Generative AI Solutions Corp. — Management Reports 2021

Jul 30, 2021

MANAGEMENT’S DISCUSSION AND ANALYSIS

Niko Resources Ltd. (“Niko” or the “Company”) is a company incorporated in Alberta, Canada. The address of its registered office and principal place of business is Suite 1500, 205 – 5th Avenue SW, Calgary, Alberta, T2P 2V7. The Company was engaged in the exploration for and development and production of oil and natural gas, primarily in India and Bangladesh. Effective March 13, 2019, the Company’s common shares and convertible notes were delisted from the Toronto Stock Exchange (“TSX”).

The following Management’s Discussion and Analysis (“MD&A”) of the financial condition, financial performance and cash flows of the Company for the year ended March 31, 2021 should be read in conjunction with the consolidated financial statements for the year ended March 31, 2021. Additional information relating to the Company, is available on SEDAR at www.sedar.com and on the Company’s website at www.nikoresources.com. This MD&A is dated July 29, 2021.

The MD&A contains forward-looking information and statements. Refer to the end of this MD&A for the Company’s advisory on forward-looking information and statements.

LIQUIDITY AND CAPITAL RESOURCES

Going concern

Commencing June 2016, the Company ceased receiving revenue related to the 60 percent interest of its indirect subsidiary, Niko Exploration (Block 9) Ltd. (“Niko Block 9”), in the Block 9 production sharing contract (“PSC”) in Bangladesh, due to legal cases related to this and other ownership interests in Bangladesh (see Note 21(a) of the consolidated financial statements for the year ended March 31, 2021 for further details on these matters}. In addition, since fiscal 2019, the Company has been in default of its Facilities Agreement (see Note 10 of the consolidated financial statements for the year ended March 31, 2021) with its senior lenders (the “Lenders”) and has not recognized or received any oil and gas revenue. At March 31, 2021, the Company has significant existing liabilities, obligations and contingent liabilities (see Note 21 of the consolidated financial statements for the year ended March 31, 2021). An adverse outcome on one or more of the claims impacting the Company and its subsidiaries could significantly and negatively impact the future cash flows of the Company and further deteriorate its overall liquidity. Currently, the Company’s primary focus is on attempting to realize value related to amounts for which the Company believes are owed to its subsidiaries that hold interests in Bangladesh and attempting to collect income and other tax refunds in India, with any realized value likely to be for the ultimate benefit of its Lenders. There is no guarantee that the Company will be successful in realizing any value in these endeavors.

As a result of the foregoing matters (including the obligations, defaults and contingent liabilities of the Company and its subsidiaries), there are material uncertainties that cast significant doubt about the ability of the Company to continue as a going concern.

These consolidated financial statements for the year ended March 31, 2021 do not reflect the adjustments or reclassification of assets and liabilities which would be necessary if the Company were unable to continue as a going concern and therefore be required to realize on its assets and liabilities in other than the normal course of business and potentially at amounts significantly different from those recorded in the consolidated financial statements for the year ended March 31, 2021.

India

In January 2021, Niko (NECO) Ltd. (“Niko NECO”), an indirect subsidiary of the Company, received a refund of $1.8 million for income taxes previously withheld from interest earned on previous tax refunds received by the subsidiary in India.

In May, 2021, Niko NECO received a refund of $5.3 million for GST previously paid with respect to the D6 settlement transaction after receiving a ruling from the GST department of India that GST was not applicable to the transaction. In January 2020, Niko NECO had received net proceeds from the D6 settlement transaction after agreeing to withdraw from the D6 PSC and joint operating agreement and settle an arbitration case in exchange for $36 million, net of applicable taxes. Under the terms of the Company’s Facilities Agreement, the Lenders had appointed a receiver over the shares of Niko NECO and exercised their rights over the bank account of Niko NECO that the net proceeds of the D6 settlement were deposited into. In February 2020, $26 million (net of payments of taxes, including the aforementioned GST, and other transaction costs) was distributed by Niko NECO solely to the security trustee of the Lenders pursuant to the Waterfall Distribution mechanism defined in the Facilities Agreement and the indenture governing the Convertible Notes of the Company, and was reflected in fiscal 2020 as a loss on revaluation of long-term debt offset by an impairment reversal, net of income taxes (as part of discontinued operations). In March 2021, the receiver over the shares of Niko NECO was removed by the Lenders.

