Annual and Transition Report (foreign Private Issuer) (20-f)

Date : 04/21/2017 @ 2:07PM
Source : Edgar (US Regulatory)
Stock : Dxi Energy Inc. (QB) (DXIEF)
Quote : 0.0499  0.0 (0.00%) @ 4:00PM

Annual and Transition Report (foreign Private Issuer) (20-f)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ______

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report:

Commission file number: 001-33491

DXI ENERGY INC.
(Exact name of Registrant as specified in its charter)

Province of British Columbia, Canada
(Jurisdiction of incorporation or organization)

598 - 999 Canada Place
Vancouver, British Columbia V6C 3E1
(Address of principal executive offices)

David N. Matheson
598 - 999 Canada Place
Vancouver, British Columbia V6C 3E1
Tel: (604) 638-5050
Facsimile: (604) 638-5051
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of each exchange on which registered
Common Shares, without par value OTCQB

Securities registered pursuant to Section 12(g) of the Act: None


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of the close of the period covered by the annual report:
44,808,286 common shares as at December 31, 2016 and April 20, 2017

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [  ]     No [X]

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [  ]     No [X]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [X]

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

  U.S. GAAP [   ] International Financial Reporting Standards as issued
  Other [   ] by the International Accounting Standards Board   [X]

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 [  ]          Item 18 [  ]

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]     No [X]


TABLE OF CONTENTS

GENERAL INFORMATION 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 4
CURRENCY AND EXCHANGE RATES 6
ABBREVIATIONS 7
PART I 8
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS. 8
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 8
ITEM 3. KEY INFORMATION 8
ITEM 4. INFORMATION ON THE COMPANY 18
ITEM 4A. UNRESOLVED STAFF COMMENTS 20
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 34
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. 41
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. 51
ITEM 8. FINANCIAL INFORMATION. 53
ITEM 9. THE OFFER AND LISTING 54
ITEM 10. ADDITIONAL INFORMATION 55
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 71
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 73
PART II 74
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 74
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 74
ITEM 15. CONTROLS AND PROCEDURES 75
ITEM 16. [RESERVED] 75
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 75
ITEM 16B. CODE OF ETHICS 75
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 75
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 76
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS 76
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 76
ITEM 16G. CORPORATE GOVERNANCE 76
ITEM 16H. MINE SAFETY DISCLOSURE 76
PART III 77
ITEM 17. FINANCIAL STATEMENTS 77
ITEM 18. FINANCIAL STATEMENTS 77
ITEM 19. EXHIBITS 78
SIGNATURES 80


GENERAL INFORMATION

All references in this annual report on Form 20-F to the terms “we”, “our”, “us”, “the Company” and “DXI Energy” refer to DXI Energy Inc.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and, if warranted, development of our properties, plans related to our business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. The forward-looking statements contained in this annual report on Form 20-F concern, among other things:

  drilling inventory, drilling plans and timing of drilling, re-completion and tie-in of wells;
     
productive capacity of wells, anticipated or expected production rates and anticipated dates of commencement of production;
     
  •  drilling, completion and facilities costs;
     
  •  results of our various projects;
     
  •  ability to lower cost structure in certain of our projects;
     
  •  our growth expectations;
     
  •  timing of development of undeveloped reserves;
     
  •  the performance and characteristics of the Company’s oil and natural gas properties;
     
  •  oil and natural gas production levels;
     
  •  the quantity of oil and natural gas reserves;
     
  •  capital expenditure programs;
     
  supply and demand for oil and natural gas and commodity prices;
     
  •  the impact of federal, provincial, and state governmental regulation on DXI Energy;
     
expected levels of royalty rates, operating costs, general administrative costs, costs of services and other costs and expenses;
     
expectations regarding our ability to raise capital and to continually add to reserves through acquisitions, exploration and development;
     
  treatment under governmental regulatory regimes and tax laws; and
     
  •  realization of the anticipated benefits of acquisitions and dispositions.

These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of our management.

4


Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

  •   risks related to the marketability and price of oil and natural gas being affected by factors outside our control;
     
risks related to world oil and natural gas prices being quoted in U.S. dollars and our production revenues being adversely affected by an appreciation in the Canadian dollar;
     
  •   risks related to our ability to execute projects being dependent on factors outside our control;
     
  •   risks related to oil and gas exploration having a high degree of risk and exploration efforts failing;
     
  •   risks related to cumulative unsuccessful exploration efforts;
     
  •   risks related to oil and natural gas operations involving hazards and operational risks;
     
  •   risks related to seasonal factors and unexpected weather;
     
  •   risks related to competition in the oil and gas industry;
     
  •   risks related to the fact that we do not control all of the assets that are used in the operation of our business;
     
  •   risks related to our ability to market oil and natural gas depending on its ability to transport the product to market;
     
  •   risks related to high demand for drilling equipment;
     
  •   risks related to title to our properties;
     
  •   risks related to our ability to continue to meet its oil and gas lease or license obligations;
     
risks related to our anticipated substantial capital needs for future oil and gas exploration, development and acquisitions;
     
•   risks related to our cash flow from reserves not being sufficient to fund its ongoing operations;
     
  •   risks related to covenants in issued debt restricting the ability to conduct future financings;
     
  •   risks related to renewal or refinancing;
     
  •   risks related to our being exposed to third party credit risks;
     
  •   risks related to our being able to find, acquire, develop and commercially produce oil and natural gas;
     
  •   risks related to our properties not producing as projected;
     
  •   risks related to our estimated reserves being based upon estimates;
     
  •   risks related to future oil and gas revenues not resulting in revenue increases;
     
  •   risks related to our managing growth;
     
  •   risks related to our being dependent on key personnel;
     
  risks related to our reliance on strategic relationships;
     
  risks related to uncertainty regarding realization of planned completion/testing programs;
     
  •   risks related to our operations being subject to federal, state, local and other laws, controls and regulations;
     
  •   risks related to uncertainty regarding claims of title and right of aboriginal people;
     
  •   risks related to environmental laws and regulations;
     
  •   risks related to our being a public company;
     
  •   risks related to our being a foreign private issuer;
     
  •   risks related to our not having paid dividends to date; and

5



  risks related to our stock price being volatile.

This list is not exhaustive of the factors that may affect any of our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the section heading “Item 3. Key Information – D. Risk Factors” below. If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Forward-looking statements in this document are not a prediction of future events or circumstances, and those future events or circumstances may not occur. Given these uncertainties, users of the information included herein, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Investors should consult our quarterly and annual filings with Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to forward-looking statements. We do not assume responsibility for the accuracy and completeness of these statements.

Forward-looking statements are based on our beliefs, opinions and expectations at the time they are made, and we do not assume any obligation to update our forward-looking statements if those beliefs, opinions, or expectations, or other circumstances, should change, except as required by applicable law.

We qualify all the forward-looking statements contained in this annual report on Form 20-F by the foregoing cautionary statements.

CURRENCY AND EXCHANGE RATES

Canadian Dollars Per U.S. Dollar

Unless otherwise indicated, all references in this annual report are to Canadian dollars ("$" or "Cdn$"). Certain numbers in this annual report are rounded to the nearest thousands of Canadian dollars.

The following tables set forth the number of Canadian dollars required to buy one United States dollar (US$) based on the average, high and low nominal noon exchange rate as reported by the Bank of Canada for each of the last five fiscal years and each of the last six months. The average rate means the average of the exchange rates on the last day of each month during the period.

  Canadian Dollars Per One U.S. Dollar
  2016 2015 2014 2013 2012
Average for the period 1.3248 1.2787 1.1045 1.0299 0.9996

March
2017
February
2017
January
2017
December
2016
November
2016
October
2016
High for the period 1.3505 1.3248 1.3438 1.3556 1.3582 1.3403
Low for the period 1.3279 1.3004 1.3030 1.3120 1.3337 1.3104

Exchange rates are based on the Bank of Canada nominal noon exchange rates. The nominal noon exchange rate on April 20, 2017 as reported by the Bank of Canada for the conversion of U.S. dollars into Canadian dollars was US$1.00 = Cdn$1.3480.

6


ABBREVIATIONS

Oil and Natural Gas Liquids   Natural Gas
bbl barrel   Mcf thousand cubic feet
bbls barrels   MCFD thousand cubic feet per day
BOPD barrels per day   MMcf million cubic feet
Mbbls thousand barrels   MMcf/d million cubic feet per day
Mmbtu million British thermal units   Mcfe Thousand cubic feet of gas equivalent

Other  
AECO Virtual pricing point for all natural gas delivered anywhere within the Province of Alberta on Trans- Canada’s pipeline system known as NOVA and traded under the provisions of the NOVA Inventory Transfer Service. Reported in Cdn$ per gigajoule
BOE Barrels of oil equivalent. A barrel of oil equivalent is determined by converting a volume of natural gas to barrels using the ratio of 6 Mcf to one barrel.
BOE/D Barrels of oil equivalent per day.
BCFE Billion cubic feet equivalent.
MBOE Thousand barrels of oil equivalent.
NYMEX New York Mercantile Exchange.
WTI West Texas Intermediate, the reference price paid in U.S. dollars at Cushing Oklahoma for crude oil of standard grade.

7


PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A.

Selected Financial Data

Our selected financial data and the information in the following tables for the years ended December 31, 2012 – 2016 was derived from our audited consolidated financial statements. These audited consolidated financial statements have been audited by BDO Canada LLP, Chartered Professional Accountants, for the years ended December 31, 2016, 2015, 2014, 2013, and 2012.

The information in the following table should be read in conjunction with the information appearing under the heading “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements under the heading "Item 18. Financial Statements".

The Company’s annual audited Consolidated Financial Statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Our present policy is to retain all available funds for use in our operations and the expansion of our business.

The following table is a summary of selected audited consolidated financial information of the Company for each of the four most recently completed financial years. The information presented is presented in accordance with IFRS:

(CA$ thousands, except per share data) Years Ended December 31,
  2016 2015 2014   2013     2012
Net Oil and Gas Revenue $4,073 $7,096 $7,561 $7,506 $5,766
Net Loss for the Year ($5,486) ($7,108) ($7,203) ($2,577) ($11,753)
Loss Per Share ($0.13) ($0.19) ($0.20) ($0.10) ($0.40)
Dividends Per Share Nil Nil Nil Nil Nil
Weighted Avg. Shares, basic (,000) 42,095 36,492 35,425 29,783 28,211
Weighted Avg. Shares, diluted (,000) 42,095 36,492 35,425 29,783 28,211
Year-end Shares (,000) 44,808 36,510 36,480 29,783 29,783
Working Capital (Deficiency) ($11,075) ($10,295) ($4,480) ($8,908) ($8,557)
Resource properties and equipment $20,182 $25,121 $21,016 $23,667 $25,033
Long-term Liabilities $9,120 $8,552 $6,448 $6,107 $6,622
Share Capital $98,111 $97,162 $97,132 $90,274 $90,274
Retained Earnings (Deficit) ($110,636) ($105,150) ($98,042) ($90,839) ($88,262)
Total Assets $21,260 $27,686 $23,274 $25,499 $27,573
Net Assets $1,546 $6,568 $10,385 $9,099 $10,245

Exchange Rate History

See the disclosure under the heading "Currency and Exchange Rates" above.

8


Adoption of New and Amended Accounting Standards

The Company applied for the first time certain amendments, which are effective for annual periods beginning on or after January 1, 2016. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Although these amendments applied for the first time in 2016, they did not have a material impact on the annual consolidated financial statements of the Company.

B.

Capitalization and Indebtedness

Not Applicable.

C.

Reasons for the Offer and Use of Proceeds

Not Applicable.

D.

Risk Factors

An investment in a company engaged in oil and gas exploration involves an unusually high amount of risk, both unknown and known, present and potential, including, but not limited to the risks enumerated below. An investment in our common shares is highly speculative and subject to a number of known and unknown risks. Only those persons who can bear the risk of the entire loss of their investment should purchase our securities. An investor should carefully consider the risks described below and the other information that we file with the Securities and Exchange Commission (“SEC”) and with Canadian securities regulators before investing in our common shares. The risks described below are not the only ones faced. Additional risks that we are not currently aware of or that we currently believe are immaterial may become important factors that affect our business. The risk factors set forth below and elsewhere in this annual report, and the risks discussed in our other filings with the SEC and Canadian securities regulators, may have a significant impact on our business, financial condition and/or results of operations and could cause actual results to differ materially from those projected in any forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”.

Our failure to successfully address the risks and uncertainties described below would have a material adverse effect on our business, financial condition and/or results of operations, and the trading price of our common stock may decline and investors may lose all or part of their investment. We cannot assure you that we will successfully address these risks or other unknown risks that may affect our business.

Risks related to commodity price fluctuations

The marketability and price of oil and natural gas are affected by numerous factors outside of our control. Material fluctuations in oil and natural gas prices could adversely affect our net production revenue and oil and natural gas operations.

Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:

  •  

the domestic and foreign supply of and demand for oil and natural gas;

  •  

the price and quantity of imports of crude oil and natural gas;

  •  

overall domestic and global economic conditions;

political and economic conditions in other oil and natural gas producing countries, including embargoes and continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage;

the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

  •  

the level of consumer product demand;

  •  

weather conditions;

  •  

the impact of the U.S. dollar exchange rates on oil and natural gas prices; and

  •  

the price and availability of alternative fuels.

9


Our ability to market our oil and natural gas depends upon our ability to acquire space on pipelines that deliver such commodities to commercial markets. We are also affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing and storage facilities and operational problems affecting such pipelines and facilities, as well as extensive governmental regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and many other aspects of the oil and natural gas business.

Both oil and natural gas prices are unstable and are subject to fluctuation. Any material decline in prices could result in a reduction of our net production revenue. The economics of producing from some wells may change as a result of lower prices, which could result in reduced production of oil or natural gas and a reduction in the volumes and net present value of our reserves. We might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in our net production revenue and a reduction in our oil and natural gas acquisition, development and exploration activities.

Because world oil and natural gas prices are quoted in U.S. dollars, our production revenues could be adversely affected by an appreciation of the Canadian dollar.

World oil and natural gas prices are quoted in U.S. dollars, and the price received by Canadian producers, including us, is therefore affected by the Canadian/U.S. dollar exchange rate, which will fluctuate over time and may affect our production revenues. Significant increases in the value of the Canadian dollar would exacerbate potential negative effect and could have a material adverse effect on our financial condition and results of operations. An increase in the exchange rate for the Canadian dollar and future Canadian/U.S. exchange rates could also negatively affect the future value of our reserves as determined by independent petroleum reserve engineers.

Risks related to operating an exploration, development and production company

Our ability to execute projects will depend on certain factors outside of our control. If we are unable to execute projects on time, on budget or at all, we may not be able to effectively market the oil and natural gas that we produce.

We manage a variety of small and large projects in the conduct of our business. Our ability to execute projects and market oil and natural gas will depend upon numerous factors beyond our control, including:

  the availability of adequate financing;
  the availability of processing capacity;
  the availability and proximity of pipeline capacity;
  the availability of storage capacity;
  the supply of and demand for oil and natural gas;
  the availability of alternative fuel sources;
  the effects of inclement weather;
  the availability of drilling and related equipment;
  accidental events;
  currency fluctuations;
  changes in governmental regulations; and
  the availability and productivity of skilled labor.

Because of these factors, we could be unable to execute projects on time, on budget or at all, and may not be able to effectively market the oil and natural gas that we produce.

Oil and gas exploration has a high degree of risk and our exploration efforts may be unsuccessful, which would have a negative effect on our operations.

There is no certainty that the expenditures to be made by us in the exploration of our current projects, or any additional project interests we may acquire, will result in discoveries of recoverable oil and gas in commercial quantities. An exploration project may not result in the discovery of commercially recoverable reserves and the level of recovery of hydrocarbons from a property may not be a commercially recoverable (or viable) reserve that can be legally and economically exploited. If exploration is unsuccessful and no commercially recoverable reserves are defined, we would be required to evaluate and acquire additional projects that would require additional capital, or we would have to cease operations altogether.

10


Cumulative unsuccessful exploration efforts could result in us having to cease operations.

The expenditures to be made by us in the exploration of our properties may not result in discoveries of oil and natural gas in commercial quantities. Many exploration projects do not result in the discovery of commercially recoverable oil and gas deposits, and this occurrence could ultimately result in us having to cease operations.

Oil and natural gas operations involve many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which we are not fully insured, our business, financial condition, results of operations and prospects could be adversely affected.

Our involvement in the oil and natural gas exploration, development and production business subjects us to all of the risks and hazards typically associated with those types of operations, including hazards such as fire, explosion, blowouts, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or personal injury. In particular, we may explore for and produce sour natural gas in certain areas. An unintentional leak of sour natural gas could result in personal injury, loss of life or damage to property, and may necessitate an evacuation of populated areas, all of which could result in liability to us. In accordance with industry practice, we are not fully insured against all of these risks. Although we maintain liability insurance in an amount that we consider consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits, in which event we could incur significant costs that could have a material adverse effect upon our business, financial condition, results of operations and prospects. In addition, the risks we face are not, in all circumstances, insurable and, in certain circumstances, we may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. For instance, we do not have insurance to protect against the risk from terrorism. Oil and natural gas production operations are also subject to all of the risks typically associated with those operations, including encountering unexpected geologic formations or pressures, premature decline of reservoirs and the invasion of water into producing formations. Losses resulting from the occurrence of any of these risks could have a material adverse effect on our business, financial condition, results of operations and prospects.

Seasonal factors and unexpected weather patterns may lead to declines in exploration and production activity.

The level of activity in the Canadian oil and natural gas industry is influenced by seasonal weather patterns. Oil and natural gas development activities, including seismic and drilling programs in northern Alberta and British Columbia, are restricted to those months of the year when the ground is frozen. Wet weather and spring thaw may make the ground unstable. Although not as prevalent, such conditions sometimes prevail in the Rocky Mountains of Colorado where the Company’s US properties are located. Consequently, municipalities and provincial transportation departments enforce road bans that restrict the movement of rigs and other heavy equipment, thereby reducing activity levels. In addition, certain oil and natural gas producing areas are located in areas that are inaccessible other than during the winter months because the ground surrounding the sites in these areas consists of swampy terrain, and additional seasonal weather variations will also affect access to these areas. Seasonal factors and unexpected weather patterns may lead to declines in exploration and production activity during certain parts of the year.

The petroleum industry is highly competitive, and increased competitive pressures could adversely affect our business, financial condition, results of operations and prospects.

The petroleum industry is competitive in all of its phases. We compete with numerous other organizations in the search for, and the acquisition of, oil and natural gas properties and in the marketing of oil and natural gas. Our competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than us. Our ability to increase our reserves in the future will depend not only upon our ability to explore and develop our present properties, but also upon our ability to select and acquire other suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery and storage.

We do not control all of the assets that are used in the operation of our business and, therefore, cannot ensure that those assets will be operated in a manner favorable to us.

Other companies operate some of the assets in which we have an interest. As a result, we have a limited ability to exercise influence over the operation of those assets or their associated costs, which could adversely affect our financial performance. Our return on assets operated by others will therefore depend upon a number of factors that may be outside of our control, including the timing and amount of capital expenditures, the operator's expertise and financial resources, the approval of other participants, the selection of technology and risk management practices.

11


Our ability to market oil and natural gas depends on our ability to transport our product to market. If we are unable to expand and develop the infrastructure in the areas surrounding certain of our assets, we may not be able to effectively market the oil and natural gas that we produce.

Due to the location of some of our assets, both in Canada and the United States, there is minimal infrastructure currently available to transport oil and natural gas from our existing and future wells to market. As a result, even if we are able to engage in successful exploration and production activities, we may not be able to effectively market the oil and natural gas that we produce, which could adversely affect our business, financial condition, results of operations and prospects.

Demand and competition for drilling equipment could delay our exploration and production activities, which could adversely affect our business, financial condition, results of operations and prospects.

Oil and natural gas exploration and development activities depend upon the availability of drilling and related equipment (typically leased from third parties) in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to us and may delay exploration and development activities. To the extent we are not the operator of our oil and natural gas properties, we depend upon the operators of the properties for the timing of activities related to the properties and are largely unable to direct or control the activities of the operators.

Title to our oil and natural gas producing properties cannot be guaranteed and may be subject to prior recorded or unrecorded agreements, transfers, claims or other defects.

Although title reviews may be conducted prior to the purchase of oil and natural gas producing properties or the commencement of drilling wells, those reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat our claim. Unregistered agreements or transfers, or native land claims, may affect title. If title is disputed, we will need to defend our ownership through the courts, which would likely be an expensive and protracted process and have a negative effect on our operations and financial condition. In the event of an adverse judgment, we would lose our property rights. A defect in our title to any of our properties may have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be unable to meet all of the obligations necessary to successfully maintain each of the licenses and leases and working interests in licenses and leases related to our properties, which could adversely affect our business, financial condition, results of operations and prospects.

Our properties are held in the form of licenses and leases and working interests in licenses and leases. If we or the holder of the license or lease fails to meet the specific requirement of a license or lease, the license or lease may terminate or expire. None of the obligations required to maintain each license or lease may be met. The termination or expiration of our licenses or leases or the working interests relating to a license or lease may have a material adverse effect on our business, financial condition, results of operations and prospects.

Risks related to financing continuing and future operations

We have a working capital deficiency and will be required to raise capital through financings. We may not be able to obtain capital or financing on satisfactory terms, or at all.

As of December 31, 2016, the Company had a working capital deficiency of approximately $11.1 million, which includes the loans from related parties of $2.4 million, and an accumulated deficit of $110.6 million. Excluding the non-cash derivative liability of $0.2 million, the adjusted working capital deficiency was $10.9 million. Of this amount, $7.2 million is represented by a financial contract liability of Dejour USA, which was due on September 30, 2016. The maximum cash component due in full settlement of the financial contract liability is US$3.0 million. The details of the settlement progress are described in note 12 to the consolidated financial statements. We expect to incur general and administration expenses of approximately $0.8 million over the next twelve months. We cannot assure you that debt or equity financing will be available to us, and even if debt or equity financing is available, it may not be on terms acceptable to us. Our inability to access sufficient capital for our operations would have a material adverse effect on our business, financial condition, results of operations and prospects.

12


The Company's ability to continue as a going concern is dependent upon attaining profitable operations and obtaining sufficient financing to meet obligations and continue exploration and development activities. Whether and when the Company can attain profitability is uncertain. These uncertainties cast substantial doubt upon the Company’s ability to continue as going concern.

During the year ended December 31, 2016, the Company incurred a loss of $5.5 million and has an accumulated deficit of $110.6 million. Whether and when the Company can attain profitability is uncertain. The Company also has a working capital deficiency of $11.1 million as at December 31, 2016. These uncertainties cast substantial doubt upon the Company’s ability to continue as going concern in the next twelve months, because we will be required to obtain additional capital in the future to continue our operations and there is no assurance that we will be able to obtain such capital, through equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Our independent auditors have included an explanatory paragraph in their report on our consolidated financial statements for the year ended December 31, 2016 that describes uncertainties that cast substantial doubt about our ability to continue as a going concern. Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board applicable to a going concern, which implies we will continue to meet our obligations and continue our operations for the next twelve months. Realization values may be substantially different from carrying values as shown, and our consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of the going concern uncertainty.

On November 21, 2013, the Company was advised by NYSE Regulation representing NYSE MKT LLC (“NYSE MKT” or “the Exchange”) that a review of the Company’s Form 6K for the period ended September 30, 2013 indicates the Company is not in compliance with three of the Exchange’s continued listing standards relating to minimum stockholders’ equity thresholds, consecutive annual net losses, and general “going concern” issues. The Company has committed to update NYSE Regulation as to its’ financial progress as appropriate or upon request but no later than at the completion of each quarter until full compliance is achieved on or before May 22, 2015, the target date for full compliance established by the Exchange.

On June 1, 2015, the Company received notification from the Exchange that it has regained compliance with the Exchange’s requirement addressing a company’s ability to continue to operate as a going concern.

On January 19, 2016, the Company received a letter from the Exchange stating that it is not in compliance with the continued listing standards as it pertains to the low price of its securities. In order to maintain its listing, the Company must address how it intends to regain compliance by July 19, 2016. If the plan is accepted, the Company may be able to continue its listing but will be subject to periodic reviews by the Exchange. If the plan is not accepted or if it is accepted but the Company is not in compliance with the continued listing standards by July 19, 2016, or if the Company does not make progress consistent with the plan, the Exchange may initiate delisting procedures as appropriate. The Company’s stock was voluntarily delisted from the NYSE MKT at the close of trading on Thursday, August 4, 2016.

We anticipate making substantial capital expenditures for future acquisition, exploration, development and production projects. We may not be able to obtain capital or financing necessary to support these projects on satisfactory terms, or at all.

We anticipate making substantial capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future. If our revenues or reserves decline, we may not have access to the capital necessary to undertake or complete future drilling programs. Debt or equity financing, or cash generated by operations, may not be available to us or may not be sufficient to meet our requirements for capital expenditures or other corporate purposes. Even if debt or equity financing is available, it may not be on terms acceptable to us. Our inability to access sufficient capital for our operations could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our cash flow from our reserves may not be sufficient to fund our ongoing activities at all times, thereby causing us to forfeit our interest in certain properties, miss certain acquisition opportunities and reduce or terminate our operations.

Our cash flow from our reserves may not be sufficient to fund our ongoing activities at all times and we are currently utilizing the loans from related parties to fund our working capital deficit. From time to time, we may require additional financing in order to carry out our oil and gas acquisition, exploration and development activities. Failure to obtain such financing on a timely basis could cause us to forfeit its interest in certain properties, not be able to take advantage of certain acquisition opportunities and reduce or terminate our level of operations. If our revenues from our reserves decrease as a result of lower oil and natural gas prices or otherwise, our ability to expend the necessary capital to replace our reserves or to maintain our production will be impaired. If our cash flow from operations is not sufficient to satisfy our capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or, if available, on favorable terms.

13


Debt that we incur in the future may limit our ability to obtain financing and to pursue other business opportunities, which could adversely affect our business, financial condition, results of operations and prospects.

From time to time, we may enter into transactions to acquire assets or equity of other organizations. These transactions may be financed in whole or in part with debt, which may increase our debt levels above industry standards for oil and natural gas companies of a similar size. Depending upon future exploration and development plans, we may require additional equity and/or debt financing that may not be available or, if available, may not be available on acceptable terms. None of our organizational documents currently limit the amount of indebtedness that we may incur. The level of our indebtedness from time to time could impair our ability to obtain additional financing on a timely basis to take advantage of business opportunities that may arise.

We may be exposed to the credit risk of third parties through certain of our business arrangements. Non-payment or non-performance by any of these third parties could have an adverse effect on our financial condition and results of operations.

We may be exposed to third-party credit risk through our contractual arrangements with our current or future joint venture partners, marketers of our petroleum and natural gas production and other parties. In the event those entities fail to meet their contractual obligations to us, those failures could have a material adverse effect on our financial condition and results of operations. In addition, poor credit conditions in the industry and of joint venture partners may affect a joint venture partner's willingness to participate in our ongoing capital program, potentially delaying the program and the results of the program until we find a suitable alternative partner.

Risks related to maintaining reserves and acquiring new sources of oil and natural gas

Our success depends upon our ability to find, acquire, develop and commercially produce oil and natural gas, which depends upon factors outside of our control.

Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. Our long-term commercial success depends upon our ability to find, acquire, develop and commercially produce oil and natural gas. We have only recently commenced production of oil and natural gas. There is no assurance that our other properties or future properties will achieve commercial production. Without the continual addition of new reserves, our existing reserves and our production will decline over time as our reserves are exploited. A future increase in our reserves will depend not only upon our ability to explore and develop any properties we may have from time to time, but also upon our ability to select and acquire new suitable producing properties or prospects. No assurance can be given that we will be able to locate satisfactory properties for acquisition or participation. Moreover, if acquisitions or participations are identified, we may determine that current market conditions, the terms of any acquisition or participation arrangement, or pricing conditions, may make the acquisitions or participations uneconomical, and further commercial quantities of oil and natural gas may not be produced, discovered or acquired by us, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Properties that we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against such liabilities.

Our long-term commercial success depends upon our ability to find, acquire, develop and commercially produce oil and natural gas reserves. However, our review of acquired properties is inherently incomplete, as it generally is not feasible to review in depth every individual property involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken.

14


Our estimated reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in the reserve estimates or the underlying assumptions may adversely affect the quantities and present value of our reserves.

There are numerous uncertainties inherent in estimating quantities of oil, natural gas reserves and the future cash flows attributed to the reserves. Our reserve and associated cash flow estimates are estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the associated future net cash flows are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. All estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from our estimates of them, and those variations could be material.

Estimates of proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Recovery factors and drainage areas are estimated by experience and analogy to similar producing pools. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves, and those variations could be material.

Our future oil and natural gas production may not result in revenue increases and may be adversely affected by operating conditions, production delays, drilling hazards and environmental damages.

Future oil and natural gas exploration may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient petroleum substances to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

Risks related to management of the Company

We may experience difficulty managing our anticipated growth.

We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to attract and retain qualified management and technical personnel to meet the needs of our anticipated growth. Our inability to deal with this growth could have a material adverse effect on our business, financial condition, results of operations and prospects.

We depend upon key personnel and the absence of any of these individuals could result in us having to cease operations.

Our ability to continue our operation business depends, in large part, upon our ability to attract and maintain qualified key management and technical personnel. Competition for such personnel is intense and we may not be able to attract and retain such personnel.

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Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.

Our ability to successfully acquire additional licenses, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements depends on developing and maintaining close working relationships with industry participants and government officials and on our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.

We cannot be certain that current expected expenditures and any current or planned completion/testing programs will be realized.

