ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report on Form 10-K.
General
We are focused on the acquisition, exploration, and development of oil and gas properties in the United States and Canada. As of June 13, 2016 we did not have any revenue from commercial production.
Results of Operations
Years Ended February 29, 2016 and February 28, 2015
The following summary of our results of operations should be read in conjunction with our audited financial statements for the years ended February 29, 2016 and February 28, 2015 which are included herein:
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
Revenue
|
$
|
-
|
|
$
|
-
|
|
|
Expenses
|
|
(574,894
|
)
|
|
(665,516
|
)
|
|
Net Loss
|
$
|
(370,324
|
)
|
$
|
(355,479
|
)
|
Revenues
During the years ended February 29, 2016 and February 28, 2015, we did not generate any revenues from commercial production.
Expenses
Expenses decreased during the year ended February 29, 2016 to $574,894 as compared to $665,516 during the year ended February 28, 2015.
26
The table below details the changes in major expenditures for the year ended February 29, 2016 as compared to the corresponding year ended February 28, 2015:
|
|
|
Expenses
|
Increase / Decrease in Expenses
|
Explanation for Change
|
Management fees
|
Decrease of $14,700
|
Decrease due to the change in foreign exchange rates from CAD to the US dollar as management compensation (in CAD) remained unchanged in both fiscal years.
|
Office, travel and general expenses
|
Decrease of $56,751
|
Decrease due to decreases in insurance, general office expenses, office rent, and travel expenses as part of cost cutting initiatives.
|
Professional fees
|
Decrease of $38,810
|
Decrease due to less professional services used for corporate filings, accounting, and legal services.
|
Salaries and benefits
|
Increase of $127,910
|
Increase due to new hiring of COO and VP of Exploration during the year.
|
Stock-based compensation
|
Increase of $107,172
|
Increase due to stock options granted during in November 2015 whereas no stock options were granted in the comparative year.
|
For the year ended February 29, 2016, we recorded a gain on the fair value adjustment of derivative financial liability of $229,327. The derivative liability consists of the fair value of share purchase warrants that were issued in unit private placements that have an exercise price in a currency other than the functional currency of our company. The derivative liability is a non-cash liability as we will not be required to expend any cash.
Liquidity and Capital Resources
Working Capital
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2016
|
|
|
At February 28, 2015
|
|
|
Current assets
|
$
|
33,514
|
|
$
|
82,068
|
|
|
Current liabilities
|
|
1,286,228
|
|
|
1,124,840
|
|
|
Working capital deficit
|
$
|
(1,252,714
|
)
|
$
|
(1,042,772
|
)
|
We had cash of $22,426 and a working capital deficit of $1,252,714 as of February 29, 2016 compared to cash of $26,858 and working capital deficit of $1,042,772 as of February 28, 2015.
We anticipate general and administrative expense, excluding impairment of oil and gas property, if any, will be similar to fiscal 2016 during the upcoming fiscal year. In connection with oil and gas operations, we will retain the same number of executive officers. As a result, we estimate our general and administrative expense will be consistent during the next twelve months.
Our companys cash will not be sufficient to meet our working capital requirements for the next twelve month period. Our company plans to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the issuance of our equity securities. There is no assurance that our company will be able to obtain further funds required for our continued working capital requirements. The ability of our company to meet our financial liabilities and commitments is primarily dependent upon the continued financial support of our directors and shareholders, the continued issuance of equity to new shareholders, and our ability to achieve and maintain profitable operations.
27
There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration of our property interests, the identification of reserves sufficient enough to warrant development, successful development of our property interests and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited financial statements for the year ended February 29, 2016, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
Cash Flows
|
|
|
|
|
|
|
|
|
12 months
|
|
|
12 months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2016
|
|
|
2015
|
|
Cash used in operating activities
|
$
|
(238,717)
|
|
$
|
(623,099)
|
|
Cash provided by financing activities
|
|
282,793
|
|
|
626,811
|
|
Cash used in investing activities
|
|
(47,736)
|
|
|
(20,120)
|
|
Effect of Foreign Exchange
|
|
(772)
|
|
|
129
|
|
Change in cash
|
$
|
(4,432)
|
|
$
|
(16,279)
|
|
Cash Used in Operating Activities
Our cash used in operating activities for the twelve months ended February 29, 2016, compared to our cash used in operating activities for the twelve months ended February 28, 2015, decreased by $384,382, primarily due to decrease in non-cash items and non-cash working capital items from operations in the current year.
