NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(Unaudited)
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION:
Petrolia
Energy Corporation (“we”, “us”, “Petrolia” and the “Company”) is an oil and gas
exploration, development, and production company. The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”).
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission
(“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the
Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the results of operations for the interim periods presented
have been reflected herein. The results of operations for such interim periods are not necessarily indicative of operations for
a full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the
audited financial statements for the year ended December 31, 2017, as reported in Form 10-K for the year ended December 31, 2017,
have been omitted.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Askarii Resources, LLC
and Bow Energy Ltd. Our subsidiaries operate in the oil and gas industry. All significant intercompany transactions are eliminated
in the consolidation process. Since the single subsidiary is wholly-owned, all non-intercompany balances are included in the consolidated
financial statement balances.
Also,
the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Askarii Resources,
LLC and Bow Energy Ltd. Our subsidiaries operate in the oil and gas industry. All significant intercompany transactions are eliminated
in the consolidation process. Since the single subsidiary is wholly-owned, all non-intercompany balances are included in the consolidated
financial statement balances.
Use
of Estimates
The
preparation of these condensed consolidated financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and
the effects of revisions are reflected in the interim condensed consolidated financial statements in the period they are determined.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (Update or ASU) No. 2014-09,
Revenue from Contracts with Customers (“ASU 2014-09”). The Company adopted this standard on a modified
retrospective basis on January 1, 2018. No financial statement impact occurred upon adoption.
Revenue
from Contracts with Customers
We
recognize revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is
measured based on the consideration we expect to receive in exchange for those products.
Performance
Obligations and Significant Judgments
We
sell oil and natural gas products in the United States through a single reportable segment. We enter into contracts that generally
include one type of distinct product in variable quantities and priced based on a specific index related to the type of product.
The
oil and natural gas is typically sold in an unprocessed state to processors and other third parties for processing and sale to
customers. We recognize revenue at a point in time when control of the oil or natural gas passes to the customer or processor,
as applicable, discussed below. For oil sales, control is typically transferred to the customer upon receipt at the wellhead or
a contractually agreed upon delivery point. Under our natural gas contracts with processors, control transfers upon delivery at
the wellhead or the inlet of the processing entity’s system. For our other natural gas contracts, control transfers upon
delivery to the inlet or to a contractually agreed upon delivery point. In the cases where we sell to a processor, we have determined
that we are the principal in the arrangement and the processors are our customers. We recognize the revenue in these contracts
based on the net proceeds received from the processor.
Transfer
of control drives the presentation of transportation and gathering costs within the accompanying unaudited consolidated statements
of operations. Transportation and gathering costs incurred prior to control transfer are recorded within the transportation and
gathering expense line item on the accompanying unaudited consolidated statements of operations, while transportation and gathering
costs incurred subsequent to control transfer are recorded as a reduction to the related revenue.
A
portion of our product sales are short-term in nature. For those contracts, we use the practical expedient in ASC 606-10-50-14
exempting us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation
is part of a contract that has an original expected duration of one year or less.
For
our product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC 606-10-50-14(a)
which states we are not required to disclose the transaction price allocated to remaining performance obligations if the variable
consideration is allocated entirely to an unsatisfied performance obligation. Under these sales contracts, each unit of product
represents a separate performance obligation; therefore, future volumes are unsatisfied, and disclosure of the transaction price
allocated to remaining performance obligations is not required. We have no unsatisfied performance obligations at the end of each
reporting period.
We
do not believe that significant judgments are required with respect to the determination of the transaction price, including any
variable consideration identified. There is a low level of uncertainty due to the precision of measurement and use of index-based
pricing with predictable differentials. Additionally, any variable consideration identified is not constrained.
Business
combinations
In
January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU
provides an updated model for determining if acquired assets and liabilities constitute a business. In a business combination,
the acquired assets and liabilities are recognized at fair value and goodwill could be recognized. In an asset acquisition, the
assets are allocated value based on relative fair value and no goodwill is recognized. The ASU narrows the definition of a business.
We adopted this standard in the first quarter of 2018. ASU 2017-01 did not have a material impact on our financial statements.
Recent
Accounting Pronouncements
The
Company has evaluated all the recent accounting pronouncements through the filing date and believes that none of them will have
a material effect on the Company.
