Purcell Basin Minerals Inc. Preliminary Financial Information for the Financial Year Ended December 31, 2015 Prepared by Management

Transcription

1 Preliminary Financial Information for the Financial Introductory Note from Management The following preliminary Income Statement, Cash Flows Statement and accompanying notes (the Financial Information ) are for Purcell Basin Minerals Inc. ( Purcell or the Company ) for the financial year ended December 31, The Financial Information does not include information regarding the income, expenses, or cash flows of the subsidiaries of Purcell. The Company s management is in the process of compiling such information in respect of Purcell s subsidiaries, and will provide shareholders with a consolidated income statement and cash flows statement of Purcell and its subsidiaries for the financial year ended December 31, 2015 as soon as such process is complete. The Financial Information does not include a balance sheet of Purcell or its subsidiaries. We have been advised by Purcell s auditors, Johnson Archer LLP (the Auditors ) that in order to prepare a balance sheet, information will have to be obtained regarding the historical assets, liabilities, retained earnings, deficits and accounting practices of Purcell s predecessor companies, which comprised the Stanfield Group (collectively, the Stanfield Companies ). The financial records of the Stanfield Companies were not well maintained, and to the best of our knowledge, the Stanfield Companies did not prepare any financial statements since In order to prepare a current balance sheet of Purcell, financial information from 2009 to 2015 will have to be compiled. The Auditors have estimated that it will take approximately six months to compile the information necessary to produce a balance sheet for Purcell, and it will take approximately a further 12 months to audit such information. The anticipated cost of the foregoing audit is over $150,000. Following the Financial Information, you will find attached a letter from Taylor Veinotte Sullivan, the Company s legal counsel, to the Auditors, which sets out further information regarding the audit process and anticipated timing. The Company s management thanks you for your patience as we work to provide you with further financial information, while moving forward the permitting process for the Company s Bul River mine. 1

2 Statement of Loss (12 months) (1 month) General and administrative expenses Investor relations 26,984 17,825 Bank charges and interest Government permit review fee 60,000 - Environmental and permitting consulting fees 938, ,876 Interest on long-term debt 1,499,002 91,666 Legal fees 145, ,000 Transfer agent fees 87,090 50,326 Laboratory testing fees 25,729 7,701 Travel 6,739 34,285 2,789, ,041 Net loss for the year (2,789,064) (939,041) 2

3 Statement of Cash Flows (12 months) (1 month) Operating activity Net loss for the year (2,789,064) (939,041) Item not affecting cash: Expenses paid by Cuveras LLC 1,286, ,727 Accrued interest on long-term debt 1,499,002 91,666 Cash flow used by operating activities (3,954) (34,648) Investing activity Advances to subsidiary (543,806) (581,000) Financing activities Net advances from (repayments to) Cuveras LLC (1,603,230) 581,000 Net advances from shareholders 3,740 34,285 Share subscriptions 948,148 1,206,215 (651,342) 1,821,500 Decrease in cash flow (1,199,102) 1,205,852 Cash - beginning of year 1,205,854 - Cash - end of year 6,752 1,205,852 3

4 Notes and Assumptions 1. The income statement is prepared on a cash basis and no adjustment has been made to accrue for expenses not invoiced or paid before December 31, No adjustment has been made for amounts that should have been accrued as at December 31, The income statement and statement of cash flows do not include income or expenses or cash flows of the subsidiaries of Purcell Basin Minerals Inc. 3. The Company is party to two notes payable with total original principal of $14,347,795 payable to CuVeras LLC and Highlands Pacific Partners LLP. The notes are accruing interest at 10% per annum, compounding quarterly. The note payable to Highlands Pacific Partners LLP matures and is payable on December 9, 2016 and the note payable to CuVeras LLC matures and is payable on December 9, Purcell Basin Minerals Inc. Notes on Related Party Transactions Mr. Brendan MacMillan ( MacMillan ) has served as the Company s President and sole director and officer since the Company was amalgamated on December 9, 2014 pursuant to the CCAA proceeding. The Company has entered into contracts with Mr. MacMillan to remunerate him for his services and with his affiliate Highlands Pacific LLC ( Highlands ) to obtain the necessary working capital to fund the Company s operations. Some of the relevant transactions below occurred subsequent to the Company s 2015 year end but are disclosed here for the sake of completeness. As noted below, Mr. MacMillan has not received any cash payments from the Company in connection the services he has provided in his capacity as President of the Company, and, as noted under the Subsequent Events section, he has agreed to renegotiate the terms of some of the arrangements described below, including his compensation arrangements. Compensation of Management Mr. MacMillan s compensation for serving as President (the Compensation ) was set by the board of Directors of the Company (the Board ), pursuant to a directors resolutions dated as of December 9, 2014 (the December 9, 2014 Resolutions ). The Compensation consists of a base fee of US$40,000 and an additional US$8,000 per week for each week after December 9, 2014 that Mr. MacMillan served as President. Any compensation that is not paid to Mr. MacMillan is to accrue interest at 18% per annum or the highest amount allowable by law. The minimum amount 4