Cash Provided by Financing Activities
Our cash provided by financing activities for the twelve months ended February 29, 2016, compared to our cash provided by financing activities for the twelve months ended February 28, 2015, decreased by $344,018 due to less proceeds received from common stock issued for cash (which was partly offset by repayment of advances and notes payable in the comparative year). Even though proceeds received from common stock issued for cash was lower in the current year, we received cash for a future obligation to issue shares along with higher net proceeds received from related parties.
Cash Used in Investing Activities
Our cash used in investing activities for the twelve months ended February 29, 2016, compared to our cash used in investing activities for the twelve months ended February 28, 2015, increased by $27,616 due to an increase of expenditures on oil and gas properties. However, in the comparative year, we purchased equipment which did not occur in the current year.
Outstanding Shares, Options, Warrants and Convertible Securities
As of June 13, 2016, we have 31,082,567 shares of common stock outstanding, 2,300,000 stock options outstanding and 1,280,000 warrants outstanding. In addition, as of June 13, 2016, 1,000,000 shares of our common stock and 1,000,000 warrants are issuable upon conversion of a secured convertible debenture with a principal of $200,000 with an interest rate of 10% per annum.
28
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
Going Concern
Our audited financial statements and information for the period ended February 29, 2016, have been prepared by our management on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We have generated no revenues to date and have incurred a net loss of $370,324 during the 12 month period ended February 29, 2016, and $3,620,720 from inception (July 9, 2004) through February 29, 2016. We cannot provide any assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional funds through the sale of debt and/or equity.
Application of Critical Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate estimates and assumptions. We base our estimates and assumptions on current facts, historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Our actual results may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to carrying values of oil and gas properties, the assumptions used to record asset retirement obligations and the estimated useful life of financial instruments.
Fair Value of Financial instruments
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, prepaid expenses, other receivables, accounts payable and amounts due to related parties approximates their carrying value due to their short-term nature.
Foreign Currency Translation
The Companys functional currency is the Canadian dollar and reporting currency is the United States dollar. The Company translates assets and liabilities to US dollars using year-end exchange rates, stockholders deficit accounts are translated at historical exchange rates, and translates revenues and expenses using average exchange rates during the period. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the other comprehensive income. The Company has not to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
29
Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.
The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations. The Companys oil and gas properties are under development with minimal production to date. Accordingly, no amortization is being recorded.
Equipment
Equipment is recorded at cost and amortized on a straight line basis over 20 years.
Income Taxes
Income taxes are determined using the liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes that date of enactment. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
We account for uncertainty in income taxes by applying a two-step method. First, we evaluate whether a tax position has met a more likely than not recognition threshold, and second, it measures that tax position to determine the amount of benefit, if any, to be recognized in the financial statements. The application of this method did not have a material effect on our financial statements.
Asset Retirement Obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until the Company settles the obligation.
30
Loss per share
We present both basic and diluted earnings (loss) per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Diluted EPS figures are equal to those of basic EPS for each period since we have incurred losses since inception.
Recently issued accounting pronouncements
The Company adopted accounting pronouncements that are applicable effective March 1, 2015. There was no material impact on adoption of these recent accounting pronouncements on its financial position, results of operations or cash flows.
The Company has also reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
FEBRUARY 29, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENTS OF CASH FLOWS
STATEMENT OF STOCKHOLDERS DEFICIT
NOTES TO FINANCIAL STATEMENTS
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Strongbow Resources Inc.
