,386 (August 31, 2014: $Nil) (see Note 10 and 11 to the Unaudited Interim Condensed Consolidated
Financial Statements).
SIGNIFICANT ACCOUNTING POLICIES
The Unaudited Interim Condensed Consolidated
Financial Statements were prepared using the same accounting policies and methods as those described in our consolidated financial
statements for the year ended August 31, 2014.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company’s management made assumptions,
estimates and judgments in the preparation of the Unaudited Condensed Interim Consolidated Financial Statements. Actual results
may differ from those estimates, and those differences may be material. There has been no material changes in the three months
ended May 31, 2015 to the critical accounting estimates and judgments.
RECENT ACCOUNTING PRONOUNCEMENTS
AND RECENT ADOPTED ACCOUNTING STANDARDS
Recent
Issued Accounting Pronouncements
The following standards, amendments and interpretations,
which may be relevant to the Company have been introduced or revised by the IASB:
(i) On July 24, 2014, the IASB issued the
complete IFRS 9 (IFRS 9 (2014). In November 2009, the IASB issued the first version of IFRS 9, Financial Instruments (IFRS 9 (2009)
and subsequently issued various amendments in October 2010, (IFRS 9 Financial Instruments (2010) and November 2013 (IFRS 9 Financial
Instruments (2013). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must
be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required
and is only permitted if information is available without the use of hindsight. The Company intends to adopt IFRS 9 effective
September 1, 2018.
(ii) In May 2014, the IASB issued IFRS 15
Revenue from Contracts with Customers, which supersedes IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty
Programmes, and IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC
31 Revenue – Barter Transactions Involving Advertising Services. IFRS 15 establishes a comprehensive five-step framework
for the timing and measurement of revenue recognition. The Company intends to adopt IFRS 15 effective September 1, 2017.
The Company has not yet begun the process
of assessing the impact that the new and amended standards will have on its consolidated financial statements.
Recent
Adopted Accounting Standards
The following standards, amendments and interpretations
have been adopted by the Company as of September 1, 2014. There were no material impacts on the consolidated financial statements
as a result of the adoption of these standards, amendments and interpretations: (i) IFRIC 21 Levies.
SHARE CAPITAL AND RESERVES
The Company filed Articles of Amendment effective
August 25, 2014 consolidating the common shares of Eagleford Energy Inc., on the basis of one (1) common share for every ten (10)
common shares and changing its name to Eagleford Energy Corp. The stock consolidation has been applied retrospectively for all
periods presented.
Share Capital
Authorized:
Unlimited number of common shares at no par value
Unlimited non-participating, non-dividend paying, voting redeemable
preference shares
Issued:
The following table sets out the changes in common shares during
the respective periods:
Common Shares | |
Number* | | |
Amount | |
Balance August 31, 2013 | |
| 12,262,517 | | |
| 7,050,350 | |
Warrants exercised (Note (b) (a)) | |
| 651,904 | | |
| 306,405 | |
Debt settlement (Note (b) (c)) | |
| 14,757,120 | | |
| 1,715,426 | |
Balance August 31, 2014 and May
31, 2015 | |
| 27,671,541 | | |
$ | 9,072,181 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
Share Purchase Warrants
The following table sets out the changes in warrants during the
respective periods:
| |
May 31, 2015 | | |
August 31, 2014 | |
Warrants | |
Number
of Warrants* | | |
Weighted
Average Price* | | |
Number
of Warrants* | | |
Weighted
Average Price* | |
Outstanding, beginning of period | |
| 9,293,560 | | |
$ | 0.18 | | |
| 4,020,095 | | |
$ | 0.40 | |
Warrants exercised (Note (a)) | |
| - | | |
| | | |
| (651,904 | ) | |
$ | 0.35 | |
Warrants expired (Note (b)) | |
| - | | |
| | | |
| (1,453,191 | ) | |
$ | 0.35 | |
Warrants issued (Note (c)) | |
| - | | |
| | | |
| 7,378,560 | | |
$ | 0.10 | |
Warrants expired (Note (d)) | |
| (1,915,000 | ) | |
$ | 0.50 | | |
| - | | |
| - | |
Balance, end of period | |
| 7,378,560 | | |
$ | 0.10 | | |
| 9,293,560 | | |
$ | 0.18 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
(a) Effective
February 27, 2014, 651,904 common share purchase warrants were exercised at $0.35 expiring February 27, 2014 for settlement of
cash advances of $228,167. The amount allocated to warrants based on relative fair value using the Black-Scholes option pricing
model was $78,238 (see Note 9 to the Unaudited Interim Condensed Consolidated Financial Statements).
(b) On
February 5, 2014, 200,000 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants based
on relative fair value using the Black-Scholes option pricing model was $24,000 with a corresponding increase to contributed surplus.