We believe that the costs used to prepare internal budgets are reasonable, however, there are assumptions, uncertainties, and risk that may cause our allocated funds on a per well basis to change as a result of having to alter certain activities from those originally proposed or programmed to reduce and mitigate uncertainties and risks. These assumptions, uncertainties, and risks are inherent in the completion and testing of wells and can include but are not limited to: pipe failure, casing collapse, unusual or unexpected formation pressure, environmental hazards, and other operating or production risk intrinsic in oil and or gas activities. Any of the above may cause a delay in any of our completion/testing programs or our ability to determine reserve potential.

Risks related to federal, state, local and other laws, controls and regulations

We are subject to complex federal, provincial, state, local and other laws, controls and regulations that could adversely affect the cost, manner and feasibility of conducting our oil and natural gas operations.

Oil and natural gas exploration, production, marketing and transportation activities are subject to extensive controls and regulations imposed by various levels of government, which may be amended from time to time. Governments may regulate or intervene with respect to price, taxes, royalties and the exportation of oil and natural gas. Regulations may be changed from time to time in response to economic or political conditions. The implementation of new regulations or the modification of existing regulations affecting the oil and natural gas industry could reduce demand for crude oil and natural gas and increase our costs, any of which may have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, in order to conduct oil and natural gas operations, we require licenses from various governmental authorities. We cannot assure you that we will be able to obtain all of the licenses and permits that may be required to conduct operations that we may desire to undertake.

There is uncertainty regarding claims of title and rights of the aboriginal people to properties in certain portions of western Canada, and such a claim, if made in respect of our property or assets, could adversely affect our business, financial condition, results of operations and prospects.

Aboriginal peoples have claimed aboriginal title and rights to a substantial portion of western Canada. We are not aware that any claims have been made in respect of its property and assets. However, if a claim arose and was successful it would have an adverse effect on our business, financial condition, results of operations and prospects.

We are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities, which could adversely affect our business, financial condition, results of operations and prospects.

All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation under a variety of federal, provincial, state and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with legislation can require significant expenditures, and a breach of applicable environmental legislation may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy any discharge. Environmental laws may result in a curtailment of production or a material increase in the costs of production, development or exploration activities, or otherwise adversely affect our business, financial condition, results of operations and prospects.

16


As a public company, our compliance costs and risks have increased in recent years.

Legal, accounting and other expenses associated with public company reporting requirements have increased significantly in the past few years. We anticipate that general and administrative costs associated with regulatory compliance will continue to increase with on-going compliance requirements under the Sarbanes-Oxley Act of 2002, as well as any new rules implemented by the SEC, Canadian Securities Administrators, the Toronto Stock Exchange and the Over-The-Counter Market (“OTC MKT”) in the future. These rules and regulations have significantly increased our legal and financial compliance costs and made some activities more time-consuming and costly. We cannot assure you that we will continue to effectively meet all of the requirements of these regulations, including Section 404 of the Sarbanes-Oxley Act and National Instrument 52-109 of the Canadian Securities Administrators. Any failure to effectively implement internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations, or result in our principal executive officer and principal financial officer being required to give a qualified assessment of our internal control over financial reporting. Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common shares and our ability to raise capital. These rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

Risks Related to Our Being a Foreign Private Issuer

As a foreign private issuer, our shareholders may receive less complete and timely data.

We are a “foreign private issuer” as defined in Rule 3b-4 under the United States Securities Exchange Act of 1934. Our equity securities are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act, pursuant to Rule 3a12-3 of the Exchange Act. Therefore, we are not required to file a Schedule 14A proxy statement in relation to our annual meetings of shareholders. The submission of proxy and annual meeting of shareholder information on Form 6-K may result in shareholders having less complete and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial ownership and purchases and sales of common shares by insiders and restrictions on insider trading in our securities may result in shareholders having less data and there being fewer restrictions on insiders’ activities in our securities.

It may be difficult to enforce judgments or bring actions outside the United States against us and certain of our directors and officers.

It may be difficult to bring and enforce suits against us. We are incorporated in British Columbia, Canada. Many of our directors and officers are not residents of the United States and some of our assets are located outside of the United States. As a result, it may be difficult for U.S. holders of our common shares to effect service of process on these persons within the United States or to enforce judgments obtained in the U.S. based on the civil liability provisions of the U.S. federal securities laws against us or our officers and directors. In addition, a shareholder should not assume that the courts of Canada (i) would enforce judgments of U.S. courts obtained in actions against us or our officers or directors predicated upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States, or (ii) would enforce, in original actions, liabilities against us or our officers or directors predicated upon the U.S. federal securities laws or other laws of the United States.

Risks related to investing in our common shares

We have not paid any dividends on our common shares. Consequently, your only opportunity currently to achieve a return on your investment will be if the market price of our common shares appreciates above the price that you pay for our common shares.

17


We have not declared or paid any dividends on our common shares since our incorporation. Any decision to pay dividends on our common shares will be made by our board of directors on the basis of our earnings, financial requirements and other conditions existing at such future time. Consequently, your only opportunity to achieve a return on your investment in our securities will be if the market price of our common shares appreciates and you are able to sell your common shares at a profit.

Our common share price has been volatile and your investment in our common shares could suffer a decline in value.

Our common shares are traded on the Toronto Stock Exchange and the OTCQB. The market price of our common shares may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include price fluctuations of precious metals, government regulations, disputes regarding mining claims, broad stock market fluctuations and economic conditions in the United States.

Dilution through officer, director, employee, consultant or agent options could adversely affect our shareholders.

Because our success is highly dependent upon our officers, directors, employees, consultants and agents, we have granted to some or all of our key officers, directors, employees, consultants and agents options to purchase common shares as non-cash incentives. To the extent that we grant significant numbers of options and those options are exercised, the interests of our other shareholders may be diluted.

The issuance of additional common shares may negatively affect the trading price of our common shares.

We have issued equity securities in the past and may continue to issue equity securities to finance our activities in the future, including to finance future acquisitions, or as consideration for acquisitions of businesses or assets. In addition, outstanding options and warrants to purchase our common shares may be exercised, resulting in the issuance of additional common shares. The issuance by us of additional common shares would result in dilution to our shareholders, and even the perception that such an issuance may occur could have a negative effect on the trading price of our common shares.

ITEM 4. INFORMATION ON THE COMPANY

A.

History and Development of the Company

Introduction

Our executive office is located at Suite 598, 999 Canada Place, Vancouver, British Columbia, Canada V6C 3E1; telephone: (604) 638-5050 and facsimile: (604) 638-5051. The contact person is: Mr. Robert L. Hodgkinson, Co-Chairman and Chief Executive Officer (email: rhodgkinson@dxienergy.com ) or Mr. David Matheson, Chief Financial Officer (email: dmatheson@dxienergy.com ).

Our common shares are traded on the Toronto Stock Exchange under the symbol “DXI” in Canada and the OTCQB Marketplace (“OTCQB”) under the symbol “DXIEF” in the U.S.

Our authorized capital consists of three classes of shares: an unlimited number of common voting shares; an unlimited number of preferred shares designated as First Preferred Shares, issuable in series; and an unlimited number of preferred shares designated as Second Preferred Shares, issuable in series. There are no indentures or agreements limiting the payment of dividends and there are no conversion rights, special liquidation rights, pre-emptive rights or subscription rights.

The First Preferred Shares have priority over the Common Shares and the Second Preferred Shares with respect to the payment of dividends and in the distribution of assets in the event of a winding up of DXI Energy. The Second Preferred Shares have priority over the Common Shares with respect to dividends and surplus assets in the event of a winding up of DXI Energy.

As of December 31, 2016, there were 44,808,286 common shares issued and outstanding. As of December 31, 2016, there were no First Preferred Shares and no Second Preferred Shares issued and outstanding.

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Incorporation and Name Changes

DXI Energy Inc. (formerly Dejour Energy Inc.) is incorporated under the laws of British Columbia, Canada. On June 29, 2015, the Company’s shareholders approved the consolidation of its issued and outstanding common shares on the basis of one (1) post-consolidation common share for every five (5) pre-consolidation common shares. On October 27, 2015, the Company changed its name from Dejour Energy Inc. to DXI Energy Inc. and effected a five-to-one share consolidation of its common shares. The Company began trading on a post-consolidation basis on October 30, 2015.

Financings

We have financed our operations through funds from loans, public/private placements of common shares, common shares issued for property, common shares issued in debt settlements, and shares issued upon exercise of stock options and share purchase warrants. The following table summarizes our financings for the past three fiscal years.

Fiscal Year Nature of Share Issuance   Number of Shares Gross Proceeds (Cdn$)
2016 Private Placement (1)   8,298,333 995,800
2015 Exercise of Options   29,898 23,000
2014 Private Placement (2)   1,400,000 770,000
  Acquisition of property (3)   1,920,000 1,939,000
  Equity Offering (4)   1,200,000 1,640,000
  Exercise of Options and Warrants   2,177,153 2,232,000

(1)

In June and July 2016, the Company completed a dual tranche private placement and 8,298,333 common shares were issued at a price of $0.12 per share for total gross proceeds of $995,800. The Company paid finders’ fees of $18,000 and other costs of $29,000 related to this offering. Directors and Officers of the Company purchased 3,600,000 common shares of this offering.

   
(2)

In January 2014, we completed a private placement of 1,400,000 common shares at $0.55 per share. Gross proceeds raised were $770,000. In connection with this private placement, the Company paid finders’ fees of $27,000 and other related costs of $58,000. Directors and Officers of the Company purchased 180,000 common shares of this offering.

   
(3)

In July 2014, we closed the acquisition of an additional 24% working interest in the Drake/Woodrush oilfield in Northeastern B.C. to increase our working interest to 99%. As consideration for the purchase, the Company issued 1,920,000 common shares at a price of $1.01 per share for $1,939,000. In connection with this acquisition, the Company paid other related costs of $49,000. A company controlled by the CEO of the Company sold its 5% working interest in the Drake/Woodrush property for 400,000 common shares.

   
(4)

In August 2014, we completed an equity offering of 1,200,000 units at US$1.25 per unit. Each unit consists of one common share and one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share of the Company at US$1.75 per common share until December 31, 2015. Gross proceeds raised were $1,640,000 (US$1,500,000). In connection with this private placement, the Company paid other related costs of $64,000.

Past Capital Expenditures

Fiscal Year Cash flows used for equipment and resource properties
2016 Cdn$530,000 (1)
2015 Cdn$5,738,000 (2)
2014 Cdn$3,834,000 (3)

(1)

$3,000 of these funds was spent on the purchase of corporate and other assets; and $527,000 was spent on our resource properties. (For a breakdown on the resource property expenditures, see Notes 5 and 6 to our audited consolidated financial statements for the fiscal year ended December 31, 2016, filed with this annual report on Form 20-F.)

   
(2)

$1,000 of these funds was spent on the purchase of corporate and other assets; and $5,737,000 was spent on our resource properties. (For a breakdown on the resource property expenditures, see Notes 5 and 6 to our audited consolidated financial statements for the fiscal year ended December 31, 2015, filed with this annual report on Form 20-F.)

   
(3)

$13,000 of these funds was spent on the purchase of corporate and other assets; and $3,821,000 was spent on our resource properties. (For a breakdown on the resource property expenditures, see Notes 5 and 6 to our audited consolidated financial statements for the fiscal year ended December 31, 2014, filed with this annual report on Form 20-F.)

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Capital Expenditures

DXI Energy is committed to future growth through its strategy to implement a full-cycle exploration and development program, augmented by strategic acquisitions with exploitation upside.

During the year ended December 31, 2016, the Company incurred $0.3 million for the workover related to one water disposal well at its Woodrush properties, north of Fort St. John, British Columbia. In the U.S., the Company paid $0.2 million for the ongoing Kokopelli development program in Colorado.

During the year ended December 31, 2015, the Company incurred $1.0 million to complete and tie into production the 2 infill wells that were drilled in 2015 at its Woodrush properties, north of Fort St. John, British Columbia. In the U.S., the Company paid $4.5 million to drill, case and complete its 25% working interest share of eight natural gas wells at Kokopelli in Colorado and complete a salt water disposal facility.

During the year ended December 31, 2014, the Company acquired certain natural gas producing assets and related processing facilities adjacent to its existing Woodrush oilfield at Ft. St. John, British Columbia, resulting in the acquisition of an additional 9,600 net acres (44% developed). Additionally, the Company acquired an additional 24% working interest in its existing Woodrush oilfield to increase the working interest to 99%.

Additions to property and equipment and exploration and evaluation assets:

    Year ended December 31, 2016     Year ended December 31, 2015  
(CA$ thousands) $       % of total   $       % of total     % change  
                               
Land acquisition and retention   40     7.5%     76     1.3%     -47%  
Drilling and completion   331     62.5%     3,825     66.7%     -91%  
Facility and pipelines   -     0.0%     1,545     26.9%     -100%  
Capitalized general and administrative   159     30.0%     292     5.1%     -46%  
Total   530     100.0%     5,738     100.0%     -91%  

Daily Production

    Three months ended December 31,     Year ended December 31,  
    2016     2015     2016     2015  
By Product                        
   Oil and natural gas liquids (bbls/d)   106     515     209     369  
   Natural gas (mcf/d)   1,327     2,773     1,666     1,764  
Total (boe/d)   327     977     487     663  

The decrease in oil production for the three and twelve months ended December 31, 2016 reflects the natural decline in oil production and increase in water cut associated with Halfway formation waterfloods of the Woodrush type in northeastern British Columbia.

The decrease in natural gas production for the three and twelve months ended December 31, 2016 reflects the natural decline in natural gas production at Kokopelli in Colorado. In Canada, production restriction imposed by Spectra, the transporter of the Company’s natural gas in northeastern British Columbia, further limited natural gas deliveries in Q4 2016.

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B.

Business Overview

General

The Company is in the business of acquiring, exploring and developing energy projects with a focus on oil and gas exploration in Canada and the United States.

The Company holds approximately 40,128 net acres of oil and gas leases in the following regions:

The Peace River Arch of northeastern British Columbia and northwestern Alberta, Canada
The Piceance, Paradox and Uinta Basins in the US Rocky Mountains

Summary

Over the past few years, the Company has continued to develop its Halfway oilfield in northeastern British Columbia, Canada while evaluating its exploration prospects in the Piceance Basin with the intent of developing drillable prospects of merit at the earliest possible opportunity. This process involved several distinct steps:

Classification and prioritization of acreage based on economic promise, technical robustness, infrastructural and logistic advantage and commercial maturity
•   Evaluation and development planning for top tier acreage positions
•   Developing partnerships within financial and industry circles to speed the exploitation process, and
•   Aggressively bringing production on line where feasible

As a result of this process, the Company’s assets in Canada and the Piceance basin have moved to a higher weighting of lower risk development projects as opposed to higher risk exploration projects.

Our business objective is to grow our oil and gas production and generate sufficient cash flow to continue to expand company operations and enhance shareholder value.

Specialized Skill and Knowledge: Exploration for and development of petroleum and natural gas resources requires specialized skills and knowledge including in the areas of petroleum engineering, geophysics, geology and title. The Company and its subsidiaries have obtained personnel with the required specialized skills and knowledge to carry out their respective operations. While the current labour market in the industry is highly competitive, the Company expects to be able to attract and maintain appropriately qualified employees for fiscal 2017.

Cycles: All of the Company's operations in Canada are affected by seasonal operating conditions. Dejour Energy (Alberta) Ltd. holds properties in northwestern Alberta and northeastern British Columbia which are accessible to heavy equipment in winter only when the ground is frozen, typically between December to early April. For this reason drilling and pipeline construction ceases over the remainder of the year, limiting growth to winter only. Production operations continue year round in these areas once production is established. The prices that the Company will receive for oil and gas production in the future are weighted to world benchmark prices and may be adversely affected by mild weather conditions. Despite robust demand for petroleum products, relatively high production and inventory levels provided downward pressure on oil prices throughout most of 2016. However, recent agreements to curb production within the Organization of the Petroleum Exporting Countries (OPEC) and additional pledges by some key non-OPEC producers put upward pressure on prices at the end of 2016. In 2016, natural gas prices reached its 17-year low since 1999. Warmer-than-normal temperatures for most of 2016 and changing demand were the main drivers of natural gas prices in 2016.

Commodity price cycles are also affected by world industrial supply and demand, domestic and international commodity transportation systems, and political factors affecting construction of pipelines and exports of controversial commodities like liquid natural gas. See "Risk Factors – Risks related to operating an exploration, development and production company".

Environmental Protection: The Company's operations are subject to environmental regulations (including regular environmental impact assessments and permitting) in the jurisdictions in which it operates. Such regulations cover a wide variety of matters, including, without limitation, emission of greenhouse gases, prevention of waste, pollution and protection of the environment, labour regulations and worker safety. Under such regulations there are preventative obligations, clean-up costs and liabilities for toxic or hazardous substances which may exist on or under any of its properties or which may be produced as a result of its operations. Environmental legislation and legislation relating to exploration and production of oil and natural gas will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their directors and employees. Such stricter standards could impact the Company's costs and have an adverse effect on results of operations. The Company expects to incur abandonment and site reclamation costs as existing oil and gas properties are abandoned and reclaimed; however, the Company does not anticipate making material expenditures beyond normal compliance with environmental regulations in 2017 and future years.

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Employees: The Company had the equivalent of approximately 10 full-time employees and consultants during 2016.

Social or Environmental Policies: The health and safety of employees, contractors and the public, as well as the protection of the environment, is of utmost importance to the Company. The Company endeavors to conduct its operations in a manner that will minimize adverse effects of emergency situations by:

•   complying with government regulations and standards;
•   following industry codes, practices and guidelines;
•   ensuring prompt, effective response and repair to emergency situations and environmental incidents; and
educating employees and contractors of the importance of compliance with corporate safety and environmental rules and procedures.

The Company believes that all Company personnel have a vital role in achieving excellence in environmental, health and safety performance. This is best achieved through careful planning and the support and active participation of everyone involved.

Competitive Conditions: The Company operates in geographical areas where there is strong competition by other companies for reserve acquisitions, exploration leases, licences and concessions and skilled industry personnel. The Company’s competitors include major integrated oil and natural gas companies and numerous other independent oil and natural gas companies and individual producers and operators, many of whom have greater financial and personnel resources than the Company. The Company’s ability to acquire additional property rights, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers is dependent upon developing and maintaining close working relationships with its current industry partners and joint operators, and its ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment.

Three Year History

2016

During the year ended December 31, 2016, the Company:

1.

Retired the Company’s bank loan and related credit facility with a Canadian bank;

   
2.

Completed a $995,800 private placement;

   
3.

Decreased G&A expenses for the year ended December 31, 2016 by $675,000 (30%) to $1.6 million in response to a 24% decrease in average realized prices per BOE from 2015 to 2016; and

   
4.

Decreased the loss for the year ended December 31, 2016 to $5.5 million from $7.1 million for the comparative period ended December 31, 2015.

2015

During the year ended December 31, 2015, the Company:

1.

Successfully completed and tied into production two new wells at the Company’s Woodrush property, north of Fort St. John, British Columbia;

22



2.

Completed the drilling, casing and completion of eight natural gas wells in the Company’s Kokopelli development project in Colorado. Production from the eight natural gas wells was commenced in the 4th quarter of 2015. The Company has a 25% working interest in this project;

   
3.

Secured $6.5 million in bridge financing from a company controlled by a Director and Officer ($4.5 million) and from a company associated with the Director and Officer ($2.0 million). Extended the maturity date of $6.5 million bridge financing from December 31, 2015 to November 30, 2018;

   
4.

Increased oil and natural gas production by 48% to 663 BOE/d from 449 BOE/d for the comparative year ended December 31, 2014;

   
5.

Reduced operating and transportation expenses for oil operations from $27.65/bbl for the year ended December 31, 2014 to $13.39/bbl for the year ended December 31, 2015; and

   
6.

Reduced G&A expenses per BOE by 56% to $9.28 per BOE from $21.31 per BOE for the comparative year ended December 31, 2014.

2014

During the year ended December 31, 2014, the Company:

1.

Completed an equity financing of 1,400,000 units at $0.55 per common share in January 2014. Gross proceeds raised were $770,000;

   
2.

Completed the acquisition of certain natural gas producing assets and related processing facilities adjacent to the Company’s existing Woodrush oilfield at Ft. St. John, British Columbia, resulting in the acquisition of an additional 9,600 net acres (44% developed);

   
3.

Closed the sale of 65% of the Company’s working interest in the initial four wells drilled in 2013 at its Kokopelli project in Colorado, together with certain related production facilities, for $4,136,000 (US$3,876,000) cash and a 25% carried working interest in a US$16.0 million eight-well drilling and completion program commenced in 2014 and planned for completion in Q2 2015 to be funded 100% by the Purchaser of the assets;

   
4.

Retired the related loan facility of $3.5 million due to a Canadian institutional lender;

   
5.

Closed the acquisition of an additional 24% working interest in the Drake/Woodrush oilfield in Northeastern B.C. to increase its working interest to 99%. As consideration for the purchase, the Company issued 9,600,000 common shares at a price of $0.202 per share for total share consideration of $1,939,000;

   
6.

Completed an equity financing of 1,200,000 units at US$1.25 per unit in August 2014. Each unit consists of one common share and one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share of the Company at US$0.35 per common share until December 31, 2015. Gross proceeds raised were $1,640,000 (US$1,500,000); and

   
7.

Successfully drilled two new wells at the Company’s Woodrush property, north of Fort St. John, British Columbia. The initial well is a new natural gas discovery in the Gething geological formation while the second well is a development well drilled into the extreme south end of the Company’s Woodrush oil pool.

United States vs. Foreign Sales/Assets

Net Revenue for fiscal year ended: Canada United States
(Cdn$ in 000) $ $
12/31/2014 5,952 1,609
12/31/2015 6,606 490
12/31/2016 3,190 883

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Asset Location as of: Canada United States
(Cdn$ in 000) $ $
12/31/2014 11,133 12,141
12/31/2015 7,965 19,721
12/31/2016 5,639 15,621

Commodity Price Environment

Generally, the demand for, and the price of, natural gas increases during the colder winter months and decreases during the warmer summer months. Pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can lessen seasonal demand fluctuations. Crude oil and the demand for heating oil are also impacted by seasonal factors, with generally higher prices in the winter. Seasonal anomalies, such as mild winters, sometimes lessen these fluctuations.

Our results of operations and financial condition are significantly affected by oil and natural gas commodity prices, which can fluctuate dramatically. The market for oil and natural gas is beyond our control and prices are difficult to predict. (See also ‘Trend Information’ under item 5 ‘Operating and Financial Review and Prospects’)

Forward Contracts

The Company is not bound by an agreement (including any transportation agreement) directly or through an aggregator, under which it may be precluded from fully realizing, or may be protected from the full effect of, future market prices for oil and gas. The Company had no commodity contracts in place at December 31, 2016.

Additional Information Concerning Abandonment and Reclamation Costs

For the Company’s Canadian and US oil and gas interests, the well abandonment costs for all wells with reserves have been included at the property level. The Company estimated the total undiscounted amount of the cash flows required to settle the decommissioning liabilities as at December 31, 2016 to be approximately $3,776,000. These obligations are expected to be settled over the next 15 years with the majority of costs incurred between 2017 and 2031.

Government Regulations

Our oil and natural gas exploration, production and related operations, when developed, are subject to extensive laws and regulations promulgated by federal, state, tribal and local authorities and agencies. These laws and regulations often require permits for drilling operations, drilling bonds and reports concerning operations, and impose other requirements relating to the exploration for and production of oil and natural gas. Many of the laws and regulations govern the location of wells, the method of drilling and casing wells, the plugging and abandoning of wells, the restoration of properties upon which wells are drilled, temporary storage tank operations, air emissions from flaring, compression, the construction and use of access roads, sour gas management and the disposal of fluids used in connection with operations.

Our operations are subject to environmental regulations (including regular environmental impact assessments and permitting) in the jurisdictions in which it operates. Such regulations cover a wide variety of matters, including, without limitation, emission of greenhouse gases, prevention of waste, pollution and protection of the environment, labour regulations and worker safety. Under such regulations there are preventative obligations, clean-up costs and liabilities for toxic or hazardous substances which may exist on or under any of its properties or which may be produced as a result of its operations. Environmental legislation and legislation relating to exploration and production of oil and natural gas will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their directors and employees. Such stricter standards could impact our costs and have an adverse effect on results of operations.

The Comprehensive Environmental, Response, Compensation, and Liability Act, or CERCLA, and comparable state statutes impose strict, joint and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at such sites. It is not uncommon for the government to file claims requiring cleanup actions, demands for reimbursement for government-incurred cleanup costs, or natural resource damages, or for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes govern the disposal of "solid waste" and "hazardous waste" and authorize the imposition of substantial fines and penalties for noncompliance, as well as requirements for corrective actions. Although CERCLA currently excludes petroleum from its definition of "hazardous substance," state laws affecting our operations may impose clean-up liability relating to petroleum and petroleum-related products. In addition, although RCRA classifies certain oil field wastes as "non-hazardous," such exploration and production wastes could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements. CERCLA, RCRA and comparable state statutes can impose liability for clean-up of sites and disposal of substances found on drilling and production sites long after operations on such sites have been completed. Other statutes relating to the storage and handling of pollutants include the Oil Pollution Act of 1990, or OPA, which requires certain owners and operators of facilities that store or otherwise handle oil to prepare and implement spill response plans relating to the potential discharge of oil into surface waters. The OPA, contains numerous requirements relating to prevention of, reporting of, and response to oil spills into waters of the United States. State laws mandate oil cleanup programs with respect to contaminated soil. A failure to comply with OPA's requirements or inadequate cooperation during a spill response action may subject a responsible party to civil or criminal enforcement actions.

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The Endangered Species Act, or ESA, seeks to ensure that activities do not jeopardize endangered or threatened animal, fish and plant species, or destroy or modify the critical habitat of such species. Under the ESA, exploration and production operations, as well as actions by federal agencies, may not significantly impair or jeopardize the species or its habitat. The ESA has been used to prevent or delay drilling activities and provides for criminal penalties for willful violations of its provisions. Other statutes that provide protection to animal and plant species and that may apply to our operations include, without limitation, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act. Although we believe that our operations are in substantial compliance with these statutes, any change in these statutes or any reclassification of a species as threatened or endangered or re-determination of the extent of "critical habit" could subject us to significant expenses to modify our operations or could force us to discontinue some operations altogether.

The National Environmental Policy Act, or NEPA, requires a thorough review of the environmental impacts of "major federal actions" and a determination of whether proposed actions on federal and certain Indian lands would result in "significant impact." For purposes of NEPA, "major federal action" can be something as basic as issuance of a required permit. For oil and gas operations on federal and certain Indian lands or requiring federal permits, NEPA review can increase the time for obtaining approval and impose additional regulatory burdens on the natural gas and oil industry, thereby increasing our costs of doing business and our profitability.

The Clean Water Act, or CWA, and comparable state statutes, impose restrictions and controls on the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the Environmental Protection Agency (EPA) or an analogous state agency. The CWA regulates storm water run-off from oil and natural gas facilities and requires a storm water discharge permit for certain activities. Such a permit requires the regulated facility to monitor and sample storm water run-off from its operations. The CWA and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlands and other waters of the United States unless authorized by an appropriately issued permit. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges for oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.

Hydraulic fracturing is an important and common practice that is used to stimulate production of oil and/or natural gas from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. We routinely use hydraulic fracturing as part of our operations. The process is typically regulated by state oil and natural gas commissions but the EPA has asserted federal regulatory authority pursuant to the Safe Water Drinking Act, or SDWA, over certain hydraulic fracturing activities involving the use of diesel. In addition, in May, 2014, the EPA issued an Advance Notice of Proposed Rulemaking to collect data on chemicals used in hydraulic fracturing operations under Section 8 of the Toxic Substance Control Act. To date, no other action has been taken. At the state level, several states have adopted or are considering legal requirements that could impose more stringent permitting disclosure, and well construction requirements on hydraulic fracturing activities.

25


We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. Nonetheless, if new or more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate (primarily the State of Colorado at present), we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from drilling wells.

The Clean Air Act, as amended, restricts the emission of air pollutants from many sources, including oil and gas operations. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance. In addition, the EPA has promulgated more stringent regulations governing emissions of toxic air pollutants from sources in the oil and gas industry, and these regulations may increase the costs of compliance for some facilities.

Significant studies and research have been devoted to climate change and global warming, and climate change has developed into a major political issue in the United States and globally. Certain research suggests that greenhouse gas emissions contribute to climate change and pose a threat to the environment. Recent scientific research and political debate has focused in part on carbon dioxide and methane incidental to oil and natural gas exploration and production. Many state governments have enacted legislation directed at controlling greenhouse gas emissions, and future state and federal legislation and regulation could impose additional restrictions or requirements in connection with our operations and favor use of alternative energy sources, which could increase operating costs and demand for oil products. As such, our business could be materially adversely affected by domestic and international legislation targeted at controlling climate change.

We expect to incur abandonment and site reclamation costs as existing oil and gas properties are abandoned and reclaimed; however, we do not anticipate making material expenditures beyond normal compliance with environmental regulations in 2017 and future years.

The health and safety of employees, contractors and the public, as well as the protection of the environment, is of utmost importance to us. We endeavour to conduct our operations in a manner that will minimize adverse effects of emergency situations by:

  •   complying with government regulations and standards;
  •   following industry codes, practices and guidelines;
  •   ensuring prompt, effective response and repair to emergency situations and environmental incidents; and
educating employees and contractors of the importance of compliance with corporate safety and environmental rules and procedures.

We believe that all of our personnel have a vital role in achieving excellence in environmental, health and safety performance. This is best achieved through careful planning and the support and active participation of everyone involved.

Competition

We operate in geographical areas where there is strong competition by other companies for reserve acquisitions, exploration leases, licences and concessions and skilled industry personnel. Our competitors include major integrated oil and natural gas companies and numerous other independent oil and natural gas companies and individual producers and operators, many of whom have greater financial and personnel resources than us. Our ability to acquire additional property rights, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers is dependent upon developing and maintaining close working relationships with its current industry partners and joint operators, and its ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment.