We have audited the accompanying balance sheets of Strongbow Resources Inc. as of February 29, 2016 February 28, 2015, and the related statements of operations, cash flows and stockholders deficit for the years ended February 29, 2016 and February 28, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material respects, the financial position Strongbow Resources Inc. as of February 29, 2016 and February 28, 2015, and the results of its operations and its cash flows for the years ended February 29, 2016 and February 28, 2015 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has not generated revenues since inception, has incurred losses in developing its business, and further losses are anticipated. The Company requires additional funds to meet its obligations and the costs of its operations. These factors raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
DALE MATHESON CARR-HILTON LABONTE LLP
|
CHARTERED PROFESSIONAL ACCOUNTANTS
|
Vancouver, Canada
June 13, 2016
33
|
|
|
|
|
|
STRONGBOW RESOURCES INC.
|
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash
|
|
22,426
|
|
26,858
|
|
Receivable
|
|
3,279
|
|
4,680
|
|
Prepaid expense and other
|
|
7,809
|
|
50,530
|
|
|
|
33,514
|
|
82,068
|
Non-current assets
|
|
|
|
|
|
Deposit
|
|
32,224
|
|
22,048
|
|
Equipment
|
|
57,236
|
|
65,421
|
|
Oil and gas properties, full cost method
|
|
568,151
|
|
587,770
|
|
|
|
691,125
|
|
757,307
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable
|
|
632,983
|
|
558,591
|
|
Accrued liabilities
|
|
99,765
|
|
35,937
|
|
Due to related parties
|
|
334,869
|
|
130,884
|
|
Note payable
|
|
18,475
|
|
19,965
|
|
Derivative financial liabilities
|
|
150,136
|
|
379,463
|
|
Subscriptions received
|
|
50,000
|
|
-
|
|
|
|
1,286,228
|
|
1,124,840
|
|
|
|
|
|
|
Asset retirement obligation
|
|
21,900
|
|
21,515
|
|
|
|
1,308,128
|
|
1,146,355
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
Capital stock
|
|
|
|
|
|
Authorized:
|
|
|
|
|
|
750,000,000 common shares, par value $0.001 per share
|
|
|
|
|
Issued and outstanding:
|
|
|
|
|
|
30,029,046 common shares (29,881,824 at February 28, 2015)
|
21,919
|
|
21,772
|
|
Additional paid in capital
|
|
3,115,078
|
|
2,962,947
|
|
Accumulated other comprehensive loss
|
|
(133,280)
|
|
(123,371)
|
|
Accumulated deficit
|
|
(3,620,720)
|
|
(3,250,396)
|
|
|
|
(617,003)
|
|
(389,048)
|
|
|
|
691,125
|
|
757,307
|
Subsequent events (Note 11)
The accompanying notes are an integral part of these financial statements
34
|
|
|
|
|
|
STRONGBOW RESOURCES INC.
|
|
|
|
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
Accretion
|
|
2,061
|
|
1,704
|
|
Consulting
|
|
103,799
|
|
97,908
|
|
Depreciation
|
|
3,419
|
|
3,462
|
|
Impairment of oil and gas property
|
|
-
|
|
221,648
|
|
Management fees
|
|
91,824
|
|
106,524
|
|
Office, travel and general
|
|
73,327
|
|
130,078
|
|
Professional fees
|
|
65,382
|
|
104,192
|
|
Salaries and benefits
|
|
127,910
|
|
-
|
|
Stock-based compensation
|
|
107,172
|
|
-
|
|
|
|
|
|
|
Loss from operations
|
|
(574,894)
|
|
(665,516)
|
|
|
|
|
|
|
|
Write-off of advances receivable
|
|
(25,000)
|
|
-
|
|
Gain on settlement of debt
|
|
-
|
|
109,392
|
|
Interest income
|
|
243
|
|
156
|
|
Gain on fair value adjustment of derivative financial liabilities
|
229,327
|
|
200,489
|
|
|
|
|
|
Net loss
|
|
(370,324)
|
|
(355,479)
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
(9,909)
|
|
(101,811)
|
|
|
|
|
|
|
Comprehensive loss
|
|
(380,233)
|
|
(457,290)
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
(0.01)
|
|
(0.01)
|
|
|
|
|
|
|
Weighted average number of basic
|
|
|
|
|
common shares outstanding
|
|
29,894,089
|
|
28,898,624
|
The accompanying notes are an integral part of these financial statements
35
|
|
|
|
|
|
|
STRONGBOW RESOURCES INC.
