Argenta Silver Corp. — Annual Report 2019

Jun 12, 2020

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ANNUAL FINANCIAL REPORT

DECEMBER 31, 2019

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Butte Energy Inc.

Opinion

We have audited the accompanying financial statements of Butte Energy Inc. (the “Company”), which comprise the statements of financial position as at December 31, 2019 and 2018, and the statements of operations and comprehensive loss, changes in shareholders’ equity (deficiency), and cash flows for the years then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”).

Basis for Opinion

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 1 of the financial statements, which indicates that the Company incurred a total deficit of $21,532,813 during the year ended December 31, 2019 and, as of that date, the Company’s current liabilities exceeded its current assets by $111,931. As stated in Note 1, these events and conditions indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Other Information

Management is responsible for the other information. The other information obtained at the date of this auditor's report includes Management’s Discussion and Analysis.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor’s report is Glenn Parchomchuk.

“DAVIDSON & COMPANY LLP”

Vancouver, Canada Chartered Professional Accountants

June 11, 2020

BUTTE ENERGY INC. STATEMENTS OF FINANCIAL POSITION

EXPRESSED IN CANADIAN DOLLARS

Assets Current assets Cash and cash equivalents $ Accounts receivable Reclamation deposits (Note 4) $ Liabilities Current liabilities Trade and other payables $ Provision for environmental liabilities (Note 5) Convertible loan due to a related party (Note 10(b)) Shareholders’ deficiency Share capital (Note 6) Contributed surplus Equity component of convertible loan Deficit $	December 31, 2019 14,013 $ 5,877 96,129 116,019$ 147,080 $ 80,870 227,950 326,730 554,680 20,612,174 389,893 92,085 (21,532,813) (438,661) 116,019$	December 31, 2018
		31,671 1,148 94,227
		127,046
		61,681 66,596
		128,277 266,046
		394,323
		20,612,174 389,893 92,085 (21,361,429)
		(267,277)
		127,046

Nature of operations and going concern (Note 1) Proposed transaction (Note 15) Subsequent event (Note 16)

Approved and authorized on behalf of the Board of Directors on June 11, 2020:

“Lee Bowles” “Jason Rickert” Director Director

See accompanying notes to financial statements

5

BUTTE ENERGY INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY)

EXPRESSED IN CANADIAN DOLLARS

Balance at January 1, 2018 Shares issued for debt settlement Equity component of convertible loan Net loss for the year Balance at December 31, 2018 Net loss for the year Balance at December 31, 2019	Number of Common Shares Share Capital Contributed Surplus Equity Component of Convertible Loan Deficit Total Shareholders’ Equity (Deficiency)
	43,738,810 $ 7,645,794 $ 389,893 $ - $ (21,171,436) $ (13,135,749) 259,327,592 12,966,380 - - - 12,966,380 - - - 92,085 - 92,085 - - - - (189,993) (189,993)
	303,066,402 20,612,174 389,893 92,085 (21,361,429) (267,277) - - - - (171,384) (171,384)
	303,066,402$20,612,174$ 389,893 $ 92,085 $ (21,532,813) $ (438,661)

See accompanying notes to financial statements

6

BUTTE ENERGY INC. STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31

EXPRESSED IN CANADIAN DOLLARS

General and administrative expenses (Note 7) $ Exploration and evaluation expenditures Finance income Finance expense Foreign exchange gain Net loss and comprehensive loss for the year $ Loss per share – basic and diluted (Note 9) $	2019 2018 (98,122) $ (105,711) (14,480) (30,389) (112,602) (136,100) 1,902 1,352 (60,684) (58,131) - 2,886 (171,384)$ (189,993) - $ -	2018

See accompanying notes to financial statements

7

BUTTE ENERGY INC. STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31

EXPRESSED IN CANADIAN DOLLARS

Operating activities Net loss and comprehensive loss $ Adjustments for Finance expense Change in non-cash working capital (Note 11) Investing activities Increase in reclamation deposits Financing activities Proceeds from issue of convertible loan to a related party (Note 10(b)) Change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $	2019 (171,384) $ 60,684 94,944 (15,756) (1,902) (1,902) - - (17,658) 31,671 14,013$	2018
		(189,993) 58,131 (42,970)
		(174,832)
		(94,227)
		(94,227)
		300,000
		300,000
		30,941 730
		31,671