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Bangladesh

Going forward, the Company plans to use its remaining available cash and future potential cash inflows primarily to fund its ongoing efforts to recover amounts due from Bangladesh Oil, Gas and Mineral Corporation (“Petrobangla”) in Bangladesh, subject to the Lenders’ continuing right to appoint a receiver. In fiscal 2011, an indirect subsidiary, Niko Resources (Bangladesh) Ltd. (“NRBL”), filed two arbitration cases under the rules of International Centre for Settlement of Investment Disputes (“ICSID”) regarding i) a dispute over payment for gas delivered from the Feni field from November 2004 to April 2010 under the Feni Gas Purchase Sales Agreement (“Feni GPSA”) with Petrobangla (the “Payment Claim”) and ii) a dispute over compensation claims arising from the uncontrolled flow problems that occurred in Chattak field in January and June 2005 (the “Compensation Claim”). In fiscal 2020, Niko Block 9, filed an arbitration case against Petrobangla and the Government of Bangladesh under the rules of ICSID regarding a dispute over nonpayment of amounts due from Petrobangla under the Block 9 gas and condensate purchase and sales agreements and effective expropriation of Niko Block 9’s 60 percent interest in the Block 9 PSC (the “Block 9 Claim”). The Payment Claim and Compensation Claim are expected to conclude within the next year and the tribunal for the Block 9 Claim is expected to be constituted within the next few months. Refer to Note 21(a) if the consolidated financial statement for the year ended March 31, 2021 for further details on these matters.

Contingent Liabilities

The Company and its subsidiaries are subject to various claims from other parties, as described in Note 21 of the consolidated financial statements for the year ended March 31, 2021, and are actively defending against these claims.

OVERALL PERFORMANCE AND RESULTS OF OPERATIONS BY REPORTABLE SEGMENT

The Company’s results for the fourth quarter and year ended March 31, 2021 are as follows:

	Three months ended March 31,	Three months ended March 31,	Year ended March 31,	Year ended March 31,
(thousands of US Dollars)	2021	2020	2021	2020
Net income (loss) from continuing operations	(783)	(25,324)	(3,114)	(27,624)
Net income (loss) from discontinued operations	(157)	24,144	(1,504)	22,803
Total net income(loss)	(940)	(1,180)	(4,618)	(4,821)

Highlights for the fourth quarter ended March 31, 2021:

Net income from continuing operations in the fourth quarter of fiscal 2021 primarily reflected a provision of $2.2 million for the Compensation Claim case related to the Chattak field in Bangladesh (refer to Note 21(a) of the consolidated financial statements for the year ended March 31, 2021 for further details) and general and administrative expenses, partially offset by a refund of $1.8 million for income taxes previously withheld from interest earned on previous tax refunds received by the subsidiary in India. General and administrative expenses increased from the fourth quarter of fiscal 2020 primarily due to increased legal expenses and the reclassification of costs associated with the D6 settlement transaction from general and administrative expenses in the fourth quarter of fiscal 2020, partially offset by the Company’s cost saving efforts. Net income from continuing operations in the fourth quarter of fiscal 2020 also reflected the recognition of a loss on revaluation of long-term debt of $26 million resulting from the distribution to the security agent of the Lenders of $26 million of the net proceeds of the D6 settlement.

Net loss from discontinued operations in the fourth quarter of fiscal 2021 primarily reflected commercial claim expense, which was virtually unchanged from the fourth quarter of fiscal 2020. Net income from discontinued operations in the fourth quarter of fiscal 2020 also reflected a reversal of impairment of property, plant and equipment in the D6 Block in India of $28.4 million as a result of the D6 settlement transaction, partially offset by current income tax expense of $2.4 million related to the settlement transaction and recognition of unfulfilled exploration commitment expense of $1.4 million related to the Company’s interests in Brazil.

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NIKO RESOURCES LTD.