NOTE
3. GOING CONCERN
The
Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. The Company plans to generate profits by reworking its existing oil or gas wells and
drilling additional wells, as needed. The Company will need to raise funds through either the sale of its securities,
issuance of corporate bonds, joint venture agreements and/or bank financing to accomplish its goals. The Company does
not have any commitments or arrangements from any person to provide the Company with any additional capital, at this time. If
additional financing is not available when needed, the Company may need to cease operations. The Company may not be
successful in raising the capital needed to drill and/or rework existing oil wells. Any additional wells that the Company
may drill may be non-productive. Management believes that actions presently being taken to secure additional funding
for the reworking of its existing infrastructure will provide the opportunity for the Company to continue as a going concern. Since
the Company has an oil producing asset, its goal is to increase the production rate by optimizing its current infrastructure. The
accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to
the financial statements have been made to account for this uncertainty.
NOTE
4. ACQUISITION OF BOW ENERGY LTD.
On
November 30, 2017, we signed an Arrangement Agreement (the “Arrangement”) to acquire Bow Energy Ltd (“Bow”
and the “Acquisition”). Bow is a Canadian company with corporate offices in Alberta, Calgary.
On
February 27, 2018, the Acquisition closed and we acquired all of the issued and outstanding shares of capital stock of Bow (each
a “Bow Share”). The Arrangement was approved by an overwhelming majority of more than 99% of the votes cast by Bow’s
shareholders at a special meeting of shareholders of Bow held on February 21, 2018. Final approval of the Arrangement was granted
by the Court of Queen’s Bench of Alberta (the “Court”) on February 23, 2018.
Under
the terms of the Arrangement, Bow shareholders are deemed to have received 1.15 Petrolia common stock shares for each Bow Share.
A total of 106,156,712 shares of the Company’s common stock were issued to the Bow shareholders as a result of the Arrangement,
plus additional shares in connection with the rounding described below. The Arrangement provided that no fractional shares would
be issued in connection with the Arrangement, and instead, each Bow shareholder otherwise entitled to a fractional interest would
receive the nearest whole number of Company shares. For example, where such fractional interest is greater than or equal to 0.5,
the number of shares to be issued would be rounded up to the nearest whole number and where such fractional interest is less than
0.5, the number of shares to be issued would be rounded down to the nearest whole number. In calculating such fractional interests,
all shares issuable in the name of or beneficially held by each Bow shareholder or their nominee as a result of the Arrangement
shall be aggregated.
The
Arrangement provides that any certificate formerly representing Bow common stock not duly surrendered on or before the last business
day prior to the third anniversary of the closing date will cease to represent a claim by, or interest of, any former shareholder
of any kind of nature against Bow or the Company and on such date all consideration or other property to which such former holder
was entitled shall be deemed to have been surrendered to the Company.
The
Company also assumed all of the outstanding warrants to purchase shares of common stock of Bow (the “Bow Warrants”)
and certain options to purchase shares of common stock of Bow (the “Bow Options”) in connection with the Arrangement
(i.e., each warrant/option to purchase one (1) share of Bow represents the right to purchase one (1) share of the Company following
the closing).
At
the closing of the Acquisition, we issued the Bow shareholders the shares described above and assumed warrants to purchase 320,000
shares of common stock valued at $103,632.
A
subsidiary of Bow, Bow Energy Pte. Ltd. (“BEPL”), BEPL owns 75% of the issued and outstanding shares of Renco Elang
Energy Pte. Ltd. (“REE”) which owns a 75% working interest in a Production Sharing Contract referred to as “South
Block A” (the “Assets” or “SBA”) located onshore, North Sumatra, Indonesia. REE is the operator
of the Assets. Effectively, the Company has a 44.48% working interest in the Assets.
On
May 24, 2017, Bow’s wholly-owned subsidiary, Bow Energy International Holdings Inc. (“BEIH”), acquired all of
Bukit Energy Inc.’s shareholding interests (the “Subsidiary Shares”) in five Singapore holding companies (the
“Holding Companies”) that own the interests in four Production Sharing Contracts (“PSCs”) and one non-conventional
joint study agreement (“JSA”), all interests are located onshore in Sumatra, Indonesia. The Holding Companies being
acquired were Bukit Energy Central Sumatra (Mahato) Pte. Ltd. (“Mahato”), Bukit Energy Palmerah Baru Pte. Ltd. (“Palmerah
Baru”), Bukit Energy Resources Palmerah Deep Pte. Ltd. (“Palmerah Deep”), Bukit Energy Bohorok Pte. Ltd. (“Bohorok”),
and Bukit Energy Resources North Sumatra Pte. Ltd. (“Bohorok Deep”), collectively referred to as the “Bukit
assets.”