See accompanying notes to financial statements

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN

At December 31, 2017, Butte Energy Inc. (“Butte” or the “Company”) had been incorporated under the Business Corporations Act (Alberta). The Company continued from the Province of Alberta to the Province of British Columbia effective June 19, 2018. The Company’s head office and principal address is 500-666 Burrard Street, Vancouver, British Columbia, Canada, V6C 2X8, and its registered address is 1700-666 Burrard Street, Vancouver, British Columbia, Canada, V6C 2X8. The Company lists its common shares on the NEX board of the TSX Venture Exchange under the symbol BEN.H.

The Company had been engaged in the acquisition, exploration and development of petroleum and natural gas reserves in Western Canada. During the year ended December 31, 2017, the Company sold its last remaining asset, and has no active operations other than the completion of reclamation activities on previously abandoned wells. In January 2018, there was a change of control of the Company with a new board and management team appointed. The board of directors have been evaluating potential opportunities, including those outside of the oil and gas industry.

On November 20, 2018, the Company announced it had entered into an agreement to acquire all of the issued and outstanding equity of Pura Valley, LLC and Pura Extractions LLC. The acquisition of the Purchased Companies is being done in conjunction with a 10:1 consolidation of Butte's share capital, a change of Butte's name, a financing, and changes to Butte's management (collectively, the "Proposed Transaction"). On completion of the Proposed Transaction, Butte will carry on the business currently carried on by the Purchased Companies. Among other closing conditions, the Proposed Transaction is subject to the approval of Butte's shareholders. Butte's shares will remain halted until the closing of the Proposed Transaction. See Note 15 for further details.

These financial statements have been prepared assuming the Company will continue as a going concern. The Company has an accumulated deficit of $21,532,813 and a working capital deficiency of $111,931 as at December 31, 2019.

In order to fund future operations or acquisitions, the Company will need to raise additional funds by way of equity or debt. However, there is no assurance that the Company will be able to raise such funds on terms acceptable to it.

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or ability to raise funds.

These factors indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the going concern basis of accounting be inappropriate.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN (continued)

Closing of share transfer, convertible loan and debt purchase and settlement, new board and management in January 2018

On January 4, 2018 the Company announced that it closed the following transactions:

• a share purchase agreement (the “Share Purchase Agreement”) with Victor Redekop (“Redekop”), Bill Baker (“Baker”) and Stone’s Throw Capital Inc. (“Stone’s Throw”) pursuant to which Redekop and Baker, as vendors, agreed to sell 30,000,000 common shares of the Company (“Common Shares”) to Stone’s Throw for aggregate consideration of $2.00;

• a convertible loan agreement (the “Convertible Loan Agreement”) with Stone’s Throw, pursuant to which the Company has borrowed the principal amount of $300,000 from Stone’s Throw, which will bear interest at 10% per annum and is repayable on the date that is 12 months from the date of issuance (subsequently extended to January 4, 2021 - Note 10(b)). The principal amount and accrued interest will be convertible at the option of Stone’s Throw into units of the Company (“Units”) at a conversion price of $0.05 per Unit. Each Unit will consist of one Common Share and one Common Share purchase warrant (a “Warrant”). Each Warrant will entitle the holder to acquire one Common Share at an exercise price of $0.05 for a period of 12 months from the date they are issued (subsequently extended to January 4, 2021 - Note 10(b)); and

• a debt purchase and settlement agreement (the “DPS Agreement”) with Redekop, Baker, Sand Hills Energy Inc. (“Sand Hills”) and Stone’s Throw pursuant to which: (i) Redekop, Baker and Sand Hills agreed to their indebtedness from the Company in the aggregate amount of $12,966,380 (the “Purchased Debt”); and (ii) the Company and Stone’s Throw agreed to settle the Purchased Debt by the issuance to Stone’s Throw of an aggregate of 259,327,592 Common Shares (Notes 6 and 10(b)).

