Changes to Non-Arms Length Agreements – Restating Year End Financial Statements

CALGARY, AB / ACCESSWIRE / May 15, 2019 / Tenth Avenue Petroleum Corp. (“TAPC”)(TSXV: TPC) TAPC is pleased to announce the following:

1. Amendments to Loan and Participation Agreement (“LPA”) with Smoky Oil & Gas Corp (“Smoky”) and Batoche Oil & Gas Exploration Ltd. (“Batoche”)

On July 31, 2017, TAPC entered into the non-arms length LPA with Smoky and Batoche. Pursuant to the terms of the LPA, Smoky lent the sum of $1,326,593 to make the acquisition of assets in Waskahigan, Alberta. The interest rate on the loan principal is 6% per annum. The loan is payable on demand. The LPA was amended to delay Smoky’s entitlement to all net cash flows from the Waskahigan assets until January 1, 2019. By further amendment, the restriction on charging general and administrative costs to a maximum of $75,000 per year for the administration of the Waskahigan assets has been delayed and will commence on January 1, 2019. On July 31, 2017, TAPC had agreed to farmout to Batoche certain Waskahigan assets. By amending agreement, TAPC and Batoche agreed to terminate the farm in rights effective July 31, 2017. Pursuant to the LPA, as additional consideration, Smoky was entitled to receive post payout of the loan: (a) 80% of net cash flow from the Waskahigan Assets (as defined)(less agreed general and administrative expenses) until December 31, 2021 (subject to farmout rights); (b) 80% of net sale proceeds of Waskahigan Assets (subject to farmout rights); (c) right to compel TAPC to buy Smoky’s right to 80% of the net cash flow from the Waskahigan Assets (subject to farmout rights) for 2.5 times net cash flow; and (d) right to compel TAPC to buy Smoky’s right to 24% of the net cash flow from the Waskahigan Participation Assets (subject to farmout rights) for 2.5 times net cash flow from the Waskahigan Participation Assets (hereinafter called the “Post Payout Additional Consideration“). Pursuant to the LPA, TAPC had the right to compel Smoky to sell its right to Post Payout Additional Consideration for 2.5 times net cash flow on trailing 12 month basis. This amount was $1.00 for the fiscal period ended December 31, 2018. TAPC exercised its right to buyout the right of Smoky to the Post Payout Additional Consideration.

2. Auditors – Restatement

TAPC’s auditors for fiscal year ended 2017 were Calvista LLP which now operate as BDO LLP. TAPC restated its 2017 financial statements which caused a delay in filing. The discussion below sets out the reasons for those restatements and how they effected the 2017 (restated) and 2018 financial statements.

(a) The Loan Component of LPA

The LPA is a related party loan and the interest rate charged on the loan was deemed to be below the market rate which was estimated to be 15%. The expected future cash flows from the loan were discounted by 15% and the resulting difference of $491,920 between the fair value of the loan and the face value was charged to contributed surplus when the loan was initially recognized. Annual interest is accruing at the market rate of 15%. The accounting treatment does not change the legal obligation of TAPC to repay $1,325,810 with interest at 6%. The “discount” will reverse over the life of the loan giving rise to interest expense as follows: 2017 – $52,170, 2018 – $133,030, 2019 – $135,580, 2020 – $102,670 and 2021 – $68,470. A 1% change in the interest rate used to discount the loan would result in a $23,135 change to the value of the loan.

(b) Asset Retirement Obligation

The asset retirement obligation was recorded as a $402,286 liability for the fiscal period ended December 31, 2017. This amount was increased to $784,458 because additional wells were added.

(c) Prior Period Adjustment

Adjustments were made retrospectively and have affected the 2017 balances. The adjustments on each of the 2017 financial statement line items are as follows:

Note

Original Adjustment Restated

Asset retirement obligation – current

a $ 186,574 $ (186,574) $ –

Asset retirement obligation – long term

b 215,712 568,746 784,458

Property and equipment

c 1,576,158 303,686 1,879,844

Depletion, depreciation and impairment

d 48,480 70,884 119,364

Loan payable

e 1,359,958 (472,750) 887,208

Accretion

f 20,183 7,603 27,786

Interest expense

g 33,441 19,169 52,610

Comprehensive income (loss)

h (378,900) (97,656) (476,556)

Deficit

i (22,283,650) (97,656) (22,381,306)

Contributed surplus

j 9,659,522 491,920 10,151,442

(a) The asset retirement obligation’s current portion was restated to long term as none of the obligations were expected to be settled in the next year.

(b) The long-term asset retirement obligation was increased due to the reclassification of the current portion, the addition of several wells that were excluded from the asset retirement obligation computation, and a change in the rate used to discount the liabilities at year end. These excluded wells were from the purchase of assets made in 2017 and the adjustment is to recognize the future liability associated with them. The asset retirement obligation on the new wells was initially calculated at a rate of 13% at the time of the purchase. The adjustment also reflects a change to a 6% discount rate at year end which reflects TAPC’s risk free rate adjusted for the risk in the liability.

(c) Property and equipment was adjusted due to the additional wells included in the asset retirement obligation, the changes in the estimated discount rate, and the effects that the change in asset base had on depletion.

(d) Depletion, depreciation and impairment were adjusted to reflect the increased depletion due to the increased asset base caused by the adjustment to the asset retirement obligation asset as well as the addition of future development costs for reserve acquired in 2017.

(e) The loan payable has been adjusted as this is a related party loan that has a non-market rate of interest. The loan has been valued at the present value of the discounted cash flows discounted at the market interest rate of 15%.

(f) Accretion has been adjusted to reflect the changes in the asset retirement obligation liability as well as the discount rate used.

(g) Interest expense has been adjusted to reflect the market interest rate on the related party loan of 15% versus the stated rate of 6%.

(h) Comprehensive income and deficit have both been adjusted due to the changes in depletion and accretion.

(i) Contributed surplus has been adjusted to reflect the non-market rate of interest as a contribution to the equity of TAPC. The contribution is the difference between the present value of the future cash flows of the loan discounted at the market rate of 15% and the face value of the loan

3. New Interim CFO

Mr. Craig Leggatt, Calgary, Alberta will be assuming the role of CFO effectively immediately. His appointment is on an interim basis until a permanent replacement can be found. Mr. Leggatt replaces Robin Chan.

About Tenth Avenue Petroleum Corp

Tenth Avenue Petroleum Corp. is a junior oil and gas exploration and production company. For further information, please contact:

Gregory J. Leia, President and CEO
Tenth Avenue Petroleum Corp.
Suite 203 – 221 – 10th Avenue SE
Calgary Alberta T2G 0V9
T: (403) 265 4122
E: [email protected]
Website: www.tenthavenuepetroleum.com

Reader Advisory

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SOURCE: Tenth Avenue Petroleum Corp.

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