The accompanying notes are an integral part
of these unaudited interim condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited interim condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited interim condensed consolidated financial statements.
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. AMENDMENT OF PREVIOUSLY ISSUED
FINANCIAL STATEMENTS
The Company has determined that it should amend its previously issued financial statements in its Form 10-Q for the quarter
ended March 31, 2018 due to its failure to adequately disclose the following matters associated with related party transactions
involving the Company and its officers. Thus, the Company has filed the amendment
to its previously issued financial statements to adequately disclose and clarify that:
(a)
the Bow Energy Ltd (“Bow”)
Acquisition (defined below) is a related party transaction, because of the related party relationship the Company failed to disclose
as described in (c), below;
(b)
the President, Chief Executive
Officer and 100% owner of Blue Sky International Holdings Inc. (“Blue Sky”) is Ilyas Chaudhary, the father of Zel C.
Khan, the Company’s Chief Executive Officer; that Mr. Chaudhary owns and controls BSIH Ltd. (“BSIH”), which was
the largest shareholder of the Company prior to the cancellation of the shares held by BSIH in September 2018, pursuant to the
terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd. dated August 31, 2018 of which entity Mr. Chaudhary
also owns and controls;
(c)
prior to the acquisition of Bow
as described in (b), above, BSIH, and as a result of his ownership and control of BSIH, Mr. Chaudhary controlled Bow;
(d)
on April 12, 2018 a $500,000
convertible promissory note was issued to Blue Sky and such note was subsequently canceled by the Company;
(e)
BSIH and Blue Sky Resources Ltd.
are both entirely owned by Mr. Chaudhary; and
(f)
Quinten Beasley,
the Company’s Director, and not Mr. Khan, beneficially owns the shares of the Company’s common stock held by Jovian
Petroleum Corporation.
NOTE 4. 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 5. ACQUISITION OF BOW ENERGY LTD,
A RELATED PARTY
On November 30, 2017, we signed an Arrangement
Agreement (the “Arrangement”) to acquire Bow Energy Ltd, a related party (“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.
Ilyas Chaudhary, is the father of Zel C. Khan, the Company's Chief
Executive Officer. Mr. Chaudhary owned and controlled BSIH Ltd. (“BSIH”) prior to the acquisition of Bow and through
the ownership and control of BSIH, Mr. Chaudhary controlled Bow. Therefore, the BOW acquisition is considered to be a related party
transaction. Additionally, BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to
the terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018.
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 6. 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
|
%
|
|
|
May 11, 2021
|
|
|
|
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 12.
|
NOTE 7. 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 Energy Ltd, a related party, 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 5. 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 8. 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 9. 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.
On February 27, 2018, the
transactions contemplated by the November 30, 2017, Arrangement (the “Arrangement”) entered into to acquire Bow
Energy Ltd (“Bow” and the “Acquisition”), a Canadian company with corporate offices in Alberta,
Calgary, closed and the Company acquired Bow Energy Ltd., a related party and all of the issued and outstanding shares of
capital stock of Bow (each a “Bow Share”). Under the terms of the Arrangement, Bow shareholders are deemed
to have received 1.15 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 rounding.
Prior to the acquisition of Bow, BSIH Ltd. (“BSIH”) controlled Bow. The President, Chief Executive Officer and
100% owner of BSIH is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer. Because
Mr. Chaudhary owns and controls BSIH, the acquisition of Bow was a related party transaction.
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.
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.
On May 22, 2018, 500,000 shares of common
stock were issued to (CFO) Tariq Chaudhary as per his employment offer letter.
Also, 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., a related party. 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. This note was
never utilized and subsequently cancelled on April 27, 2018; 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. Both the BSIH Promissory
Note and the Jovian Line of Credit are related party transactions. Blue Sky International Holdings Inc. is owned by Mr. Ilyas
Chaudhary, father of Zel C. Khan, former Director and Officer of Jovian and current CEO and President of Petrolia.
Effective on June 29, 2018, the Company acquired a 25% working interest
in approximately 41,526 acres located in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest Saskatchewan and
Eastern Alberta, Canada (collectively, the “Canadian Properties” and the “Working Interest”). The Canadian
Properties currently encompass 64 sections, with 240 oil and 12 natural gas wells currently producing on the properties. Additionally,
there are several idle wells with potential for reactivation and 34 sections of undeveloped land (approximately 21,760 acres).