Without taking into account any securities which may be issuable upon the conversion of the convertible loan, on closing, Stone’s Throw holds 289,327,592 of the 303,066,402 of the Common Shares issued and outstanding on closing, representing 95.4% of the issued and outstanding Common Shares, and is a control person of the Company.

The securities of the Company were acquired by Stone’s Throw for investment purposes. Prior to the closing of the foregoing transactions, Stone’s Throw held no securities of the Company.

Each of Mr. Redekop and Mr. Baker ceased to be an insider of the Company on closing.

On closing, the Company appointed a new board and management.

10

Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

2. BASIS OF PRESENTATION

(a) Statement of Compliance

These annual financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and the Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

Butte’s significant accounting policies under IFRS are presented in Note 3.

(b) Basis of Measurement

The financial statements have been prepared on a historical cost basis except where noted in the accounting policies. In addition, these financial statements have been prepared using the accrual basis of accounting except for cash flow information.

(c) Functional and Presentation Currency

These financial statements are presented in Canadian dollars, which is the Company’s functional currency.

(d) Management Estimates and Judgements

The preparation of financial statements requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the year. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the financial statements.

Accordingly, actual results may differ from the estimated amounts as future confirming events occur. Significant estimates and judgments made by management in the preparation of these financial statements are as follows:

• (i) Amounts recorded for the provision of environmental liabilities require the use of estimates with respect to the amount and timing of reclamation expenditures. The ultimate amount and timing of the restoration expenses are uncertain and cost estimates can vary in response to many factors. Based on a review of the expected timing of future cashflows, it was management’s judgment that the time value of money was not material and therefore did not need to present value the expenditures expected to be required to settle the obligation.

11

Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

2. BASIS OF PRESENTATION (continued)

(d) Management Estimates and Judgements (continued)

• (ii) Convertible debentures are accounted for in accordance with their substance and are presented in their component parts of debt and equity. The Company estimates the fair value of the debt component of convertible debentures by calculating the discounted cash flows of the debenture using an effective interest rate of a similar instrument but without the conversion feature. Similar instruments may have certain features that, while similar, may differ, such as the term, amount, security, and credit risk, and therefore management are required to exercise significant judgment or estimate in determining an appropriate discount rate.

• (iii) Tax interpretations, regulations and legislation are subject to change. As such, income taxes are subject to measurement uncertainty. Management assesses deferred income tax assets at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all years presented in these financial statements, and have been applied consistently by the Company.

(a) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, term deposits with banks, and other shortterm liquid investments with original maturities of three months or less.

(b) Financial instruments

Financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are not offset unless the Company has the current legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously.

Classification of Financial Assets and Financial Liabilities:

The initial classification of a financial asset depends upon the Company’s business model for managing its financial assets and the contractual terms of the cash flows. There are three measurement categories into which the Company classified its financial assets:

• Amortized Cost: Includes assets that are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest;

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Financial instruments (continued)

Classification of Financial Assets and Financial Liabilities (continued)

• Fair Value through Other Comprehensive Income ("FVOCI"): Includes assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets, where its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest; or

• Fair Value Through Profit or Loss ("FVTPL"): Includes assets that do not meet the criteria for amortized cost or FVOCI and are measured at fair value through profit or loss. This includes all derivative financial instruments.

The following table shows the measurement categories under IFRS 9 for each class of the Company’s financial assets and financial liabilities:

Financial Asset/Liability	IFRS 9 classification
Cash and cash equivalents	FVTPL
Accounts receivable	Amortized cost
Accounts payables	Amortized cost
Convertible loan	Amortized cost

Measurement:

Financial assets at FVOCI

Elected investments in equity instruments at FVOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income (loss).

Financial assets and liabilities at amortized cost

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

Financial assets and liabilities at FVTPL

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statements of operations and comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the statements of operations and comprehensive loss in the period in which they arise. Where management has opted to recognize a financial liability at FVTPL, any changes associated with the Company’s own credit risk will be recognized in other comprehensive income (loss).

13

Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

• (b) Financial instruments (continued)

Impairment of financial assets at amortized cost

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost.