The
Holding Companies own the following interests in the conventional and non-conventional PSCs and non-conventional JSA:
●
|
Bohorok
PSC (conventional) – operated 50% participating interest, 465,266 net acres
|
●
|
Palmerah
Baru PSC (conventional) – operated 54% participating interest, 98,977 net acres
|
●
|
Palmerah
Deep PSC (non-conventional)- operated 69.36% participating interest, 170,398 net acres
|
●
|
Mahato
PSC (conventional)- 20% participating interest, 167,115 net acres, non-operated
|
●
|
Bohorok
Deep (non-conventional)- 20.25% participating interest in a JSA, non-operated with option to become operator
|
The
fair value of the 106,156,712 common shares issued as part of the consideration paid for Bow ($34,607,088) was determined on the
volume weighted average share price of Bow’s common stock for the 90 days before the transaction was complete.
The
purchase price allocation can be summarized as follows:
Cash
|
|
$
|
3,784
|
|
Other
current assets
|
|
|
4,763
|
|
Deposits
|
|
|
337,997
|
|
Furniture,
equipment & software
|
|
|
12,059
|
|
Unproved
properties and properties not subject to amortization
|
|
|
9,705,590
|
|
Goodwill
|
|
|
27,129,963
|
|
Accounts
payable
|
|
|
(1,157,876
|
)
|
Note
payable
|
|
|
(1,429,192
|
)
|
The
fair values of identifiable assets acquired as reported in the table above were estimated based on information available at the
time of preparation of these interim condensed consolidated financial statements. The fair value was assessed based on the volume
weighted average share price of Bow’s common stock for the 90 days before the transaction was complete. Actual amounts recognized
by the Company once the acquisition accounting is finalized may differ materially from these estimates. Fair value of cash, other
current assets, deposits, furniture, equipment & software, accounts payable, and note payable was valued at the carrying value
of Bow as this was deemed to be the most accurate measure of fair value. Fair value assigned to properties, which contain prospective
oil and gas resources instead of reserves, was derived using market approach.
Acquisition
costs included a finder’s fee grant of 100,000 shares of common stock ($37,000) as a bonus for the Bow Energy acquisition
at a fair value of $0.37 per share. In addition, the Company incurred $103,632 in transaction costs associated with the issuance
of warrants to purchase 320,000 shares of common stock in connection with the transaction.
The
amount of Bow’s loss included in Petrolia’s consolidated income statement for the three months ended March 31, 2018,
and the loss of the combined entity had the acquisition date been January 1, 2018, and January 1, 2017, are as follows.
|
|
|
Revenue
|
|
|
|
Earnings
(Loss
|
)
|
February
28, 2018 to March 31, 2018
|
|
$
|
9,993
|
|
|
$
|
(10,568,097
|
)
|
Supplemental
pro forma from January 1, 2018 to March 31, 2018
|
|
$
|
29,980
|
|
|
$
|
(29,740,308
|
)
|
Supplemental
pro forma from January 1, 2017 to March 31, 2017
|
|
$
|
2,388,184
|
|
|
$
|
(290,976
|
)
|
Impairment
loss
On
March 31, 2018, the Company recorded an impairment to goodwill of $27,129,963 relating to the impairment of the goodwill of Bow
which was acquired by the Company pursuant to the Acquisition. The impairment was assessed based on future cash flow as of March
31, 2018.
NOTE
5. SHORT-TERM NOTE PAYABLE
|
|
|
|
|
|
March
31, 2018
|
|
December
31, 2017
|
|
|
Nominal
interest rate
|
|
Date
of
maturity
|
|
Face
value
|
|
Carrying
amount
|
|
Face
value
|
|
Carrying
amount
|
Current
portion of truck loan (i)
|
|
|
5.49
|
%
|
|
|
January
6, 2022
|
|
|
$
|
32,582
|
|
|
$
|
32,582
|
|
|
$
|
32,582
|
|
|
$
|
32,582
|
|
Promissory
note (ii)
|
|
|
12
|
%
|
|
|
June
30, 2018
|
|
|
|
37,613
|
|
|
|
42,127
|
|
|
|
—
|
|
|
|
—
|
|
Promissory
note (iii)
|
|
|
12
|
%
|
|
|
June
30, 2018
|
|
|
|
36,451
|
|
|
|
39,747
|
|
|
|
—
|
|
|
|
—
|
|
Bukit
Energy Inc. (iv)
|
|
|
8.5
|
%
|
|
|
Dec
15, 2017
|
|
|
|
500,000
|
|
|
|
538,677
|
|
|
|
—
|
|
|
|
—
|
|
Credit
note (v)
|
|
|
9
|
%
|
|
|
See
Note 11
|
|
|
|
800,000
|
|
|
|
835,855
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,406,646
|
|
|
$
|
1,488,988
|
|
|
$
|
32,582
|
|
|
$
|
32,582
|
|
The
promissory notes are repayable in full on maturity. The difference between the face value and carrying amount is attributed to
accrued interest.