The Canadian Properties and the
Working Interest were acquired from Blue Sky Resources Ltd. (“Blue Sky”), whose President is Ilyas Chaudhary, the
father of Zel C. Khan, the Company’s Chief Executive Officer. Mr. Chaudhary owns and controls BSIH Ltd.
(“BSIH”). BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to the
terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018. Blue Sky had
previously acquired an 80% working interest in the Canadian Properties from Georox Resources Inc., who had acquired the
Canadian Properties from Cona Resources Ltd. and Cona Resources Partnership prior to the acquisition by the Company.
The effective date of the acquisition was
June 1, 2018. The acquisition of the Canadian Properties was evidenced and documented by a Memorandum of Understanding
between the Company and Blue Sky dated June 29, 2018 and a General Conveyance between the parties dated as of the same date,
pursuant to which the Company agreed to acquire the Working Interest in consideration for $1,428,581 in Canadian dollars
(“CAD”) (approximately $1,089,150 in U.S. dollars) of which CAD $1,022,400 (approximately $779,478 in U.S.
dollars) was paid in cash (the “Cash Payment”) and CAD $406,181 (approximately $314,912 in U.S. dollars) was
evidenced by a promissory note (the “Acquisition Note”).
The Cash Payment was made with funds
borrowed by the Company pursuant to the terms of that certain $1,530,000 May 9, 2018, Amended and Restated Loan Agreement
entered into with Bow and a third party (the “Loan Agreement” and the “Lender”). The amount owed
under the Loan Agreement 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. The Working Interest will be held in the name of the Company’s newly formed
wholly-owned Alberta, Canada, subsidiary, Petrolia Canada Corporation. The Acquisition Note, which was dated June 8, 2018,
bears interest at the rate of 9% per annum, beginning on August 1, 2018 and is due and payable on November 30, 2018, provided
that we have the right to extend the maturity date for a period six months with 10 days’ notice to Blue Sky, in the
event we pay 25% of the principal amount of the Acquisition Note at the time of extension.
The acquisition has not formally closed as the assets can only be
transferred after the payment/settlement of the Acquisition Note.
On August 17, 2018, the Company sold an
aggregate of $90,000 in Convertible Promissory Notes (the “Director Convertible Notes”), to the Company’s directors,
Ivar Siem ($20,000) through an entity that he is affiliated with; Leo Womack ($60,000); and Joel Oppenheim ($10,000). The Director
Convertible Notes accrue interest at the rate of 12% per annum until paid in full and are due and payable on October 17, 2018.
The amount owed may be prepaid at any time without penalty. The outstanding principal and interest owed under the Director Convertible
Notes are convertible into common stock of the Company, from time to time, at the option of the holders of the notes, at a conversion
price of $0.10 per share. As additional consideration for entering into the notes, the Company agreed to grant one-year warrants
to purchase one share of the Company’s common stock at an exercise price of $0.10 per share for each dollar loaned pursuant
to the Director Convertible Notes (the “Bridge Note Warrants”). As such, the Company granted (a) 20,000 Bridge Note
Warrants to an entity affiliated with Ivar Siem; (b) 60,000 Bridge Note Warrants to Leo Womack; and (c) 10,000 Bridge Note Warrants
to Joel Oppenheim. The Director Convertible Notes contain standard and customary events of default. It is contemplated that up
to an additional $160,000 in Director Convertible Notes will be sold to affiliates of the Company in the next several months.
Effective on August 31, 2018, the Company
entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“Blue
Sky” and the “Exchange Agreement”). The President, Chief Executive Officer and 100% owner of Blue Sky is Ilyas
Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer. Chaudhary indirectly owns and controls BSIH
Ltd. (“BSIH”), which is a significant shareholder of the Company. Additionally, prior to the acquisition of Bow Energy
Ltd. (“Bow”) (which we acquired pursuant to an Arrangement Agreement dated November 30, 2017, which acquisition closed
on February 27, 2018), BSIH, and as a result of his ownership and control of BSIH, Mr. Chaudhary, controlled Bow.