We compete with many companies possessing greater financial resources and technical facilities for the acquisition of oil and gas properties, exploration and production equipment, as well as for the recruitment and retention of qualified employees.

26


Seasonality

The Company’s core operations are in Canada and they are affected by seasonal operating conditions. Dejour Energy (Alberta) Ltd., its wholly owned subsidiary, holds properties in northwestern Alberta and northeastern British Columbia which are accessible to heavy equipment in winter only when the ground is frozen, typically between December to early April. For this reason drilling and pipeline construction ceases over the remainder of the year, limiting growth to winter only. Production operations continue year round in these areas once production is established. The prices that we will receive for oil and gas production in the future are weighted to world benchmark prices and may be adversely affected by mild weather conditions.

C.

Organizational Structure

We have three wholly-owned subsidiaries:

Dejour Energy (USA) Corp. (“Dejour USA”), a Nevada corporation, holds DXI Energy's United States oil and gas interests;
Dejour Energy (Alberta) Ltd. (“DEAL”), an Alberta corporation, holds DXI Energy’s Canadian oil and gas interests in northwestern Alberta and northeastern British Columbia; and
  •   0855524 B.C. Ltd. (“0855524 ”) , a British Columbia Corporation, which is currently inactive.

D.

Property, Plant and Equipment

Our executive offices are located in rented premises of approximately 2,519 sq. ft. at Suite 598, 999 Canada Place, Vancouver, British Columbia, V6C 3E1. We began occupying these facilities on July 1, 2009.

Resource Properties

Our current focus is on oil and gas properties located in the United States and Canada and currently have oil and gas leases in the following regions:

  The Piceance, Paradox and Uinta Basins in the US Rocky Mountains.
  The Peace River Arch of northeastern British Columbia and northwestern Alberta, Canada.

US Oil and Gas Interests

Kokopelli, Piceance Basin

During 2012, the Company drilled an initial well into the Williams Fork natural gas formation at Kokopelli to hold its 2,200 gross acres (550 net acres) of leasehold interests. The Company also entered into a financial contract with an industry Drilling Fund to complete and tie-in the initial well and drill, complete, and tie-in an additional 3 wells. The Drilling Fund’s investment of US$7,000,000 (an initial investment of US$6,500,000 supplemented with an additional US$500,000 for a total of US$7,000,000) represents about 67% of the total program cost of US$10,400,000. The primary producing geological horizons are the Williams Fork and Niobrara/Mancos zones at depths ranging from 9,000 to 10,500 ft. respectively.

During 2013, the Company drilled three additional wells and completed all four wells in the Williams Fork formation. Production commenced in September, 2013.

On June 30, 2014, the Company sold 65% of its 71.43% working interest in the 4 wells, together with 65% of its remaining 1,542 acres at Kokopelli for US$4,000,000 cash and a commitment by the Purchaser to spend US$16,000,000 at Kokopelli to drill, complete, and equip seven wells to the base of the Williams Fork formation and one well to the base of the Mancos/Niobrara formation. Pursuant to the terms of the Purchase and Sale Agreement, the Company was “carried” for 25% through the entire expenditure of US$16,000,000.

27


During 2015, the Company completed the drilling, casing and completion of eight natural gas wells in the Kokopelli development project in Colorado. Production from the eight natural gas wells commenced in the 4 th quarter of 2015. The Company has a 25% working interest in this project.

The Company and its partners intend to continue to develop the Kokopelli Project when natural gas and natural gas liquids prices paid to producers return to acceptable levels.

Canadian Oil and Gas Interests

Drake/Woodrush, Fort St. John, British Columbia

The Company’s Drake/Woodrush oilfield is located about 110 km. north of Fort St. John, British Columbia, Canada. In 2016, the Company continued its oil and gas production operations in Northeastern, British Columbia.

Reserve Data

The standards of the SEC require that proved reserves be estimated using existing economic conditions (constant pricing). Based on this methodology, the Company’s results have been calculated utilizing the 12-month average price for each of the years presented.

The Company reports in Canadian currency and therefore the Reserves Data set forth in the tables below has been converted to Canadian dollars at the prevailing conversion rate at December 31, 2016. The conversion rate used per Bank of Canada is 1.3427.

In 2016, GLJ Petroleum Consultants (“GLJ”), independent petroleum engineering consultants based in Calgary, Alberta was retained by the Company to evaluate the Canadian properties of the Company. Their report, titled “Third Party Report on Reserves, Dejour Energy (Alberta) Ltd.”, is dated March 9, 2017 and has an effective date of December 31, 2016.

Gustavson Associates (“Gustavson”), an independent petroleum engineering consultants based in Denver, Colorado were retained by the Company to evaluate the US properties of the Company. Their report, titled “Reserve Estimate and Financial Forecast as to Dejour’s Interests in the Kokopelli Field Area, Garfield County, Colorado” is dated March 31, 2017 and has an effective date of January 1, 2017.

The reserves data set forth below (the " Reserves Data "), derived from GLJ and Gustavson’s reports, summarizes our oil, liquids and natural gas reserves.

The GLJ and Gustavson reports are based on certain factual data supplied by the Company, and GLJ and Gustavson's opinion of reasonable practice in the industry. The extent and character of ownership and all factual data pertaining to the Company’s petroleum properties and contracts (except for certain information residing in the public domain) were supplied by the Company to GLJ and Gustavson and accepted without any further investigation. GLJ and Gustavson accepted this data as presented and neither title searches nor field inspections were conducted. All statements relating to the activities of the Company for the year ended December 31, 2016 include a full year of operating data on the properties of the Company.

The reserve estimates of crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas liquids and natural gas reserves may be greater than or less than the estimates provided herein.

Controls Over Reserve Report Preparation

Our reserve estimates reports as of December 31, 2016 are prepared by our independent qualified reserve evaluators, GLJ and Gustavson. To ensure accuracy and completeness of the data prior to disclosure of reserve estimates to the public, our reserves committee does the following: (1) reviews our procedures for providing information to the independent qualified reserve evaluators, (2) meets with the independent qualified reserves evaluators to determine whether any restrictions affected the ability of the qualified reserves evaluators to report without reservation, (3) reviews the reserves data with management and the independent qualified reserves evaluator. If the reserve committee is satisfied with results of its evaluation it will approve the content of our reserve disclosure. If any concerns arise in the reserve committee’s evaluation, the reserve committee will work with our management and the independent qualified reserves evaluators to resolve the issues before disclosure of reserves is made public.

28


As of December 31, 2016, the Company’s reserve committee was composed of: Ross Gorrell, Ronnie Bozzer and James Dai. Please see “Item 6. Directors, Senior Management and Employees, A. Directors and Senior Management” for biographical information on the members of the reserve committee.

Summary of Oil and Gas Reserves as of Fiscal Year-End Based on Average Fiscal Year Prices

  Net Reserves
Proved Reserves Category Oil
(Mbbl)
Condensate
(MBO)
Natural Gas
(Mmcf)
Natural Gas
Liquids
(Mbbl)
Developed        
   Canada 46 - 501 1
   United States - 7 917 40
Undeveloped        
   Canada - - - -
   United States - - - -
TOTAL PROVED 46 7 1,418 41

Given economic commodity prices, the Company plans to fully develop its reserves over the next five years.

Canada – Decrease in Total Proved Oil Reserves of 82 Mbbls and Increase in Total Proved Gas Reserves of 74 MMcf:

During the year ended December 31, 2016, the reduction in light and medium oil reserves was primarily a result of a lower 12-month average trailing oil and natural gas prices. The increase in natural gas reserves was due to the slower-than-expected decline in reserves for one of the natural gas wells at Woodrush.

United States – Decrease in Total Proved Natural Gas Reserves of 565 MMcf:

During the year ended December 31, 2016, the reduction in natural gas reserves was mainly attributed to the higher than normal decline in production and a result of a lower 12-month average trailing oil and natural gas prices.

Total Proved Reserves

The table below compares our estimated proved reserves and associated present value (discounted at an annual rate of 10%) of the estimated future revenue before income tax.

  December 31, 2016
Canada (Proved Developed and
Undeveloped Reserves)
Natural Gas Oil Natural Gas
Liquids
Total PV-10 (2)
  (Mmcf) (Mbbl) (Mbbl) (Mmcfe) (Cdn$ thousands)
2016 12-month average prices (SEC) (1) 501              46 1              783 ($71)

  December 31, 2016
United States (Proved Developed and
Undeveloped Reserves)
Natural Gas Condensate Natural Gas
Liquids
Total PV-10 (2)
  (Mmcf) (Mbbl) (Mbbl) (Mmcfe) (Cdn$ thousands)
2016 12-month average prices (SEC) (1) 917 7 40          1,199 $1,104

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  December 31, 2016
Total (Proved Developed and
Undeveloped Reserves)
Natural Gas Oil Condensate Natural
Gas
Liquids
Total PV-10 (2)
  (Mmcf) (Mbbl) (Mbbl) (Mbbl) (Mmcfe) (Cdn$ thousands)
2016 12-month average prices (SEC) (1) 1,418 46 7 41 1,982 $1,033

Reconciliation to Standardized Measure

As at December 31, 2016                  
(CA$ thousands)   Canada     USA     Total  
                   
Present value of estimated future net cash flows before income taxes $  (71 ) $  1,104   $  1,033  
Income taxes - discounted   -     (371 )   (371 )
                   
Standardized measure of discounted future net cash flow $  (71 ) $  733   $  662  

Notes:

(1)

The 12-month average prices (SEC) are calculated based on an average of market prices posted at or near the first of each month from January to December 2016, adjusted for pipeline transportation costs from the wellhead to the interstate pipeline prevailing at December 31, 2016. The 12-month average prices (SEC) used for Canadian properties were Cdn$44.62 per barrel of oil and Cdn$1.47 per Mcf of natural gas. The 12-month average prices (SEC) used for US properties were US$32.50 per barrel of condensate, US$2.49 per Mcf of natural gas, and US$27.89 per barrel of NGLs.

   
(2)

Present value of estimated future net cash flows before income taxes (PV-10) is considered a non-GAAP financial measure as defined by the SEC. We believe that our PV-10 presentation is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our proved reserves before taking into account the related deferred income taxes, as such taxes may differ among various companies because of differences in the amounts and timing of deductible basis, net operating loss carryforwards and other factors. We believe investors and creditors use our PV-10, before tax, as a basis for comparison of the relative size and value of our proved reserves to the reserve estimates of other companies. PV-10 is not a measure of financial or operating performance under GAAP and is not intended to represent the current market value of our estimated oil and natural gas reserves. PV-10, before tax, should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.

   
(3)

US dollars are converted into Canadian dollars using the closing exchange rate on December 31, 2016, which is US$1.00 = Cdn$1.3427.

Oil and Gas Production, Production Prices and Production Costs

The following is our total net oil and gas production for the fiscal years ended December 31, 2016, 2015 and 2014. Production came from our Canadian and United States properties.

  Production   
Fiscal Year Ended Oil and Natural Gas
Liquids
(bbls)
Natural Gas
(Mcf)
Total (BOE)
December 31, 2016 76,506 609,858                      178,147
December 31, 2015 134,772 644,022                      242,109
December 31, 2014 66,485 584,566                      163,911

The following table includes the average prices the Company received for its production for the fiscal years ended December 31, 2016, 2015 and 2014.

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  Average Sales Prices   
Fiscal Year Ended Oil and Natural Gas
Liquids
($/bbls)
Natural Gas
($/Mcf)
Total
($/BOE)
December 31, 2016 43.25 2.47 27.02
December 31, 2015 52.68 2.33 35.52
December 31, 2014 87.99 5.45 55.14

The following table includes the average production cost, not including ad valorem and severance taxes, per unit of production for the fiscal years ended December 31, 2016, 2015 and 2014.

  Average Production Costs   
Fiscal Year Ended Oil and Natural Gas
Liquids
($/bbls)
Natural Gas
($/Mcf)
Total
($/BOE)
December 31, 2016                                      25.80                            2.86                        20.86
December 31, 2015                                      23.64                            3.35                        22.09
December 31, 2014                                      42.42                            4.72                        34.03

Drilling and Other Exploratory and Development Activities

During the fiscal years ended December 31, 2016 and December 31, 2015, no wells were drilled in Canada and the United States.

During the fiscal year ended December 31, 2014, we drilled the following wells in Canada and the United States:

  Net Exploratory Wells Net Development Wells
Canada Productive Dry Productive Dry
Oil -   - 0.99                  -
Natural Gas -   - 0.99                  -
Total Wells -   - 1.98                  -

  Net Exploratory Wells                   Net Development Wells
U.S.A Productive Dry  Productive Dry
Natural Gas   - - 2.00                  -
Total Wells   - - 2.00                  -

Delivery Commitments

We have no current delivery commitments for either oil or natural gas.

Oil and Gas Properties and Wells

The following tables summarizes the number of producing and non-producing wells as at December 31, 2016:

  Producing Wells
Country Oil Natural Gas
                                                                                                                      Gross   Net Gross Net
Canada 3 2.97 5 4.42
USA - - 12 2.29
Total 3 2.97 17 6.71

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  Non-Producing Wells
Country Oil (1) Natural Gas (2)
                                                                                                                          Gross Net Gross Net
Canada 6 5.94 26 19.49
USA - - - -
Total 6 5.94 26 19.49

  (1)

Includes water source wells and injection wells

     
  (2)

Includes non-producing wells, shut-in wells and wells being temporarily suspended

The following tables summarizes the number of producing and non-producing wells as at December 31, 2015:

  Producing Wells
Country Oil Natural Gas
                                                                                                                        Gross Net Gross Net
Canada 3 2.97 5 4.42
USA - - 12 2.29
Total 3 2.97 17 6.71

  Non-Producing Wells
Country Oil (1) Natural Gas (2)
  Gross Net Gross Net
Canada 6 5.94 26 19.49
USA - - - -
Total 6 5.94 26 19.49

  (3)

Includes water source wells and injection wells

     
  (4)

Includes non-producing wells, shut-in wells and wells being temporarily suspended

The following tables summarizes the number of producing and non-producing wells as at December 31, 2014:

  Producing Wells
Country Oil Natural Gas
Gross Net Gross Net
Canada 3 2.97                    5 4.34
USA - -                    4 0.29
Total 3 2.97                    9 4.63

  Non-Producing Wells
Country Oil (1) Natural Gas (2)
                                                                                                                        Gross Net Gross Net
Canada 5 4.95 25 18.58
USA  - - - -
Total 5 4.95 25 18.58

  (1)

Includes water source wells and injection wells

     
  (2)

Includes non-producing wells, shut-in wells and wells being temporarily suspended

Interest in Oil and Gas Properties

The following table sets forth information for our interest in oil and gas properties as of December 31, 2016 relating to our leasehold acreage. Developed acres are acres spaced or assigned to productive wells including undrilled acreage held-byproduction under the terms of a lease. Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of gas or oil, regardless of whether such acreage contains proved reserves. Gross acres are the total number of acres in which a working interest is owned. Net acres are the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.

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As at December 31, 2016, the Company’s developed and undeveloped acres are as follows:

  Developed Acreage Undeveloped Acreage Total
  Gross Net Gross Net Gross Net
Canada 8,975 6,576 11,757 7,868    20,732  14,444
U.S.A 2,240 590 30,934 25,094    33,174  25,684
TOTAL 11,215 7,166 42,691 32,962    53,906  40,128

The Company’s net undeveloped acres as of December 31, 2016, together with expiries for the period from 2017 to 2019 and thereafter is as follows.

  Undeveloped Acreage
As of December 31, 2016 Net 2017 Expirations 2018 Expirations 2019 and thereafter
Expirations
Canada:        
Manning 1,423 - - 1,423
Woodrush/Hunter 6,445 4,161 694 1,590
Subtotal: 7,868 4,161 694 3,013
U.S.A:        
Ashley 480 - - 480
Book Cliffs 1,762 - - 1,762
Dinosaur 18,971 - - 18,971
North Rangely 1,280 1,280 - -
Pinyon Ridge 640 - - 640
Roan Creek 1,961 - - 1,961
Subtotal: 25,094 1,280 - 23,814
TOTAL: 32,962 5,441 694 26,827

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following is a discussion of our consolidated operating results and financial position, including all our wholly-owned subsidiaries. It should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2016 and related notes included therein under the heading "Item 18. Financial Statements" below.

The financial statements of the Company for the years ended December 31, 2016, 2015, and 2014 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

Certain forward-looking statements are discussed in this Item 5 with respect to our activities and future financial results. These are subject to risks and uncertainties that may cause projected results or events to differ materially from actual results or events. Readers should also read the "Cautionary Note Regarding Forward-Looking Statements" above and “Item 3. Key Information - Risk Factors.”

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CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in accordance with IFRS requires management to make estimates and judgments that affect reported assets, liabilities, revenues, expenses, gains, and losses. These estimates and judgments are subject to change based on experience and new information. The financial statement areas that require significant estimates and judgments are as follows:

Decommissioning liability

The Company recognizes decommissioning liabilities for its exploration and evaluation assets and property and equipment. Measurement of the decommissioning liabilities involves estimates and judgements as to the cost and timing of incurrence of future decommissioning programs. It also involves assessment of appropriate discount rates, rates of inflation applicable to future costs and the rate used to measure the accretion charge for each reporting period. Measurement of the liability also reflects current engineering methodologies as well as current and expected future environmental legislation and standards. Actual decommissioning costs will ultimately depend on future market prices for the decommissioning costs which will reflect the market conditions at the time the decommissioning costs are actually incurred. The final cost of the currently recognized decommissioning provisions may be higher or lower than currently provided for.

Exploration and evaluation expenditures

The application of the Company’s accounting policy for exploration and evaluation expenditures requires judgment in determining whether it is likely that future economic benefits will flow to the Company, which is based on assumptions about future events or circumstances. Estimates and assumptions made may change if new information becomes available. If, after the expenditure is capitalized, information becomes available suggesting that the recovery of the expenditure is unlikely, the amount capitalized is written off in profit or loss in the period in which the new information becomes available.

Share-based payment transactions

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Management uses judgment to determine the most appropriate valuation model to estimate the fair value for share-based payment transactions. The inputs to the valuation model, including the expected life of the share option, volatility and dividend yield, require judgment for determination.

Financial contract liability

The application of the Company’s accounting policy for financial liabilities requires the Company to adjust the carrying amounts of the financial liabilities in the event it revises its payments or receipts to reflect actual and revised estimated cash flows. The Company’s financial contract liability was originally recognized at fair value using the effective interest method which ensures that any interest expense over the period of repayment is at a constant rate on the balance of the liability carried in the balance sheet. Effective June 30, 2014, the Company’s financial contract liability was reduced by the residual reserve value of its working interest in the wellbores at September 30, 2016.

At December 31, 2016, the financial contract liability was adjusted to reflect the present value of the amount outstanding at year-end, net of the present value of the residual reserves of its working interest in the wellbores.

Impairment

Management applies judgment in assessing the existence of impairment and impairment reversal indicators based on various internal and external factors.

The recoverable amounts of CGUs and individual assets have been determined based on the higher of fair value less costs to sell or value-in-use. The key estimates the Company applies in determining the recoverable amount normally include anticipated future commodity prices, expected production volumes, future operating and development costs, and discount rates. Changes to these assumptions will affect the recoverable amounts of CGUs and individual assets and may then require a material adjustment to their related carrying value. At December 31, 2016, the Company has one CGU in Canada (Drake/Woodrush) and one CGU in the United States (Kokopelli).

34


Financial instruments

When estimating the fair value of financial instruments, the Company uses valuation methodologies that utilize observable market data where available. In addition to market information, the Company incorporates transaction specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk.

Reserves

The estimate of reserves is used in forecasting the recoverability and economic viability of the Company’s oil and gas properties, and in the depletion and impairment calculations. The process of estimating reserves is complex and requires significant interpretation and judgment. It is affected by economic conditions, production, operating and development activities, and is performed using available geological, geophysical, engineering, and economic data. Reserves are evaluated at least annually by the Company’s independent reserve evaluators and updates to those reserves, if any, are estimated internally. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of such wells and associated production facilities and other capital costs.

FUTURE ACCOUNTING PRONOUNCEMENTS

Certain pronouncements were issued by “IASB” or “IFRIC” that are mandatory for accounting periods beginning after January 1, 2017 or later periods.

The following new accounting standards, amendments to accounting standards and interpretations, have not been early adopted in these consolidated financial statements. The Company is currently assessing the impact, if any, of this new guidance on the Company’s future results and financial position:

IFRS 9, “Financial Instruments”: In July 2014, the IASB completed the final phase of its project to replace IAS 39, the current standard on the recognition and measurement of financial instruments. IFRS 9 is now the new standard which sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. IFRS 9 provides a single model of classifying and measuring financial assets and liabilities and provides for only two classification categories: amortized cost and fair value. Hedge accounting requirements have also been updated in the new standard and are now more aligned with the risk management activities of an entity. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted; however, if an entity elects to apply this standard early, it must disclose that fact and apply all of the requirements in this standard at the same time. It is anticipated that the adoption of IFRS 9 does not have material impact on the Company’s consolidated financial statements.

IFRS 15 was issued in May 2014 “Revenue from Contracts with Customers.” IFRS 15 applies to contracts with customers, excluding, most notably, insurance and leasing contracts. IFRS 15 prescribes a framework in accounting for revenues from contracts within its scope, including (a) identifying the contract, (b) identify separate performance obligations in the contract, (c) determine the transaction price of the contract, (d) allocate the transaction price to the performance obligations and (e) recognize revenues when each performance obligation is satisfied. IFRS 15 also prescribes additional financial statement presentations and disclosures. The Company currently expects to adopt IFRS 15 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company’s evaluation of IFRS 15 is ongoing and not complete. The IASB has issued and may issue in the future, interpretative guidance, which may cause its evaluation to change. The Company does not currently believe IFRS 15 will have a material effect on its consolidated financial statements.

IFRS 16, “Leases”: In January 2016, the IASB issued the standard to replace IAS 17 “Leases”. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted. It is anticipated that the adoption of IFRS 16 will have impact on the Company’s consolidated balance sheet due to the operating lease commitments.

35



A.

Operating Results

The Company’s annual audited Consolidated Financial Statements for the year ended December 31, 2016, including 2015 and 2014 required comparative information, have been prepared in accordance with IFRS.

All financial information is stated in Canadian dollars, the Company’s presentation currency, unless otherwise noted.

Year ended December 31, 2016 compared to the year ended December 31, 2015

1.

Revenues

For the year ended December 31, 2016, total revenue, before royalties, decreased by $3,771,000 or, 44%, due to a decline in combined average realized prices and a reduction in oil and natural gas production.

2.

Oil Operations

The average price received for oil sales decreased by 18% for the year ended December 31, 2016, relative to the prior year. The decrease in DXI Energy’s average realized oil price reflected lower benchmark prices in Canada and the rest of the world.

Average oil royalties paid for the year ended December 31, 2016 were lower by 27%, relative to those paid in the year ended December 31, 2015, due to lower average oil prices received in 2016.

Operating and transportation expenses for the year ended December 31, 2016 were higher, compared to the amount recorded for the year ended December 31, 2015, mainly due to the temporary closure of the contract processing terminal and the necessity to transport oil to an alternative facility further from the Woodrush oilfield.

3.

Natural Gas Operations

The average price received for gas sales increased by 6% for the year ended December 31, 2016, relative to the prior year. The increase in DXI Energy’s average realized gas price reflected the slight benchmark price recovery in both Canada and the United States.

Average gas royalties for the three and twelve months ended December 31, 2016 were higher compared to the corresponding periods of 2015. Initiation of gas production from the eight wells at Kokopelli in September 2015 contributed to the increase in royalties in both periods as the effective rate in Colorado is higher than the lower royalty rates for marginal gas production in British Columbia.

Operating and transportation expenses for the year ended December 31, 2016 were lower, relative to the amount recorded for the year ended December 31, 2015. The decline resulted from lower variable operating costs due to lower natural gas production volume at Kokopelli in Colorado. This was partially offset by the increased costs associated with to the temporary closure of the contract processing terminal and the necessity to transport oil to an alternative facility further from the Woodrush oilfield.

4.

General and Administrative Expenses

G&A expenses for fiscal 2016 were lower compared to the amount recorded for fiscal 2015. The reduction in G&A expenses for fiscal 2016 was due to the implementation of the Company’s overall cost savings plan.

Year ended December 31, 2015 compared to the year ended December 31, 2014

1.

Revenues

For the year ended December 31, 2015, total revenue, before royalties, decreased by $470,000 or, 5%, due to a decline in combined average realized prices. This was offset by a 48% increase in oil and natural gas production for the year on a BOE basis.

36



2.

Oil Operations

The average price received for oil sales decreased by 40% for the year ended December 31, 2015, relative to the prior year. The decrease in DXI Energy’s average realized oil price reflected lower benchmark prices in Canada and the rest of the world.

Average oil royalties paid for the year ended December 31, 2015 were lower by 31%, relative to those paid in the year ended December 31, 2014, due to lower average oil prices received in 2015.

Operating and transportation expenses for the year ended December 31, 2015 were lower, compared to the amount recorded for the year ended December 31, 2014. The decline in per unit operating and transportation expenses resulted from the allocation of fixed operating costs over a higher oil production volume.

3.

Natural Gas Operations

The average price received for gas sales decreased by 57% for the year ended December 31, 2015, relative to the prior year. The decrease in DXI Energy’s average realized gas price reflected lower benchmark prices in both Canada and the United States.

Average gas royalties for the year ended December 31, 2015 were lower, relative to those paid in the year ended December 31, 2014, due to lower average gas prices received in 2015.

Operating and transportation expenses for the year ended December 31, 2015 were lower, relative to the amount recorded for the year ended December 31, 2014. The decline resulted from lower water disposal costs at Kokopelli in Colorado in 2015 compared with 2014. This decrease was partially offset by the increased costs associated with the reactivation of one of the gas wells at Drake/Woodrush in February 2015 and higher contractual pipeline transportation costs associated with a new contract signed on November 1, 2014.

4.

General and Administrative Expenses

G&A expenses for fiscal 2015 were lower compared to the amount recorded for fiscal 2014. The reduction in G&A expenses for the year ended December 31, 2015 was due to the termination of all salaried employees at the Company’s office in Denver, Colorado as part of the June 30, 2014 sale of a controlling working interest in the Kokopelli project to the Company’s Kokopelli partner and new “Operator” of the project. Also, higher G&A expenses for fiscal 2014 resulted from the non-recurring severance payments associated with the termination of a number of the Company’s service providers in the year.

Financial Instruments and Risk Management

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current portion of loans from related parties. Management has determined that the fair value of these financial instruments approximates their carrying values due to their immediate or short-term maturity.

From time to time, the Company enters into derivative contracts such as forwards, futures and swaps in an effort to mitigate the effects of volatile commodity prices and protect cash flows to enable funding of its exploration and development programs. Commodity prices can fluctuate due to political events, meteorological conditions, disruptions in supply and changes in demand.

The primary risks and how the Company mitigates them are disclosed in Item 11 – Quantitative and Qualitative Disclosures About Market Risk, below.

37



B.

Liquidity and Capital Resources

Loans from Related Parties

On March 12, 2015, as amended on May 6, 2015, June 22, 2015, September 28, 2015 and November 18, 2015, the Company issued a promissory note for $4.5 million to Hodgkinson Equities Corp. (“HEC”), a private company controlled by the CEO of the Company. The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber its Canadian oil and gas properties without HEC’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest was repayable by the earlier of (i) within 10 business days of receipt of written demand from HEC for the repayment and (ii) June 10, 2015 or such later date to which the term of the promissory note may be extended. On May 6, 2015, the due date of the loan was extended to September 30, 2015. On September 28, 2015, the due date of the loan was further extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $114,230.77 is due on the 1 st day of each month commencing June 1, 2016. HEC agreed to waive the requirement of the Company to repay the total monthly principal repayments of $1,142,000 for a period of 10 months. In consideration for the extension, the Company issued HEC 9,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HEC on its Canadian oil and gas properties. The first mortgage security so issued ranks “pari passu” with HVI’s first mortgage security interest. Upon an event of default, all the indebtedness under the promissory note become due and payable and the interest rate is immediately increased to the Canadian prime rate plus 8.5% per annum.

On June 22, 2015, as amended on September 28, 2015 and November 18, 2015, the Company issued a promissory note for $2.0 million to Hodgkinson Ventures Inc. (“HVI”), a private company associated with the CEO of the Company, on a “pari passu” basis with the loan from HEC. The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber its Canadian oil and gas properties without HVI’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest was repayable on or before September 30, 2015. On September 28, 2015, the due date of the loan was extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $50,769.23 is due on the 1 st day of each month commencing June 1, 2016. HVI agreed to waive the requirement of the Company to repay the total monthly principal repayments of $508,000 for a period of 10 months. In consideration for the extension, the Company issued HVI 4,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HVI on its Canadian oil and gas properties. The first mortgage security so issued ranks “pari passu” with HEC’s first mortgage security interest. Upon an event of default, all the indebtedness under the promissory note become due and payable and the interest rate is immediately increased to the Canadian prime rate plus 8.5% per annum.

On September 15, 2015, as amended on January 11, 2016, March 31, 2016 and June 2, 2016, the Company issued a grid promissory note of up to $1.0 million to a director and officer of the Company and his spouse. The promissory note bears interest at 12% per annum. The principal and interest accrued on the loan were repayable on or before December 31, 2015. On January 11, 2016, the Company issued an additional grid promissory note of up to $200,000 to a director and officer of the Company and his spouse and the due date of the loan was extended to March 31, 2016. On March 31, 2016, the due date of the loan was further extended to September 30, 2016. On June 2, 2016, the Company increased the maximum amount of the non-revolving loan from $1.2 million to $1.5 million. The interest rate was also reduced from 12% to 10% per annum. Additionally, the Company issued a 2 nd mortgage in favour of the Lenders on DEAL’s oil and gas properties to a maximum of $1.5 million as partial security for the loan. On September 30, 2016, the due date of the loan was extended to December 31, 2016. On December 31, 2016, the due date of the loan was further extended to June 30, 2017. The maximum loan amount available at December 31, 2016 was $1.5 million (December 31, 2015 - $1.0 million). During the year ended December 31, 2016, $350,000 was borrowed (2015 - $1.0 million) and $300,000 was repaid (2015 - $Nil) leaving a balance outstanding of $1.1 million at December 31, 2016.