|
(i)
|
On
January 6, 2017, the Company purchased a truck and entered into an installment note with
Don Ringer Toyota in the amount of $35,677 for a term of five years at 5.49% annual percentage
rate (APR).
|
|
(ii)
|
The
note matures on February 28, 2018 and carries interest at 12% per annum. The note was
extended to June 30, 2018.
|
|
(iii)
|
The
note matures on February 28, 2018 and carries interest at 12% per annum. The note was
extended to June 30, 2018.
|
|
(iv)
|
In
conjunction with the closing of the purchase of the Bukit assets, Bow issued a note payable
to Bukit Energy Inc. of $500,000 with interest at the rate of 8.5% per annum, calculated
monthly, not in advance, on the principal amount. The note matured on August 31, 2017.
The note was extended to December 15, 2017. The note is in default and remained in default
at the time of issuance of these financial statements.
|
|
(v)
|
Bow
has a loan in default of $800,000. The credit note is secured by a general security agreement
over the assets of Bow. Interest accrues monthly and is recorded at 9% on the full amount
of the original issued notes of USD $1,100,000. The note is in default and remained in
default at the time of issuance of these financial statements. The debt holder also was
issued warrants to purchase 320,000 shares of common stock exercisable at $0.08 per share,
expiring February 27, 2021. The warrants were valued at $103,633 using the Black Scholes
options pricing model with volatility of 283%, discount rate of 2.42% and call option
value of $0.32. The note was amended on May 9, 2018. Terms of which, are disclosed in
Note 11.
|
NOTE
6. EQUITY
Preferred
Stock
The
holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 9% per annum. The Preferred Stock
will automatically convert into common stock upon the earlier to occur of (a) the majority consent of the holders of such Preferred
Stock; (b) a registered public offering of the Company’s common stock, provided that the gross proceeds to the Company are
at least $10 million and the price is at least $0.30; (c) the five year anniversary of the filing of the designation of the Preferred
Stock with the Secretary of State of Texas (May 3, 2022); or (d) the date that the Company’s common stock price equals or
exceeds $0.28 per share for 30 consecutive trading days. At conversion, the value of each dollar of preferred stock (based on
a $10 per share price) will convert into 7.1429 common shares (which results in a $0.14 per common share conversion rate).
On
February 5, 2018, one accredited investor subscribed and purchased 2,000 Series A preferred shares by remitting payment of $20,000.
As of March 31, 2018, there were 199,100 preferred shares outstanding.
In
accordance with the terms of the preferred shares, a dividend was declared of $44,006.
Common
Stock
During
the three months ended March 31, 2018, the Company issued an aggregate of 110,739,588 shares of common stock. As of March 31,
2018, there were 222,437,810 shares of common stock outstanding.
On
January 24, 2018, 350,000 shares, valued at $59,500, were issued in accordance with Mr. James Burns’ common stock related
salary compensation.
On
January 24, 2018, Mr. James Burns was issued 616,210 shares of restricted common stock in consideration for 2017 deferred salary
of $61,621. A debt settlement loss of $203,349 was recorded.
On
February 1, 2018, a law firm was granted 100,000 shares (valued at $37,000) of common stock as a bonus for the Bow Energy acquisition
at a fair value of $0.37 per share.
On
February 1, 2018, a geologist consultant in Oklahoma, was issued 150,000 shares of common stock (valued at $18,000) at a deemed
fair value of $0.12 per share (valued based on the Company’s stock trading price in 2017 when the obligation occurred),
in exchange for his professional consulting services.
On
February 1, 2018, director, Joel Oppenheim subscribed for half of one unit (discussed below) resulting in the issuance of 208,333
shares of common stock and one warrant for gross proceeds of $25,000 at a price of $0.12 per unit. 83,333 shares of common stock
were not issued until subsequent to quarter end and an amount of $10,000 is in subscriptions received in advance.