5 payable to Mr. MacMillan regardless of the length of his service is US$800,000. The December 9, 2014 Resolutions also provided that any unpaid Compensation shall become a secured obligation of the Company, ahead of all other payables, and would be immediately payable upon the appointment of any other officers or directors, or on the discontinuance of Mr. MacMillan s tenure with the Company. Mr. MacMillan has not received any cash compensation for his services as President of the Company to date, pursuant to the terms of the December 9, 2014 Resolutions or otherwise. By a director s resolutions dated April 25, 2016 (the April 25, 2016 Resolutions ), the Board approved the issuance to Mr. MacMillan of three million common shares of the Company at an issue price of CAD$0.10 per share as a partial payment for the accrued and unpaid Compensation payments that were due to Mr. MacMillan under the December 9, 2014 Resolutions. The Board additionally approved the execution by the Company of a promissory note (the Compensatory Note ) evidencing the Company s indebtedness to Mr. MacMillan in the amount of US$1,453,802 in consideration for the remaining past Compensatory payments that were due to Mr. Macmillan. The amount payable by the Company to Mr. MacMillan under the Compensatory Note was later increased to US$1,517,802 to reflect additional Compensatory payments that accrued in favour of Mr. MacMillan. The amounts payable by the Company to Mr. MacMillan under the Compensatory Note do not accurately reflect the terms of the December 9, 2014 Resolutions. Accordingly, on October 13, 2016, through his counsel, Mr. MacMillan advised the Company s counsel in writing that he does not intend to rely on or seek to enforce the terms of the Compensatory Note. The amount currently payable by the Company to Mr. MacMillan pursuant to the terms of the December 9, 2014 Resolutions is approximately CAD$871,982.40, plus accrued interest. Loan from Highlands In the April 25, 2016 Resolutions, the Board approved a loan to the Company by Highlands in an amount up to CAD$15,000,000, to be advanced at Highlands s discretion, to fund the Company s operations (the Highlands Loan ). The Board also approved the execution by the Company of a promissory note (the Senior Promissory Note ) payable to Highlands to reflect the Company s repayment obligation with respect to the Highlands Loan. The Senior Promissory Note provides that it shall rank senior to all other indebtedness (with the exception of the Compensatory Note) of the Company. The interest on the Highlands Loan is 10% per annum, compounded quarterly. The Highlands Loan matures and is repayable on December 8, The maturity date may be extended at the discretion of Highlands. As of October 21, 2016, the Company owes, at current exchange rates, CAD$332,809 plus accrued interest to Highlands under the terms of the Highlands Loan. The Priority Agreement The April 25, 2016 Resolutions provides that the Company shall grant a first priority security interest in the Company s assets to secure the obligations reflected in the Senior Promissory Note and the Compensatory Note. To this end, the April 25, 2016 Resolutions further provide for the amendment of the Company s other 10% senior promissory notes, which are due in 2016, and for the Company to seek any required approvals from Highlands Pacific Partners LLC ( HPP ) and CuVeras LLC ( CuVeras ) to effect the priority of the Senior Promissory Note. Further, the Company 5

6 entered into a priority agreement with CuVeras, Highlands and HPP (including the Company, the Parties ) dated as of April 25, 2016, pursuant to which the Parties agreed to grant certain priority rights to MacMillan and Highlands for the obligations reflected in the Compensatory and Senior Promissory Notes. Subsequent Events As noted above, on October 13, 2016, Mr. MacMillan advised the Company in writing that he would not be relying on the Compensatory Note. He also advised that it was his intention to seek to renegotiate the terms of the Compensation payments with the Company at arm s length. By a director s resolution dated October 21, 2016 and pursuant to the authority contained in the Company s articles, the Board appointed Michael Moretti of San Antonio, Texas to act as an attorney (the Attorney ) for the Company to exercise the authority to re-negotiate and approve the terms of Mr. MacMillan s compensation for serving as President of the Company and the Highlands Loan. Mr. Moretti is a significant shareholder of the Company, and an arm s length party to Mr. MacMillan. The Company has entered into an indemnity agreement with Mr. Moretti with respect to his role as the Attorney of the Company. Mr. MacMillan has proposed a compensation package to the Company that provides for a reduced level of compensation from that approved in the December 9, 2014 Resolutions. Any revision of the compensation payable to Mr. MacMillan will be subject to the final approval of the Company, as directed by Mr. Moretti in his capacity as Attorney for the Company, and Mr. MacMillan. Set out below is the schedule of loans which Highlands, directly and through an affiliate, has made to Purcell pursuant to the Highlands Loan: 2016 Schedule of Investments into Purcell HPP LP 20-May US$ 20, Jun US$ 20, Jun US$ 20,000 6-Sep US$ 30,000 Crdt Cards Various US$ 45,874 Total US$ 135,874 Total CAD$ Conversion 176, HP LLC 25-Jul CAN$ 30,000 1-Aug CAN$ 10,000 3-Aug CAN$ 10,000 8-Aug CAN$ 10, Aug CAN$ 10, Aug CAN$ 10,000 6

7 26-Aug CAN$ 10, Aug CAN$ 25,000 5-Oct CAN$ 2,000 6-Oct CAN$ 2, Oct CAN$ 2, Oct CAN$ 3,000 Total CAD$ Direct 124,000 Total Combined CAD$ Investments 300, * Conversion at the rate of $CAD1.31/$USD1 7