Pursuant to the
Exchange Agreement, we exchanged 100% of the ownership of Bow, in consideration for:
(a)
70,807,417
shares of the Company’s common stock owned and controlled by Mr. Chaudhary and BSIH (the “Blue Sky Shares”);
(b)
$100,000
in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
(c)
the
assumption of certain payables owed by Bow totaling $1,696,332 (which includes $730,000 owed under the terms of a Loan Agreement,
as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow pursuant to the amendment to the Loan
Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement));
(d)
20%
of Bow Energy International Holdings, Inc, which is wholly-owned by Bow (“Bow EIH”)(which entity’s subsidiaries
own certain Production Sharing Contracts (the “PSC”) and certain other participating assets), pursuant to an Assignment
Agreement;
(e)
certain
carry rights described in greater detail in the Exchange Agreement, providing for Blue Sky to carry the Company for up to the next
$10 million of aggregate costs in BOW EIH and the PSC assets, with any profits from BOW EIH being distributed 80% to Bow and 20%
to the Company, pursuant to a Petrolia Carry Agreement (the “Carry Agreement”); and
(f)
a
3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which is wholly-owned by BOW EIH in the
Bohorok, Indonesia PSC (the “Bohorok PSC”) since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s
share of the prior sunk cost of the Bohorok PSC), which royalty is evidenced by an Assignment of Petrolia Royalty (the “Royalty
Assignment”).
The Exchange Agreement closed on August 31,
2018 and has an effective date of July 1, 2018. The Exchange Agreement contains customary and standard representations and warranties
of the parties, indemnification obligations (which survive for six months following the closing) and closing conditions. The Company
is in the process of cancelling the Blue Sky Shares and returning such shares to the status of authorized but unissued shares
of common stock.
NOTE 10. 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 11. SUPPLEMENTAL CASH
Interest Paid
|
|
$
|
376
|
|
|
$
|
8,318
|
|
NON-CASH INVESTING AND FINANCIAL DISCLOSURES
|
|
|
|
|
|
|
|
|
Common shares issued for purchase Bow Energy Ltd., a related party
|
|
$
|
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 12. 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. This note was subsequently cancelled on April 27
th
, 2018 and was no longer valid after this fact. Had this note been activated, this would have been a related party transaction, as Ilyas Chaudhary is the father of Zel C. Khan, the Company’s Chief Executive Officer. Mr. Chaudhary owns and controls 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 May 11, 2018 & May 15, 2018, 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.
|
|
|
|
|
(viii)
|
On May 22, 2018, 500,000 shares of common stock were issued to (CFO) Tariq Chaudhary as per his employment offer letter.
|
|
|
|
|
(ix)
|
Effective on June 29, 2018, the Company acquired a 25% working interest in approximately 41,526 acres located
in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest Saskatchewan and Eastern Alberta, Canada (collectively,
the “Canadian Properties” and the “Working Interest”). The Canadian Properties currently encompass 64 sections,
with 240 oil and 12 natural gas wells currently producing on the properties. Additionally, there are several idle wells with potential
for reactivation and 34 sections of undeveloped land (approximately 21,760 acres).
|
|
|
|
|
|
The Canadian Properties and the Working Interest were acquired from Blue Sky Resources Ltd.
(“Blue Sky”), whose President is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief
Executive Officer. Mr. Chaudhary owns and controls BSIH Ltd. (“BSIH”). BSIH was the largest shareholder of
the Company prior to the cancellation of the shares pursuant to the terms of a Share Exchange Agreement between the
Company and Blue Sky Resources Ltd dated August 31, 2018. Blue Sky had previously acquired an 80% working interest in the
Canadian Properties from Georox Resources Inc., who had acquired the Canadian Properties from Cona Resources Ltd. and
Cona Resources Partnership prior to the acquisition by the Company.
|
|
|
|
|
|
The effective date of the acquisition was June 1,
2018. The acquisition of the Canadian Properties was evidenced and documented by a Memorandum of Understanding between the
Company and Blue Sky dated June 29, 2018 and a General Conveyance between the parties dated as of the same date, pursuant to
which the Company agreed to acquire the Working Interest in consideration for $1,428,581 in Canadian dollars
(“CAD”) (approximately $1,089,150 in U.S. dollars) of which CAD $1,022,400 (approximately $779,478 in U.S.
dollars) was paid in cash (the “Cash Payment”) and CAD $406,181 (approximately $314,912 in U.S. dollars) was
evidenced by a promissory note (the “Acquisition Note”).