On
February 1, 2018, a Director exercised warrants to purchase 1,110,000 shares of common stock by settling $102,590 of Accounts
Payable to a company controlled by the director at an average share price of $0.092 per share. No gain or loss was recorded on
settlement.
From
January 1, 2018 to March 31, 2018, the Company continued with the private offering of its securities under Regulation D of the
Securities Act to accredited investors. Each unit which has a price of $50,000, is comprised of 416,667 shares of common
stock and one warrant to purchase an additional 416,667 shares of common stock at a price of $0.20 per share at any time prior
to October 1, 2020. From January 1, 2018 to March 31, 2018, two and a half (2.5) units had been subscribed for and 1,041,667
shares of common stock and warrants to acquire 1,041,667 shares of common stock had been purchased by various accredited investors
for $125,000.
On
February 27, 2018, the Company closed the Acquisition and acquired all of the issued and outstanding shares of capital stock of
Bow in consideration for 106,156,712 shares (valued at $34,607,088, less $27,129,963 relating to the impairment of the goodwill
of Bow) of the Company’s common stock as disclosed in Note 4. The shares were valued on the volume weighted average share
price of Bow’s common stock for the 90 days before the transaction was complete.
On
February 28, 2018, one (1) warrant holder exercised a total of 360,000 warrants by remitting payment of $36,875 at an average
share price of $0.102 per share.
On
February 28, 2018, Director Joel Oppenheim exercised 630,000 warrants by remitting payment of $61,800 at an average share price
of $0.098 per share.
Warrants
Summary
information regarding common stock warrants issued and outstanding as of March 31, 2018, is as follows:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
average remaining contractual life (years)
|
Outstanding
at year ended December 31, 2017
|
|
|
35,087,198
|
|
|
$
|
0.24
|
|
|
|
2.15
|
|
Granted
|
|
|
4,075,833
|
|
|
|
0.13
|
|
|
|
3.00
|
|
Exercised
|
|
|
(2,100,000
|
)
|
|
|
0.10
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at quarter ended March 31, 2018
|
|
|
37,063,031
|
|
|
$
|
0.23
|
|
|
|
2.02
|
|
The
intrinsic value of warrants as of March 31, 2018 is $151,581 (December 31, 2017: $1,106,583).
The
table below summarizes the warrants granted during the three month period ended March 31, 2018:
|
|
Number
of
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
|
|
|
|
Board
of Director Service
|
|
|
1,750,000
|
|
|
$
|
0.10
|
|
Pursuant
to acquisition of Bow Energy Ltd.
|
|
|
320,000
|
|
|
$
|
0.18
|
|
Private
placement – March 2018
|
|
|
1,041,667
|
|
|
$
|
0.20
|
|
Private
placement (Joel Oppenheim)
|
|
|
208,333
|
|
|
$
|
0.20
|
|
Pursuant
to employment termination agreement
|
|
|
250,000
|
|
|
$
|
0.20
|
|
Deferred
salary – CEO, former CFO
|
|
|
255,833
|
|
|
$
|
0.14
|
|
Pursuant
to settlement of loan from director (Joel Oppenheim)
|
|
|
250,000
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,075,833
|
|
|
|
|
|
Stock
options
Upon
closing of the Acquisition, the Company granted stock options to purchase 3,500,000 shares of common stock to former Bow employees
and directors exercisable at $0.12 per share and expiring on February 27, 2021. The stock options were valued at $1,131,639 using
the Black Scholes options pricing model with volatility of 283%, discount rate of 2.42% and a call option value of $0.32.
Subscriptions
received in advance
On
February 1, 2018, director, Joel Oppenheim subscribed for half of one unit resulting in the issuance of 208,333 shares of common
stock and warrants to purchase 208,333 shares of common stock, for gross proceeds of $25,000 at a price of $50,000 per unit. 83,333
shares of common stock were not issued until subsequent to quarter end and an amount of $10,000 is included in subscriptions received
in advance on the balance sheet.
On
February 23, 2018, the Company received $12,500 at a subscription price of $0.12 in advance of shares being issued. The private
placement closed on April 23, 2018 and 104,167 shares were issued.