|
|
|
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Cash flows used in operating activities
|
|
|
|
|
|
Net loss
|
|
(370,324)
|
|
(355,479)
|
|
Non-cash items
|
|
|
|
|
|
|
Accretion
|
|
2,061
|
|
1,704
|
|
|
Depreciation
|
|
3,419
|
|
3,462
|
|
|
Shares issued for salaries and benefits
|
|
37,500
|
|
-
|
|
|
Stock-based compensation
|
|
107,172
|
|
-
|
|
|
Write-off of advances receivable
|
|
25,000
|
|
-
|
|
|
Gain on settlement of debt
|
|
-
|
|
(109,392)
|
|
|
Gain on fair value adjustment of derivative financial liabilities
|
|
(229,327)
|
|
(200,489)
|
|
|
Impairment of oil and gas properties
|
|
-
|
|
221,648
|
|
|
Interest income accrued
|
|
(243)
|
|
-
|
|
|
Foreign exchange
|
|
31,674
|
|
-
|
|
Changes in non-cash working capital items
|
|
|
|
|
|
|
Receivable
|
|
1,401
|
|
(2,978)
|
|
|
Prepaid expenses and other
|
|
17,721
|
|
(72,497)
|
|
|
Accounts payable and accrued liabilities
|
|
135,229
|
|
(109,078)
|
|
|
Cash used in operating activities
|
|
(238,717)
|
|
(623,099)
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
Expenditures on oil and gas properties
|
|
(35,399)
|
|
(11,243)
|
|
Deposits on oil and gas properties
|
|
(12,337)
|
|
-
|
|
Expenditures on equipment
|
|
-
|
|
(8,877)
|
|
|
Cash used in investing activities
|
|
(47,736)
|
|
(20,120)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Common stock issued for cash
|
|
7,606
|
|
756,657
|
|
Subscriptions received
|
|
50,000
|
|
-
|
|
Repayments of advances and notes payable
|
|
-
|
|
(212,340)
|
|
Net proceeds from related parties
|
|
225,187
|
|
82,494
|
|
|
Cash provided by financing activities
|
|
282,793
|
|
626,811
|
|
|
|
|
|
|
|
Effect of foreign exchange
|
|
(772)
|
|
129
|
|
|
|
|
|
|
|
Change in cash
|
|
(4,432)
|
|
(16,279)
|
Cash, beginning of year
|
|
26,858
|
|
43,137
|
Cash, end of year
|
|
22,426
|
|
26,858
|
|
|
|
|
|
|
|
Non-cash transactions
|
|
|
|
|
|
Accrued expenditures on oil and gas properties
|
|
10,292
|
|
10,358
|
|
Common stock issued as repayment of note payable
|
|
-
|
|
376,923
|
|
Common stock issued as settlement of accounts payable
|
|
-
|
|
156,000
|
|
Accrued expenditures on equipment
|
|
-
|
|
7,541
|
The accompanying notes are an integral part of these financial statements
36
|
|
|
|
|
|
|
|
STRONGBOW RESOURCES INC.
|
|
|
|
|
|
STATEMENT OF STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common Stock
|
Additional
|
Accumulated
|
Other
|
Total
|
|
|
Number
|
|
Paid In
|
Deficit
|
Comprehensive
|
Stockholders'
|
|
|
of Shares
|
Amount
|
Capital
|
|
Loss
|
Deficit
|
|
|
|
$
|
$
|
$
|
$
|
$
|
Balance, February 28, 2014
|
27,896,697
|
19,787
|
2,255,304
|
(2,894,917)
|
(21,560)
|
(641,386)
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
1,246,666
|
1,247
|
755,410
|
-
|
-
|
756,657
|
Value of warrants issued
|
-
|
-
|
(579,952)
|
-
|
-
|
(579,952)
|
Common stock issued as repayment of note
payable
|
538,461
|
538
|
376,385
|
-
|
-
|
376,923
|
Common stock issued as settlement of
accounts payable
|
200,000
|
200
|
155,800
|
-
|
-
|
156,000
|
Net loss
|
-
|
-
|
-
|
(355,479)
|
-
|
(355,479)
|
Foreign currency translation
|
-
|
-
|
-
|
-
|
(101,811)
|
(101,811)
|
Balance, February 28, 2015
|
29,881,824
|
21,772
|
2,962,947
|
(3,250,396)
|
(123,371)
|
(389,048)
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
22,222
|
22
|
7,584
|
-
|
-
|
7,606
|
Stock-based compensation
|
-
|
-
|
107,172
|
-
|
-
|
107,172
|
Shares issued for salaries and benefits
|
125,000
|
125
|
37,375
|
-
|
-
|
37,500
|
Net loss
|
-
|
-
|
-
|
(370,324)
|
-
|
(370,324)
|
Foreign currency translation
|
-
|
-
|
-
|
-
|
(9,909)
|
(9,909)
|
Balance, February 29, 2016
|
30,029,046
|
21,919
|
3,115,078
|
(3,620,720)
|
(133,280)
|
(617,003)
|
The accompanying notes are an integral part of these financial statements
37
STRONGBOW RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
February 29, 2016
1.