At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition.

If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to twelve month expected credit losses. The Company applies the simplified method and measures a loss allowance equal to the lifetime expected credit losses for trade receivables .

The Company recognizes in the statements of operations, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

Fair value hierarchy

The Company characterizes its fair value measurements into a three-level hierarchy depending on the degree to which the inputs are observable, as follows:

• Level 1 inputs are quoted prices in active markets for identical assets and liabilities;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability.

The fair value of cash and cash equivalents is measured based on level 1 inputs of the fair value hierarchy.

(c) Property, plant and equipment and intangible exploration assets

Pre-license costs are recognized in the statement of operations and comprehensive loss as incurred.

Exploration and evaluation costs, including the costs of acquiring licenses and directly attributable general and administrative costs, initially are capitalised as either tangible or intangible exploration and evaluation (“E&E”) assets according to the nature of the assets acquired. The costs are accumulated in cost centres by well, field or exploration area pending determination of technical feasibility and commercial viability.

14

Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Property, plant and equipment and intangible exploration assets (continued)

E&E assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For purposes of impairment testing, E&E assets are allocated to cash-generating units.

Property, plant and equipment (“PP&E”) are stated at cost less depletion, depreciation and accumulated impairment losses. The cost of an item of PP&E consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Gains and losses on disposal of an item of PP&E, including oil and natural gas interests, are determined by comparing the proceeds from disposal with the carrying amount of PP&E and are recognized net in the statement of operations and comprehensive loss.

The net carrying value of development or production assets is depleted using the unit of production method by reference to the ratio of production in the year to the related proven and probable reserves, taking into account estimated future development costs necessary to bring those reserves into production. Future development costs are estimated taking into account the level of development required to produce the reserves. Independent reserve engineers review these estimates at least annually.

For other assets, depreciation is recognized in the statement of operations and comprehensive loss on a declining balance basis over the estimated useful lives of each part of an item of PP&E. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. There is no depreciation of land.

At each reporting date, there is a review of depreciation methods, useful lives and residual values.

(d) Impairment of non-financial assets

The carrying amounts of the Company’s non-financial assets, other than E&E assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and other intangible assets that have indefinite lives or that are not yet available for use, an impairment test is completed each year. E&E assets are assessed for impairment when they are reclassified to PP&E as oil and natural gas interests, and also if facts and circumstances suggest that the carrying amount exceeds the recoverable amount.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Impairment of non-financial assets (continued)

For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (CGU). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be derived from production of proven and probable reserves.

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of operations and comprehensive loss. Impairment losses recognized in respect of CGU’s are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. Reversal of an impairment loss occurs if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.

(e) Provisions

A provision is recognized if, due to a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses

(f) Asset retirement obligations (ARO)

The Company’s activities give rise to dismantling, decommissioning and site disturbance remediation activities. Provision is made for the estimated cost of site restoration, and capitalized in the relevant asset category.

Asset retirement obligations are measured at the present value of management’s best estimate of expenditures required to settle the present obligation at the statement of financial position date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Asset retirement obligations (ARO) (continued)

The increase in the provision due to the passage of time is recognized as finance costs in the statement of operations whereas increases/decreases due to changes in the estimated future cash flows are capitalized. Actual costs incurred upon settlement of the asset retirement obligations are charged against the provision to the extent the provision was established.

(g) Convertible debentures

Convertible debentures and debenture units with detachable equity are accounted for in accordance with their substance and are presented in their component parts of debt and equity. The debt component is measured at the present value of the cash payments of interest and principal due over the term of the debentures using interest rates of comparable non-convertible debt. The difference between the face value of the debentures and the debt component value is allocated to the equity component, to the extent that the fair value of a detachable equity instrument does not exceed the fair value of the underlying common share. When the convertible debentures are distributed in conjunction with warrants, the fair value of the warrants and the conversion feature is estimated using the Black-Scholes option valuation model. The residual equity component is allocated pro rata between the conversion feature and the warrants based on their relative fair values.