NOTE
7. COMMITMENTS AND CONTINGENCIES
The
Company, as a lessee of oil and gas properties, is subject to various federal, state and local laws and regulations relating to
discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability
on the Company for the cost of pollution clean-up resulting from operations and subject the Company to liability for pollution
damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company
is not aware of any environmental claims existing as of March 31, 2018 which have not been provided for, or covered by insurance
or which may have a material impact on its financial position or results of operations. There can be no assurance, however, that
current regulatory requirements will not change, or past noncompliance with environmental laws will not be discovered on the Company’s
properties.
Office
Lease
– The Company has a one year office lease in Houston at a cost of $2,012 per month. The lease expires January
31, 2019 with two, one year renewal options.
NOTE
8. RELATED PARTY TRANSACTIONS
On
January 15, 2018, Paul Deputy, the former CFO, terminated his employment with the Company. The Company has agreed to pay severance
of $192,521 amortized over a 30 month period beginning April 15, 2018 at a 5% annual percentage rate, $5,000 per month for January,
February and March of 2018 and issue warrants to purchase 250,000 shares of common stock exercisable at $0.20 per share expiring
in 36 months. The fair value of warrants granted was $109,021.
On
January 12, 2018, the Company entered into an employment agreement with Tariq Chaudhary, the Company’s CFO, for a period
of one year. The CFO will be paid a salary of $7,500 a month during the first 90 days of the probationary period. Upon successful
completion of the probationary period, the salary will be $120,000 per year. Also, the CFO will be given a signing bonus of 500,000
shares of common stock, and was granted warrants to purchase 500,000 shares of common stock exercisable at $0.12 per share equally
vesting over 36 months upon successful completion of the probationary period.
On
February 1, 2018, a Director exercised warrants to purchase 1,110,000 shares of common stock by settling $102,590 of Accounts
Payable to a company controlled by director, Quinton Beasley, at an average share price of $0.092 per share. No gain or loss was
recorded at settlement.
On
February 1, 2018, director, Joel Oppenheim subscribed for half of one unit resulting in the issuance of 208,333 shares of common
stock and warrants to purchase 208,333 shares of common stock for gross proceeds of $25,000 at a price of $50,000 per unit. 83,333
shares of common stock were not issued until subsequent to quarter end and an amount of $10,000 is included in subscriptions received
in advance on the balance sheet.
On
February 9, 2018, the Company entered into a Revolving Line of Credit Agreement (“LOC”) for $200,000 (subsequently
increased to $500,000 on April 12, 2018) with Jovian Petroleum Corporation, a company controlled by a Director of the Company.
The initial agreement is for a period of 6 months and can be extended for up to 5 additional terms of 6 months each. All amounts
advanced pursuant to the LOC will bear interest from the date of advance until paid in full at 3.5% simple interest per annum.
Interest will be calculated on a basis of a 360-day year and charged for the actual number of days elapsed. The Company repaid
$47,600 on the LOC.
On
February 26, 2018, Mr. Oppenheim was issued 630,000 shares of common stock. These shares were the result of exercising warrants
to purchase 630,000 shares of common stock, at an average exercise price of $0.098 per share, which included the remittance of
$61,800 as the aggregate exercise price.
NOTE
9. BUSINESS SEGMENTS
We
are a diversified oil and gas company with operations in two segments:
Oil
and Gas Exploration and Production
– which includes exploration, development, and production of current and potential
oil and gas properties.
Oil
field services
– which includes selling oil field related equipment and providing various oil field related services
to the oil and gas industry.