NATURE AND CONTINUANCE OF OPERATIONS
Strongbow Resources Inc. (the Company) was incorporated in the State of Nevada on July 9, 2004. The Company focuses its business efforts on the acquisition, exploration, and development of oil and gas properties.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of February 29, 2016, the Company has not achieved profitable operations, has incurred losses in developing its business, and further losses are anticipated. The Company has an accumulated deficit of $3,620,720.
As at February 29, 2016, two Statements of Claim totaling $208,236 (CAD$281,781) are outstanding against the Company and is recorded in accounts payable.
The Companys ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and pay its liabilities when they come due. To date, the Company has funded operations through the issuance of capital stock and debt. Management plans to continue raising additional funds through equity or debt financings and loans from directors. There is no certainty that further funding will be available as needed. These factors raise substantial doubt about the ability of the Company to continue operating as a going concern. The ability of the Company to continue its operations as a going concern is dependent upon its ability to raise sufficient new capital to fund its operating commitments and ongoing losses and ultimately on generating profitable operations. The financial statements do not include any adjustments to be recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States (US GAAP), and are expressed in United States dollars. The Company has not produced material revenues from its principal business to date.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to carrying values of oil and gas properties, the assumptions used to record asset retirement obligations, the assumptions used to determine the fair value of derivative financial liabilities, and the estimated useful life of equipment.
Foreign Currency Translation
The Companys functional currency is the Canadian dollar and reporting currency is the United States dollar. The Company translates assets and liabilities to US dollars using year-end exchange rates, stockholders deficit accounts are translated at historical exchange rates, and translates revenues and expenses using average exchange rates during the period. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the other comprehensive income (loss). The Company has not to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
38
Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.
The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations. The Companys oil and gas properties are under development with minimal production to date. Accordingly, no amortization is being recorded.
Equipment
Equipment is recorded at cost and amortized on a straight line basis over 20 years.
Asset Retirement Obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until the Company settles the obligation.
Environmental
Oil and gas activities are subject to extensive federal and state environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Expenditures that have future economic benefits are capitalized. Liabilities for expenditures of a non-capital nature are recorded when an environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.
Fair Value of Financial instruments
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, receivable, accounts payable, amounts due to related party, and notes payable approximates their carrying value due to their short-term nature.
39
Impairment of Long-Term Assets
The Company has adopted FASB ASC 360
Accounting for the Impairment or Disposal of Long-Lived Assets," w
hich requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas interests accounted for under the full cost method are subject to a ceiling test, described above, and are excluded from this requirement.
Income Taxes
Income taxes are determined using the liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes that date of enactment. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
The Company accounts for uncertainty in income taxes by applying a two-step method. First, it evaluates whether a tax position has met a more likely than not recognition threshold, and second, it measures that tax position to determine the amount of benefit, if any, to be recognized in the financial statements.
Loss per Share
The Company presents both basic and diluted loss per share (LPS) on the face of the statements of operations. Basic LPS is computed by dividing net loss available to common shareholders by the weighted average number of shares outstanding during the period. Diluted LPS gives effect to all dilutive potential common shares outstanding during the period. Diluted LPS excludes all dilutive potential shares if their effect is anti-dilutive. Diluted LPS figures are equal to those of basic LPS for each period since the Company in is a loss position.
Revenue
Revenue is recognized when:
·
The significant risks and rewards of ownership have been transferred;
·
Neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold has been retained;
·
The amount of revenue can be measured reliably; and
·
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue is measured at the fair value of consideration received or receivable.
Proceeds from the sale of oil and gas prior to commercial production are credited to costs deferred during development.
Recent Accounting Pronouncements
Recent pronouncements with future effect dates are either not applicable or are not expected to be significant to the financial statements of the Company.
40
3.