Highlights for the year ended March 31, 2021:

Net loss from continuing operations in fiscal 2021 of $3.1 million primarily reflected a provision of $2.2 million for the Compensation Claim case related to the Chattak field in Bangladesh (refer to Note 21(a) of the consolidated financial statements for the year ended March 31, 2021 for further details) and $2.9 million of general and administrative expenses, partially offset by a refund of $1.8 million for income taxes previously withheld from interest earned on previous tax refunds received by the subsidiary in India. General and administrative expenses increased from fiscal 2020 primarily due to increased legal expenses, partially offset by the Company’s cost saving efforts. Net income from continuing operations in the fourth quarter of fiscal 2020 also reflected the recognition of a loss on revaluation of long-term debt of $26 million resulting from the distribution to the security agent of the Lenders of $26 million of the net proceeds of the D6 settlement.

Net loss from discontinued operations in fiscal 2021 primarily reflected $1.8 million of commercial claim expense, which was virtually unchanged from fiscal 2020. Net income from discontinued operations in the fourth quarter of fiscal 2020 also reflected a reversal of impairment of property, plant and equipment in the D6 Block in India of $28.4 million as a result of the D6 settlement transaction, partially offset by current income tax expense of $2.4 million related to the settlement transaction and recognition of unfulfilled exploration commitment expense of $1.4 million related to the Company’s interests in Brazil.

SELECTED ANNUAL INFORMATION

The selected annual information provides comparatives for the three most recently completed financial years:

		Year ended March 31,
(thousands of US Dollars)	2021	2020	2019
Continuing Operations
Basic and diluted(1)
Net income (loss) from continuing operations	(3,114)	(27,624)	206,314
Weighted average number of common shares	94,049,967	94,049,967	94,049,967
Net income (loss) per share	(0.03)	(0.29)	2.19
Discontinued Operations
Basic and diluted(1
Net income (loss) from discontinued operations(2)	(1,504)	22,803	(274,874)
Weighted average number of common shares	94,049,967	94,049,967	94,049,967
Net income (loss) per share	(0.02)	0.24	(2.92)
Total Assets	2,311	3,399	5,210
Total Current Liabilities	408,787	405,237	402,227

(1) For the years ended March 31, 2021, 2020, and 2019, the outstanding Convertible Notes were excluded from the diluted earnings per share calculation as they were anti-dilutive.

(2) The Company has discontinued operations in Brazil, India, Indonesia, Pakistan and Trinidad.

Net loss from continuing operations in fiscal 2021 of $3.1 million primarily reflected general and administrative expenses of $2.9 million and a provision of legal claim of $2.2 million pertaining to the Compensation Claim case in Bangladesh, partially offset by a refund of $1.8 million for income taxes previously withheld from interest earned on previous tax refunds received by the subsidiary in India. Net loss from continuing operations of $27.6 million in fiscal 2020 primarily reflected a loss on revaluation of long-term debt of $26 million and general and administrative expenses of $1.8 million. Net income from continuing operations of $206 million in fiscal 2019 primarily reflected a gain on revaluation of long-term debt of $211 million, partially offset by an impairment loss associated with Block 9 in Bangladesh of $1 million.

Net loss from discontinued operations in fiscal 2021 primarily reflected $1.8 million of commercial claim expense, which was virtually unchanged from fiscal 2020. Net income from discontinued operations of $22.8 million in fiscal 2020 also reflected reversal of impairment of $28.4 million, partially offset by current income tax expense of $2.4 million, commercial claim expense of $1.8 million, and unfulfilled exploration commitment expense of $1.4 million. Net loss from discontinued operations of $275 million in fiscal 2019 primarily reflected net impairment loss of $219 million, depletion and depreciation expenses of $39 million for the D6 Block in India and current income tax expense of $16 million.

Total assets decreased since fiscal 2019 primarily due to a reduction in cash balances.

Total current liabilities increased since fiscal 2019 primarily due to the recognition of the liability for commercial claim expense.

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NIKO RESOURCES LTD.

SUMMARY OF QUARTERLY RESULTS

	Mar 31,	Dec 31,	Sep 30,	Jun 30,	Mar 31,	Dec 31,	Sep 30,	Jun 30,
(thousands of US Dollars)	2021	2020	2020	2020	2020	2019	2019	2019
Net loss from
continuing operations(1)	(783)	(526)	(948)	(857)	(25,324)	(918)	(560)	(822)
Net income (loss) from
discontinued operations(1)(2)	(157)	(447)	(450)	(450)	24,144	(449)	(448)	(444)
Total net loss	(940)	(973)	(1,398)	(1,307)	(1,180)	(1,367)	(1,008)	(1,266)
Earnings (loss) per share –
Basic and diluted(1)
Continuing operations	(0.01)	(0.01)	(0.01)	(0.01)	(0.27)	(0.01)	(0.01)	(0.01)
Discontinued operations	(0.00)	(0.00)	(0.00)	(0.00)	0.26	(0.00)	(0.00)	(0.00)
Total	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)

(1) The results for the eight most recent quarters were prepared in accordance with IFRS and presented in US Dollars.