|
|
Three
months ended
March 31, 2018
|
|
Three
months ended
March 31, 2017
|
Revenues
|
|
|
|
|
Oil
& Gas
|
|
$
|
29,980
|
|
|
$
|
33,560
|
|
Oil
field services
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
Oil
& Gas
|
|
|
(27,272,990
|
)
|
|
|
(459,222
|
)
|
Oil
field services
|
|
|
(4,048
|
)
|
|
|
(4,048
|
)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Oil
& Gas
|
|
|
23,341,260
|
|
|
|
13,057,078
|
|
Oil
field services
|
|
|
236,014
|
|
|
|
181,593
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
|
|
|
|
|
|
Oil
& Gas
|
|
|
18,254
|
|
|
|
48,201
|
|
Oil
field services
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE
10: SUPPLEMENTAL CASH
Interest
Paid
|
|
$
|
376
|
|
|
$
|
8,318
|
|
NON-CASH
INVESTING AND FINANCIAL DISCLOSURES
|
|
|
|
|
|
|
|
|
Issued
common shares for purchase Bow Energy. Goodwill and assets
|
|
$
|
34,607,088
|
|
|
$
|
—
|
|
Settlement
of accrued salaries with common shares
|
|
|
61,621
|
|
|
|
—
|
|
Settlement
of account payable for common shares, related party
|
|
|
102,590
|
|
|
|
—
|
|
Initial
recognition of asset retirement obligation
|
|
|
—
|
|
|
|
101,405
|
|
Settlement
of accounts receivable and other assets for oil and gas properties
|
|
|
—
|
|
|
|
465,788
|
|
Note
payable for vehicle purchase
|
|
|
—
|
|
|
|
35,677
|
|
Series
A preferred dividend
|
|
|
44,006
|
|
|
|
—
|
|
NOTE
11: SUBSEQUENT EVENTS
|
(i)
|
On
April 12, 2018, the Board of Directors approved (a) the entry by the Company into a $500,000 Convertible Promissory Note with
Blue Sky International Holdings Inc. The note, effective April 1, 2018, is due on April 1, 2019, accrues interest at the rate
of 11% per annum until paid in full, and is convertible into shares of common stock of the Company at the rate of $0.12 per
share; and (b) the entry into an Amended Revolving Line of Credit Agreement with Jovian Petroleum Corporation, a related party,
which establishes a revolving line of credit in the amount of $500,000 for a period of six months (through August 9, 2018)
with amounts borrowed thereunder due at the expiration of the line of credit and accruing interest at the rate of 3.5% per
annum unless there is a default thereunder at which time amounts outstanding accrue interest at the rate of 7.5% per annum
until paid in full, with such interest payable every 90 days.
|
|
|
|
|
(ii)
|
On
April 18, 2018, a Separation and Release Agreement between the former President of the Company, James Burns and the Company
became effective whereby Mr. Burns ceased to be an employee of the Company. Pursuant to the terms of the agreement, the Company
will pay Mr. Burns $33,000,
grant him warrants to purchase 3,000,000 shares of common stock
at an exercise price of $0.10 per share and also issue 2,000,000 shares of restricted common stock of the Company, which it
satisfied on May 14, 2018. The warrants were granted at fair value using a Black Scholes model for $266,971 and the restricted
shares were valued at the closing price of Petrolia’s stock, for $180,000.
|
|
|
|
|
(iii)
|
On
April 20, 2018, the Company entered into an agreement to offer the position of Chairman of the Board to James Burns. Mr. Burns
accepted and became Chairman of the Board effective May 1, 2018. Pursuant to the terms of the offer, Mr. Burns will be paid
an annual salary of $65,000 and up to $25,000 in health benefits for Mr. Burns and his family. The Company will issue 500,000
shares of restricted common stock, which it satisfied on May 14, 2018. An additional 500,000 shares of restricted common stock
will be issued upon a successful listing of the Company on the NASDAQ or NYSE exchanges. Mr. Burns will also be granted fully
vested warrants to purchase 2,000,000 shares of common stock exercisable at $0.10 per share expiring in 36 months. The warrants
were granted at fair value using a Black Scholes model for $177,982 and the restricted shares were valued at the closing price
of Petrolia on the date of the agreement for $45,000.
|
|
|
|
|
(iv)
|
On
April 26, 2018, the Company issued 200,000 shares of common stock as a bonus to a vendor valued at $14,000 based on the closing
price of $0.07 per share.
|
|
|
|
|
(v)
|
On
April 26, 2018, a warrant holder exercised his 500,000 warrants at a strike price of $0.10 for gross proceeds of $50,000 and
was issued 500,000 shares of common stock.
|
|
|
|
|
(vi)
|
On
May 9, 2018, Bow, the Company’s wholly owned subsidiary, entered into an Amended and Restated Loan Agreement with a
third party (the “
Loan Agreement
” and the “
Lender
”). The Loan Agreement increased by
$800,000 the amount of a previous loan agreement entered into between Bow and the Lender, to $1,530,000. The amount owed under
the Loan Agreement ($1,530,000) accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default)
and is due and payable on May 11, 2021, provided that the amount owed can be prepaid prior to maturity, beginning 60 days
after the date of the Loan Agreement, provided that the Company give the Lender 10 days’ notice of our intent to repay
and pay the Lender the interest which would have been due through the maturity date at the time of repayment. The Company
is also required to make a payment of principal and interest in the amount of $50,818 per month towards the amount owed beginning
on July 15, 2018. The Loan Agreement contains standard and customary events of default, including cross defaults under other
indebtedness obligations of us and Bow, and the occurrence of any event which would have a material adverse effect on us or
Bow.