38


Financial Contract Liability

On December 31, 2012, Dejour USA entered into a financial contract with a U.S. oil and gas drilling fund (“Drilling Fund”) to fund the drilling of up to three wells and the completion of up to four wells in the State of Colorado. The Drilling Fund contributed US$6.5 million cash to earn working interests in production from the wellbores ranging from 55.56% to 77.78% before payout and 44.44% to 58.33% after payout. This amount was subsequently increased by US$500,000 to US$7,000,000 with the Company’s consent.

The December 31, 2012 financial contract states the Drilling Fund has the right to require Dejour USA to purchase its working interests in the wellbores for cash in September 2016, 36-months after the final well in the 4-well program is placed in production. The repurchase price is based on a predetermined formula which ensures the Drilling Fund earns a minimum return, compounded annually and applied on a monthly basis, on 75% of its original US$7,000,000 investment over the 36-month period. Accordingly, the Company considered the transaction to be a financial contract as the risks and rewards of ownership were not substantially transferred to the Drilling Fund and, on December 31, 2012, the Company recorded the transaction in its accounts by increasing property and equipment and financial contract liability by US$6,500,000 on its balance sheet. This amount was subsequently increased to US$7,000,000.

On June 30, 2014, the financial contract was amended and the Drilling Fund agreed to retain its working interest in the wells as at September 30, 2016, should it exercise its right to require Dejour USA to pay the minimum return calculated in accordance with the provisions of the contract. In determining the minimum return to be paid, the Drilling Fund agreed to deduct the residual reserve value of its working interest in the 4 wellbores at September 30, 2016. The parties also agreed to have a third party engineering firm calculate the residual value of the reserves in accordance with industry accepted valuation standards.

Finally, the parties agreed to limit the cash consideration to be paid by Dejour USA, should it be required to pay the minimum return provided for in the December 31, 2012 contract to US$3,000,000. Additional consideration, if any, may be paid by Dejour USA by an assignment of a working interest in certain proven assets at a jointly owned oil and gas property in Colorado applying an industry-standard valuation approach.

The June 30, 2014 amendment transferred the risks of ownership of the 4 wellbores back to the Drilling Fund and the financial contract liability was adjusted to reflect the present value of the amount owing to the Drilling Fund under the financial contract at December 31, 2016 ($7,843,000), net of the present value of the residual reserves ($617,000), or $7,226,000, as follows:

(CA$ thousands) $    
Balance at January 1, 2015 (US$2,361)   2,739  
Accretion expense (US$410)   525  
Foreign exchange loss   595  
Adjustment to financial contract liability (US$2,436)   3,348  
Balance at December 31, 2015 (US$5,207)   7,207  
Accretion expense (US$222)   296  
Foreign exchange gain   (214 )
Adjustment to financial contract liability (US$47)   (63 )
Balance at December 31, 2016 (US$5,382)   7,226  

On September 30, 2016, the Drilling Fund served notice to Dejour USA requiring Dejour USA to purchase the Drilling Fund’s 77.71% working interest in the 4 wellbores in accordance with the provisions of the “put” option contract described above. However, prior to serving such notice, the Drilling Fund executed certain assignments transferring ownership of its working interests in the 4 wellbores to another entity and the assignee mortgaged its interest therein. The Company is assessing as to whether such assignment and subsequent mortgaging of working interests by the entity disentitled the Drilling Fund from exercising the “put” option which underlies the entire financial contract, and the related liability as set out in these consolidated financial statements, and whether, as a result thereof, the “put” contract option exercise was null and void as at September 30, 2016.

39


Working Capital Position

As at December 31, 2016 (CA$ thousands) $    
Working capital deficit   (11,075 )
Non-cash derivative liability   153  
Adjusted working capital deficit   (10,922 )
Add: current portion of loans from related parties   2,363  
Add: non-cash portion of financial contract liability   3,198  
Adjusted working capital deficit (excluding loans from related parties and financial contract liability)   (5,361 )

Working capital is defined as current assets less current liabilities.

As at December 31, 2016, the Company had a working capital deficit of $11.1 million. Excluding the non-cash derivative liability of $0.2 million, the adjusted working capital deficit was $10.9 million. Of this amount, $7.2 million is represented by a financial contract liability of Dejour USA, which was due on September 30, 2016. The maximum cash component due in full settlement of the financial contract liability is US$3.0 million. The details of the settlement progress are described in the “Financial Contract Liability” section above. Our independent auditors have included an explanatory paragraph in their report on our consolidated financial statements for the year ended December 31, 2016 that describes uncertainties that cast substantial doubt about our ability to continue as a going concern.

Capital Resources

a)

Canada

In 2016, the Company incurred $0.3 million for the workover related to one water disposal well at its Woodrush properties, north of Fort St. John, British Columbia. These capital expenditures were funded by cash on hand of the Company.

b)

United States

In 2016, the Company paid $0.2 million for the ongoing Kokopelli development program in Colorado and it is related to the installation of an electrical system for eight natural gas wells. The Company funded this program through the use of a combination of cash on hand and the loans from the companies associated with a director and officer of the Company.

C.

Research and Development, Patents and Licenses, etc.

None.

D.

Trend Information


a)

Oil Prices

The general outlook for crude oil prices will be tied primarily to the supply response to the current price environment and the pace of growth of the global economy. Overall, crude oil price volatility and a modest price improvement are expected in 2017. Production cut agreed by OPEC members, combined with annual increases in demand growth, should support prices in the 1 st half of 2017. Stronger pricing was further supported by non-OPEC countries and they also agreed to curb their production levels.

b)

Natural gas

In 2016, natural gas prices reached its 17-year low since 1999. Warmer-than-normal temperatures for most of 2016 and changing demand were the main drivers of natural gas prices in 2016.

40


A colder-than-usual winter in late 2016 to 2017 and improving demand could reduce the surplus natural gas inventories. As a result, shrinking inventories along with steady demand could support natural gas prices going into 2017.

E.

Off-Balance Sheet Arrangements

The Company has no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on our results of operations or financial condition at December 31, 2016.

F.

Tabular Disclosure of Contractual Obligations

As of December 31, 2016, and in the normal course of business we have obligations to make future payments, representing contracts and other commitments that are known and committed.

(CA$ thousands)   2017     2018     2019     2020     2021     Thereafter     Total  
               
Trade and other payables   2,165     -     -     -     -     Nil     2,165  
Operating lease obligations   101     13     -     -     -     Nil     114  
Debt repayments   3,030     4,520     -     -     -     Nil     7,550  
Interest payments   53     -     -     -     -     Nil     53  
Financial contract liability (1)   7,226     -     -     -     -     Nil     7,226  
Total   12,575     4,533     -     -     -     Nil     17,108  

(1)

This represents the Company’s obligations over the 36-month put option period until it expires. See Note 12 to the consolidated financial statements for details.


G.

Safe Harbor

The Company seeks safe harbor for our forward-looking statements contained in Items 5.E and F. See the heading “Cautionary Note Regarding Forward-Looking Statements” above.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.

Directors and Senior Management

The following table sets forth all current directors and executive officers of DXI Energy as of the date of this annual report on Form 20-F, with each position and office held by them in the Company and the period of service as such.

Name, Jurisdiction
of Residence and
Position (1)
Principal occupation or
employment during the
past
5 years
Number of DXI Energy
Common Shares
beneficially owned, directly
or indirectly, or controlled
or directed (2)
Percentage of DXI Energy
Common Shares
beneficially owned, directly
or indirectly, or controlled
or directed (2)
Director Since
Robert L.
Hodgkinson
British Columbia,
Canada

Director, Chairman
and Chief Executive
Officer
(Age: 67)

President of a private company,
Hodgkinson Equities Corporation, which provides consulting services emerging businesses in the petroleum resource industry.
Formerly a director of Titan Uranium (TSX-V: TUE).

3,760,004 8.39% May 18, 2004
Craig Sturrock (3)(4)
British Columbia,
Canada

Director
(Age: 73)

Tax lawyer since 1971.
Currently, he is a partner at Thorsteinssons LLP, and his practice focuses primarily on civil and criminal tax
litigation.

130,000 0.29% August 22, 2005

41



Name, Jurisdiction
of Residence and
Position (1)
Principal occupation or
employment during the
past
5 years
Number of DXI Energy
Common Shares
beneficially owned, directly
or indirectly, or controlled
or directed (2)
Percentage of DXI Energy
Common Shares
beneficially owned, directly
or indirectly, or controlled
or directed (2)
Director Since
Dr. A. Gorrell (5)(6)
British Columbia,
Canada
Director
(Age: 72)
Dr. Gorrell has over 30 years’ experience with both private and public oil and gas property exploration and development in Western Canada and China. Dr. Gorrell has served as director, officer and controlling principal of several oil and gas ventures listed on the Toronto Stock Exchange. Currently, Dr. Gorrell is a director, President/CEO and Co-Chairman of Petromin Resources Ltd. 10,000 0.02% December 14, 2012
Ronnie Bozzer
(3)(4)(5)(6)
British Columbia,

Canada
Director
(Age: 67)
Mr. Bozzer has extensive years of legal practice encompassing mergers and acquisitions, banking and finance transactions, public private partnerships, syndications and securitizations. 90,000 0.20% January 15, 2014
James Dai (3)(4)(5)(6)
British Columbia,

Canada
Director
(Age: 35)
Mr. Dai is a capital markets professional in Canada. He has an investment banking background from Raymond James and has assisted Asian investors invest over $200 million into Canadian capital markets. - - March 16, 2015
David Matheson
British Columbia,
Canada
Chief Financial
Officer
(Age: 67)
Mr. Matheson has over 30 years of executive experience in the oil and gas industry in both operations and finance. He previously served as CFO and then as President of Equatorial Energy Ltd., a public Canadian oil and gas exploration & production company with operations in Canada and Indonesia. Mr. Matheson was admitted to the Institute of Chartered Accountants in British Columbia, the Northwest Territories, and Canada in 1975. 600,000 1.34% N/A

(1)

Each director will serve until the next annual general meeting of the Company or until a successor is duly elected or appointed in accordance with the Notice of Articles and Articles of the Company and the Business Corporations Act (British Columbia).

(2)

The number of common shares beneficially owned, directly or indirectly, or over which control or direction is exercised is based upon information furnished to the Company by individual directors and executive officers.

(3)

Member of audit committee .

42



(4)

Member of governance and nominating committee.

(5)

Member of compensation committee .

(6)

Member of reserves committee .

Directors and Executive Officers

Brief biographies for DXI Energy's directors and executive officers are set forth below:

Robert L. Hodgkinson: Mr. Hodgkinson was the founder and Chairman of Optima Petroleum, which drilled wells in Alberta and the Gulf of Mexico before merging to form Petroquest Energy, a NASDAQ traded company. Subsequently, he founded and was CEO of Australian Oil Fields, which would later merge to become Resolute Energy/Cardero Energy Inc. Mr. Hodgkinson was also a Vice-President and partner of Canaccord Capital Corporation, and an early stage investor and original lease financier in Synenco Energy's Northern Lights Project in the Alberta oil sands.

Craig Sturrock: Mr. Sturrock has served as a director and founding member of various public and private companies. Admitted to the British Columbia Bar in 1969, he joined Thorsteinssons LLP, tax lawyers in 1971. He served for 15 years as a tax lawyer and partner at Birnie, Sturrock & Company returning to Thorsteinssons as a partner in 1989. He is an author and speaker for the Canadian and British Columbia Bar Associations, the Continuing Legal Education Society of British Columbia and the Canadian Tax Foundation. He is also a former member of the Board of Governors of the Canadian Tax Foundation.

Dr. A. Gorrell: Dr. Gorrell has over 30 years’ experience with both private and public oil and gas property exploration and development in Western Canada and China. Dr. Gorrell has served as director, officer and controlling principal of several oil and gas ventures listed on the Toronto Stock Exchange. Currently, Dr. Gorrell is a director, President/CEO and Co-Chairman of Petromin Resources Ltd.

Ronnie Bozzer: Mr. Bozzer's legal practice encompasses mergers and acquisitions, banking and finance transactions, public private partnerships, syndications and securitizations. His honours include receiving the highest peer review rating by Martindale Hubbell, becoming Chairman of Canada's International Finance Centre and recognition by "2010 Best Lawyers in Canada" in the specialty of Banking Law. Mr Bozzer is also listed as Canadian Leading Lawyer in the field of Corporate Law by "Law Day".

James Dai: Mr. Dai is a capital markets professional in Canada. He has an investment banking background from Raymond James and has assisted Asian investors invest over $200 million into Canadian capital markets.

David Matheson : Mr. Matheson has over 30 years of executive experience in the oil and gas industry in both operations and finance. He previously served as CFO and then as President of Equatorial Energy Ltd., a public Canadian oil and gas exploration & production company with operations in Canada and Indonesia. Mr. Matheson was admitted to the Chartered Professional Accountants of Canada in 1975.

Family Relationships

There are no family relationships between any directors or executive officers of the Company.

Arrangements

There are no known arrangements or understandings with any major shareholders, customers, suppliers or others, pursuant to which any of the Company’s officers or directors was selected as an officer or director of the Company, other than indicated immediately above and at “Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions.”

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the knowledge of the Company, no director or executive officer of the Company is, or has been in the last ten years, a director, chief executive officer or chief financial officer of an issuer that, while that person was acting in that capacity, (a) was the subject of a cease trade order or similar order or an order that denied the issuer access to any exemptions under Canadian securities legislation, for a period of more than 30 consecutive days, or (b) was subject to an event that resulted, after that person ceased to be a director, chief executive officer or chief financial officer, in the issuer being the subject of a cease trade or similar order or an order that denied the issuer access to any exemption under Canadian securities legislation, for a period of more than 30 consecutive days. To the knowledge of the Company, no director or executive officer of the Company, or a shareholder holding a sufficient number of securities in the Company to affect materially the control of the Company, is or has been in the last ten years, a director or executive officer of an issuer that, while or acting in that capacity within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets. To the knowledge of the Company, in the past ten years, no such person has become bankrupt, made a proposal under any legislation related to bankruptcy or insolvency, or was subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold their assets.

43


Conflicts of Interest

Certain of the Company's directors and officers serve or may agree to serve as directors or officers of other reporting companies or have significant shareholdings in other reporting companies and, to the extent that such other companies may participate in ventures in which the Company may participate, the directors of the Company may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises at a meeting of the Company's directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms and such director will not participate in negotiating and concluding terms of any proposed transaction. From time to time, several companies may participate in the acquisition, exploration and development of natural resource properties thereby allowing for their participation in larger programs, permitting involvement in a greater number of programs and reducing financial exposure in respect of any one program. It may also occur that a particular company will assign all or a portion of its interest in a particular program to another of these companies due to the financial position of the company making the assignment. Under the laws of the Province of British Columbia, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company. In determining whether or not the Company will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time. See also "Description of the Business – Risk Factors".

B.

Compensation

Basis of Compensation for Executive Officers

The Company compensates its executive officers through a combination of base compensation, bonuses and Common Stock options. The base compensation provides an immediate cash incentive for the executive officers. Bonuses encourage and reward exceptional performance over the financial year. Common Stock options ensure that the executive officers are motivated to achieve long term growth of the Company and continuing increases in shareholder value. In terms of relative emphasis, the Company places more importance on Common Stock options as long term incentives. Bonuses are related to performance and may form a greater or lesser part of the entire compensation package in any given year. Each of these means of compensation is briefly reviewed in the following sections.

Base Compensation

Base compensation, including that of the Chief Executive Officer, are set by the Compensation Committee and approved by the Board of Directors on the basis of the applicable executive officer’s responsibilities, experience and past performance. The compensation program is intended to provide a base compensation competitive among companies of a comparable size and character in the oil and gas industry. In making such an assessment, the Board considers the objectives set forth in the Company’s business plan and the performance of executive officers and employees in executing the plan in combination with the overall result of the activities undertaken.

44


Common Stock Options

The Company provides long term incentive compensation to its executive officers through the Common Stock Option Plan, which is considered an integral part of the Company’s compensation program. Upon the recommendation of management and approval by the Board of Directors, stock options are granted under the Company’s Option Plan to new directors, officers and key employees, usually upon their commencement of employment with the Company. The Board approves the granting of additional stock options from time to time based on its assessment of the appropriateness of doing so in light of the long term strategic objectives of the Company, its current stage of development, the need to retain or attract key technical and managerial personnel in a competitive industry environment, the number of stock options already outstanding, overall market conditions, and the individual’s level of responsibility and performance within the Company.

The Board views the granting of stock options as a means of promoting the success of the Company and creating and enhancing returns to its shareholders. As such, the Board does not grant stock options in excessively dilutive numbers. Total options outstanding are presently limited to 10% of the total number of shares outstanding under the rules of the TSX. Grant sizes are, therefore, determined by various factors including the number of eligible individuals currently under the Option Plan and future hiring plans of the Company.

The Board granted a total of 1,400,000 stock options to the executive officers in 2016.

Summary Compensation Table

The following table provides a summary of the compensation earned during the fiscal year ended December 31, 2016 for the Named Executive Officers and Directors listed in the table below.

    Annual Compensation           Long Term Compensation  
Name and
principal
position
Year Salary
($)
Consulting
Fees
($)
Bonus
($)
Awards Payouts
($)
All other
compensation
($)
Securities
Under
Option/
SAR's
Granted
(#)
Shares/
Units
Subject to
Resale
Restrictions
($)
Robert
Hodgkinson,
Director,
Chairman and
Chief Executive
Officer
2016
2015
2014
48,600 (1)
48,600
78,000
192,000 (2)
192,000
174,600
Nil
Nil
100,000 (4)
300,000
100,000
682,382
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
David
Matheson,
Chief Financial
Officer
2016
2015
2014
200,000 (3)
200,000
199,038
Nil
Nil
Nil
Nil
Nil
100,000 (4)
400,000
100,000
421,914
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Craig Sturrock,
Director
2016
2015
2014
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
200,000
25,000
198,940
Nil
Nil
Nil
Nil
Nil
Nil
7,500 (5)
8,000
8,500
Dr. A. Gorrell
Director
2016
2015
2014
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
150,000
20,000
89,726
Nil
Nil
Nil
Nil
Nil
Nil
6,000 (5)
6,000
7,000
Ronnie Bozzer
Director
2016
2015
2014
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
200,000
35,000
695,313
Nil
Nil
Nil
Nil
Nil
Nil
8,000 (5)
8,000
8,500
James Dai
Director (5)
2016
2015
Nil
Nil
Nil
Nil
Nil
Nil
150,000
100,000
Nil
Nil
Nil
Nil
8,000 (5)
5,500

(1)

Include an unpaid amount of $20,250 payable by the Corporation to Mr. Hodgkinson at December 31, 2016.

(2)

Include an unpaid amount of $160,000 payable by the Corporation to Mr. Hodgkinson at December 31, 2016.

(3)

Include an unpaid amount of $42,000 payable by the Corporation to Mr. Matheson at December 31, 2016.

(4)

Included in accounts payable and accrued liabilities at December 31, 2014.

(5)

Included in accounts payable and accrued liabilities at December 31, 2016.

45


Stock Option Grants

Name # of Options Granted Exercise Price per Share Grant Date Expiration Date
Robert Hodgkinson 300,000 $0.16 June 6, 2016 June 5, 2021
Craig Sturrock 200,000 $0.16 June 6, 2016 June 5, 2021
Dr. A. Gorrell 150,000 $0.16 June 6, 2016 June 5, 2021
Ronnie Bozzer 200,000 $0.16 June 6, 2016 June 5, 2021
James Dai 150,000 $0.16 June 6, 2016 June 5, 2021
David Matheson 400,000 $0.16 June 6, 2016 June 5, 2021

Director Compensation

The Company has compensation agreements for its Directors who are not executive officers. Under the agreements, Directors receive $2,500 per meeting for the first 4 meetings each year, and $1,500 for each meeting thereafter. The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director. Per an amendment to the agreements approved by the Board of Directors, effective January 1, 2010, the Directors received $1,000 per quarter plus $500 for each meeting.

For the most recently completed fiscal year, each non-management director of the Company earned total compensation for services provided to the Company in his capacity as director as follows:

Name Fees earned $
Craig Sturrock 7,500 (1)
Dr. A. Gorrell 6,000 (1)
Ronnie Bozzer 8,000 (1)
James Dai 8,000 (1)

(1)

Included in accounts payable and accrued liabilities at December 31, 2016.

Long Term Incentive Plan Awards

Long term incentive plan awards (" LTIP ") means any plan providing compensation intended to serve as an incentive for performance to occur over a period longer than one financial year, whether the performance is measured by reference to financial performance of the Company or an affiliate of the Company, the price of the Company's shares, or any other measure, but does not include option or stock appreciation rights plans or plans for compensation through restricted shares or units. The Company did not award any LTIPs to any executive officer during the most recently completed financial year ended December 31, 2016. There are no pension plan benefits in place for the executive officers.

Stock Appreciation Rights

Stock appreciation rights (" SARs ") means a right, granted by the Company or any of its subsidiaries as compensation for services rendered or in connection with office or employment, to receive a payment of cash or an issue or transfer of securities based wholly or in part on changes in the trading price of the Company's shares. No SARs were granted to, or exercised by, any executive officer of the Company during the most recently completed financial year ended December 31, 2016.

Bonus/Profit Sharing/Non-Cash Compensation

The Board adopted a bonus plan for eligible executives, which include the senior executives of the Company or any subsidiary of the Company, including but not limited to the CEO, President, Executive Vice-President and CFO who, by the nature of their positions are, in the opinion of the Committee, in a senior position to contribute to the success of the Company.

The bonus plan includes both non-discretionary and discretionary portions.

46



  A)

Executives Non-Discretionary;

Each Eligible Executives will receive a USD$100,000 award should:

  i)

Total Shareholder Return % exceeds Total XEG Return % by a minimum of 10% and in addition. For purposes of the bonus plan, “ XEG ” is defined as the iShares™ CDN Energy Sector Index Fund, trading under the symbol “XEG” on the TSX. Total Shareholder Return and Total XEG Return are based on the 20 days average closing shares price of DXI Energy shares and XEG on the TSX at the end of each fiscal year.;

     
  ii)

Total Shareholder Return is positive (the share price of DXI Energy shares is higher at the end of the year, in comparison to, the price of the shares at the beginning of the year).

For example, for fiscal 2011, if Total Shareholder Return % is 20%, while Total XEG Return is 5%, then DXI Energy’s stock outperformed the XEG by 15% and a USD$100,000 award is payable to each executives. However, this award would only be payable in the event that during the same period shareholder return is positive.

  B)

Executives Discretionary;

The Compensation Committee, upon the recommendation of the CEO, shall review (i) performance goals and objectives (“Performance Targets') for the Company and the subsidiaries for such period and (ii) target awards (“Target Awards') for each Participant which shall be based on, up to 30% of the Participant's base compensation, provided however, the Performance Targets for each Executive Participants shall be exactly the same during each year, calculated based on the same percentage of each Participants base compensation, unless otherwise agreed by the Participants.

Such Performance Targets shall include but not be limited to the following:

 

Increase in oil & gas production;

Achievement of financial stability and working capital position including compliance with the Company loan covenants;

 

Increase in Proved Developed Production (PDP) Reserves;

 

Increase in Proved and Probable (2P) reserves;

Creating significant positive impact on the Company business as demonstrated by significant accomplishments not in the base budget/business plan;

 

Increase in Operating Cash flow and Adjusted EBITDA;

 

Reduce operation costs;

 

Reducing overhead costs;

 

Other factors or extraordinary success, that in the opinion of the Committee, enhance shareholder value.

Pension/Retirement Benefits

No funds were set aside or accrued by the Company during fiscal 2016 to provide pension, retirement or similar benefits for Directors or Senior Management.

C.

Board Practices

The Company’s Governance Committee has establish the following committees to ensure the Company maintains the highest possible governance standards in the conduct of its business:

1.

Governance and Nominating Committee;

2.

Compensation Committee;

3.

Audit Committee, and

4.

Reserves Committee.

47


Each of the primary functions of these committees is located on the Company’s website at www.dxienergy.com as follows:

Governance and Nominating Committee

The Governance and Nominating Committee is comprised of three Directors, Ronnie Bozzer (Chairman), Craig Sturrock, and James Dai.

(a)

“Responsibilities” for the Governance and Nominating Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Committees and Responsibilities/Governance and Nominating Committee”.

   
(b)

The Company’s “Charter” for the Governance and Nominating Committee can be found on the Company’s website at www. dxienergy.com under “Investors/Corporate Governance/Governance and Nominating Committee Charter”.

Compensation Committee

The Company’s Compensation Committee is comprised of three Directors, Ronnie Bozzer (Chairman), A. Ross Gorrell, and Craig Sturrock.

(a)

“Responsibilities” for the Compensation Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Committees and Responsibilities/Compensation Committee”.

   
(b)

The Company’s “Charter” for the Compensation Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Compensation Committee Charter”.

Audit Committee

The Company’s Audit Committee is comprised of three Directors, Craig Sturrock (Chairman), Ronnie Bozzer, and James Dai.

(a)

“Responsibilities” for the Audit Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Committees and Responsibilities/Audit Committee”.

   
(b)

The Company’s “Charter” for the Audit Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Audit Committee Charter”.

Reserves Committee

The Company has a Reserves Committee comprised of three directors, A. Ross Gorrell (Chairman), Ronnie Bozzer, and Craig Sturrock.

(a)

“Responsibilities” for the Reserves Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Committees and Responsibilities/Reserves Committee”.

   
(b)

The Company’s “Charter” for the Reserves Committee can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/Reserves Committee Charter”.

Differences between Canadian and NYSE Governance Standards

DXI Energy’s corporate governance practices satisfy all the existing guidelines for effective corporate governance established by Canadian National Instrument 58-1-1 and National Policy 58-201 (collectively CSA Rules). The Company qualifies for and is currently listed on the OTCQB Venture Market in the OTC Markets Group in the United States. The Company qualifies for the OTCQB’s elevated status because it is a full SEC registrant in the United States. Although no longer listed on the NYSE, the Company still adheres to NYSE corporate governance standards and will continue to do so.

48


The NYSE corporate governance listing standards applicable to DXI Energy’s corporate governance policies satisfy all the existing guidelines for effective corporate governance established by the CSA Rules. The rules of the New York Stock Exchange (“the NYSE”), as set for the in the NYSE Listed Company Manual (“the NYSE Manual”), permit listed companies that are “foreign private issuers”, as defined under the U.S. Securities Exchange Act of 1934, as amended (“The Exchange Act”), including DXI Energy, to follow home country practice in lieu of certain NYSE corporate governance provisions.

The significant differences between DXI Energy’s corporate governance practices and those followed by NYSE-listed U.S. companies pursuant to the NYSE Manual can be found on the Company’s website at www.dxienergy.com under “Investors/Corporate Governance/DXI Energy Inc. Differences between Canadian and NYSE Governance Standards”.

D.

Employees

The Company had the equivalent of approximately 10 full-time employees and consultants during 2016.

E.

Share Ownership

Directors and Officer Beneficial Ownership

The following table discloses information regarding beneficial ownership of the Company’s voting securities, consisting solely of common shares, as of April 20, 2017 by the Company’s executive officers and directors.

Name of Beneficial Owner Number of
Common Shares
Percentage of
Outstanding
Common Shares
Owned
Number of
Common Share
Purchase Warrants
Robert L. Hodgkinson 3,760,004 (1) 8.39% 9,000,000 (1)
Craig Sturrock 130,000 0.29% -
Dr. A. Gorrell 10,000 0.02% -
Ronnie Bozzer 90,000 0.20% -
James Dai - 0% -
David Matheson 600,000 1.34% -
Total 4,590,004 10.24% 9,000,000

(1)

3,000,000 of these shares are owned by Hodgkinson Equities Corp., a private company controlled by Robert Hodgkinson. The remaining 760,004 shares are owned by Robert Hodgkinson. All common share purchase warrants are owned by Hodgkinson Equities Corp.

   
(2)

All percentages are based on 44,808,286 common shares outstanding as of April 20, 2017.

49


Stock Option Plan

We have a Stock Option Plan that was initially approved in 2009 and amended in 2012 and 2015 (the “Option Plan”). The principal purposes of which is to (i) advance our interests by aiding us, and our subsidiaries, in motivating, attracting and retaining key employees and directors capable of assuring the future success of the Company; and (ii) secure for us and our shareholders the benefits inherent in the ownership of our common shares by key employees and directors of the Company and our subsidiaries. We also have a United States stock incentive sub-plan that was initially approved in 2009 and amended in 2012 (the “Sub-Plan”) and forms a part of the Option Plan. Any option granted under the Sub-Plan is also subject to the terms and conditions of the Option Plan. Where there is a conflict between the terms and conditions of the Sub-Plan and the terms and conditions of the Option Plan, the terms and conditions of the Option Plan govern.

Directors, officers, employees and other insiders of us or any of our subsidiaries, as well as any person or corporation engaged to provide services for us or for any entity controlled by us for an initial, renewable or extended period of twelve months or more (or a lesser period of time if approved by the committee that administers the Option Plan and acceptable to the Toronto Stock Exchange (the “TSX”) (including individuals employed by such person or corporation), are eligible to participate in the Option Plan. Eligible participants who are natural persons resident in the United States, United States citizens, or are otherwise subject to United States tax law may participate in the Sub-Plan.