(2) The Company has discontinued operations in Brazil, India, Indonesia, Pakistan and Trinidad. Prior quarters have been restated for comparative purposes.

The Company’s quarterly results primarily reflected general and administrative expenses and. In addition, total net loss for the quarter ended March 31, 2021 included a provision of legal claim of the Company of $2.2 million, partially offset by a refund of $1.8 million for income taxes previously withheld from interest earned on previous tax refunds received by the subsidiary in India and total net loss for the quarter ended March 31, 2020 included a reversal of impairment of $28 million which was offset by a loss on revaluation of long-term debt of $26 million and current tax expenses of $2 million. Refer to the Company’s previously issued annual and interim MD&A’s, available on SEDAR at www.sedar.com for further information regarding changes in the prior quarters.

CONTRACTUAL OBLIGATIONS

The following table represents the Company’s contractual obligations and other commitments as at March 31, 2021:

	Face	Carrying
(thousands of US Dollars)	Value	Value	< 1year	1 to 3years	3 to 5years	>	5years
Term loan facilities(1)(2)	533,294	-	-	-	-		-
Convertible notes(1)(3)	134,770	-	-	-	-		-
Contract settlement obligation(4)	26,057	-	-	-	-		-
Deferred obligation(5)	6,925	-	-	-	-		-
Exploration work commitments	270,667	270,667	270,667	-	-		-
Total contractual obligations	971,713	270,667	270,667	-	-		-

(1) The Company is not required to make interest payments (including interest previously owing) under the term loan facilities agreement or the note indenture governing the convertible notes, other than in connection with a waterfall distribution.

(2) The term loan facilities are recorded in the financial statements at fair value of nil.

(3) The convertible notes are recorded in the financial statements at fair value of nil. The face value of the convertible notes as at March 31, 2021 is Cdn$169.5 million (including accrued interest).

(4) The contract settlement obligation is recorded in the financial statements at fair value of nil.

(5) The deferred obligation is recorded in the financial statements at fair value of nil.

OUTSTANDING SHARE DATA

The Company did not issue any common shares or securities convertible or exchangeable into common shares in fiscal 2021. As at July 29, 2021, the Company has 94,049,967 common shares, 1 preferred share, and no stock options outstanding.

OFF BALANCE SHEET ARRANGEMENTS

The Company had no off balance sheet arrangements in place as at March 31, 2021.

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GENERAL AND ADMINISTRATIVE EXPENSES

	Year ended March 31,	Year ended March 31,
(thousands of US Dollars)	2021	2020
Legal fees	1,816	388
Salaries	242	290
Management fees	172	199
Insurance	100	179
Audit fees	65	90
Rent	27	51
Consultants	23	38
Office costs	13	19
Other	435	512
	2,893	1,766

RELATED PARTY TRANSACTIONS

Key management of the Company includes its directors and executive officers (Chief Executive Officer and Chief Financial Officer). Non-management directors receive an annual fee and the Chief Executive Officer and Chief Financial Officer receive a salary. The Company does not have other short-term benefits, defined contribution plans or defined benefit plans and does not provide postemployment benefits.

Key management compensation includes the following:

	Year ended March 31,	Year ended March 31,
(thousands of US Dollars)	2021	2020
Annual fees for non-management directors(1)	83	117
Executive officers – salaries(1)	235	286
	318	403

(1) Amounts are based on cash payments made during the years ended March 31, 2021 and March 31, 2020, respectively.

FINANCIAL INSTRUMENTS

The Company is exposed to credit risk, liquidity risk, foreign currency risk and commodity price risk as a part of normal operations. A detailed description of the Company’s financial instruments and risk management is included in Note 11 to the consolidated financial statements for the year ended March 31, 2021.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company’s Chief Executive Officer and the Vice President, Finance and Chief Financial Officer have assessed the design and effectiveness of internal controls over financial reporting (“ICFR”) and disclosure controls and procedures (“DC&P”) as at March 31, 2021. There have been no significant changes in ICFR during the three ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, ICFR.