OIL AND GAS PROPERTIES
Effective February 21, 2012, the Company entered into a Farmout Agreement (the Agreement) with Harvest Operations Corp. (Farmor). The Agreement provided for the Companys acquisition of an undivided 100% working interest (Working Interest) in a petroleum and natural gas license covering land located in the Compeer Area in the Province of Alberta, Canada (the Farmout Lands).
To earn the Working Interest the Company was required to drill, complete, equip or abandon a test well on the Farmout Lands (Test Well). On March 14, 2012, the Company obtained operator status and was transferred the well license relating to the Test Well.
The Companys Working Interest in the Farmout Lands will be held subject to a non-convertible overriding royalty payable to the Farmor (Farmors Royalty). The Farmors Royalty on net crude oil revenues will be measured on a sliding scale from 5% to 15% over a range of production volumes from 1 to 150 barrels per day. The Farmors Royalty on net gas and other petroleum product revenues is 15%.
The Test Well was spudded on May 27, 2012, and on September 5, 2012, the Company received an earning notice granting the Company a 100% working interest in the Farmout Lands.
During the year ended February 28, 2015, the Company estimated that the net present value of future cash flows from the property is $587,770 and recorded an impairment charge of $221,648.
During the year ended February 29, 2016, net proceeds of $nil (February 28, 2015 - $9,107) were received from the sales of oil less direct costs of $25,107 (February 28, 2015 - $24,717) were added to the carrying value of the oil and gas properties.
As of February 29, 2016, the Company has incurred $568,151 (February 28, 2015 - $587,770) in exploration costs to drill, complete and equip the Test Well, net of impairment charges in prior periods.
As at February 29, 2016, the Company has $32,224 (February 28, 2015 - $22,048) in bonds held with the Alberta Energy Regulator for its oil and gas properties.
4. EQUIPMENT
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
|
$
|
|
$
|
|
$
|
Oil and gas equipment
|
|
66,038
|
|
8,802
|
|
57,236
|
|
|
|
|
|
|
|
|
|
February 28, 2015
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
|
$
|
|
$
|
|
$
|
Oil and gas equipment
|
|
71,364
|
|
5,943
|
|
65,421
|
5.
NOTE PAYABLE
As at February 29, 2016, the Company had $18,475 (CAD$25,000) (February 28, 2015 - $19,965 (CAD$25,000)) in short term note obligations to an unrelated party. The note payable is unsecured, non-interest bearing and payable upon demand.
41
During the year ended February 28, 2015, the Company paid $177,571 and issued 538,461 common shares with a fair value of $376,923 to settle notes payable of $492,674. As a result, the Company recorded a loss on settlement of debt of $61,820.
During the year ended February 28, 2015, the Company settled $413,265 of debt for an aggregate settlement amount of $233,752 with various vendors and recognized a net gain on settlement of $171,212 net of GST of $8,301.
6.
ASSET RETIREMENT OBLIGATION
The Companys asset retirement obligation consists of reclamation and closure costs associated with the Test Well in the Farmout Lands. The asset retirement obligation was estimated based on the Companys understanding of its requirements to reclaim currently disturbed areas. Significant reclamation and closure activities include land rehabilitation, water, removal of building and well facilities and tailings reclamation.
The undiscounted estimate of this liability was $36,950 (CAD$50,000) (February 28, 2015 - $39,930 (CAD$50,000)) reflecting payments commencing in 2024. This estimate was adjusted for an inflation rate of 2.00% and then discounted at a rate of 10.00% for a net present value of $21,900 (CAD$29,660) (February 28, 2015 - $21,515 (CAD$26,941)) as at February 29, 2016.
7.
DERIVATIVE FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
|
$
|
Balance, February 28, 2014
|
|
|
|
-
|
Warrants issued
|
|
|
|
579,952
|
Fair value adjustment
|
|
|
|
(200,489)
|
Balance, February 28, 2015
|
|
|
|
379,463
|
Fair value adjustment
|
|
|
|
(229,327)
|
Balance, February 29, 2016
|
|
|
|
150,136
|
The derivative liability consists of the fair value of share purchase warrants that were issued in unit private placements that have an exercise price in a currency other than the functional currency of the Company. The derivative liability is a non-cash liability as the Company will not be required to expend any cash.