At the time of grant of any option, the aggregate number of common shares reserved for issuance under the Option Plan (which includes the Sub-Plan) that may be made subject to options any time and from time to time, together with common shares reserved for issuance at that time under any of our other share compensation arrangements, may not exceed 10% of the total number of issued and outstanding common shares, on a non-diluted basis, on the date of grant of the option. Of this 10%, the number of common shares reserved for issuance to any one participant pursuant to the Sub-Plan in any year may not exceed 5% of our total outstanding common shares on a non-diluted basis. Common shares subject to any option (or portion thereof) under the Option Plan that has been cancelled or otherwise terminated prior to the issuance or transfer of such common shares will again be available for options under the Option Plan. The number of common shares authorized under the Option Plan may be increased, decreased or fixed by the Board of Directors. Subject to adjustment in accordance with the Sub-Plan, a maximum of 3,700,000 common shares, less those common shares issued under the Option Plan, may be issued pursuant to stock options issued under the Sub-Plan. To clarify this rule, notwithstanding the number of options permitted under the US Sub-Plan to a total of 3.7 million, the Company is still bound by its Option Plan whereby the maximum number of shares that can be awarded as options is still 10%, but within the 10% as permitted, up to 3,700,000 can be allocated to the US Sub-Plan. If a stock option terminates, is forfeited or is cancelled without the issuance of any common shares, or any common shares covered by a stock option or to which a stock option relates are not issued for any other reason, then the number of common shares counted against the aggregate number of common shares available under the Sub-Plan with respect to such stock option, to the extent of any such termination, forfeiture, cancellation or other event, will again be available for granting stock options under the Sub-Plan.

The option exercise price will be determined by the committee that administers the Option Plan or the Sub-Plan administrator, as applicable. The exercise price may not be less than the last closing price per common share on the TSX on the trading day immediately preceding the day the options are granted, or if the common shares are not listed on the TSX, on the most senior of any other exchange on which the common shares are then traded, on the last trading day immediately preceding the date of grant of such options.

The Option Plan may be terminated by the committee that administers the Option Plan at any time. The Sub-Plan terminates at midnight on January 5, 2022, unless it is terminated before then by our Board of Directors. Any option outstanding under the Option Plan or Sub-Plan at the time of termination shall remain in effect until such option has been exercised, has expired, has been surrendered to us or has been terminated.

A copy of the Option Plan and Sub-Plan is incorporated by reference into this Form 20-F as Exhibits 4.1 and 4.2, respectively.

Stock Options Outstanding

The names and titles of the Directors/Executive Officers of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options is set forth in the following table as of April 20, 2017:

50



Name # of Options Held

# of Options Vested

Exercise Price per Option Grant Date Expiration Date
Robert Hodgkinson 300,000 300,000 $0.16 June 6, 2016 June 5, 2021
Craig Sturrock 200,000 200,000 $0.16 June 6, 2016 June 5, 2021
Dr. A. Gorrell 150,000 150,000 $0.16 June 6, 2016 June 5, 2021
Ronnie Bozzer 200,000 200,000 $0.16 June 6, 2016 June 5, 2021
James Dai 150,000 150,000 $0.16 June 6, 2016 June 5, 2021
David Matheson 400,000 400,000 $0.16 June 6, 2016 June 5, 2021

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS .

A.

Major Shareholders

Shareholders

The Company is aware of one person who each beneficially own 5% or more of the Registrant's voting securities. The following table lists as of April 20, 2017 persons and/or companies holding 5% or more beneficial interest in the Company’s outstanding common stock.

5% or Greater Shareholders as of April 20, 2017

Title of Class Name of Shareholder Number of Common Shares Percent of Common Shares
Common Robert L. Hodgkinson (1)                                            3,760,004                                                    8.39%

(1)

3,000,000 of these shares are owned by Hodgkinson Equities Corp., a private company controlled by Robert Hodgkinson. The remaining 760,004 shares are owned by Robert Hodgkinson.


All percentages are based on 44,808,286 common shares outstanding as of April 20, 2017.

Changes in ownership by major shareholders

To the best of the Company’s knowledge there have been no changes in the ownership of the Company’s shares other than disclosed herein.

Voting Rights

The Company’s major shareholders do not have different voting rights.

Shares Held in the United States

As of April 3, 2017, there were approximately 7,710 registered holders of the Company’s shares in the United States, with combined holdings of 30,305,814 common shares.

Change of Control

As of the date of this annual report, there were no arrangements known to the Company which may, at a subsequent date, result in a change of control of the Company.

Control by Others

To the best of the Company’s knowledge, the Company is not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.

B.

Related Party Transactions

During the years ended December 31, 2016 and 2015, the Company entered into the following transactions with related parties:

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(a)

Compensation awarded to key management included a total of salaries and consulting fees of $470,000 (2015 - $473,000) and non-cash stock-based compensation of $80,000 (2015 - $464,000). Key management includes the Company’s officers and directors. The salaries and consulting fees are included in general and administrative expenses. Included in accounts payable and accrued liabilities at December 31, 2016 is $262,000 (December 31, 2015 - $200,000) owing to the two officers of the Company.

   
(b)

Interest expenses of $595,000 (2015 - $343,000) related to the loans from related parties were paid to the CEO of the Company and his spouse or the companies controlled by or associated with the CEO of the Company.

   
(c)

In 2015, the Company entered into loan agreements with a director and officer of the Company and his spouse and the private companies associated with the director and officer of the Company. The terms and conditions of these agreements are described in the “Liquidity and Capital Resources” section under Item 5 “Operating and Financial Review and Prospects”.


C.

Interests of Experts and Counsel

Not Applicable.

ITEM 8. FINANCIAL INFORMATION.

A.

Consolidated Statements and Other Financial Information

Financial Statements

Description Page
Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014 F-1 - F-38

Supplementary Oil and Gas Reserve Estimation and Disclosures (Unaudited) for the years ending December 31, 2016 and 2015

Legal Proceedings

The Directors and the management of the Company do not know of any material, active or pending, legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation.

The Directors and the management of the Company know of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company.

Dividend Policy

The Company has not paid any dividends on its common shares. Any decision to pay dividends on common shares in the future will be made by the board of directors on the basis of the earnings, financial requirements and other conditions existing at such time.

B.

Significant Changes

None.

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ITEM 9. THE OFFER AND LISTING

A.

Offering and Listing Details

The Company’s common shares were listed on the New York Stock Exchange, or the NYSE, in the United States, under the symbol of “DXI”. The Company’s stock was voluntarily delisted from the NYSE MKT at the close of trading on Thursday, August 4, 2016. The Company’s common shares remain listed for trading on the Toronto Stock Exchange, or the TSX, in Canada, under the symbol of “DXI”. Effective August 5, 2016, the Company’s common shares are listed for trading on the OTCQB (“OTCQB”), in the United States, under the symbol of “DXIEF.”

The following table sets forth, for the periods indicated, the reported high and low prices:

  OTCQB (US$)     TSX (Cdn$)     NYSE (US$)
  High Low High Low High Low
Annual High and Low Market Prices – Past 5            
Years            
Year Ended:            
December 31, 2016 $0.14 $0.03 $0.37 $0.03 $0.30 $0.10
December 31, 2015 N/A N/A $1.10 $0.18 $0.93 $0.12
December 31, 2014 N/A N/A $1.80 $0.63 $1.65 $0.57
December 31, 2013 N/A N/A $1.30 $0.50 $1.23 $0.46
December 31, 2012 N/A N/A $2.95 $0.60 $2.85 $0.61
             
Quarterly High and Low Market Prices – Past 2            
Years            
Quarter Ended:            
December 31, 2016 $0.08 $0.03 $0.11 $0.03 N/A N/A
September 30, 2016 $0.14 $0.06 $0.19 $0.09 $0.18 $0.11
June 30, 2016 N/A N/A $0.31 $0.14 $0.26 $0.10
March 31, 2016 N/A N/A $0.37 $0.21 $0.30 $0.14
             
December 31, 2015 N/A N/A $0.63 $0.18 $0.70 $0.12
September 30, 2015 N/A N/A $0.90 $0.53 $0.67 $0.35
June 30, 2015 N/A N/A $0.90 $0.63 $0.80 $0.56
March 31, 2015 N/A N/A $1.10 $0.75 $0.93 $0.61
             
Monthly High and Low Market Prices – Most            
Recent 6 Months            
March 31, 2017 $0.07 $0.04 $0.09 $0.07 N/A N/A
February 29, 2017 $0.08 $0.06 $0.11 $0.07 N/A N/A
January 31, 2017 $0.09 $0.06 $0.11 $0.08 N/A N/A
December 31, 2016 $0.08 $0.03 $0.11 $0.05 N/A N/A
November 30, 2016 $0.07 $0.04 $0.09 $0.03 N/A N/A
October 31, 2016 $0.08 $0.06 $0.11 $0.08 N/A N/A

On April 20, 2017, the closing price of our common shares on the TSX was Cdn$0.08 per common share and on the OTCQB was US$0.04 per common share.

B.

Plan of Distribution

Not Applicable.

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C.

Markets

Our common shares, no par value, are traded on the TSX in Canada under the symbol of “DXI” and the OTCQB in the United States under the symbol of “DXIEF”.

D.

Selling Shareholders

Not Applicable.

E.

Dilution

Not Applicable.

F.

Expenses of the Issue

Not Applicable.

ITEM 10. ADDITIONAL INFORMATION

A.

Share Capital

Not Applicable.

B.

Memorandum and Articles of Association

DXI Energy Inc. is incorporated under the laws of British Columbia, Canada. The Company was originally incorporated as “Dejour Mines Limited” on March 29, 1968 under the laws of the Province of Ontario. By articles of amendment dated October 30, 2001, the issued shares were consolidated on the basis of one (1) new for every fifteen (15) old shares and the name of the Company was changed to Dejour Enterprises Ltd. On June 6, 2003, the shareholders approved a resolution to complete a one-for-three-share consolidation, which became effective on October 1, 2003. In 2005, the Company was continued in British Columbia under the Business Corporations Act (British Columbia) (the “Act”). Effective March 9, 2011, the Company changed its name from Dejour Enterprises Ltd. to Dejour Energy Inc. On October 27, 2015, the Company changed its name from Dejour Energy Inc. to DXI Energy Inc. and effected a five-to-one share consolidation of its common shares. The Company’s common shares began trading on a post-consolidation basis on October 30, 2015.

There are no restrictions on what business the Company may carry on in the Articles of Incorporation.

Under Article 17 of the Company’s Articles and under Part 5, Division 3 of the Act, a director must declare its interest in any existing or proposed contract or transaction with the Company and is not allowed to vote on any transaction or contract with the Company in which has a disclosable interest, unless all directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution. A director may hold any office or place of profit with the Company in conjunction with the office of director, and no director shall be disqualified by his office from contracting with the Company. A director or his firm may act in a professional capacity for the Company and he or his firm shall be entitled to remuneration for professional services. A director may become a director or other officer or employee of, or otherwise interested in, any corporation or firm in whom the Company may be interested as a shareholder or otherwise. The director shall not be accountable to the Company for any remuneration or other benefits received by him from such other corporation or firm subject to the provisions of the Act.

Article 16 of the Company’s Articles addresses the powers and duties of the directors. Directors must, subject to the Act, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers which are not required to be exercised by the shareholders as governed by the Act. Article 19 of the Company’s Articles addresses Committees of the Board of Directors. Directors may, by resolution, create and appoint an executive committee consisting of the director or directors that they deem appropriate. This executive committee has, during the intervals between meetings of the Board, all of the directors’ powers, except the power to fill vacancies in the Board, the power to remove a Director, the power to change the membership of, or fill vacancies in, any committee of the Board and any such other powers as may be set out in the resolution or any subsequent directors’ resolution. Directors may also by resolution appoint one or more committees other than the executive committee.

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These committees may be delegated any of the directors’ powers except the power to fill vacancies on the board of directors, the power to remove a director, the power to change the membership or fill vacancies on any committee of the directors, and the power to appoint or remove officers appointed by the directors. Article 18 of the Company’s Articles details the proceedings of directors. A director may, and the Secretary or Assistant Secretary, if any, on the request of a director must call a meeting of the directors at any time. The quorum necessary for the transaction of the business of the directors may be fixed by the directors and if not so fixed shall be deemed to a majority of the directors. If the number of directors is set at one, it quorum is deemed to be one director.

Article 8 of the Company’s Articles details the borrowing powers of the directors. They may, on behalf of the Company:

Borrow money in a manner and amount, on any security, from any source and upon any terms and conditions as they deem appropriate;

   

Issue bonds, debentures, and other debt obligations either outright or as security for any liability or obligation of the Company or any other person at such discounts or premiums and on such other terms as they consider appropriate;

   

Guarantee the repayment of money by any other person or the performance of any obligation of any other person; and

   

Mortgage, charge, or grant a security in or give other security on, the whole or any part of the present or future assets and undertaking of the Company.

A director need not be a shareholder of the Company, and there are no age limit requirements pertaining to the retirement or non-retirement of directors. The directors are entitled to the remuneration for acting as directors, if any, as the directors may from time to time determine. If the directors so decide, the remuneration of directors, if any, will be determined by the shareholders. The remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company as such who is also a director. The Company must reimburse each director for the reasonable expenses that he or she may incur in and about the business of the Company. If any director performs any professional or other services for the Company that in the opinion of the directors are outside the ordinary duties of a director, or if any director is otherwise specially occupied in or about the Company’s business, he or she may be paid remuneration fixed by the directors, or, at the option of that director, fixed by ordinary resolution and such remuneration may be either in addition to, or in substitution for, any other remuneration that he or she may be entitled to receive. Unless other determined by ordinary resolution, the directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any director who has held any salaried office or place of profit with the Company or to his or her spouse or dependents and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.

Article 21 of the Company’s Articles provides for the mandatory indemnification of directors, former directors, and alternate directors, as well as his or hers heirs and legal personal representatives, or any other person, to the greatest extent permitted by the Act. The indemnification includes the mandatory payment of expenses actually and reasonably incurred by such person in respect of that proceeding. The failure of a director, alternate director, or officer of the Company to comply with the Act or the Company’s Articles does not invalidate any indemnity to which he or she is entitled. The directors may cause the Company to purchase and maintain insurance for the benefit of eligible parties who:

(a)

is or was a director, alternate director, officer, employee or agent of the Company;

   
(b)

is or was a director, alternate director, officer employee or agent of a corporation at a time when the corporation is or was an affiliate of the Company;

   
(c)

at the request of the Company, is or was a director, alternate director, officer, employee or agent of a corporation or of a partnership, trust, joint venture or other unincorporated entity;

55



(d)

at the request of the Company, holds or held a position equivalent to that of a director, alternate director or officer of a partnership, trust, joint venture or other unincorporated entity;

against any liability incurred by him or her as such director, alternate director, officer, employee or agent or person who holds or held such equivalent position

Under Article 9 of the Company’s Articles and subject to the Act, the Company may alter its authorized share structure by directors’ resolution or ordinary resolution, in each case determined by the directors, to:

(a)

create one or more classes or series of shares or, if none of the shares of a series of a class or series of shares are allotted or issued, eliminate that class or series of shares;

   
(b)

increase, reduce or eliminate the maximum number of shares that the Company is authorized to issue out of any class or series of shares or establish a maximum number of shares that the company is authorized to issue out of any class or series of shares for which no maximum is established;

   
(c)

subdivide or consolidate all or any of its unissued, or fully paid issued, shares;

   
(d)

if the Company is authorized to issue shares of a class or shares with par value;


  (i)

decrease the par value of those shares; or

     
  (ii)

if none of the shares of that class of shares are allotted or issued, increase the par value of those shares;


(e)

change all or any of its unissued, or fully paid issued, shares with par value into shares without par value or any of its unissued shares without par value into shares with par value;

   
(f)

alter the identifying name of any of its shares; or

by ordinary resolution otherwise alter its share or authorized share structure.

Subject to Section9.2 of the Company’s Articles and the Act, the Company may:

(1)

by directors’ resolution or ordinary resolution, in each case determined by the directors, create special rights or restrictions for, and attach those special rights or restrictions to, the shares of any class or series of shares, if none of those shares have been issued, or vary or delete any special rights or restrictions attached to the shares of any class or series of shares, if none of those shares have been issued; and

   
(2)

by special resolution of the shareholders of the class or series affected, do any of the acts in Section 9.1 of the Company’s Articles if any of the shares of the class or series of shares has been issued.

The Company may by resolution of its directors or by ordinary resolution, in each case as determined by the directors, authorize an alteration of its Notice of Articles in order to change its name.

The directors may, whenever they think fit, call a meeting of shareholders. An annual general meeting shall be held once every calendar year at such time (not being more than 15 months after holding the last preceding annual meeting) and place as may be determined by the Directors.

There are no limitations upon the rights to own securities.

There is no special ownership threshold above which an ownership position must be disclosed. However, any ownership level above 10% must be disclosed to the TSX and all applicable Canadian Securities Commission.

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Description of Share Capital

The Company is authorized to issue an unlimited number of common shares, preferred shares and series 1 preferred shares of which, as of April 20, 2017, 44,808,286 common shares, are issued and outstanding. The rights, preferences and restrictions attaching to each class of the Company’s shares are as follows:

Common Shares

All the common shares of the Company are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets. All common shareholders are entitled to receive notice of, attend and be heard at any meeting of shareholders of the Company, except a meeting of the holders of shares of another class, as such, and except a meeting of the holders of a particular series, as such. Holders of shares of common stock are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders, including the election of directors. Except as otherwise required by law the holders of the Company’s common shares will possess all voting power. Generally, all matters to be voted on by shareholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all common shares that are present in person or represented by proxy. Subject to the special rights and restrictions attached to the shares of any class or series of classes, one holder of common shares issued, outstanding and entitled to vote, represented in person or by proxy, is necessary to constitute a quorum at any meeting of our shareholders.

Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or other disposition of the property or assets of the Company, holders of shares of common stock are entitled to receive pro rata the assets of Company, if any, remaining after payments of all debts and liabilities to the holders of preferred shares or any other shares ranking senior to shares of common stock. No shares have been issued subject to call or assessment. There are no preemptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.

The holders of the Company’s common shares will be entitled to such cash dividends as may be declared from time to time by our Board of Directors but such dividend will rank junior to the holders of preferred shares and series 1 preferred shares.

In the event of any merger or consolidation with or into another company in connection with which the Company’s common shares are converted into or exchangeable for shares, other securities or property (including cash), all holders of the Company’s common shares will be entitled to receive the same kind and amount of shares and other securities and property (including cash).

There are no indentures or agreements limiting the payment of dividends on the Company’s common shares and there are no special liquidation rights or subscription rights attaching to the Company’s common shares.

Preferred Shares

Preferred shares may, at any time and from time to time, be issued in one or more series and the Company may, by directors’ resolution or ordinary resolution, do one or more of the following:

determine the maximum number of shares of any of those series of preferred shares that the Company is authorized to issue, determine that there is no maximum number or alter any determination made or otherwise, in relation to a maximum number of those shares, and authorize the alteration of the Notice of Articles accordingly;

   

alter the Articles of the Company, and authorize the alteration of the Notice of Articles, to create an identifying name by which the shares of any of those series of preferred shares may be identified or to alter any identifying name created for those shares; and

   

alter the Articles of the Company, and authorize the alteration of the Notice of Articles, to attach special rights or restrictions to the shares of any of those series of preferred shares or to alter any special rights or restrictions attached to those shares, subject to the special rights and restrictions attached to the preferred shares.

57


If the alterations, determinations or authorizations contemplated above are to be made in relation to a series of shares of which there are issued shares, those alterations, determinations or authorizations may be made by ordinary resolution. However, no special rights or restrictions attached to a series of preferred shares shall confer on the series of preferred shares priority over another series of preferred shares respecting (i) dividends or (ii) return of capital on the dissolution of the Company or on the occurrence of any event that entitles the shareholders holding the shares of all series of preferred shares to a return of capital.

All holders of preferred shares shall not be entitled to receive notice of, attend and be heard at any meeting of or vote at any meeting of shareholders of the Company, except any specific meeting of the holders of preferred shares.

The holders of the Company’s preferred shares will be entitled to such cash dividends as may be declared from time to time by our Board of Directors and shall rank senior to the holders of our common shares and any other shares of the Company ranking junior to the preferred shares.

Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or other disposition of the property or assets of the Company, holders of the holders of the Preferred Shares, including the Series 1 Preferred Shares, shall be entitled to receive, for each preferred share held, from the property and assets of the Company, a sum equivalent to the amount paid up thereon together with the premium (if any) thereon and any dividends declared thereon before any amount shall be paid or any property or asset of the Company is distributed to the holders of the common shares or any other shares ranking junior to the preferred shares with respect to repayment of capital. After payment to the holders of the preferred shares of the amount so payable to them, the holders of the preferred shares shall not be entitled to share in any further distribution of the property or assets of the Company except as specifically provided in special rights and restrictions attached to any particular series of preferred shares

Series 1 Preferred Shares

The Company may, at any time and from time to time, issue series 1 preferred shares. The Company may, by directors’ resolution or ordinary resolution passed before the issue of any series 1 preferred shares, in each case as determined by the directors or, if there are issued series 1 preferred shares, by ordinary resolution, do one or more of the following:

determine the maximum number of the series 1 preferred shares that the Company is authorized to issue, determine that there is no maximum number or alter any determination made in relation to a maximum number of those shares, and authorize the alteration of the Notice of Articles accordingly;
     
alter the Articles of the Company, and authorize the alteration of the Notice of Articles, to alter the name of the series 1 preferred shares; and
     
alter the Articles of the Company, and authorize the alteration of the Notice of Articles, to attach special rights or restrictions to the series 1 preferred shares or to alter any special rights or restrictions attached to those shares, subject to the special rights and restrictions attached to the preferred shares.

The special rights and restrictions that may be attached to the series 1 preferred shares may include, without in any way limiting or restricting the generality of such paragraph, rights and restrictions respecting the following:

the rate or amount of dividends, whether cumulative, non-cumulative or partially cumulative and the dates, places and currencies of payment thereof;
     
the consideration for, and the terms and conditions of, any purchase for cancellation or redemption thereof, including redemption after a fixed term or at a premium, conversion or exchange rights;
     
  the terms and conditions of any share purchase plan or sinking fund;
     
the restrictions respecting the payment of dividends on, or the repayment of capital in respect of, any other shares of the Company;

58



  •   voting rights; and
     
the issuance of any shares of any other class or series of shares of the Company or any evidences of indebtedness or any other securities convertible into or exchangeable for such shares

No special rights or restrictions attached to the series 1 preferred shares confers on the series 1 preferred shares priority over another series of preferred shares respecting (i) dividends or (ii) return of capital on the dissolution of the Company or on the occurrence of any event that entitles the shareholders holding the shares of all series of preferred shares to a return of capital.

All holders of series 1 preferred shares are not entitled to receive notice of, attend and be heard at any meeting of or vote at any meeting of shareholders of the Company, except any specific meeting of the holders of series 1 preferred shares.

The holders of the Company’s series 1 preferred shares will be entitled to such cash dividends as may be declared from time to time by the Company’s Board of Directors and will rank senior to the holders of the Company’s common shares and any other shares of the Company ranking junior to the preferred shares.

Dividend Record

The Company has not paid any dividends on its common shares and has no policy with respect to the payment of dividends.

Ownership of Securities and Change of Control

There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by foreign law or by the constituent documents of the Company.

Any person who beneficially owns, directly or indirectly, or exercises control or direction over more than 10% of the Company’s voting shares is considered an insider, and must file an insider report with the Canadian regulatory commissions within ten days of becoming an insider, disclosing any direct or indirect beneficial ownership of, or control or direction over securities of the Company. In addition, if the Company itself holds any of its own securities, the Company must disclose such ownership.

There are no provisions in the Company’s Articles or Notice of Articles that would have an effect of delaying, deferring or preventing a change in control of the Company operating only with respect to a merger, acquisition or corporate restructuring involving the Company or its subsidiaries.

Differences from Requirements in the United States

Except for the Company’s quorum requirements, certain requirements related to related party transactions and the requirement for notice of shareholder meetings, discussed above, there are no significant differences in the law applicable to the Company, in the areas outlined above, in Canada versus the United States. In most states in the United States, a quorum must consist of a majority of the shares entitled to vote. Some states allow for a reduction of the quorum requirements to less than a majority of the shares entitled to vote. Having a lower quorum threshold may allow a minority of the shareholders to make decisions about the Company, its management and operations. In addition, most states in the United States require that a notice of meeting be mailed to shareholders prior to the meeting date. Additionally, in the United States, a director may not be able to vote on the approval of any transaction in which the director has an interest.

C.

Material Contracts

The following are material contracts to which the Company is a party:

Financial Contract with a U.S. Oil and Gas Drilling Fund

On December 31, 2012, Dejour USA entered into a financial contract with a U.S. oil and gas drilling fund (“Drilling Fund”) to fund the drilling of up to three wells and the completion of up to four wells in the State of Colorado. The Drilling Fund contributed US$6.5 million cash to earn working interests in production from the wellbores ranging from 55.56% to 77.78% before payout and 44.44% to 58.33% after payout. This amount was subsequently increased by US$500,000 to US$7,000,000 with the Company’s consent.

59


The December 31, 2012 financial contract states the Drilling Fund has the right to require Dejour USA to purchase its working interests in the wellbores for cash in September 2016, 36-months after the final well in the 4-well program is placed on production. The repurchase price is based on a predetermined formula which ensures the Drilling Fund earns a minimum return, compounded annually and applied on a monthly basis, on 75% of its original US$7,000,000 investment over the 36-month period. Accordingly, the Company considered the transaction to be a financial contract as the risks and rewards of ownership were not substantially transferred to the Drilling Fund and, on December 31, 2012, the Company recorded the transaction in its accounts by increasing property and equipment and financial contract liability by US$6,500,000 on its balance sheet. This amount was subsequently increased to US$7,000,000.

On June 30, 2014, the financial contract was amended and the Drilling Fund agreed to retain its working interest in the wells as at September 30, 2016, should it exercise its right to require Dejour USA to pay the minimum return provided for in the December 31, 2012 contract. The Drilling Fund further agreed to deduct the residual reserve value of its working interest in the 4 wellbores at September 30, 2016 in determining the net liability owed by Dejour USA to the Drilling Fund at September 30, 2016. The parties also agreed to have a third party engineering firm calculate the residual value of the reserves in according with industry-accepted valuation standards.

Finally, the parties agreed to limit the cash consideration to be paid by Dejour USA, should it be required to pay the minimum return provided for in the December 31, 2012 contract to US$3,000,000. Additional consideration, if any, may be paid by Dejour USA by an assignment of a working interest in certain proven assets at a jointly owned oil and gas property in Colorado applying an industry-standard valuation approach.

The June 30, 2014 amendment transferred the risks of ownership of the 4 wellbores back to the Drilling Fund and the financial contract liability was adjusted to reflect the present value of the amount owing to the Drilling Fund under the financial contract at December 31, 2016 ($7,843,000), net of the present value of the residual reserves ($617,000), or $7,226,000.

On September 30, 2016, the Drilling Fund served notice to Dejour USA requiring Dejour USA to purchase the Drilling Fund’s 77.71% working interest in the 4 wellbores in accordance with the provisions of the “put” option contract described above. However, prior to serving such notice, the Drilling Fund executed certain assignments transferring ownership of its working interests in the 4 wellbores to another entity and the assignee mortgaged its interest therein. The Company is assessing as to whether such assignment and subsequent mortgaging of working interests by the entity disentitled the Drilling Fund from exercising the “put” option which underlies the entire financial contract, and the related liability as set out in these consolidated financial statements, and whether, as a result thereof, the “put” contract option exercise was null and void as at September 30, 2016.

HEC loan to the Company

On March 12, 2015, as amended on May 6, 2015, June 22, 2015, September 28, 2015 and November 18, 2015, the Company issued a promissory note for $4.5 million to HEC, a private company controlled by the CEO of the Company. The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber its Canadian oil and gas properties without HEC’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest was repayable by the earlier of (i) within 10 business days of receipt of written demand from HEC for the repayment and (ii) June 10, 2015 or such later date to which the term of the promissory note may be extended. On May 6, 2015, the due date of the loan was extended to September 30, 2015. On September 28, 2015, the due date of the loan was further extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $114,230.77 was due on the 1 st day of each month commencing June 1, 2016. HEC agreed to waive the requirement of the Company to repay the total monthly principal repayments of $1,142,000 for a period of 10 months. In consideration for the extension, the Company issued HEC 9,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges for four months. In the event of default, all the indebtedness secured by the promissory note becomes due and payable and the interest rate is immediately increased to the Canadian prime rate plus 8.5% per annum. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HEC on DEAL’s oil and gas properties. The first mortgage security so issued ranks “pari passu” with HVI’s first mortgage security interest. As at December 31, 2016, the maximum $4.5 million had been advanced to the Company.

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HVI loan to the Company

On June 22, 2015, as amended on September 28, 2015 and November 18, 2015, the Company issued a promissory note for $2,000,000 to HVI, a private company associated with the CEO of the Company, on a “pari passu” basis with the loan from HEC. The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber its Canadian oil and gas properties without HVI’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest was repayable on or before September 30, 2015. On September 28, 2015, the due date of the loan was extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $50,769.23 was due on the 1st day of each month commencing June 1, 2016. HVI agreed to waive the requirement of the Company to repay the total monthly principal repayments of $508,000 for a period of 10 months. In consideration for the extension, the Company issued HVI 4,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges for four months. In the event of default, all the indebtedness secured by the promissory note become due and payable and the interest rate is immediately increased to the Canadian prime rate plus 8.5% per annum. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HVI on its Canadian oil and gas properties. The first mortgage security so issued ranks “pari passu” with HEC’s first mortgage security interest. As at December 31, 2016, the maximum $2.0 million had been advanced to the Company.

D.