Financing costs are allocated proportionally to the debt component and the equity component. The debt component, net of its proportional financing costs, is accreted to its face value through an interest charge over its term to maturity using the effective interest rate method. Upon conversion of the debentures, the debt portion related to the principal amount of debt converted is recognized as a charge to share capital.

(h) Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.

(i) Revenue

Revenue from the sale of oil and natural gas is recognized based on the identification of contracts with a customer, the determination of performance obligations under the contract, and the related point at which the Company satisfies its performance obligations.

The Company recognizes revenue from the sale of oil and natural gas when control is transferred to the buyer which is usually when legal title passes to the external party. This is generally at the time the product enters the pipeline. Revenue is measured net of discounts, customs duties and royalties. With respect to the latter, the entity is acting as a collection agent on behalf of others.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognized in the statement of operations and comprehensive loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using enacted tax rates or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(k) Loss per share

Basic earnings per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive instruments such as options granted to employees. Diluted earnings per share does not adjust the earnings attributable to common shareholders or the weighted average number of common shares outstanding when the effect is anti-dilutive.

(l) Segmented reporting

The Company operates in a single reportable operating segment, which historically has consisted of the acquisition of and exploration and development of oil and gas properties. The Company currently has no active operations other than the completion of reclamation activities on previously abandoned wells, and has been evaluating potential opportunities, including those outside of the oil and gas industry (Note 1).

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(m) New accounting standards adopted

Impact of application of IFRS 16 Leases

Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective application method, where the 2018 comparatives are not restated and the cumulative effect of initially applying IFRS 16 has been recorded on January 1, 2019 for any differences identified.

IFRS 16 introduces significant changes to the lessee accounting by removing the distinction between operating and finance leases under IAS 17 and requiring the recognition of a right-of-use asset (“ROU asset”) and a lease liability at the lease commencement for all leases, except for short-term leases (lease terms of 12 months or less) and leases of low value assets. Leases to explore for or use oil or natural gas are specifically excluded from the scope of IFRS 16.

As the Company does not have any leases with a term of more than twelve months, the adoption of IFRS 16 did not have any effect on the Company’s financial statements.

4. RECLAMATION DEPOSITS

In January 2018, the Company was required to provide a security deposit to the Alberta Energy Regulator in order for the Company to proceed with the finalization of the reclamation on previously abandoned wells. These deposits are refundable upon final acceptance of the reclamation certificates by the Alberta Energy Regulator.

The deposits are held in trust in an interest bearing bank account. Interest income on the account is recorded in finance income in the statements of operations and comprehensive loss.

5. PROVISION FOR ENVIRONMENTAL LIABILTIES

The Company recorded a provision for the completion of reclamation activities on previously abandoned wells (Note 2(d)(i)).

Balance – January 1 $ Additions Used – amounts charged against provision Balance – December 31 $	2019 66,596 $ 14,274 - 80,870 $	2018
		76,686 30,204 (40,294)
		66,596

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

6. SHARE CAPITAL

Authorized share capital consists of an unlimited number of Common Shares without nominal or par value.

On January 3, 2018, the Company issued 259,327,592 common shares in settlement of amounts due to related parties (Notes 1 and 10(b)).

7. GENERAL AND ADMINISTRATIVE EXPENSES

Consulting and management fees (Note 10(a)) $ Listing and filing fees Office, insurance and miscellaneous Professional fees Shareholder relations Travel Total $ NCOME TAX EXPENSE econciliation of effective tax rate: Loss before tax $ Expected tax rate Expected recovery Unrecognized deferred income tax assets Expiration of loss-carryforward $	2019 - $ 7,053 7,002 77,317 6,750 - 98,122 $ 2019 (171,384) $ 27% (46,274) 46,274 - - $	2018
		8,280 8,860 12,731 54,521 12,387 8,932
		105,711
		2018
		(189,993) 27%
		(51,298) 43,199 8,099
		-

8. INCOME TAX EXPENSE

Reconciliation of effective tax rate:

There is no recognition of deferred tax assets in respect of the following items:

Property, plant and equipment $ Tax losses Convertible loan $	2019 1,628,221 $ 3,187,727 32,081 4,848,029$	2018
		1,628,221 3,173,534 -
		4,801,755

The Company has a non-capital loss carry forward balance of $11,806,397 (2018 - $11,753,828). These losses will expire from 2024 to 2039. The balance of the remaining tax pools is $6,030,447 (2018 - $6,030,447).