CRITICAL ACCOUNTING ESTIMATES

The Company makes assumptions in applying certain critical accounting estimates that are uncertain at the time the accounting estimate is made and may have a significant effect on the condensed interim consolidated financial statements of the Company.

For a complete discussion of the critical accounting estimates, refer to Note 5 of the consolidated financial statements for the year ended March 31, 2021.

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RISK FACTORS

In the normal course of business the Company is exposed to a variety of actual and potential events, uncertainties, trends and risks. In addition to the risks associated with the use of assumptions in the critical accounting estimates, financial instruments, the Company’s commitments and actual and expected operating events, all of which are discussed above, the Company has identified the following events, uncertainties, trends and risks that could have a material adverse impact on the Company.

• The ability of the Company to continue as a going concern;

• The ability of the Company to maintain its cash resources;

• The ability of the Company to meet all of its obligations, including those under the facility agreement;

• The risks related to the various legal claims against the Company or its subsidiaries;

• Changing governmental policies, social instability and other political, economic or diplomatic developments in the countries in which the Company operates;

• Changes in taxation policies, taxation laws and interpretations thereof;

• Commodity price and foreign exchange rate risk; and

• Changes in environmental regulations and legislations.

Additional information related to the Company and its identified risks is included in the Company’s Annual Information Form for the year ended March 31, 2018 available on SEDAR at www.sedar.com.

For a complete description of the potential effects of the Company’s contingencies on the Company, refer to Note 21 of the consolidated financial statements for the year ended March 31, 2021.

BASIS OF PRESENTATION

The financial data included in this MD&A is in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”) that are effective as at March 31, 2021. All financial information is presented in thousands of US Dollars unless otherwise indicated.

The term “fiscal 2021” is used throughout the MD&A and in all cases refers to the period from April 1, 2020 through March 31, 2021. The term “fiscal 2020” is used throughout the MD&A and in all cases refers to the period from April 1, 2019 through March 31, 2020. The term “fiscal 2019” is used throughout the MD&A and in all cases refers to the period from April 1, 2018 through March 31, 2019.

FORWARD LOOKING INFORMATION STATEMENTS

Certain statements in this MD&A constitute forward-looking information, including forward-looking information relating to the Company defending certain claims. Such forward-looking information is based on a number of risks, uncertainties and assumptions, which may cause actual results or other expectations to differ materially from those anticipated and which may prove to be incorrect. Undue reliance should not be placed on forward-looking information. Such forward-looking information reflects the Company's current beliefs and assumptions and is based on information currently available to the Company. This forward-looking information is also based on certain key expectations and assumptions, many of which are not within the control of the Company. There can be no assurances that the Company will be able to meet the goals and purposes of its business plan (including resolving various disputes in its favour) or fund its cash requirements. In addition, the Company is in default under the Facilities Agreement and the Lenders have not agreed to waive the default. Further, the Company’s ability to defend claims may be restricted or limited for various reasons. Absolutely no assurance can be made that the Company will be able to meet its funding requirements or its other obligations, and nothing herein should be read as stating or inferring otherwise. The reader is cautioned that the assumptions used in the preparation of forward-looking information, although considered reasonable at the time of preparation, may prove to be incorrect. Actual results may vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors and such variations may be material. Such risk factors include, but are not limited to those set out above as well as: risks related to the ability of the Company to continue as a going concern, risks related to the Company not being able to maintain its cash resources, risks associated with the Company meeting its obligations under the facilities agreement, risks related to the various legal claims against the Company or its subsidiaries, risks associated with meeting all of the Company's obligations, risks discussed under "Risk Factors" in the Company's Annual Information Form for the year ended March 31, 2018, and in the Company's public disclosure documents, and other factors, many of which are beyond the Company's control. Niko makes no representation that the actual results achieved during the forecast period will be the same in whole or in part as those forecasts. The forward-looking information included in this MD&A is expressly qualified in its entirety by this cautionary statement. The forwardlooking information included herein is made as of the date of this MD&A and Niko assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.

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