Exchange Controls

There are no governmental laws, decrees, or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends, or other payments to non-resident holders of the Company’s common stock. Any remittances of dividends to United States residents are, however, subject to Canadian withholding tax at the rate of 25% under the Canadian Tax Act. However, pursuant to Article X of the reciprocal tax treaty between Canada and the United States, if the U.S. Holder is entitled to benefit under the Treaty, the applicable rate of Canadian withholding tax is generally reduced to 15% (a further reduction of 10% may be applicable if the shareholder is a corporation owning at least 10% of the outstanding Common Stock of the Company.

Except as provided in the Investment Canada Act (the “ICA”), there are no limitations specific to the rights of non-Canadians to hold or vote the common shares of the Company under the laws of Canada or the Province of British Columbia or in the charter documents of the Company.

Management of the Company considers that the following general summary is materially complete and fairly describes those provisions of the ICA pertinent to an investment by an American investor in the Company.

The ICA requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business, the gross value of the assets of which exceed certain threshold levels or the business activity of which is related to Canada’s cultural heritage or national identity, to either notify, or file an application for review with, Investment Canada, the federal agency created by the ICA.

The notification procedure involves a brief statement of information about the investment of a prescribed form which is required to be filed with Investment Canada by the investor at any time up to 30 days following implementation of the investment. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada’s cultural heritage and national identity.

If an investment is reviewable under the ICA, an application for review in the form prescribed is normally required to be filed with Investment Canada prior to the investment taking place and the investment may not be implemented until the review has been completed and the Minister responsible for Investment Canada is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, may be required to divest himself of control of the business that is the subject of the investment.

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The following investments by non-Canadians are subject to notification under the ICA:

(a)

an investment to establish a new Canadian business; and

   
(b)

an investment to acquire control of a Canadian business that is not reviewable pursuant to the ICA.

An investment is reviewable under the ICA if there is an acquisition by a non-Canadian of a Canadian business and the asset value of the Canadian business being acquired equals or exceeds the following thresholds:

(a)

for non-WTO Investors, the threshold is $5,000,000 for a direct acquisition and over $50,000,000 for an indirect acquisition. The $5,000,000 threshold will apply however for an indirect acquisition if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction;

   
(b)

except as specified in paragraph (c) below, a threshold is calculated annually for reviewable direct acquisitions by or from WTO Investors. The threshold for 2012 is $330,000,000. Pursuant to Canada’s international commitments, indirect acquisitions by or from WTO Investors are not reviewable; and

   
(c)

the limits set out in paragraph (a) apply to all investors for acquisitions of a Canadian business that is a cultural business.:

WTO Investor as defined in the ICA means:

(a)

an individual, other than a Canadian, who is a national of a WTO Member or who has the right of permanent residence in relation to that WTO Member;

   
(b)

a government of a WTO Member, whether federal, state or local, or an agency thereof;

   

an entity that is not a Canadian-controlled entity, and that is a WTO investor-controlled entity, as determined in accordance with the ICA;

   
(c)

a corporation or limited partnership:


  (i)

that is not a Canadian-controlled entity, as determined pursuant to the ICA;

     
  (ii)

that is not a WTO investor within the meaning of the ICA;

     
  (iii)

of which less than a majority of its voting interests are owned by WTO investors;

     
  (iv)

that is not controlled in fact through the ownership of its voting interests; and

     
  (v)

of which two thirds of the members of its board of directors, or of which two thirds of its general partners, as the case may be, are any combination of Canadians and WTO investors;


(d)

a trust:


  (i)

that is not a Canadian-controlled entity, as determined pursuant to the ICA;

     
  (ii)

that is not a WTO investor within the meaning of the ICA;

     
  (iii)

that is not controlled in fact through the ownership of its voting interests, and

     
  (iv)

of which two thirds of its trustees are any combination of Canadians and WTO investors, or


(e)

any other form of business organization specified by the regulations that is controlled by a WTO investor.

WTO Member as defined in the ICA means a member of the World Trade Organization.

Generally, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its Canadian parent or grandparent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian parent or grandparent of an entity carrying on the Canadian business. Control may be acquired through the acquisition of actual or de jure voting control of a Canadian corporation or through the acquisition of substantially all of the assets of the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor.

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The ICA specifically exempts certain transactions from either notification or review. Included among the category of transactions is the acquisition of voting shares or other voting interests by any person in the ordinary course of that person’s business as a trader or dealer in securities.

E.

Taxation

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder who is the beneficial holder of common shares of the Company and who, at all relevant times, for the purposes of the application of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “ Canada Tax Act ”) (i) deals at arm’s length with the Company, (ii) is not affiliated with the Company, (iii) holds the common shares as capital property, and (iv) who, for the purposes of the Canada Tax Act and the Canada – United States Income Tax Convention (the “ Treaty ”), is at all relevant times resident in and only in the United States, is a qualifying person entitled to all of the benefits of the Treaty, and (v) does not use or hold and is not deemed to use or hold the shares in carrying on a business in Canada (a “ U.S. Holder ”). Special rules, which are not discussed below, may apply to a U.S. Holder that is an insurer or authorized foreign bank that carries on business in Canada and elsewhere.

This summary is based on the current provisions of the Canada Tax Act and the current published administrative policies and assessing practices of the Canada Revenue Agency (“ CRA ”) published in writing prior to the date hereof. This summary also takes into account all specific proposals to amend the Canada Tax Act and Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (collectively, the “ Tax Proposals ”) and assumes all Tax Proposals will be enacted in the form proposed. There is no certainty that the Tax Proposals will be enacted in the form proposed, if at all. This summary does not otherwise take into account or anticipate any changes in laws or administrative policy or assessing practice whether by judicial, regulatory, administrative or legislative decision or action nor does it take into account provincial, territorial or foreign income tax legislation or considerations.

This summary is of a general nature only and is not, and is not intended to be, nor should it be construed to be, legal or tax advice to any particular purchaser of Units. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, purchasers should consult their own tax advisors regarding the income tax consequences of purchasing Units based on their particular circumstances.

Dividends

Dividends paid or credited or deemed to be paid or credited to a U.S. Holder by the Company will be subject to Canadian withholding tax at the rate of 25% under the Canada Tax Act, subject to any reduction in the rate of withholding to which the U.S. Holder is entitled under the Treaty. For example, if the U.S. Holder is entitled to benefits under the Treaty and is the beneficial owner of the dividends, the applicable rate of Canadian withholding tax is generally reduced to 15%. The rate of Canadian withholding tax for such U.S. Holder will generally be further reduced under the Treaty to 5% if such holder is a corporation that beneficially owns at least 10% of the voting shares of the Company, and may be further reduced to nil if such holder is a qualifying pension TRUST i/o fund.

Dispositions

A U.S. Holder will not be subject to tax under the Canada Tax Act on any capital gain realized on a disposition of a common share (including a deemed disposition on death), unless the common share is or is deemed to be “taxable Canadian property” to the U.S. Holder for the purposes of the Canada Tax Act.

Generally, provided the Shares are listed on a “designated stock exchange” as defined in the Canada Tax Act (which includes the TSX) at the time of disposition, the Shares will not constitute taxable Canadian property of a U.S. Holder, unless at any time during the 60-month period immediately preceding the disposition, the U.S. Holder, persons with whom the U.S. Holder did not deal at arm’s length, or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class of shares of the Company and more than 50% of the fair market value of those shares was derived directly or indirectly from any one or combination of (i) real or immovable property situated in Canada,(ii) Canadian resource properties, (iii) timber resource properties, and (iv) options in respect of, or interests in, or for civil rights law rights in, property described in any of (i) to (iii), whether or not that property exists.

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U.S. Holders whose common shares may constitute taxable Canadian property should consult with their own tax advisors.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares of the Company.

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.

No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.

Scope of this Summary

Authorities

This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, U.S. court decisions, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Treaty”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.

U.S. Holders

For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:

•   an individual who is a citizen or resident of the U.S.;
   
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;
   
•   an estate whose income is subject to U.S. federal income taxation regardless of its source; or

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a trust that (a) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (b) has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

Non-U.S. Holders

For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of common shares.

U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders that own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) U.S. Holders that acquired common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) U.S. Holders that hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) partnerships and other pass-through entities (and investors in such partnerships and entities); or (i) U.S. Holders that own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of the Company. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S. subject to Section 877 of the Code; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Act; (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Treaty. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.

If an entity that is classified as a partnership (or pass-through entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such partnership and the partners of such partnership generally will depend on the activities of the partnership and the status of such partners. Partners of entities that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of common shares.

Tax Consequences Not Addressed

This summary does not address the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of common shares.

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U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares

If the Company is not considered a “passive foreign investment company” (a “PFIC”, as defined below) at any time during a U.S. Holder’s holding period, the following sections will generally describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of the Company’s common shares.

Distributions on Common Shares

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares (see “Sale or Other Taxable Disposition of Common Shares” below). However, the Company does not intend to maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be eligible for the “dividends received deduction.”

Dividends paid by the Company generally will be taxed at the preferential tax rates applicable to long-term capital gains if (a) the Company is a “qualified foreign corporation” (as defined below), (b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and (c) certain holding period requirements are met. The Company generally will be a “qualified foreign corporation” under Section 1(h)(11) of the Code (a “QFC”) if (a) the Company is eligible for the benefits of the Treaty, or (b) common shares of the Company are readily tradable on an established securities market in the U.S. However, even if the Company satisfies one or more of such requirements, the Company will not be treated as a QFC if the Company is a PFIC for the taxable year during which the Company pays a dividend or for the preceding taxable year. (See the section below under the heading "Passive Foreign Investment Company Rules").

If the Company is a QFC, but a U.S. Holder otherwise fails to qualify for the preferential tax rate applicable to dividends discussed above, a dividend paid by the Company to a U.S. Holder, including a U.S. Holder that is an individual, estate, or trust, generally will be taxed at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains). The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the dividend rules.

Sale or Other Taxable Disposition of Common Shares

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of common shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in such common shares sold or otherwise disposed of. Subject to the PFIC rules discussed below, any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if, at the time of the sale or other disposition, such common shares are held for more than one year.

Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of common shares generally will be treated as “U.S. source” for purposes of applying the U.S. foreign tax credit rules unless the gain is subject to tax in Canada and is sourced as “foreign source” under the Treaty and such U.S. Holder elects to treat such gain or loss as “foreign source.”

Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

Receipt of Foreign Currency

The amount of any distribution paid in foreign currency to a U.S. Holder in connection with the ownership of common shares, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder that receives foreign currency and converts such foreign currency into U.S. dollars at a conversion rate other than the rate in effect on the date of receipt may have a foreign currency exchange gain or loss, which generally would be treated as U.S. source ordinary income or loss. If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

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Foreign Tax Credit

A U.S. Holder who pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.

Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. Dividends paid by the Company generally will constitute “foreign source” income and generally will be categorized as “passive income.”

The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.

Additional Tax on Passive Income

For tax years beginning after December 31, 2012, certain individuals, estates and trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and net gain from disposition of property (other than property held in a trade or business). U.S. Holders should consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of common shares.

Information Reporting; Backup Withholding Tax For Certain Payments

Under U.S. federal income tax law and regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, recently enacted legislation generally imposes new U.S. return disclosure obligations (and related penalties) on U.S. Holders that hold certain specified foreign financial assets in excess of $50,000. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U. S. Holders may be subject to these reporting requirements unless their common shares are held in an account at a domestic financial institution. Penalties for failure to file certain of these information returns are substantial. U.S. Holders of common shares should consult with their own tax advisors regarding the requirements of filing information returns, these rules, including the requirement to file an IRS Form 8938.

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Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares generally will be subject to information reporting and backup withholding tax, at the rate of 28% (and increasing to 31% for payments made after December 31, 2012), if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as corporations, generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.

Passive Foreign Investment Company Rules

If the Company were to constitute a PFIC (as defined below) for any year during a U.S. Holder’s holding period, then certain different and potentially adverse tax consequences would apply to such U.S. Holder’s acquisition, ownership and disposition of common shares.

The Company generally will be a PFIC under Section 1297 of the Code if, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income (the “income test”) or (b) 50% or more of the value of its average quarterly assets held by the Company either produce passive income or are held for the production of passive income, based on the fair market value of such assets (the “asset test”). “Gross income” generally includes all revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all (85% or more) of a foreign corporation’s commodities are (a) stock in trade of such foreign corporation or other property of a kind which would properly be included in inventory of such foreign corporation, or property held by such foreign corporation primarily for sale to customers in the ordinary course of business, (b) property used in the trade or business of such foreign corporation that would be subject to the allowance for depreciation under Section 167 of the Code, or (c) supplies of a type regularly used or consumed by such foreign corporation in the ordinary course of its trade or business, and certain other requirements are satisfied.

In addition, for purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other foreign corporation and (b) received directly a proportionate share of the income of such other foreign corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by the Company from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.

Under certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of any subsidiary of the Company which is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition of shares of a Subsidiary PFIC, both as if the holder directly held the shares of such Subsidiary PFIC.

The Company does not believe that it was a PFIC during the tax year ending December 31, 2012. However, PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question, and is determined annually. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. Furthermore, if for any given year the Company reaches either of the test standards (i.e., “income test” and “asset test”), it remains a PFIC forever, no matter how active it becomes in the future. Consequently, there can be no assurance that the Company has never been and will not become a PFIC for any tax year during which U.S. Holders hold common shares.

If the Company were a PFIC in any tax year and a U.S. Holder held common shares, such holder generally would be subject to special rules with respect to “excess distributions” made by the Company on the common shares and with respect to gain from the disposition of common shares. An “excess distribution” generally is defined as the excess of distributions with respect to the common shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from the Company during the shorter of the three preceding tax years, or such U.S. Holder’s holding period for the common shares. Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of the common shares ratably over its holding period for the common shares. Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.

68


While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including, without limitation, the “QEF Election” and the “Mark-to-Market Election”), such elections are available in limited circumstances and must be made in a timely manner. U.S. Holders should be aware that, for each tax year, if any, that the Company is a PFIC, the Company can provide no assurances that it will satisfy the record keeping requirements of a PFIC, or that it will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election under Section 1295 of the Code with respect of the Company or any Subsidiary PFIC. U.S. Holders are urged to consult their own tax advisers regarding the potential application of the PFIC rules to the ownership and disposition of common shares, and the availability of certain U.S. tax elections under the PFIC rules.

F.

Dividends and Paying Agents

Not Applicable.

G.

Statements by Experts

Not Applicable.

H.

Documents on Display

We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. In addition, the SEC maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We are required to file reports and other information with the securities commissions in Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) (http://www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system.

We “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this Form 20-F and more recent information automatically updates and supersedes more dated information contained or incorporated by reference in this Form 20-F.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders.

We will provide without charge to each person, including any beneficial owner, to whom a copy of this annual report has been delivered, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this annual report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: 598 – 999 Canada Place, Vancouver, British Columbia, Canada V6C 3E1, Telephone: (604) 638-5050, Facsimile: (604) 638-5051.

69



I.

Subsidiary Information

Not applicable.

70


ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is engaged primarily in oil and gas exploration and production and manages related industry risk issues directly. The Company may be at risk for environmental issues and fluctuations in commodity pricing. Management is not aware of and does not anticipate any significant environmental remediation costs or liabilities in respect of its current operations.

The Company’s functional currency is the Canadian dollar. The Company operates in foreign jurisdictions, giving rise to significant exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company’s operations that arises from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.

The Company also has exposure to a number of risks from its use of financial instruments including: credit risk, liquidity risk, and market risk. This note presents information about the Company’s exposure to each of these risks and the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital.

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has implemented and monitors compliance with risk management policies. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company’s activities.

(a)

Credit Risk

Credit risk arises from credit exposure to receivables due from joint operating partners and marketers included in accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The Company is exposed to third party credit risk through its contractual arrangements with its current or future joint operating partners, marketers of its petroleum and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to the Company, such failures may have a material adverse effect on the Company’s business, financial condition, and results of operations.

The objective of managing the third party credit risk is to minimize losses in financial assets. The Company assesses the credit quality of the partners, taking into account their financial position, past experience, and other factors. The Company mitigates the risk of non-collection of certain amounts by obtaining the joint operating partners’ share of capital expenditures in advance of a project and by monitoring accounts receivable on a regular basis. As at December 31, 2016 and 2015, no accounts receivable has been deemed uncollectible or written off during the year.

The Company considers all amounts outstanding for more than 90 days as past due. Currently, there is no indication that amounts are non-collectable; thus an allowance for doubtful accounts has not been set up. As at December 31, 2016, $Nil of accounts receivable are past due.

(b)

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The nature of the oil and gas industry is capital intensive and the Company maintains and monitors a certain level of cash flow to finance operating and capital expenditures.

The Company’s ongoing liquidity and cash flow are impacted by various events and conditions. These events and conditions include but are not limited to commodity price fluctuations, general credit and market conditions, operation and regulatory factors, such as government permits, the availability of drilling and other equipment, lands and pipeline access, weather, and reservoir quality.

To mitigate the liquidity risk, the Company closely monitors its credit facility, production level and capital expenditures to ensure that it has adequate liquidity to satisfy its financial obligations.

71



(c)

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Company’s net earnings. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. The Company utilizes financial derivatives to manage certain market risks. All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

(i)

Foreign Currency Exchange Risk

Foreign currency exchange rate risk is the risk that the fair value of financial instruments or future cash flows will fluctuate as a result of changes in foreign exchange rates. Although substantially all of the Company’s oil and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for oil and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollars. Given that changes in exchange rate have an indirect influence, the impact of changing exchange rates cannot be accurately quantified. The Company had no forward exchange rate contracts in place as at or during the year ended December 31, 2016 and 2015.

The Company was exposed to the following foreign currency risk at December 31:

(CA$ thousands) 2016 2015
Expressed in foreign currencies CND$ CND$
Cash and cash equivalents   1     13  
Accounts receivable   282     1,439  
Accounts payable and accrued liabilities   (312 )   (1,623 )
Balance sheet exposure   (29 )   (171 )

The following foreign exchange rates applied for the year ended and as at December 31:

    2016     2015  
December 31, reporting date rate   1.3427     1.3840  
YTD average USD to CAD   1.3253     1.2786  

The Company has performed a sensitivity analysis on its foreign currency denominated financial instruments. Based on the Company’s foreign currency exposure noted above and assuming that all other variables remain constant, a 10% appreciation of the US dollar against the Canadian dollar would result in the increase of net loss of $3,000 at December 31, 2016 (2015 - $17,000). For a 10% depreciation of the above foreign currencies against the Canadian dollar, assuming all other variables remain constant, there would be an equal and opposite impact on net loss.

(ii)

Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. At December 31, 2016, the Company was exposed to interest rate fluctuations on the bank credit facility and the loans from related parties which bore a floating rate of interest. Assuming all other variables remain constant, an increase or decrease of 1% in market interest rate at December 31, 2016 would have increased or decreased net loss by $65,000. The Company had no interest rate swap contracts in place at or during the year ended December 31, 2016 and 2015.

(iii)

Commodity Price Risk

Revenues and consequently cash flows fluctuate with commodity prices and the US/Canadian dollar exchange rate. Commodity prices are determined on a global basis and circumstances that occur in various parts of the world are outside of the control of the Company. The Company may protect itself from fluctuations in prices by using the financial derivative sales contracts. The Company may enter into commodity price contracts to manage the risks associated with price volatility and thereby protect its cash flows used to fund its capital program. Assuming all other variables remain constant, an increase or decrease of oil price of $1 per bbl and gas price of $0.01 per mcf at December 31, 2016 would have decreased or increased net loss by $83,000. The Company had no commodity contracts in place at December 31, 2016.

72



(d)

Capital Management Strategy

The Company’s policy on capital management is to maintain a prudent capital structure so as to maintain financial flexibility, preserve access to capital markets, maintain investor, creditor and market confidence, and to allow the Company to fund future developments. The Company considers its capital structure to include share capital, cash and cash equivalents, bank line of credit, and working capital. In order to maintain or adjust capital structure, the Company may from time to time issue shares or enter into debt agreements and adjust its capital spending to manage current and projected operating cash flows and debt levels.

The Company’s share capital is not subject to any external restrictions. The Company has not paid or declared any dividends, nor are any contemplated in the foreseeable future. There have been no changes to the Company’s capital management strategy during the year ended December 31, 2016.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.-C.

Not applicable.

D.

American Depositary Receipts

The Company does not have securities registered as American Depositary Receipts.

73


PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. – D.

None.

E.

Use of Proceeds

Not Applicable.

ITEM 15. CONTROLS AND PROCEDURES

A.

Disclosure Controls and Procedures

As of the end of the fiscal year ended December 31, 2016, an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), was performed by the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective to give reasonable assurance that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management concluded that our disclosure controls and procedures were effective. The applicable information was filed on a timely basis with the Canadian securities regulators on SEDAR and was publicly accessible on www.SEDAR.com and on the Company’s website, but was not timely furnished on Edgar on Form 6-K. We have taken steps designed to ensure that future information required to be furnished on Form 6-K will be so furnished on a timely basis.

B.

Management’s Report on Internal Control over Financial Reporting

The Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over the Company’s internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards. It should be noted that a control system, no matter how well conceived or operated, can only provide reasonable assurance, not absolute assurance, that the objectives of the control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

The Company’s management, (with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer), conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. This evaluation was based on the criteria set forth in Internal Control-Integrated Framework (2013) (“COSO Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has concluded that, as of December 31, 2016, the Company’s internal control over financial reporting was effective and management’s assessment did not identify material weaknesses.

74



C.

Attestation Report of the Registered Public Accounting Firm

Because the Company is not an “accelerated filer” or “large accelerated filer” within the meaning of such terms under the Exchange Act, this Annual Report is not required to include an attestation report of the Company’s independent auditors regarding the Company’s internal control over financial reporting.

D.

Changes in Internal Control Over Financial Reporting

There were no amendments to the Company’s system of internal control over financial reporting during the year ended December 31, 2016 and the Company is not aware of any amendments to its system of internal control that should be implemented to strengthen its system of internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Company does not have a financial expert, as defined by the US Securities and Exchange Commission, serving on the Company’s “Audit Committee”. In 2011, the Company adopted “International Financial Reporting Standards” (“IFRS”) to comply with Canadian public company reporting standards. The Audit Committee members do not, as yet, have sufficient experience and in-depth understanding of IFRS to qualify as experts.

ITEM 16B. CODE OF ETHICS

The Board of Directors of the Company has adopted a Code of Conduct and Ethics that outlines the Company’s values and its commitment to ethical business practices in every business transaction. This code applies to all directors, officers, and employees of the Company and its subsidiaries and affiliates. A copy of the Company’s Code of Business Conduct and Ethics is available on the Company’s website at www.dxienergy.com .

Reporting Unethical and Illegal Conduct/Ethics Questions

The Company is committed to taking prompt action against violations of the Code of Conduct and Ethics and it is the responsibility of all directors, officers and employees to comply with the Code and to report violations or suspected violations to the Company’s Compliance Officer. Employees may also discuss their concerns with their supervisor who will then report suspected violations to the Compliance Officer.

The Compliance Officer is appointed by the Board of Directors and is responsible for investigating and resolving all reported complaints and allegations and shall advise the President and CEO, the CFO and/or the Audit Committee.

During the fiscal year ended December 31, 2016, the Company did not substantially amend, waive, or implicitly waive any provision of the Code with respect to any of the directors, executive officers or employees subject to it.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets out the fees billed to the Company by BDO Canada LLP for professional services rendered during fiscal years ended December 31, 2016 and December 31, 2015. During these years, BDO Canada LLP was our external auditors.

Year ended
December 31, 2016
Year ended
December 31, 2015
   $ $  
Audit Services (1) 157,000 161,000
Audit Related Services (2) 16,000 -
Tax Services (3) 10,600 9,200
All Other Fees (4) 15,522 15,258

75


NOTES:

(1)

Audit fees consist of fees for the audit of the Company’s annual financial statements and review of the Company’s quarterly financial statements, or services that are normally provided in connection with statutory and regulatory filings or engagements.

   
(2)

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported as Audit fees. During fiscal 2016 and 2015, the services provided in this category included consultation on accounting and audit-related matters and review of reserves disclosure.

   
(3)

Tax fees consist of fees for tax compliance services, tax advice and tax planning. During fiscal 2016 and 2015, the services provided in this category included assistance and advice in relation to the preparation of corporate income tax returns.

   
(4)

During fiscal 2016 and 2015, the aggregate fees in this category consist of Canadian Public Accountability Board (“CPAB”) fees and administration costs.

Pre-Approval Policies and Procedures

Generally, in the past, prior to engaging the Company’s auditors to perform a particular service, the Company’s audit committee has, when possible, obtained an estimate for the services to be performed. The audit committee in accordance with procedures for the Company approved all of the services described above.

In relation to the pre-approval of all audit and audit-related services and fees the Company’s audit committee charter provides that the audit committee shall:

Review and pre-approve all audit and audit-related services and the fees and other compensation related thereto, and any non-audit services, provided by the Company’s external auditors. The pre-approval requirement is waived with respect to the provision of non-audit services if:

i.

the aggregate amount of all such non-audit services provided to the Company constitutes not more than five percent of the total amount of revenues paid by the Company to its external auditors during the fiscal year in which the non-audit services are provided;

ii.

such services were not recognized by the Company at the time of the engagement to be non-audit services; and

iii.

such services are promptly brought to the attention of the Committee by the Company and approved prior to the completion of the audit by the Committee or by one or more members of the Committee who are members of the Board to whom authority to grant such approvals has been delegated by the Committee.

Provided the pre-approval of the non-audit services is presented to the Committee’s first scheduled meeting following such approval such authority may be delegated by the Committee to one or more independent members of the Committee.

We did not rely on the de minimus exemption provided by Section (c)(7)(i)(C) of Rule 2-01 of SEC Regulation S-X in 2016.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS

The Company did not repurchase any common shares in the fiscal year ended December 31, 2016.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Not applicable

ITEM 16H – MINE SAFETY DISCLOSURE

Not Applicable.

76


PART III

ITEM 17. FINANCIAL STATEMENTS

The Company has provided financial statements pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

Report of Independent Registered Chartered Accountants, dated March 22, 2017

Consolidated Balance Sheets at December 31, 2016 and 2015

Consolidated Statements of Comprehensive Loss for the years ending December 31, 2016, 2015 and 2014.

Consolidated Statements of Changes in Shareholder’s Equity for the years ended December 31, 2016, 2015 and 2014.

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014.

Notes to the Consolidated Financial Statements

Supplementary Oil and Gas Reserve Estimation and Disclosures (Unaudited) for the years ending December 31, 2016 and 2015

77


ITEM 19. EXHIBITS

Financial Statements

Description Page
Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014. F-1 - F-38

Supplementary Oil and Gas Reserve Estimation and Disclosures (Unaudited) for the years ending December 31, 2016 and 2015

EXHIBIT  
NUMBER DESCRIPTION
1.1 Articles (1)
1.2 Notice of Articles (1)
1.3 Certificate of Continuation (1)
1.4 Notice of Alteration (1)
1.5 Certificate of Name Change (2)
1.6 Amendment to Articles to Include Special Rights (1)
4.1 Option Plan (1)
4.2 Option Plan (Sub-Plan) (1)
4.3 Financial Contract with Bakken Drilling Fund III, LP dated December 31, 2012 (3)
4.4 Amendment to Financial Contract with Bakken Drilling Fund III, LP dated September 10, 2013 (3)
4.5 Amendment to Financial Contract with Bakken Drilling Fund III, LP dated June 16, 2014 (3)  
4.6 Purchase and Sale Agreement - Drake/Woodrush area, British Columbia dated July 3, 2014 (3)
4.7 Loan Agreement between the Company and HEC dated March 12, 2015 (3)  
4.8 Amendment No.1 to the Loan Agreement between the Company and HEC dated May 6, 2015 (incorporated herein by reference to Exhibit 99.1 on Form 6-K filed on May 26, 2015)
4.9 Amendment No.2 to the Loan Agreement between the Company and HEC dated June 22, 2015 (incorporated herein by reference to Exhibit 99.1 on Form 6-K filed on July 29, 2015)
4.10 Loan Agreement between the Company and HVI dated March 12, 2015 (incorporated herein by reference to Exhibit 99.2 on Form 6-K filed on July 29, 2015)
4.11 Credit Facility Renewal Letter between DEAL and Canadian Western Bank dated July 6, 2015 (incorporated herein by reference to Exhibit 99.3 on Form 6-K filed on July 29, 2015)
4.12 Amendment No.3 to the Loan Agreement between the Company and HEC dated September 28, 2015  (incorporated herein by reference to Exhibit 99.1 on Form 6-K filed on October 23, 2015)
4.13 Amendment No.1 to the Loan Agreement between the Company and HVI dated September 28, 2015  (incorporated herein by reference to Exhibit 99.2 on Form 6-K filed on October 23, 2015)
4.14 Amendment No.4 to the Loan Agreement between the Company and HEC dated November 18, 2015  (incorporated herein by reference to Exhibit 3 on Schedule 13D filed on January 6, 2016)
4.15 Amendment No.2 to the Loan Agreement between the Company and HVI dated November 18, 2015 (incorporated herein by reference to Exhibit 99.1 on Form 6-K filed on April 18, 2016)
8.1 List of Subsidiaries (3)
12.1 Certification of CEO Pursuant to Rule 13a-14(a)*
12.2 Certification of CFO Pursuant to Rule 13a-14(a)*

78



EXHIBIT  
NUMBER DESCRIPTION
13.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350*
13.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350*
15.1 Consent of BDO Canada LLP*
15.2 Consent Letter from GLJ Petroleum Consultants*
15.3 Consent Letter from Gustavson Associates*
99.1 Third Party Report on Reserves Prepared by GLJ Petroleum Consultants, Effective December 31, 2016*
99.2 Reserve Estimate and Financial Forecast as to DXI Energy’s Interests in the Kokopelli Field Area, Garfield County, Colorado, Prepared by Gustavson Associates, Effective January 1, 2017*

(1) Incorporated by reference to the Registrant’s registration statement on Form S-8, filed with the commission on February 16, 2012.
(2) Incorporated by reference to the Registrant’s registration statement on Form 6-K, filed with the commission on October 28, 2015.
(3) Previously Filed with the Commission.
* Filed herewith

79


SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

DXI Energy Inc.