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

9. EARNINGS PER SHARE

For the year ended December 31, 2019, basic and diluted loss per share is calculated using the weighted average number of outstanding common shares of 303,066,402 (2018 – 300,934,942).

The convertible debt could potentially dilute basic earnings per share, but was not included in the calculation of diluted earnings per share because they are anti-dilutive for the years ended December 31, 2019 and 2018.

10. RELATED PARTY TRANSACTIONS

(a) Compensation of key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the Company, directly or indirectly. Senior management personnel include the Company’s executive officers and members of the Board of Directors.

Consulting and management fees $	2019 - $	2018
		5,000

(b) Borrowings

Convertible loan due to a related party

On January 3, 2018, the Company borrowed the principal amount of $300,000 from Stone’s Throw, which bears interest at 10% per annum. In January 2019, the term of the convertible loan was extended to January 4, 2021 from January 3, 2019. The principal amount and accrued interest will be convertible at the option of Stone’s Throw into units of the Company (“Units”) at a conversion price of $0.05 per Unit. Each Unit will consist of one Common Share and one Common Share purchase warrant (a “Warrant”). Each Warrant will entitle the holder to acquire one Common Share at an exercise price of $0.05 for a period of 12 months from the date they are issued (Notes 1 and 15).

The convertible loan has been classified as debt with the residual value allocated to shareholders’ equity. The initial fair value of the liability portion of the convertible loan was determined using a market interest rate of 13% for an equivalent non-convertible loan at the issue date. The liability is subsequently recognized on an amortized cost basis until extinguished on conversion or maturity of the convertible loan. The remainder of the proceeds is allocated to the conversion option and recognized in shareholders’ equity and is not subsequently re-measured.

Interest expense is calculated by applying the effective interest rate of 13% to the liability component, and is included in finance expense in the statement of operations and comprehensive loss.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

10. RELATED PARTY TRANSACTIONS (continued)

(b) Borrowings (continued)

Convertible loan due to a related party (continued)

The convertible loan is presented in the financial statements as follows:

Balance – January 1, 2018 $ Proceeds received from issue of convertible loan Equity component of convertible loan Liability component of convertible loan Finance expense Balance – December 31, 2018 Finance expense Balance – December 31, 2019 $	- 300,000 (92,085)
	207,915 58,131
	266,046 60,684
	326,730

Due to related parties

As of December 31, 2017, the Company had promissory notes and advances owing to directors for $12,865,156 and a note payable of $101,224 to Sand Hills, a Company owned by a director. Sand Hills was considered a related party by virtue of a common director.

In January 2018, a series of transactions resulted in the change in the majority shareholders of the Company, and the amounts due to related parties of $12,966,380 as of December 31, 2017 were settled by the issuance of 259,327,592 common shares (Notes 1 and 6).

11. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital is comprised of:

Accounts receivable $ Trade and other payables Provision for environmental liabilities Change related to operating activities $	2019 (4,729) $ 85,399 14,274 94,944 $	2018
		(620) (32,260) (10,090)
		(42,970)

Non-cash transactions

During the year ended December 31, 2018, the Company issued 259,327,592 common shares in settlement of amounts due to related parties (Notes 1, 6 and 10(b)).

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

12. DETERMINATION OF FAIR VALUES

The fair value of cash and cash equivalents, accounts receivable, trade and other payables, and convertible loans is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. The fair values of these balances approximate their carrying value.

Financial assets and liabilities recorded or disclosed at fair value in the statement of financial position are categorized using a three-level hierarchy that reflects the level of judgment associated with the inputs used to measure their fair value. The fair values of financial assets and liabilities included in Level 1 are determined by reference to unadjusted quoted prices in active markets for identical assets and liabilities. Fair values of financial assets and liabilities in Level 2 are based on inputs other than Level 1 quoted prices that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices). The fair values in Level 3 financial assets and liabilities are not based on observable market data.