|
|
|
|
|
|
The
additional $800,000 borrowed in connection with the entry into the Loan Agreement can only be used by the Company for a future
acquisition of oil and gas properties, which the Company is currently in discussions regarding, and will be secured by such
assets, when/if the transaction closes. In the event the acquisition (or another mutually agreed upon acquisition), for any
reason does not close, the $800,000 in additional funds are anticipated to be immediately repaid to the Lender.
|
|
|
|
|
|
In
order to induce the Lender to enter into the Loan Agreement, the Company agreed to issue the Lender 500,000 shares of restricted
common stock (the “
Loan Shares
”), which were issued on May 18, 2018, and warrants to purchase 2,320,000
shares of common stock (the “
Loan Warrants
”), of which warrants to purchase (a) 320,000 shares of common
stock have an exercise price of $0.10 per share in Canadian dollars, and expire on the date the Loan Agreement has been repaid;
(b) 500,000 shares of common stock have an exercise price of $0.12 per share in U.S. dollars, and expires on May 15, 2021;
and (c) 1,500,000 shares of common stock have an exercise price of $0.10 per share in U.S. dollars and expire on May 15, 2020.
|
|
|
|
|
(vii)
|
On
June 8, 2018, the Company issued a note receivable of CAD $406,181 or $314,912 to Blue Sky
Resources Ltd. This note bears nine percent simple interest per annum commencing as of August 1, 2018. The note matures on
November 30, 2018.
|
|
|
|
|
(viii)
|
On
May 22, 2018, 500,000 shares of common stock were issued to (CFO) Tariq Chaudhary as per his employment offer letter.
|
|
|
|
|
(ix)
|
The
Company closed a private placement of two of units for $100,000, with each unit having a price of $50,000, is comprised of
416,667 shares of common stock and one warrant to purchase an additional 416,667 shares of common stock at a price of $0.20
per share at any time prior to October 1, 2020.
|
FORWARD
LOOKING STATEMENTS
This
report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements.
These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include
the words ”may,” ”will,” ”could,” ”should,” ”would,” ”believe,”
”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan” or other words
or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events.
The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations,
anticipations and intentions with respect to our financial condition, results of operations, future performance and business,
including statements relating to our business strategy and our current and future development plans.
The
potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance
to differ materially from those expressed or implied in this report include:
|
●
|
The
sale prices of crude oil;
|
|
|
|
|
●
|
The
amount of production from oil wells in which we have an interest;
|
|
|
|
|
●
|
Lease
operating expenses;
|
|
|
|
|
●
|
International
conflict or acts of terrorism;
|
|
|
|
|
●
|
General
economic conditions; and
|
|
|
|
|
●
|
Other
factors disclosed in this report.
|
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will
be important in determining our future performance. Consequently, actual results may differ materially from those that might be
anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion
of a forward-looking statement in this report as a representation by us that our plans and objectives will be achieved, and you
should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law.
You
should read the matters described in “Risk Factors” and the other cautionary statements made in, and incorporated
by reference in, this report as being applicable to all related forward-looking statements wherever they appear in this report. We
cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore prospective investors
are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation
to update or revise these forward-looking statements, even though our situation may change in the future.
Please
see the “Glossary of Oil and Gas Terms” on page 9 of our Annual Report on Form 10-K for the year ended December 31,
2017, filed with the SEC on April 17, 2018 (the “2017 Annual Report”) for a list of abbreviations and definitions
used throughout this report.
This
information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this
Quarterly Report on Form 10-Q, and the unaudited financial statements and notes thereto and Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our 2017 Annual Report.
Certain
capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated
financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.
Unless
the context requires otherwise, references to the “
Company,
” “
we,
” “
us,
” “
our,
” “
Petrolia
” and “
Petrolia Energy Corp.
” refer specifically
to Petrolia Energy Corp. and its wholly-owned subsidiaries.
In
addition, unless the context otherwise requires and for the purposes of this report only:
|
●
|
“
Bbl
” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to
crude oil or other liquid hydrocarbons;
|
|
●
|
“
Boe
” barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas
liquids, to six Mcf of natural gas;
|
|
●
|
“
Mcf
” refers to a thousand cubic feet of natural gas;
|
|
●
|
“
SEC
” or the “ Commission ” refers to the United States Securities and Exchange Commission; and
|
|
●
|
“
Securities Act
” refers to the Securities Act of 1933, as amended.
|