On February 25, 2014, 80,052 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants based
on relative fair value using the Black-Scholes option pricing model was $9,606 with a corresponding increase to contributed surplus.
On February 27, 2014, 1,173,139 common share purchase warrants exercisable at $0.35 expired. The amount allocated to warrants
based on relative fair value using the Black-Scholes option pricing model was $140,793 with a corresponding increase to contributed
surplus.
(c) Effective
August 30, 2014, the Company converted shareholders’ loans and interest due in the aggregate amount of $1,180,570 through
the issuance of a total of 14,757,102 units in the capital of the Company at a price of $0.08 per unit. Each unit is comprised
of one (1) common share and one half of one (1/2) common share purchase warrant. Each full warrant entitles the holder to purchase
one (1) common share at an exercise price of CDN$0.10 until August 30, 2017.The fair value of the units ($2,516,505) was allocated
to common shares $1,715,426 and warrants $801,079 based on their relative fair values and $1,335,935 was recorded as a loss on
settlement of debt in the consolidated statement of operations and comprehensive loss. The warrant component was valued using
a Binomial Lattice model whereas the fair value of the common share component was based on the current market value of the company’s
stock (see Note 10 and 11 to the Unaudited Interim Condensed Consolidated Financial Statements).
(d) On
January 24, 2015, 600,000 common share purchase warrants exercisable at $0.50 expired. The amount allocated to warrants based
on relative fair value using the Black-Scholes option pricing model was $507,038 with a corresponding increase to contributed
surplus. On February 17, 2015, 1,315,000 common share purchase warrants exercisable at $0.50 expired. The amount allocated to
warrants based on relative fair value using the Black-Scholes option pricing model was $662,851 with a corresponding increase
to contributed surplus.
The following table summarizes the outstanding
warrants as at May 31, 2015 and August 31, 2014, respectively:
Number
of Warrants* | | |
Exercise Price* | | |
Expiry Date | |
Weighted
Average
Remaining Life (Years) | | |
Warrant Value
($) | |
| 7,378,560 | | |
$ | 0.10 | | |
August 30, 2017 | |
| 2.25 | | |
| 801,079 | |
Number
of Warrants* | | |
Exercise Price* | | |
Expiry Date | |
Weighted
Average Remaining Life (Years) | | |
Warrant Value
($) | |
| 600,000 | | |
$ | 0.50 | | |
January 24, 2015 | |
| 0.40 | | |
$ | 507,038 | |
| 1,315,000 | | |
$ | 0.50 | | |
February 17, 2015 | |
| 0.47 | | |
| 662,851 | |
| 7,378,560 | | |
$ | 0.10 | | |
August 30, 2017 | |
| 3.00 | | |
| 801,079 | |
| 9,293,560 | | |
$ | 0.50 | | |
| |
| 2.47 | | |
| 1,970,968 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
Weighted Average Shares Outstanding
The following table summarizes the weighted average shares outstanding:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
May 31, | | |
May 31, | |
| |
2015(1) | | |
2014 (1) | | |
2015
(1) | | |
2014 (1) | |
Weighted Average Shares Outstanding Basic and Diluted* | |
| 27,671,541 | | |
| 12,913,907 | | |
| 27,671,541 | | |
| 12,486,599 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
| (1) | The effects of any potential dilutive
instruments on loss per share are anti-dilutive and therefore have been excluded from
the calculation of diluted loss per share. |
Share Purchase Options and Stock Based
Compensation
The Company has a stock option plan to provide
incentives for directors, officers, employees and consultants of the Company. The maximum number of shares, which may be set aside
for issuance under the stock option plan, is 20% of the issued and outstanding common shares of the Company on a rolling basis.