			Quoted	Significant
			Prices in	Other	Significant
			Active	Observable	Unobservable
	Carrying		Markets	Inputs	Inputs
December 31, 2019	Amount	Fair Value	(Level 1)	(Level 2)	(Level 3)
Financial Assets
Cash and cash
equivalents	$ 14,013	$ 14,013	$ 14,013	$-	$-
			Quoted	Significant
			Prices in	Other	Significant
			Active	Observable	Unobservable
	Carrying		Markets	Inputs	Inputs
December 31, 2018	Amount	Fair Value	(Level 1)	(Level 2)	(Level 3)
Financial Assets
Cash and cash
equivalents	$ 31,671	$ 31,671	$ 31,671	$-	$-

There have been no transfers between categories during the periods ended December 31, 2019 and December 2018.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

13. CAPITAL MANAGEMENT

The Company’s objective when managing capital is to ensure that it has adequate financial resources to maintain liquidity necessary to fund its operations and provide returns for shareholders and benefits to other stakeholders. In the management of capital, the Company includes the components of shareholders’ equity.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares or reduce expenditures. Management reviews the capital structure on a regular basis to ensure that objectives are met.

There have been no changes to the Company’s approach to capital management during the year ended December 31, 2019. The Company is not subject to external restrictions on its capital.

14. FINANCIAL RISK MANAGEMENT

The Company’s financial instruments are exposed to certain financial risks: credit risk, liquidity risk and market risk.

(a) Credit Risk

Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its payment obligations. All of the Company’s cash and cash equivalents and reclamation deposits are held with reputable financial institutions and, as such, the Company does not consider its credit risk to be significant as at December 31, 2019 and 2018.

(b) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through cash flow forecasting including anticipated investing and financing activities (Note 1).

( c ) Market Risk

Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates will affect the Company’s income or the value of the financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Company currently has no operating properties and therefore the exposure to market risk is minimal.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

15. PROPOSED TRANSACTION

On November 20, 2018, the Company announced that it has entered into an agreement dated November 16, 2018 with Jonathan Lasser to acquire all of the issued and outstanding equity of Pura Valley, LLC ("Valley"), which holds the licenced Price Creek Ranch production facility in Humboldt County, CA, and Pura Extractions LLC, which holds a majority interest in a high-capacity extraction lab with locations and immediate plans for two additional high-capacity labs for extraction and distillation ("Extraction", and with Valley, the "Purchased Companies").

The acquisition of the Purchased Companies is being done in conjunction with a 10:1 consolidation of Butte's share capital, a change of Butte's name, a financing, and changes to Butte's management (collectively, the "Proposed Transaction"). The parties have agreed to cooperate reasonably and in good faith in finalizing the structure of the Proposed Transaction for optimal tax treatment of the parties and for operational purposes. On completion of the Proposed Transaction, Butte will carry on the business currently carried on by the Purchased Companies.

The original agreement had subsequently been amended to extend the deadline of negotiation of a definitive agreement and related documentation respecting the Proposed Transaction to June 30, 2019, which has now expired. Although the parties have not formalized a further extension to the completion of the definitive agreement, the parties continue negotiations of finalizing a definitive agreement. Terms of the Proposed Transaction may change upon conclusion of agreeing on the definitive agreement.

Among other closing conditions, the Proposed Transaction is subject to the approval of Butte's shareholders, which will be obtained at a general meeting to be scheduled at a future date (the "Meeting"). Butte's shares will remain halted until the closing of the Proposed Transaction. Further information respecting the Proposed Transaction and the Purchased Companies and their business will be contained in the management information circular to be prepared by the Company and delivered to its shareholders prior to the Meeting.

Acquisition of the Purchased Companies

The November 16, 2018 agreement between Butte and Mr. Lasser includes the following terms:

• In conjunction with a 10:1 consolidation of its share capital (the "Butte Consolidation"), Butte shall raise funds pursuant to a subscription receipt offering (the "Butte Financing"), which on closing will be contributed to a newly formed wholly owned US subsidiary corporation ("USCo"), which shall invest such funds in the Purchased Companies and become the sole manager of the Purchased Companies.