The fair value of the warrants was determined using the Black-Scholes option pricing model using the following weighted average market assumptions:
|
|
|
|
|
|
|
February 29, 2016
|
|
February 28, 2015
|
Volatility
|
|
235%
|
|
126%
|
Risk-free interest rate
|
|
0.68%
|
|
0.79%
|
Expected life
|
|
1.43 years
|
|
2.44 years
|
Dividend yield
|
|
nil
|
|
nil
|
8. SHARE CAPITAL
During the year ended February 29, 2016:
In August 2015, the Company issued 22,222 shares at CAD $0.45 for gross proceeds of $7,606 (CAD$10,000) in subscriptions for a private placement.
In January 2016, the Company issued 125,000 shares to a former officer for an employment contract entered in April 2015. The fair value of the shares issued was $37,500, and is included in salaries and benefits.
42
During the year ended February 29, 2016, the Company received $50,000 (2015 - $Nil) in subscriptions for private placement that was completed subsequent to year end (Note 11 c).
During the year ended February 28, 2015:
In March 2014, the Company completed a one for four reverse stock split of the issued and outstanding common stock. All share and per share information in these financial statements has been retroactively restated to reflect the consolidation.
In April 2014, the Company issued 100,000 common shares at a price of $0.50 per share. Gross proceeds from the private placement totaled $50,000.
In June 2014, the Company issued 200,000 common shares with a fair value of $0.78 per share to settle outstanding debt of $128,828 (CAD$140,000).
In June 2014, the Company issued 66,666 common shares at a price of $0.69 (CAD$0.75) per share for gross proceeds of $46,000 (CAD$50,000). Pursuant to the private placement, the Company paid a finders fee of $2,343 (CAD$2,500).
In August 2014, the Company issued 80,000 units at a price of $0.65 per unit for gross proceeds of $52,000. Each unit consists of one common share of the Company and one common share purchase warrant, with each warrant being exercisable into one additional share at an exercise price of $1.50 for a period of two years.
In September 2014, the Company issued 1,000,000 units at a price of $0.65 per unit for gross proceeds of $650,000. Each unit consists of one common share of the Company and one common share purchase warrant, with each warrant being exercisable into one additional share at an exercise price of $1.00 for a period of three years. Pursuant to the private placement, the Company paid a finders fee of $39,000.
In October 2014, the Company issued 538,461 common shares with a fair value of $0.70 per share to settle notes payable of $492,674 (Note 5).
Warrants
A summary of the share purchase warrants outstanding and exercisable at February 29, 2016 is as follows:
|
|
|
|
|
Exercise
Price
|
|
Number Outstanding
|
|
Expiry Date
|
$
|
|
|
|
|
1.50
|
|
80,000
|
|
August 26, 2016
|
1.00
|
|
1,000,000
|
|
September 3,2017
(1)
|
(1)
Subsequent to year end, the Company modified the exercise of these warrants to $0.40 and extended their expiry date to March 8, 2019. (Note 11(d)).
The weighted average exercise price is $1.04 and weighted average life of the warrants is 1.44 years.
Stock Options
The Companys Stock Option Plan allows a maximum 5,579,335 shares to be reserved for issuance under the plan. Options granted under the plan may not have a term exceeding 10 years and vesting provisions are at the discretion of the Board of Directors.
43
In November 2015, the Company granted 2,600,000 stock options for a period of five years, valued at $0.04 per option for a total value of $107,172 calculated using the Black-Scholes option pricing model assuming a life expectancy of five years, a risk free rate of 1.59%, a forfeiture rate of 0%, and volatility of 168%.
A summary of the stock options outstanding and exercisable at February 29, 2016 is as follows:
|
|
|
|
|
|
Exercise
Price
|
|
Number Outstanding and Exercisable
|
|
Expiry Date
|
Aggregate Intrinsic Value
|
$
|
|
|
|
|
$
|
0.10
|
|
2,600,000
|
|
November 3, 2020
|
286,000
|
As at February 29, 2016, the remaining contractual life of the stock options outstanding was 4.68 years.
The aggregate intrinsic value in the proceeding table represents the total intrinsic value, based on the Companys closing stock price of $0.21 per share as of February 29, 2016.
9.