The following table is a summary of the status of the Company’s
stock options and changes during the period:
| |
Number | | |
Weighted Average | |
| |
of
Options* | | |
Exercise
Price | |
Balance, August 31, 2014 and 2013 | |
| 105,000 | | |
$ | 1.64 | |
Granted | |
| 1,000,000 | | |
| 0.12 | |
Expired | |
| (5,000 | ) | |
| 1.64 | |
Balance, May 31, 2015 | |
| 1,100,000 | | |
$ | 0.25 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
The following table is a summary of the Company's
stock options outstanding and exercisable at May 31, 2015 and August 31, 2014, respectively:
Options Outstanding
| | |
Options Exercisable | |
Exercise Price | | |
Number of
Options* | | |
Weighted
Average Exercise
Price | | |
Weighted
Average Remaining
Life
(Years) (1) | | |
Number of
Options* | | |
Weighted
Average Exercise
Price | |
$ | 1.60 | | |
| 100,000 | | |
$ | 0.15 | | |
| 1.75 | | |
| 100,000 | | |
$ | 0.15 | |
$ | 0.12 | | |
| 1,000,000 | | |
$ | 0.11 | | |
| 4.55 | | |
| 1,000,000 | | |
$ | 0.11 | |
| | | |
| 1,100,000 | | |
$ | 0.25 | | |
| 4.21 | | |
| 1,100,000 | | |
$ | 0.25 | |
Options Outstanding
| | |
Options Exercisable | |
Exercise Price | | |
Number of
Options* | | |
Weighted
Average Exercise
Price | | |
Weighted
Average Remaining
Life
(Years) (1) | | |
Number of
Options* | | |
Weighted
Average Exercise
Price | |
$ | 1.60 | | |
| 100,000 | | |
$ | 1.60 | | |
| 2.50 | | |
| 1,00,000 | | |
$ | 1.60 | |
$ | 2.50 | | |
| 5,000 | | |
$ | 2.50 | | |
| 0.16 | | |
| 5,000 | | |
$ | 2.50 | |
| | | |
| 105,000 | | |
$ | 1.64 | | |
| 2.39 | | |
| 105,000 | | |
$ | 1.64 | |
* Reflects the August 25, 2014 one-for-ten
stock consolidation
(1) In October 2012, the Optionee passed away
and pursuant to the terms of the option agreement had a period of twelve (12) months
after the date of such death before the expiry of the option.
Stock Based Compensation
On November 12, 2014, the Company granted
options to purchase 750,000 common shares to directors of the Company. These options are exercisable at $0.12 per share, vest
immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of $84,520.
Stock Based Compensation – Non Employees
On November 12, 2014, the Company granted
options to purchase 250,000 common shares to a consultant of the Company. These options are exercisable at $0.12 per share, vest
immediately and expire on November 11, 2019. The Company recorded non-cash stock based compensation expense of $28,173.
The fair value of the stock options granted
were estimated on the date of the grant using the Black Scholes option pricing model with the following weighted average assumptions
used:
| |
November 12, 2014 | |
Weighted average fair value per option | |
$ | 0.12 | |
Weighted average risk free interest rate | |
| 1.54 | % |
Forfeiture rate | |
| 0 | % |
Weighted average expected volatility | |
| 287.49 | % |
Expected life (years) | |
| 5 | |
Dividend yield | |
| Nil | |
Contributed Surplus
Contributed surplus transactions for the respective periods are
as follows:
| |
Amount | |
Balance, August 31, 2013 | |
$ | 506,200 | |
Warrants expired | |
| 174,399 | |
Derivative warrants expired | |
| 709,299 | |
Balance, August 31, 2014 | |
$ | 1,389,898 | |
Stock options expired | |
| 11,112 | |
Warrants expired | |
| 1,169,889 | |
Derivative warrants expired | |
| 535,542 | |
Balance, May
31, 2015 | |
$ | 3,106,441 | |
LITIGATION
On or about September 30, 2014, Stratex filed
a petition against Zavala Inc. in the District Court of Zavala County, Texas seeking breach of contract and actual damages of
US$152,293 for Zavala Inc.’s alleged non-payment of its proportionate share of minimum royalties due under the Matthews
Lease. Zavala Inc. disputed the claim citing US$300,000 paid by the Company to be credited against the minimum royalties which
Stratex has failed to do. Zavala Inc. paid the US$152,293 under protest and filed a Response and Cross Notice of Default against
Stratex (Cause No.: 14-09-13290-ZCV). Effective March 31, 2015, the Company entered into a settlement agreement with Stratex and
Quadrant pursuant to which the Company is entitled to receive US$25,000 in cash and 1,333,333 common shares of Stratex and Stratex
shall assign all of its rights, title and interest in, to and under the Matthews Lease and JDA, to the Company and Quadrant. To
date, the Company has received 1,333,000 common shares of Stratex and the assignment of the Matthews lease (see Note 19 to the
Unaudited Interim Condensed Consolidated Financial Statements).
On or about October 27, 2014, the Company
filed a statement of claim in the Ontario Superior Court of Justice against Alan Gaines, a former director of the Company for
breach of fiduciary duty to the Company relating to Gaines role in the Company contracting with Stratex (Court File No.: 65-14-514935).
Effective March 25, 2015, the Company entered into a settlement agreement with Gaines under which Gaines transferred to the Company
1,200,000 common shares and 1,200,000 common share purchase warrants of Stratex exercisable at US$0.15 per until December 31,
2018 (see Note 19 to the Unaudited Interim Condensed Consolidated Financial Statements).
SUBSEQUENT EVENTS
Subsequent to the period ended May 31, 2015,
the President through Core Energy Enterprises Inc. advanced the Company CDN$21,000 and US$117,536 on terms yet to be determined.
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