Dated: April 20, 2017   /s/ Robert L. Hodgkinson
      Robert L. Hodgkinson
      Chairman & CEO

80


CONSOLIDATED FINANCIAL STATEMENTS (AUDITED)

December 31, 2016

F-1






DXI ENERGY INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian Dollars)

          December 31,     December 31,  

(thousands of Canadian dollars)

  Notes     2016     2015  
        $   $  
ASSETS                  
Current                  
       Cash and cash equivalents         141     38  
       Accounts receivable         672     2,202  
       Prepaids and deposits         19     31  
Current Assets         832     2,271  
Non-current                  
     Deposits         246     294  
     Exploration and evaluation assets   5     970     3,222  
     Property and equipment   6     19,212     21,899  
Total Assets         21,260     27,686  
                   
LIABILITIES                  
Current                  
       Bank credit facility   8     -     147  
       Accounts payable and accrued liabilities         2,165     2,985  
       Loans from related parties   9     2,363     1,402  
       Warrant liability   10     -     1  
       Derivative liability   9     153     1,226  
     Financial contract liability   12     7,226     7,207  
Current Liabilities         11,907     12,968  
Non-current                  
     Loans from related parties   9     4,031     4,325  
     Decommissioning liability   11     3,776     3,825  
Total Liabilities         19,714     21,118  
SHAREHOLDERS' EQUITY                  
       Share capital   13     98,111     97,162  
       Contributed surplus         10,626     10,438  
       Deficit         (110,636 )   (105,150 )
       Accumulated other comprehensive income         3,445     4,118  
Total Shareholders' Equity         1,546     6,568  
Total Liabilities and Shareholders' Equity         21,260     27,686  

Approved on behalf of the Board:

"signed"   "signed"
Robert Hodgkinson - Director   Craig Sturrock - Director

The accompanying notes are an integral part of these consolidated financial statements. F-4


DXI ENERGY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Expressed in Canadian dollars)

          Year ended December 31  
(thousands of Canadian dollars, except per share amounts)   Notes     2016     2015     2014  
        $   $   $  
REVENUES                        
     Gross revenues         4,808     8,579     9,049  
     Royalties         (735 )   (1,483 )   (1,488 )

            Total Revenues, net of royalties

  19     4,073     7,096     7,561  
                         
EXPENSES                        
     Operating and transportation         2,971     3,843     4,099  
     Amortization, depletion and impairment losses   7     4,493     4,189     6,515  
     General and administrative         1,571     2,246     3,493  
     Financing expenses         1,579     1,117     1,168  
     Stock based compensation         188     771     1,270  
     Foreign exchange (gain) loss         (211 )   288     286  
     Loss on settlement of loan facility         -     -     388  
     Loss on disposal of E&E assets         175     -     318  
     Loss on disposal of property and equipment         -     6     (1,909 )
     Change in fair value of warrant liability   10     (1 )   (754 )   78  
     Change in fair value of derivative liability   9     (1,073 )   (2,245 )   -  
     Loss on debt extinguishment         -     1,398     -  
     (Gain) loss on financial contract liability   12     (63 )   3,348     (918 )
            Total Expenses         9,629     14,207     14,788  
                         
Loss before other items         (5,556 )   (7,111 )   (7,227 )
   Other income         70     3     24  
                         
Loss for the year         (5,486 )   (7,108 )   (7,203 )
                         
Other Comprehensive Income (Loss)                        
Items that may be subsequently reclassified to profit or loss:                        
   Foreign currency translation adjustment         (673 )   2,497     1,107  
                         
Comprehensive loss         (6,159 )   (4,611 )   (6,096 )
                         
Loss per common share - basic and diluted   15     (0.13 )   (0.19 )   (0.20 )

The accompanying notes are an integral part of these consolidated financial statements. F-5


DXI ENERGY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in Canadian Dollars)

          Number     Share     Contributed                    
(thousands of Canadian dollars, except number of shares)   Note     of Shares     Capital     Surplus     Deficit     AOCI(L)*     Total  
              $   $   $   $   $  
Balance as at January 1, 2016         36,509,953     97,162     10,438     (105,150 )   4,118     6,568  
   Shares issued via private placements, net of issuance costs   13     8,298,333     949     -     -     -     949  
   Stock-based compensation         -     -     188     -     -     188  
   Loss         -     -     -     (5,486 )   -     (5,486 )
   Foreign currency translation adjustment         -     -     -     -     (673 )   (673 )
Balance as at December 31, 2016         44,808,286     98,111     10,626     (110,636 )   3,445     1,546  
                                           
Balance as at January 1, 2015         36,480,427     97,132     9,674     (98,042 )   1,621     10,385  
   Issue of shares on exercise of options         29,898     23     -     -     -     23  
   Contributed surplus reallocated on exercise of options         -     7     (7 )   -     -     -  
   Stock-based compensation         -     -     771     -     -     771  
   Loss         -     -     -     (7,108 )   -     (7,108 )
   Foreign currency translation adjustment         -     -     -     -     2,497     2,497  
   Adjustment due to fractional rounding         (372 )   -     -     -     -     -  
Balance as at December 31, 2015         36,509,953     97,162     10,438     (105,150 )   4,118     6,568  
                                           
Balance as at January 1, 2014         29,783,274     90,274     9,150     (90,839 )   514     9,099  
   Shares issued via private placements, net of issuance costs         2,600,000     1,920     -     -     -     1,920  
   Shares issued via acquisition of property, net of issuance costs         1,920,000     1,890     -     -     -     1,890  
   Issue of shares on exercise of options and warrants         2,177,153     2,232     -     -     -     2,232  
   Contributed surplus reallocated on exercise of warrants         -     70     -     -     -     70  
   Contributed surplus reallocated on exercise of options         -     746     (746 )   -     -     -  
   Stock-based compensation         -     -     1,270     -     -     1,270  
   Loss         -     -     -     (7,203 )   -     (7,203 )
   Foreign currency translation adjustment         -     -     -     -     1,107     1,107  
Balance as at December 31, 2014         36,480,427     97,132     9,674     (98,042 )   1,621     10,385  

* Accumulated other comprehensive income (loss)

The accompanying notes are an integral part of these consolidated financial statements. F-6


DXI ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian Dollars)

          Year ended December 31  

(thousands of Canadian dollars)

  Notes     2016     2015     2014  
        $   $   $  
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES                        
     Loss for the year         (5,486 )   (7,108 )   (7,203 )
     Adjustment for items not affecting cash:                        
         Amortization, depletion and impairment losses         4,493     4,189     6,515  
         Stock based compensation         188     771     1,270  
         Non-cash financing expenses         961     661     1,010  
         Non-cash foreign exchange on financial contract liability         (211 )   594     371  
         Loss on settlement of loan facility                     388  
         Loss on disposal of E&E assets   5     175     -     318  
         Loss on disposal of property and equipment         -     6     (1,909 )
         Change in fair value of warrant liability         (1 )   (754 )   78  
         Change in fair value of derivative liability         (1,073 )   (2,245 )   -  
         Loss on debt extinguishment         -     1,398     -  
         (Gain) loss on financial contract liability         (63 )   3,348     (918 )
         Amortization of deferred leasehold inducement                     (20 )
         Cash flows from (used in) operations         (1,017 )   860     (100 )
     Changes in operating working capital   15     667     204     (481 )
        Total Cash Flows from (used in) Operating Activities         (350 )   1,064     (581 )
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                        
     Deposits         48     2     150  
     E&E expenditures         (2 )   (106 )   (120 )
     Additions to property and equipment   6     (528 )   (5,632 )   (3,714 )
     Proceeds from sale of E&E assets         84     -     412  
     Reclamation expenditures         (53 )   -     4,136  
     Changes in investing working capital   15     178     (2,289 )   1,507  
        Total Cash Flows used in Investing Activities         (273 )   (8,025 )   2,371  
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                        
     Repayment of bank credit facility         (147 )   (1,807 )   (945 )
     Advance of loans from related parties         350     7,500     -  
     Repayment of loans from related parties         (300 )   -        
     Advance (repayment) of loan facility                     (3,820 )
     Advance (repayment) of financial contract liability                     (772 )
     Shares issued on exercise of warrants and options         -     23     2,232  
     Shares issued for cash, net of share issue costs         884     -     2,225  
     Changes in financing working capital   15     (61 )   68     -  
        Total Cash Flows from Financing Activities         726     5,784     (1,080 )
                         
CHANGE IN CASH AND CASH EQUIVALENTS         103     (1,177 )   710  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         38     1,215     505  
                         
CASH AND CASH EQUIVALENTS, END OF YEAR         141     38     1,215  

Supplemental cash flow information - Note 15

The accompanying notes are an integral part of these consolidated financial statements. F-7



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 1 – CORPORATE INFORMATION

DXI Energy Inc. (the “Company”) is a public company trading on the Toronto Stock Exchange (“TSX”) under the symbol “DXI” and the OTCQB (“OTCQB”), under the symbol “DXIEF.” The Company is in the business of exploring and developing energy properties with a focus on oil and gas in North America. On October 27, 2015, the Company changed its name from Dejour Energy Inc. to DXI Energy Inc. The address of its registered office is 598 – 999 Canada Place, Vancouver, British Columbia.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Dejour Energy (USA) Corp. (“Dejour USA”), incorporated in Nevada, Dejour Energy (Alberta) Ltd. (“DEAL”), incorporated in Alberta, and 0855524 B.C. Ltd., incorporated in British Columbia. All intercompany transactions are eliminated upon consolidation.

The consolidated financial statements are presented in Canadian dollars, which is also the functional currency of the parent company. These consolidated financial statements were authorized and approved for issuance by the Board of Directors on March 20, 2017.

NOTE 2 – BASIS OF PRESENTATION

(a)

Basis of presentation

The consolidated financial statements (the “financial statements”) are presented under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”). A summary of the Company’s significant accounting policies under IFRS is presented in note 3.

(b)

Going concern

The financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company has a working capital deficiency of $11.1 million, which includes the loans from related parties of $2.4 million, and an accumulated deficit of $110.6 million. Excluding the non-cash derivative liability of $0.2 million, the adjusted working capital deficiency was $10.9 million. Of this amount, $7.2 million is represented by a financial contract liability of Dejour USA, which is due on September 30, 2016. The maximum cash component due in full settlement of the financial contract liability is US$3.0 million. The details of the settlement progress are described in note 12.

The Company’s ability to continue as a going concern is dependent upon attaining profitable operations and the continued financial support of the non-arm’s length lenders who have provided the Company with sufficient capital to meet capital expenditure commitments and continue exploration and development activities. There is no assurance that these activities will be successful. These material uncertainties cast substantial doubt upon the Company’s ability to continue as a going concern. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used that would be necessary if the going concern assumptions were not appropriate.

(c)

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for certain financial liabilities are measured at fair value, as explained in the accounting policies in note 3.

F-8



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 2 – BASIS OF PRESENTATION (continued)

(d)

Use of estimates and judgments

The preparation of consolidated financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

(e)

Functional and presentation currency

Subsidiaries measure items using the currency of the primary economic environment in which the entity operates with entities having a functional currency different from the parent company, translated into Canadian dollars.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by the Company’s entities.

(a)

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and subsidiaries controlled by the Company. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. All intra-group balances, transactions, income and expenses are eliminated in full on consolidation.

The financial statements of the subsidiaries are prepared using the same reporting period as the parent company, using consistent accounting policies.

Exploration, development, and production activities may be conducted jointly with others and accordingly, the Company accounts for the assets, liabilities, revenues and expenses related to its interest in the joint operations from the date that joint control commences until the date that it ceases.

(b)

Foreign currency

The financial statements of entities within the consolidated group that have a functional currency different from that of the Company (“foreign operations”) are translated into Canadian dollars as follows: assets and liabilities – at the closing rate as at the balance sheet date, and income and expenses – at the average rate of the period (as this is considered a reasonable approximation to actual rates). All resulting changes are recognized in other comprehensive loss as cumulative translation differences.

When the Company disposes of its entire interests in a foreign operation, or loses control, joint control, or significant influence over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive loss related to the foreign operation are recognized in profit or loss. If an entity disposes of part of an interest in a foreign operation which remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income related to the subsidiary are reallocated between controlling and non-controlling interests.

Transactions in foreign currencies are translated into the functional currency at exchange rates at the date of the transactions. Foreign currency differences arising on translation are recognized in profit or loss. Foreign currency monetary assets and liabilities are translated at the functional currency exchange rate at the balance sheet date. Non- monetary items that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

F-9



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b)

Foreign currency (continued)

Exchange differences recognized in the profit or loss statement of the Company’s entities’ separate financial statements on the translation of monetary items forming part of the Company’s net investment in the foreign operation are reclassified to foreign exchange reserve on consolidation.

(c)

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly liquid investments having maturity dates of three months or less from the date of acquisition that are readily convertible to cash.

(d)

Resource properties

Exploration and evaluation (“E&E”) costs

Pre-license costs are expensed in the period in which they are incurred.

E&E costs are initially capitalized as either tangible or intangible E&E assets according to the nature of the assets acquired. Intangible E&E assets may include costs of license acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, and directly attributable overhead and administration expenses. The costs are accumulated in cost centers by well, field or exploration area pending determination of technical feasibility and commercial viability.

E&E assets are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability or facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For purposes of impairment testing, E&E assets are assessed at the individual asset level. If it is not possible to estimate the recoverable amount of the individual asset, exploration and evaluation assets are allocated to cash-generating units (“CGU’s”). Such CGU’s are not larger than an operating segment.

Exploration assets are not depleted and are carried forward until technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable or sufficient/continued progress is made in assessing the commercial viability of the E&E assets. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proven reserves are determined to exist. A review of each exploration license or field is carried out, at least annually, to confirm whether the Company intends further appraisal activity or to otherwise extract value from the property. When this is no longer the case, the costs are written off. Upon determination of proven reserves, E&E assets attributable to those reserves are first tested for impairment and then reclassified from E&E assets to oil and natural gas properties.

The Company may occasionally enter into arrangements, whereby the Company will transfer part of an oil and gas interest, as consideration, for an agreement by the transferee to meet certain E&E expenditures which would have otherwise been undertaken by the Company. The Company does not record any expenditures made by the transferee. Any cash consideration received from the agreement is credited against the costs previously capitalized to the oil and gas interest given up by the Company, with any excess cash accounted for as a gain on disposal.

Oil and gas properties and other property and equipment costs

Items of property and equipment, which include oil and gas development and production assets, are measured at cost less accumulated depletion and depreciation and accumulated impairment losses.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning obligation and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. When significant parts of an item of property and equipment, including oil and natural gas interests, have different useful lives, they are accounted for as separate items (major components).

F-10



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(d)

Resource properties (continued)

Depletion and Depreciation

Oil and gas development and production assets are depreciated, by significant component, on a unit-of-production basis over proved and probable reserve volumes, taking into account estimated future development costs necessary to bring those reserves into production. Future development costs are estimated by taking into account the level of development required to produce the reserves. These estimates are reviewed by independent reserve engineers at least annually. Changes in reserve estimates are dealt with prospectively. Proved and probable reserves are estimated using independent reserve engineer reports and represent the estimated quantities of oil, natural gas and gas liquids.

Other property and equipment are depreciated based on a declining balance basis, which approximates the estimated useful lives of the asset, at the following rates:

Office furniture and equipment 20%
Computer equipment 45%
Vehicle 30%
Leasehold improvements term of lease

Depreciation methods, useful lives and residual values are reviewed at each reporting date. Other property and equipment are allocated to each of the Company’s primary cash-generating units, based on estimated future net revenue, consistent with the recoverable values applied in the most recent impairment test.

Derecognition

The carrying amount of an item of property and equipment is derecognized on disposal, when no beneficial interest is retained, or when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition is included in profit or loss when the item is derecognized and is measured as the difference between the net disposal proceeds, if any, and the carrying amount of the item. The date of disposal is the date when the Company is no longer subject to the risks of ownership and is no longer the beneficiary of the rewards of ownership. Where the asset is derecognized, the date of disposal coincides with the date the revenue from the sale of the asset is recognized.

On the disposition of an undivided interest in a property, where an economic benefit remains, the Company recognizes the farm out only on the receipt of consideration by reducing the carrying amount of the related property with any excess recognized in profit or loss of the period.

Major maintenance and repairs

The costs of day-to-day servicing are expensed as incurred. These primarily include the costs of labor, consumables and small parts. Material costs of replaced parts, turnarounds and major inspections are capitalized as it is probable that future economic benefits will be received. The carrying value of a replaced part is derecognized in accordance with the derecognition principles above.

Jointly controlled operations

The Company conducts its oil and gas development and production activities through jointly controlled operations and the accounts reflect only its interest in such activities. A joint arrangement exists where the parties take their share of the output and is accounted for by recognizing the Company’s share of assets and liabilities jointly owned and incurred, and the recognition of its share of revenue and expenses of the joint operation. At December 31, 2016, the Company’s material joint operation in Canada is Drake/Woodrush. The principal activity is oil and gas production and the ownership percentage is 99% (December 31, 2015 – 99%).

F-11



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(e)

Provisions

A provision is recognized if, as a result of 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 risk specific to the liability.

Decommissioning liability

A decommissioning liability is recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. A corresponding amount equivalent to the provision is also recognized as part of the cost of the related asset. The amount recognized is management’s estimated cost of decommissioning, discounted to its present value using a risk free rate. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision and a corresponding adjustment to the related asset unless the change arises from production. The unwinding of the discount on the decommissioning provision is included as a finance cost. Actual costs incurred upon settlement of the decommissioning liability are charged against the provision to the extent the provision was established.

(f)

Earnings (loss) per share

Basic earnings (loss) per share figures have been calculated using the weighted average number of common shares outstanding during the respective periods.

Diluted earnings (loss) per common share is calculated by dividing the profit or loss applicable to common shares by the sum of the weighted average number of common shares issued and outstanding and all additional common shares that would have been outstanding if potentially dilutive instruments were converted. The diluted earnings (loss) per share figure is equal to that of basic earnings (loss) per share since the effects of options and warrants have been excluded as they are anti-dilutive.

(g)

Share based payments

Where equity-settled share options are awarded to employees, the fair value of the options at the date of grant is charged to profit or loss over the vesting period. Performance vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognized over the vesting period is based on the number of options that will eventually vest. Where equity instruments are granted to employees, they are recorded at the instruments grant date fair value.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to profit or loss over the remaining vesting period.

Where equity instruments are granted to non-employees, they are recorded at the fair value of the goods or services received in profit or loss, unless they are related to the issuance of shares. Amounts related to the issuance of shares are recorded as a reduction of share capital.

When the value of goods or services received in exchange for the share-based payment to non-employees cannot be reliably estimated, the fair value of the share-based payment is measured by use of a valuation model to measure the value of the equity instruments issued. The expected life used in the model is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

All equity-settled share based payments are reflected in contributed surplus, until exercised. Upon exercise, shares are issued from treasury and the amount reflected in contributed surplus is credited to share capital along with any consideration received.

F-12



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(g)

Share based payments (continued)

Where a grant of options is cancelled or settled during the vesting period, excluding forfeitures when vesting conditions are not satisfied, the Company immediately accounts for the cancellation as an acceleration of vesting and recognizes the amount that otherwise would have been recognized for services received over the remainder of the vesting period. Any payment made to the employee on the cancellation is accounted for as the repurchase of an equity interest except to the extent the payment exceeds the fair value of the equity instrument granted, measured at the repurchase date. Any such excess is recognized as an expense.

(h)

Revenue recognition

Revenue from the sale of oil and petroleum products is recognized when the significant risks and rewards of ownership have been transferred, which is when title passes to the customer. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism. Revenue is stated after deducting sales taxes, excise duties and similar levies.

Revenue from the production of oil and natural gas in which the Company has an interest with other producers is recognized based on the Company’s working interest and the terms of the relevant production sharing contracts.

(i)

Financial instruments

Financial assets

Financial assets are classified as one of the following categories. All transactions related to financial instruments are recorded on a trade date basis. The Company's accounting policy for each category is as follows:

Loans and receivables

These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, using the effective interest rate method, less any impairment losses. Amortized cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. The Company’s loans and receivables comprise cash and cash equivalents and accounts and other receivables.

Held-to-maturity investments

Held to maturity investments are initially measured at fair value and are subsequently measured at amortized cost using the effective interest rate method, less any impairment losses. The Company does not currently have any held-to-maturity investments.

Available-for-sale assets

Available-for-sale assets are measured at fair value, with unrealized gains and losses recorded in other comprehensive income (loss) until the asset is realized or impairment is viewed as other than temporary, at which time they will be recorded in profit or loss. The Company does not currently have any available-for-sale assets.

F-13



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(i)

Financial instruments (continued)

Financial assets at fair value through profit or loss

An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognized in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. The Company does not have any financial assets at fair value through profit or loss.

Financial liabilities

Financial liabilities are classified as either fair value through profit or loss or other financial liabilities, based on the purpose for which the liability was incurred.

The Company’s other financial liabilities comprise accounts payable and accrued liabilities, bank credit facility, loans from related parties and financial contract liability. These liabilities are initially recognized at fair value, net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method, which ensures that any financing expense over the period of repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Any revision to the amount or timing of cash flows related to an instrument is reflected in its carrying amount by computing the present value of the revised cash flows at the instrument’s initial effective interest rate. The change in carrying amount is reflected in profit or loss of the period. Accounts payable represent liabilities for goods and services provided to the Company prior to the end of the period which are unpaid. Accounts payable amounts are unsecured and are usually paid within 30 days from receipt of invoice.

Financial liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. Derivatives are also categorized as held for trading unless they are designated as hedges.

The Company has derivative financial instruments in the form of warrants issued in US dollars, or with certain adjustment provisions, and contracts entered into to manage its exposure to volatility in commodity prices. Commodity contracts are not used for trading or other speculative purposes. Such derivative financial instruments are initially recognized at fair value at the date at which the derivatives are issued and are subsequently re-measured at fair value. These derivatives do not qualify for hedge accounting and changes in fair value are recognized immediately in profit and loss.

For outstanding warrants at each reporting period, the change in the fair value of the liability between reporting periods is recorded in the consolidated statement of comprehensive income (loss). As warrants are exercised, immediately before exercise, the liability on these exercised warrants is re-measured and the valuation change is recorded in the consolidated statement of comprehensive income (loss). Upon exercise, the re-measured warrant liability on these exercised warrants is eliminated and there is an offsetting entry to share capital.

Financial instrument measurement

If the market value for a financial instrument is not an active market the Company establishes fair value by using a valuation technique. Valuation techniques include using recent arm’s length market transaction between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. The fair value of a financial instrument will be based on one or more factors that may include the time value of money, credit risk, commodity prices, equity prices, volatility, servicing costs and other factors.

F-14



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j)

Impairment

Impairment of financial assets

At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows:

Financial assets are carried at amortized cost. The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account.

Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

Non-financial assets

For the purpose of impairment testing, assets are grouped together in CGUs, which are 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. The carrying value of long-term assets is reviewed at each period for indicators that the carrying value of an asset or a CGU may not be recoverable. The Company uses geographical proximity, geological similarities, analysis of shared infrastructure, commodity type, assessment of exposure to market risks and materiality to define its CGUs. If indicators of impairment exist, the recoverable amount of the asset or CGU is estimated. If the carrying value of the asset or CGU exceeds the recoverable amount, the asset or CGU is written down with an impairment recognized in profit or loss.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Fair value is determined to be the amount for which the asset could be sold in an arm’s length transaction. For resource properties, fair value less costs to sell may be determined by using discounted future net cash flows of proved and probable reserves using forecast prices and costs. Value in use is determined by estimating the net present value of future net cash flows expected from the continued use of the asset or CGU.

Impairment losses recognized in prior years are assessed at each reporting date for any indication that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimate 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, if no impairment loss had been recognized.

(k)

Taxes

Income taxes

Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or 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 tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

F-15



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(k)

Taxes (continued)

Deferred tax is recognized for 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 temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and affects neither accounting profit nor taxable profit. 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 the asset is realized or the liability is settled, 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, when 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.

Production taxes

Royalties, resource rent taxes and revenue-based taxes are accounted for under International Accounting Standards (‘IAS’) 12 when they have characteristics of an income tax. This is considered to be the case when they are imposed under Government authority and the amount is payable based on taxable income, rather than based on quantity produced or as a percentage of revenue, after adjustment for temporary differences. For such arrangements, current and deferred tax is provided on the same basis as described above for other forms of taxation. Obligations arising from royalty arrangements that do not satisfy these criteria are recognized as a reduction of revenues.

(l)

Share capital

The Company’s common shares, stock options, share purchase warrants and flow-through shares are classified as equity instruments only to the extent that they do not meet the definition of a financial liability or financial asset. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction, net of tax, from the proceeds.

(m)

Adoption of new and amended standards

The Company applied for the first time certain amendments, which are effective for annual periods beginning on or after January 1, 2016. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Although these amendments applied for the first time in 2016, they did not have a material impact on the annual consolidated financial statements of the Company.

(n)

Future accounting pronouncements

Certain pronouncements were issued by “IASB” or “IFRIC” that are mandatory for accounting periods beginning after January 1, 2017 or later periods.

The following new accounting standards, amendments to accounting standards and interpretations, have not been early adopted in these consolidated financial statements. The Company is currently assessing the impact, if any, of this new guidance on the Company’s future results and financial position:

F-16



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(n)

Future accounting pronouncements (continued)

IFRS 9, “Financial Instruments”: In July 2014, the IASB completed the final phase of its project to replace IAS 39, the current standard on the recognition and measurement of financial instruments. IFRS 9 is now the new standard which sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. IFRS 9 provides a single model of classifying and measuring financial assets and liabilities and provides for only two classification categories: amortized cost and fair value. Hedge accounting requirements have also been updated in the new standard and are now more aligned with the risk management activities of an entity. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted; however, if an entity elects to apply this standard early, it must disclose that fact and apply all of the requirements in this standard at the same time. It is anticipated that the adoption of IFRS 9 does not have material impact on the Company’s consolidated financial statement.

IFRS 15 was issued in May 2014 “Revenue from Contracts with Customers.” IFRS 15 applies to contracts with customers, excluding, most notably, insurance and leasing contracts. IFRS 15 prescribes a framework in accounting for revenues from contracts within its scope, including (a) identifying the contract, (b) identify separate performance obligations in the contract, (c) determine the transaction price of the contract, (d) allocate the transaction price to the performance obligations and (e) recognize revenues when each performance obligation is satisfied. IFRS 15 also prescribes additional financial statement presentations and disclosures. The Company currently expects to adopt IFRS 15 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company’s evaluation of IFRS 15 is ongoing and not complete. The IASB has issued and may issue in the future, interpretative guidance, which may cause its evaluation to change. The Company does not currently believe IFRS 15 will have a material effect on its consolidated financial statements.

IFRS 16, “Leases”: In January 2016, the IASB issued the standard to replace IAS 17 “Leases”. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted. It is anticipated that the adoption of IFRS 16 will have impact on the Company’s consolidated balance sheet due to the operating lease commitments as disclosed in note 18.

NOTE 4 - CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in accordance with IFRS requires management to make estimates and judgments that affect reported assets, liabilities, revenues, expenses, gains, and losses. These estimates and judgments are subject to change based on experience and new information. The financial statement areas that require significant estimates and judgments are as follows:

Decommissioning liability

The Company recognizes decommissioning liabilities for its exploration and evaluation assets and property and equipment. Measurement of the decommissioning liabilities involves estimates and judgements as to the cost and timing of incurrence of future decommissioning programs. It also involves assessment of appropriate discount rates, rates of inflation applicable to future costs and the rate used to measure the accretion charge for each reporting period. Measurement of the liability also reflects current engineering methodologies as well as current and expected future environmental legislation and standards. Actual decommissioning costs will ultimately depend on future market prices for the decommissioning costs which will reflect the market conditions at the time the decommissioning costs are actually incurred. The final cost of the currently recognized decommissioning provisions may be higher or lower than currently provided for.

F-17



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 4 - CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued)

Exploration and evaluation expenditures

The application of the Company’s accounting policy for exploration and evaluation expenditures requires judgment in determining whether it is likely that future economic benefits will flow to the Company, which is based on assumptions about future events or circumstances. Estimates and assumptions made may change if new information becomes available. If, after the expenditure is capitalized, information becomes available suggesting that the recovery of the expenditure is unlikely, the amount capitalized is written off in profit or loss in the period in which the new information becomes available.

Share-based payment transactions

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Management uses judgment to determine the most appropriate valuation model to estimate the fair value for share-based payment transactions. The inputs to the valuation model, including the expected life of the share option, volatility and dividend yield, require judgment for determination.

Financial contract liability

The application of the Company’s accounting policy for financial liabilities requires the Company to adjust the carrying amounts of the financial liabilities in the event it revises its payments or receipts to reflect actual and revised estimated cash flows. The Company’s financial contract liability was originally recognized at fair value using the effective interest method which ensures that any interest expense over the period of repayment is at a constant rate on the balance of the liability carried in the balance sheet. Effective June 30, 2014, the Company’s financial contract liability was reduced by the residual reserve value of its working interest in the wellbores at September 30, 2016.

At December 31, 2016, the financial contract liability was adjusted to reflect the present value of the amount outstanding at year-end, net of the present value of the residual reserves of its working interest in the wellbores.

Impairment

Management applies judgment in assessing the existence of impairment and impairment reversal indicators based on various internal and external factors.