• The operating agreements of the Purchased Companies shall be amended and restated in their entirety to provide members of the Purchased Companies (other than USCo) with a redemptionexchange right which allows the members to exchange their LLC units for Butte shares or at the election of the LLC, a cash equivalent payment (the "Redemption-Exchange Right").

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

15. PROPOSED TRANSACTION (continued)

Acquisition of the Purchased Companies (continued)

• Members of the Purchased Companies shall purchase special voting shares in Butte for a nominal price based on an appraisal, each of which shall entitle the holder to exercise the equivalent voting rights which would attach to the number of Butte shares such member would be entitled to acquire upon exercise of the Redemption-Exchange Right. The number of such votes to which the holders of special voting shares are entitled will be reduced from time to time as the RedemptionExchange Right is exercised.

• Butte will reserve an aggregate of 70,000,000 common shares of Butte ("Consideration Shares") for issuance to the members of the Purchased Companies upon the exercise of the RedemptionExchange Right and in exchange for all of the issued and outstanding securities of the Purchased Companies. The value of the Consideration Shares for the purpose of the Proposed Transaction is $0.75 per share.

The Consideration Shares may be required to be escrowed pursuant to applicable stock exchange requirements.

Following the completion of the purchase of the Purchased Companies, (but prior to the issuance of securities pursuant to the Butte Financing, Mr. Lasser will have the right to exercise approximately 70% of the total votes ascribed to all of the Company’s outstanding shares. Mr. Lasser is an arm’s length party to the Company. A finder’s fee of 2,250,000 shares is payable in connection with the acquisition of the Purchased Companies.

The Proposed Transaction is expected to close later in 2020 and is subject to the conditions set out in the purchase agreement between the Company and Mr. Lasser, including the negotiation of a definitive agreement and related documentation respecting the Proposed Transaction, and the completion of the Butte Financing (described below). It is a condition of Closing of the Proposed Transaction that Butte shall have received conditional approval for the delisting of its common shares from the NEX and for listing of its common shares on the CSE.

It is a further condition of the transaction that Stone’s Throw will vote all of its common shares (representing approximately 95.4% of the Company’s issued and outstanding shares) in favour of the Proposed Transaction and the delisting of the Company’s shares from the NEX, and a support agreement respecting this commitment is expected to be entered into prior to or concurrently with the execution of the definitive agreement. The NEX may require majority of the minority approval of the Company’s shareholders for the delisting of the Company’s shares from the NEX.

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Butte Energy Inc. Notes to the Financial Statements December 31, 2019 (Expressed in Canadian dollars)

15. PROPOSED TRANSACTION (continued)

The Butte Financing

Prior to closing the acquisition of the Purchased Companies, Butte will complete a financing (the "Butte Financing") to raise proceeds to fund the operation of the purchased business and its further growth and development, including the capitalization of USCo and the Purchased Companies. The Butte Financing shall be in an amount and at a price to be determined by the parties, acting reasonably and having regard to market conditions and the anticipated capital requirements of Butte and its business after closing of the acquisition of the Purchased Companies ("Closing"). The Butte Financing will be effected by the issuance of subscription receipts which will convert into Butte common shares at Closing. Finder's fees may be payable in connection with the Butte Financing.

The common shares of Butte issued pursuant to the Butte Financing will be subject to resale hold periods under applicable Canadian and United States securities laws.

New Management

On closing, the existing board and management of Butte shall resign.

Name Change

In conjunction with the Butte Consolidation, the Company will change its name from "Butte Energy Inc." to "Pura Cali Group Inc." or such other name as may be selected by the Butte board of directors.

The Convertible Debenture

Stone’s Throw holds a $300,000 convertible loan which bears interest at 10% per annum. Stone’s Throw agreed to extend the maturity date of the debenture from January 3, 2019 to January 4, 2021 (Note 10(b)).

16. SUBSEQUENT EVENT

On May 7, 2020, the Company borrowed the principal amount of $55,000 from Stone’s Throw. The demand promissory note bears interest at 12% per annum.

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