RELATED PARTY TRANSACTIONS
During the year ended February 29, 2016, the Company
·
Incurred a total of $91,824 (February 28, 2015 - $106,524) in management fees to a director and officer of the Company.
·
Incurred a total of $3,634 (February 28, 2015 - $10,564) in consulting fees to a director and officer of the Company.
·
Incurred a total of $108,262 (February 28, 2015 - $Nil) to the former chief operating officer of the Company included in salaries and benefits. Of this amount, $37,500 was issued in shares of the Company.
·
Incurred a total of $107,172 (February 28, 2015 - $Nil) in share-based payments to directors and management of the Company.
As at February 29, 2016, $22,170 (CAD$30,000) (February 28, 2015 - $Nil) was owing to the former chief operating officer of the Company and has been included in accrued liabilities. This amount is non-interest bearing and unsecured.
Due to related parties consist of the following:
|
|
|
|
February 29, 2016
|
February 28, 2015
|
|
$
|
$
|
Due to directors and officers of the Company
|
334,869
|
130,884
|
All of the Companys advances from related parties are non-interest bearing, unsecured, and payable upon demand.
44
10.
INCOME TAXES
The Company is subject to United States federal income taxes at an approximate rate of 35%. The reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Companys income tax expense as reported is as follows
:
|
|
|
|
|
|
February 29, 2016
|
February 28, 2015
|
|
|
$
|
$
|
Loss before income taxes
|
|
(370,324)
|
(355,479)
|
Statutory tax rate
|
|
35%
|
35%
|
Expected recovery of income taxes computed at statutory rates
|
|
(129,613)
|
(124,418)
|
Permanent differences
|
|
(42,754)
|
(106,650)
|
Reconciliation of tax rates and other
|
|
(131,873)
|
(86,932)
|
Change in valuation allowance
|
|
304,240
|
318,000
|
Provision for income taxes
|
|
-
|
-
|
The significant components of deferred income tax assets at February 29, 2016 and February 28, 2015 are as follows:
|
|
|
|
|
|
February 29, 2016
|
February 28, 2015
|
Deferred income tax assets:
|
|
|
|
Operating loss carry forward
|
|
1,208,645
|
920,000
|
Oil and gas properties
|
|
345,595
|
330,000
|
Less valuation allowance
|
|
(1,554,240)
|
(1,250,000)
|
Deferred income tax assets, net
|
|
-
|
-
|
At February 29, 2016, the Company had accumulated non-capital loss carry-forwards of approximately $3,450,000 that expire from 2025 through 2036.
The potential future tax benefits of these expenses and losses carried-forward have not been reflected in these financial statements due to the uncertainty regarding their ultimate realization.
Tax attributes are subject to review, and potential adjustment by tax authorities.
45
11.
SUBSEQUENT EVENTS
Subsequent to February 29, 2016:
a)
The Company received an advance of $20,692 (CAD$28,000) from the CEO of the Company. This amount is non-interest bearing with no specific terms of repayment.
b)
The Company entered into debt settlement agreements with two creditors. In accordance with the agreements, the Company settled debt in the amount of $91,439 (CAD$123,733) by the issuance of 353,521 common shares of the Company.
c)
The Company issued 500,000 units as a price of $0.10 per unit for gross proceeds of $50,000 (received during the year ended February 29, 2016) (Note 8). Each unit consists of one share of the Company and one share purchase warrant. Each warrant will entitle the holder to acquire one additional share of the Company at a price of $0.40 per share for a period of two years.
d)
The Company amended and restated the warrant certificate with a third party to reduce the exercise price of 1,000,000 share purchase warrants from $1.00 to $0.40 per warrant and extend the expiry date from September 3, 2017 to March 8, 2019 (Note 8).
e)
The Company issued a secured convertible debenture to a third party for a principal of $200,000 with an interest rate of 10% per annum for a period of six months. The holder can convert the principal amount and any unpaid interest into units of the Company at the option of the holder. Each unit will consist of one common share of the Company and one share purchase warrant. Each warrant will entitle the holder to acquire one additional share of the Company at a price of $0.40 per share for a period of two years. In addition, the Company issued 200,000 bonus units to the holder. Each bonus unit consists of one common share of the Company and one share purchase warrant. Each warrant will entitle the holder to acquire one additional share of the Company at a price of $0.40 per share for a period of two years.
46