The recoverable amounts of CGUs and individual assets have been determined based on the higher of fair value less costs to sell or value-in-use. The key estimates the Company applies in determining the recoverable amount normally include anticipated future commodity prices, expected production volumes, future operating and development costs, and discount rates. Changes to these assumptions will affect the recoverable amounts of CGUs and individual assets and may then require a material adjustment to their related carrying value. At December 31, 2016, the Company has one CGU in Canada (Drake/Woodrush) and one CGU in the United States (Kokopelli) – Note 6.

Financial instruments

When estimating the fair value of financial instruments, the Company uses valuation methodologies that utilize observable market data where available. In addition to market information, the Company incorporates transaction specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk. See note 9 for the basis of valuation of loans from related parties and warrants issued in the year.

F-18



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 4 - CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued)

Reserves

The estimate of reserves is used in forecasting the recoverability and economic viability of the Company’s oil and gas properties, and in the depletion and impairment calculations. The process of estimating reserves is complex and requires significant interpretation and judgment. It is affected by economic conditions, production, operating and development activities, and is performed using available geological, geophysical, engineering, and economic data. Reserves are evaluated at least annually by the Company’s independent reserve evaluators and updates to those reserves, if any, are estimated internally. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of such wells and associated production facilities and other capital costs.

NOTE 5 – EXPLORATION AND EVALUATION (“E&E”) ASSETS

    Canadian Oil     United States        
    and Gas     Oil and Gas        
    Properties     Properties     Total  
  $   $   $  
Cost:                  
Balance at January 1, 2015   266     15,848     16,114  
Additions   3     103     106  
Change in decommissioning provision   12     -     12  
Foreign currency translation and other   -     3,031     3,031  
Balance at December 31, 2015   281     18,982     19,263  
Additions   2     -     2  
Change in decommissioning provision   13     -     13  
Disposals   -     (772 )   (772 )
Foreign currency translation and other   -     (768 )   (768 )
Balance at December 31, 2016   296     17,442     17,738  

    Canadian Oil     United States        
    and Gas     Oil and Gas        
    Properties     Properties     Total  
       
Accumulated impairment losses:                  
Balance at January 1, 2015   -     (13,007 )   (13,007 )
Impairment losses   -     (534 )   (534 )
Foreign currency translation and other   -     (2,500 )   (2,500 )
Balance at December 31, 2015   -     (16,041 )   (16,041 )
Impairment losses (Note 7)   -     (1,790 )   (1,790 )
Disposals   -     513     513  
Foreign currency translation and other   -     550     550  
Balance at December 31, 2016   -     (16,768 )   (16,768 )

F-19



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 5 – EXPLORATION AND EVALUATION (“E&E”) ASSETS (continued)

    Canadian Oil     United States        
    and Gas     Oil and Gas        
    Properties     Properties     Total  
       
Carrying amounts:                  
At December 31, 2015   281     2,941     3,222  
At December 31, 2016   296     674     970  

Exploration and evaluation (“E&E”) assets consist of the Company’s exploration projects which are pending the determination of proven reserves.

United States Exploration and Evaluation Properties

As at December 31, 2016, the Company holds oil and gas leases in the Piceance, Paradox and Uinta Basins in the US Rocky Mountains, of which a portion was classified as E&E assets.

During the year ended December 31, 2016, the Company sold its working interests in certain oil and gas leases in the areas of Colorado to unrelated third parties for gross proceeds of $84,000 (US$65,000). The loss on the disposal was $175,000.

The E&E asset impairment is $1,790,000 and $534,000 for the year ended December 31, 2016 and December 31, 2015, respectively. The impairment was recognized upon a review of each exploration license or field, carried out, at least annually, to confirm whether the Company intends further appraisal activity or to otherwise extract value from the property.

NOTE 6 – PROPERTY AND EQUIPMENT

    Canadian Oil     United States              
    and Gas     Oil and Gas     Corporate and        
    Properties     Properties     Other Assets     Total  
  $   $   $   $  
Cost:                        
Balance at January 1, 2015   32,181     9,970     219     42,370  
Additions   1,164     4,467     1     5,632  
Change in decommissioning provision   31     10     -     41  
Disposals   -     -     (38 )   (38 )
Foreign currency translation and other   -     2,206     (3 )   2,203  
Balance at December 31, 2015   33,376     16,653     179     50,208  
Additions   300     225     3     528  
Change in decommissioning provision   (48 )   (4 )   -     (52 )
Foreign currency translation and other   -     (502 )   -     (502 )
Balance at December 31, 2016   33,628     16,372     182     50,182  

F-20



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 6 – PROPERTY AND EQUIPMENT (continued)

    Canadian Oil     United States              
    and Gas     Oil and Gas     Corporate and        
    Properties     Properties     Other Assets     Total  
         
Accumulated amortization, depletion and impairment                        
losses:                        
Balance at January 1, 2015   (23,340 )   (932 )   (189 )   (24,461 )
Amortization and depletion   (2,434 )   (213 )   (8 )   (2,655 )
Impairment losses   (1,000 )   -     -     (1,000 )
Disposals   -     -     33     33  
Foreign currency translation and other   -     (230 )   4     (226 )
Balance at December 31, 2015   (26,774 )   (1,375 )   (160 )   (28,309 )
Amortization and depletion (Note 7)   (1,248 )   (380 )   (5 )   (1,633 )
Impairment losses (Note 7)   (1,070 )   -     -     (1,070 )
Foreign currency translation and other   -     41     1     42  
Balance at December 31, 2016   (29,092 )   (1,714 )   (164 )   (30,970 )

    Canadian Oil     United States              
    and Gas     Oil and Gas     Corporate and        
    Properties     Properties     Other Assets     Total  
  $   $   $   $  
Carrying amounts:                        
At December 31, 2015   6,602     15,278     19     21,899  
At December 31, 2016   4,536     14,658     18     19,212  

Canadian Oil and Gas Properties

Amortization and depletion is computed using the unit of production method by reference to the total production for the CGU over the estimated net proved and probable reserves of oil and gas for the CGU determined by independent consultants. The calculation of amortization and depletion for the year ended December 31, 2016 included estimated future development costs of $Nil (December 31, 2015 - nil; December 31, 2014 - $683,000) as estimated by the Company’s external reserves evaluator.

During the year ended December 31, 2016, the Company capitalized $104,000 (December 31, 2015 – $180,000) of general and administrative costs related to its Canadian oil and gas interests.

In accordance with IFRS, impairment tests were conducted at December 31, 2016 on each of the Company’s CGUs. The estimated recoverable amounts were determined using fair value less cost to sell. In determining the recoverability of oil and gas interests and making these evaluations, the Company used the net present value of the cash flows from proved plus probable oil and gas reserves of each CGU as estimated by the Company’s independent reserve evaluator.

Key input estimates used in the determination of cash flows from oil and gas reserves include the following:

F-21



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 6 – PROPERTY AND EQUIPMENT (continued)

a)

Reserves – Assumptions that are valid at the time of reserve estimation may change significantly when new information becomes available. Changes in forward price estimates, production costs or recovery rates may change the economic status of reserves and may ultimately result in reserves being restated.

b)

Crude oil and natural gas prices – Forward price estimates of the crude oil and natural gas prices are used in the cash flow model. Commodity prices have fluctuated widely in recent years due to global and regional factors including supply and demand fundamentals, inventory levels, exchange rates, weather, economic and geopolitical factors.

c)

Discount rate – The discount rate used to calculate the net present value of cash flows is 14.7% post tax.

Below are the following forward commodity price estimates used in the December 31, 2016 impairment test:

    Natural gas     NGL     Crude oil  
    (AECO)     (Edmonton Pentanes Plus)     (Edmonton Par)  
    Cdn $ / mmbtu     Cdn $ / bbl     Cdn $ / bbl  
2017   3.46     72.11     69.33  
2018   3.10     74.79     72.26  
2019   3.27     78.75     75.00  
2020   3.49     79.80     76.36  
2021   3.67     82.37     78.82  
2022   3.86     86.06     82.35  
2023   4.05     89.32     85.88  
2024   4.16     92.99     89.41  
2025   4.24     97.59     92.94  
2026   4.32     99.91     95.61  
Each benchmark price increased on average approximately 2% thereafter              

For the year ended December 31, 2016, the Company recorded an impairment of $940,000 (December 31, 2015 - $1,000,000) on its Drake/Woodrush CGU. The impairment was recognized because the carrying value exceeded the recoverable amount. The fair value less cost to sell values used to determine the recoverable amounts of the impaired PP&E assets are classified as Level 3 fair value measurements.

United States Oil and Gas Properties

Amortization and depletion is computed using the unit of production method by reference to the total production for the CGU over the estimated net proved and probable reserves of oil and gas for the CGU determined by independent consultants. The calculation of amortization and depletion for the year ended December 31, 2016 included estimated future development costs of $84.0 million (December 31, 2015 - $86.4 million; December 31, 2014 - $95.0 million) as estimated by the Company’s external reserves evaluator.

During the year ended December 31, 2016, the Company capitalized $14,000 (December 31, 2015 – $65,000) of general and administrative costs related to its US oil and gas interests.

At December 31, 2016 and December 31, 2015, the Company evaluated its oil and gas interests for indicators of any impairment or related recovery. The Company determined the recoverable amount of the CGU based on the cash flows from oil and gas reserves, using a discount rate of 14.7% (post tax) and determined there was no impairment at December 31, 2016 and December 31, 2015. The key inputs used included forward prices from NYMEX futures (adjusted for an inflationary factor), a discount rate of 14.7% (post tax) which was applied to the discounted cash flows and the reserves that were estimated.

F-22



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 7 – AMORTIZATION, DEPLETION AND IMPAIRMENT LOSSES

    Year ended December 31  
    2016     2015     2014  
  $   $   $  
Exploration and Evaluation Assets (E & E assets)                  
       Impairment losses (Note 5)   1,790     534     88  
                   
Property and Equipment (D & P assets)                  
       Amortization and depletion (Note 6)   1,633     2,655     2,867  
       Impairment losses (Note 6)   1,070     1,000     3,560  
    4,493     4,189     6,515  

NOTE 8 – BANK CREDIT FACILITY

As at January 1, 2016, the maximum amount of the credit facility was $1.1 million of which $147,000 was drawn. On January 25, 2016, the credit facility was repaid in full and no longer available.

NOTE 9 – LOANS FROM RELATED PARTIES

(a)

Loan from Hodgkinson Equity Corporation (“HEC”)

On March 12, 2015, as amended on May 6, 2015, June 22, 2015, September 28, 2015 and November 18, 2015, the Company issued a promissory note for $4,500,000 to HEC, a private company controlled by the CEO of the Company. The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber DEAL’s oil and gas properties without HEC’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest was repayable by the earlier of (i) within 10 business days of receipt of written demand from HEC for the repayment and (ii) June 10, 2015 or such later date to which the term of the promissory note may be extended. On May 6, 2015, the due date of the loan was extended to September 30, 2015. On September 28, 2015, the due date of the loan was further extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $114,230.77 was due on the 1 st day of each month commencing June 1, 2016. HEC agreed to waive the requirement of the Company to repay the total monthly principal repayments of $1,142,000 for a period of 10 months.

In consideration for the extension, the Company issued HEC 9,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges for four months. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HEC on DEAL’s oil and gas properties. The first mortgage security so issued ranks “pari passu” with HVI’s first mortgage security interest (note 9(b)).

The Company has determined that the fair value of the loan should be disclosed together with an embedded derivative liability. The fair value of the loan was determined by applying a risk-adjusted rate of 25% to discount the monthly repayments and coupon payments over the three-year life of the loan. The embedded derivative was estimated using an option pricing model. Related financing costs of $77,000 were expensed immediately.

F-23



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 9 – LOANS FROM RELATED PARTIES (continued)

(a)

Loan from Hodgkinson Equity Corporation (“HEC”) (continued)

As a result of the loan modification in November 2015, a loss on extinguishment is recognized as follows:

                                                                                                                                                                                                                                                                $  
Face value of loan liability   4,500  
Fair value of loan liability   (3,414 )
Fair value of derivative liability   (2,253 )
Loss on extinguishment   (1,167 )

The derivative liability is carried at fair value through profit and loss and re-measured at each reporting date using an option pricing model. For the year ended December 31, 2016, the Company recorded an unrealized gain on the derivative liability of $743,000 (year ended December 31, 2015 - $1,404,000, year ended December 31, 2014 - $Nil). The following key inputs to obtain the valuation are as follows:

As at

  December 31,     December 31,     November 18,  
    2016     2015     2015  
Exercise price $  0.45   $  0.45   $  0.45  
Share price $  0.10   $  0.22   $  0.44  
Expected volatility   88%     95%     91%  
Expected life   1.88 years     2.88 years     3 years  
Dividends   0.0%     0.0%     0.0%  
Risk-free interest rate   0.76%     0.49%     0.69%  

As at December 31, 2016, the carrying value of the loan liability and derivative liability are as follows:

    Loan liability     Derivative liability  
  $   $  
Balance upon initial recognition   3,414     2,253  
Accretion expense   92     -  
Cash interest   (42 )   -  
Change in fair value   -     (1,404 )
Balance at December 31, 2015   3,464     849  
Accretion expense   715     -  
Cash interest   (347 )   -  
Change in fair value   -     (743 )
Balance at December 31, 2016   3,832     106  
Current portion   (983 )   (106 )
Non-current portion   2,849     -  

Other terms of the loan are:

the interest rate of the loan remains unchanged and the Company may repay the loan at any time without penalty;

the Company, through DEAL, must receive HEC’s approval to further encumber DEAL’s Canadian oil and gas properties; and

In the event of default, all the indebtedness secured by the promissory note becomes due and payable and the interest rate is immediately increased to Canadian prime rate plus 8.5% per annum.

F-24



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 9 – LOANS FROM RELATED PARTIES (continued)

(b)

Loan from Hodgkinson Ventures Inc. (“HVI”)

On June 22, 2015, as amended on September 28, 2015 and November 18, 2015, the Company issued a promissory note for $2,000,000 to HVI, a private company associated with the CEO of the Company, on a “pari passu” basis with the loan from HEC (note 7(a)). The promissory note is secured by all assets of Dejour USA and a negative pledge by the Company not to further encumber DEAL’s oil and gas properties without HVI’s prior approval. It bears interest at the Canadian prime rate plus 5% per annum. The principal and interest were repayable on or before September 30, 2015. On September 28, 2015, the due date of the loan was extended to December 31, 2015. On November 18, 2015, the Company extended the due date of the loan from December 31, 2015 to November 30, 2018. Additionally, a monthly principal repayment of $50,769.23 was due on the 1 st day of each month commencing June 1, 2016. HVI agreed to waive the requirement of the Company to repay the total monthly principal repayments of $508,000 for a period of 10 months.

In consideration for the extension, the Company issued HVI 4,000,000 Warrants. Each Warrant entitles the holder to acquire one common share at a price of C$0.45/US$ 0.35 per share any time prior to December 4, 2020. Shares acquired through the exercise of Warrants prior to April 5, 2016 are restricted from sale through the facilities of the stock exchanges for four months. On February 19, 2016, the Company rescinded the negative pledge security agreement and issued a first mortgage in favour of HVI on DEAL’s oil and gas properties. The first mortgage security so issued ranks “pari passu” with HEC’s first mortgage security interest (note 9(a)).

The Company has determined that the fair value of the loan should be disclosed together with an embedded derivative liability. The fair value of the loan was determined by applying a risk-adjusted rate of 25% to discount the monthly repayments and coupon payments over the three-year life of the loan. The embedded derivative was estimated using an option pricing model. Related financing costs of $34,000 were expensed immediately.

As a result of the loan modification in November 2015, a loss on extinguishment is recognized as follows:

  $  
Face value of loan liability   2,000  
Fair value of loan liability   (1,230 )
Fair value of derivative liability   (1,002 )
Loss on extinguishment   (232 )

The derivative liability is carried at fair value through profit and loss and re-measured at each reporting date using an option pricing model. For the year ended December 31, 2016, the Company recorded an unrealized gain on the derivative liability of $330,000 (year ended December 31, 2015 - $625,000, year ended December 31, 2014 - $Nil). The following key inputs to obtain the valuation are as follows:

As at   December 31, 2016     December 31, 2015  
Exercise price $  0.45   $  0.45  
Share price $  0.10   $  0.22  
Expected volatility   88%     95%  
Expected life   1.88 years     2.88 years  
Dividends   0.0%     0.0%  
Risk-free interest rate   0.76%     0.49%  

F-25



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 9 – LOANS FROM RELATED PARTIES (continued)

(b)

Loan from Hodgkinson Ventures Inc. (“HVI”) (continued)

As at December 31, 2016, the carrying value of the loan liability and derivative liability are as follows:

    Loan liability     Derivative liability  
  $   $  
Balance upon initial recognition   1,230     1,002  
Accretion expense   51     -  
Cash interest   (19 )   -  
Change in fair value   -     (625 )
Balance at December 31, 2015   1,262     377  
Accretion expense   404     -  
Cash interest   (154 )   -  
Change in fair value   -     (330 )
Balance at December 31, 2016   1,512     47  
Current portion   (330 )   (47 )
Non-current portion   1,182     -  

Other terms of the loan are:

the interest rate of the loan remains unchanged and the Company may repay the loan at any time without penalty;

the Company, through DEAL, must receive HVI’s approval to further encumber DEAL’s Canadian oil and gas properties; and

In the event of default, all the indebtedness secured by the promissory note becomes due and payable and the interest rate is immediately increased to Canadian prime rate plus 8.5% per annum.


(c)

Loan from a director and officer of the Company and his spouse

On September 15, 2015, as amended on January 11, 2016, March 31, 2016 and June 2, 2016, the Company issued a grid promissory note of up to $1,000,000 to a director and officer of the Company and his spouse (the “Lenders”). The promissory note bears interest at 12% per annum. The principal and interest accrued on the loan were repayable on or before December 31, 2015. On January 11, 2016, the Company issued an additional grid promissory note of up to $200,000 to a director and officer of the Company and his spouse and the due date of the loan was extended to March 31, 2016. On March 31, 2016, the due date of the loan was further extended to September 30, 2016.

On June 2, 2016, the Company increased the maximum amount of the non-revolving loan from $1,200,000 to $1,500,000. The interest rate was also reduced from 12% to 10% per annum. Additionally, the Company issued a 2 nd mortgage in favour of the Lenders on DEAL’s oil and gas properties to a maximum of $1,500,000 as partial security for the loan. On September 30, 2016, the due date of the loan was extended to December 31, 2016. On December 31, 2016, the due date of the loan was further extended to June 30, 2017. The maximum loan amount available at December 31, 2016 was $1,500,000 (December 31, 2015 - $1,000,000). During the year ended December 31, 2016, $350,000 was borrowed (2015 - $1,000,000) and $300,000 was repaid (2015 - $Nil) leaving a balance outstanding of $1,050,000 at December 31, 2016.

F-26



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 10 – WARRANT LIABILITY

Warrants that have their exercise prices denominated in currencies other than the Company’s functional currency of Canadian dollars, other than agents’ warrants, are accounted for as derivative financial liabilities. These warrants are recorded at the fair value at each reporting date with the change in fair value for the period recorded in profit or loss for the period.

    #     $  
Balance at January 1, 2014   4,259,540     324  
Granted, investor warrants   1,200,000     355  
Warrants expired   (1,540,000 )   (2 )
Change in fair value   -     78  
Balance at December 31, 2014   3,919,540     755  
Warrants expired   (1,200,000 )   -  
Change in fair value   -     (754 )
Balance at December 31, 2015   2,719,540     1  
Change in fair value   -     (1 )
Balance at December 31, 2016   2,719,540     -  

The fair value of these investor warrants were estimated using the Hull-White Trinomial option pricing model under the following weighted average inputs:

As at   December 31,     December 31,  
    2016     2015  
Exercise price   US$ 2.00     US$ 2.00  
Share price   US$ 0.08     US$ 0.16  
Expected volatility   96%     75%  
Expected life   0.42 years     1.42 years  
Dividends   0.0%     0.0%  
Risk-free interest rate   0.85%     0.82%  

NOTE 11 – DECOMMISSIONING LIABILITY

    Canadian     United States        
    Oil and Gas     Oil and Gas        
    Properties (1)   Properties (1)   Total  
    $     $     $  
Balance at January 1, 2015   3,597     112     3,709  
Change in estimated future cash flows   46     3     49  
Additions   -     8     8  
Actual costs incurred and other   (16 )   20     4  
Unwinding of discount   52     3     55  
Balance at December 31, 2015   3,679     146     3,825  
Change in estimated future cash flows   (36 )   (4 )   (40 )
Actual costs incurred and other   (53 )   (5 )   (58 )
Unwinding of discount   46     3     49  
Balance at December 31, 2016   3,636     140     3,776  

(1) relates to property and equipment (note 6)

F-27



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 11 – DECOMMISSIONING LIABILITY

The present value of the decommissioning liability was calculated using the following weighted average inputs:

    Canadian Oil     United States  
    and Gas     Oil and Gas  
    Properties     Properties  
As at December 31, 2016:            
Discount rate   1.60%     2.34%  
Inflation rate   2.00%     2.00%  
             
As at December 31, 2015:            
Discount rate   1.37%     2.16%  
Inflation rate   2.00%     2.00%  

NOTE 12 – FINANCIAL CONTRACT LIABILITY

On December 31, 2012, Dejour USA entered into a financial contract with a U.S. oil and gas drilling fund (“Drilling Fund”) to fund the drilling of up to three wells and the completion of up to four wells in the State of Colorado. The Drilling Fund contributed US$6.5 million cash to earn working interests in production from the wellbores ranging from 55.56% to 77.78% before payout and 44.44% to 58.33% after payout. This amount was subsequently increased by US$500,000 to US$7,000,000 with the Company’s consent.

The December 31, 2012 financial contract states the Drilling Fund has the right to require Dejour USA to purchase its working interests in the wellbores for cash in September 2016, 36-months after the final well in the 4-well program is placed in production. The repurchase price is based on a predetermined formula which ensures the Drilling Fund earns a minimum return, compounded annually and applied on a monthly basis, on 75% of its original US$7,000,000 investment over the 36-month period. Accordingly, the Company considered the transaction to be a financial contract as the risks and rewards of ownership were not substantially transferred to the Drilling Fund and, on December 31, 2012, the Company recorded the transaction in its accounts by increasing property and equipment and financial contract liability by US$6,500,000 on its balance sheet. This amount was subsequently increased to US$7,000,000.

On June 30, 2014, the financial contract was amended and the Drilling Fund agreed to retain its working interest in the wells as at September 30, 2016, should it exercise its right to require Dejour USA to pay the minimum return calculated in accordance with the provisions of the contract. In determining the minimum return to be paid, the Drilling Fund agreed to deduct the residual reserve value of its working interest in the 4 wellbores at September 30, 2016. The parties also agreed to have a third party engineering firm calculate the residual value of the reserves in accordance with industry accepted valuation standards.

Finally, the parties agreed to limit the cash consideration to be paid by Dejour USA, should it be required to pay the minimum return provided for in the December 31, 2012 contract to US$3,000,000. Additional consideration, if any, may be paid by Dejour USA by an assignment of a working interest in certain proven assets at a jointly owned oil and gas property in Colorado applying an industry-standard valuation approach.

The June 30, 2014 amendment transferred the risks of ownership of the 4 wellbores back to the Drilling Fund and the financial contract liability was adjusted to reflect the present value of the amount owing to the Drilling Fund under the financial contract at December 31, 2016 ($7,843,000), net of the present value of the residual reserves ($617,000), or $7,226,000, as follows:

F-28



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 12 – FINANCIAL CONTRACT LIABILITY (continued)

  $  
Balance at January 1, 2015 (US$2,361)   2,739  
Accretion expense (US$410)   525  
Foreign exchange loss   595  
Adjustment to financial contract liability (US$2,436)   3,348  
Balance at December 31, 2015 (US$5,207)   7,207  
Accretion expense (US$222)   296  
Foreign exchange gain   (214 )
Adjustment to financial contract liability (US$47)   (63 )
Balance at September 30, 2016 and December 31, 2016 (US$5,382)   7,226  

On September 30, 2016, the Drilling Fund served notice to Dejour USA requiring Dejour USA to purchase the Drilling Fund’s 77.71% working interest in the 4 wellbores in accordance with the provisions of the “put” option contract described above. However, prior to serving such notice, the Drilling Fund executed certain assignments transferring ownership of its working interests in the 4 wellbores to another entity and the assignee mortgaged its interest therein. The Company is assessing as to whether such assignment and subsequent mortgaging of working interests by the entity disentitled the Drilling Fund from exercising the “put” option which underlies the entire financial contract, and the related liability as set out in these consolidated financial statements, and whether, as a result thereof, the “put” contract option exercise was null and void as at September 30, 2016.

NOTE 13 – SHARE CAPITAL

Authorized

The Company is authorized to issue an unlimited number of common voting shares, an unlimited number of first preferred shares issuable in series, and an unlimited number of second preferred shares issuable in series. No preferred shares have been issued and the terms of preferred shares have not been defined.

Issued and outstanding

    # of shares     $  
Balance at January 1, 2014   29,783,274     90,274  
Issue of shares on exercise of warrants and options   2,177,153     2,232  
Derivative liability reallocated on exercise of warrants   -     70  
Contributed surplus reallocated on exercise of options   -     746  
Shares issued via acquisition of property, net of issuance costs   1,920,000     1,890  
Shares issued via private placement, net of issuance costs   2,600,000     1,920  
Balance at December 31, 2014   36,480,427     97,132  
Issue of shares on exercise of options   29,898     23  
Contributed surplus reallocated on exercise of options   -     7  
Adjustment due to fractional rounding   (372 )   -  
Balance at December 31, 2015   36,509,953     97,162  
Shares issued via private placements, net of issuance costs   8,298,333     949  
Balance at December 31, 2016   44,808,286     98,111  

In June and July 2016, the Company completed a dual tranche private placement and 8,298,333 common shares were issued at a price of $0.12 per share for total gross proceeds of $995,800. The Company paid finders’ fees of $18,000 and other costs of $29,000 related to this offering. Directors and Officers of the Company purchased 3,600,000 common shares of this offering.

F-29



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 14 – STOCK OPTIONS AND SHARE PURCHASE WARRANTS

(a)

Stock Options

The Stock Option Plan (the “Plan”) is a 10% “rolling” plan pursuant to which the number of common shares reserved for issuance is 10% of the Company’s issued and outstanding common shares as constituted on the date of any grant of options.

The Plan provides for the grant of options to purchase common shares to eligible directors, senior officers, employees and consultants of the Company (“Participants”). The exercise periods and vesting periods of options granted under the Plan are to be determined by the Company with approval from the Board of Directors. The expiration of any option will be accelerated if the participant’s employment or other relationship with the Company terminates. The exercise price of an option is to be set by the Company at the time of grant but shall not be lower than the market price (as defined in the Plan) at the time of grant.

The following table summarizes information about outstanding stock option transactions:

          Weighted  
    Number of     average  
    options     exercise price  
        $  
Balance at January 1, 2014   2,124,508     0.98  
Options granted   3,397,788     1.26  
Options exercised (Note 13)   (2,037,154 )   1.01  
Options forfeited   (510,826 )   1.01  
Options expired   (34,011 )   1.00  
Balance at December 31, 2014   2,940,305     1.27  
Options granted   709,897     0.79  
Options exercised (Note 13)   (29,898 )   0.78  
Options cancelled   (2,828,551 )   1.16  
Options forfeited   (651,015 )   1.00  
Balance at December 31, 2015   140,738     1.20  
Options granted   3,400,000     0.16  
Options cancelled   (52,818 )   1.26  
Options forfeited   (87,920 )   1.16  
Balance at December 31, 2016   3,400,000     0.16  

Details of the stock options as at December 31, 2016 are as follows:

    Outstanding     Exercisable  
          Weighted average           Weighted average  
    Number     exercise     contractual     Number     exercise     contractual  
    of options     price     life (years)     of options     price     life (years)  
          $                 $        
$0.16   3,400,000     0.16     4.43     3,150,000     0.16     4.43  

F-30



DXI ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2016 and 2015
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
 

NOTE 14 – STOCK OPTIONS AND SHARE PURCHASE WARRANTS (continued)

(a)

Stock Options (continued)

The fair value of the options issued during the period was estimated using the Black Scholes option pricing model with the following weighted average inputs:

For the year ended December 31   2016     2015     2014  
                   
Fair value at grant date $  0.06   $  0.25   $  0.60  
                   
Exercise price $  0.16   $  0.79   $  1.25  
Share price $  0.16   $  0.79   $  1.25  
Expected volatility   80.35%     76.45%     84.51%  
Expected option life   1.37 years     1.12 years     2.23 years  
Dividends   0.0%     0.0%     0.0%  
Risk-free interest rate   0.54%     0.49%     1.09%  

Expected volatility is based on historical volatility and average weekly stock prices were used to calculate volatility. Management believes that the annualized weekly average of volatility is the best measure of expected volatility. A weighted average forfeiture rate of 6.85% (2015 – 5.40% and 2014 – 6.07%) is used when recording stock based compensation.

(b)

Share Purchase Warrants

The following table summarizes information about warrant transactions:

    Number of     Weighted average  
    warrants     exercise price  
          $  
Balance at January 1, 2014   7,268,852     2.11  
Warrants granted   1,200,000     2.03  
Warrants exercised   (140,000 )   1.20  
Warrants expired   (2,362,409 )   2.47  
Balance at December 31, 2014   5,966,443     1.98  
Warrants granted   13,000,000     0.45  
Warrants exercised   (3,246,903 )   1.84  
Balance at December 31, 2015 and December 31, 2016   15,719,540     0.85  

Details of the share purchase warrants as at December 31, 2016 are as follows:

    Outstanding     Exercisable  
          Weighted average           Weighted average  
    Number     exercise     Contractual     Number     exercise     contractual  
    of warrants     price     life (years)     of warrants     price     life (years)  
          $                 $        
$0.45   13,000,000