|
|
|
|
|
|
The Cash Payment was made with funds borrowed by the Company pursuant to the terms of that
certain $1,530,000 May 9, 2018, Amended and Restated Loan Agreement entered into with Bow and a third party (the “Loan
Agreement” and the “Lender”). The amount owed under the Loan Agreement 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. The Working Interest will
be held in the name of the Company’s newly formed wholly-owned Alberta, Canada, subsidiary, Petrolia Canada
Corporation. The Acquisition Note, which was dated June 8, 2018, bears interest at the rate of 9% per annum, beginning on
August 1, 2018 and is due and payable on November 30, 2018, provided that we have the right to extend the maturity date for a
period six months with 10 days’ notice to Blue Sky, in the event we pay 25% of the principal amount of the Acquisition
Note at the time of extension.
|
|
|
|
|
|
The acquisition has not formally closed as the assets can only be transferred after the payment/settlement
of the Acquisition Note.
|
|
|
|
|
(x)
|
On
August 17, 2018, the Company sold an aggregate of $90,000 in Convertible Promissory Notes (the “Director Convertible Notes”),
to the Company’s directors, Ivar Siem ($20,000) through an entity that he is affiliated with; Leo Womack ($60,000); and
Joel Oppenheim ($10,000). The Director Convertible Notes accrue interest at the rate of 12% per annum until paid in full and are
due and payable on October 17, 2018. The amount owed may be prepaid at any time without penalty. The outstanding principal and
interest owed under the Director Convertible Notes are convertible into common stock of the Company, from time to time, at the
option of the holders of the notes, at a conversion price of $0.10 per share. As additional consideration for entering into the
notes, the Company agreed to grant one-year warrants to purchase one share of the Company’s common stock at an exercise
price of $0.10 per share for each dollar loaned pursuant to the Director Convertible Notes (the “Bridge Note Warrants”).
As such, the Company granted (a) 20,000 Bridge Note Warrants to an entity affiliated with Ivar Siem; (b) 60,000 Bridge Note Warrants
to Leo Womack; and (c) 10,000 Bridge Note Warrants to Joel Oppenheim. The Director Convertible Notes contain standard and customary
events of default. It is contemplated that up to an additional $160,000 in Director Convertible Notes will be sold to affiliates
of the Company in the next several months.
|
|
|
|
|
(xi)
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Effective
on August 31, 2018, the Company entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky
Resources Ltd. (“Blue Sky” and the “Exchange Agreement”). The President, Chief Executive Officer and 100%
owner of Blue Sky is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer. Chaudhary indirectly
owns and controls BSIH Ltd. (“BSIH”), which is a significant shareholder of the Company. Additionally, prior to the
acquisition of Bow Energy Ltd. (“Bow”) (which we acquired pursuant to an Arrangement Agreement dated November 30, 2017,
which acquisition closed on February 27, 2018), BSIH, and as a result of his ownership and control of BSIH, Mr. Chaudhary, controlled
Bow.
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Pursuant to the Exchange Agreement,
we exchanged 100% of the ownership of Bow, in consideration for:
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(a)
70,807,417 shares of the Company’s common stock owned and controlled by Mr. Chaudhary and BSIH (the “Blue Sky Shares”);
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(b)
$100,000 in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
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(c)
the assumption of certain payables owed by Bow totaling $1,696,332 (which includes $730,000 owed under the terms of a Loan Agreement, as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow pursuant to the amendment to the Loan Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement));
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(d)
20% of Bow Energy International Holdings, Inc, which is wholly-owned by Bow (“Bow EIH”)(which entity’s subsidiaries own certain Production Sharing Contracts (the “PSC”) and certain other participating assets), pursuant to an Assignment Agreement;
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(e)
certain carry rights described in greater detail in the Exchange Agreement, providing for Blue Sky to carry the Company for up to the next $10 million of aggregate costs in BOW EIH and the PSC assets, with any profits from BOW EIH being distributed 80% to Bow and 20% to the Company, pursuant to a Petrolia Carry Agreement (the “Carry Agreement”); and
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(f)
a 3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which is wholly-owned by BOW EIH in the Bohorok, Indonesia PSC (the “Bohorok PSC”) since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s share of the prior sunk cost of the Bohorok PSC), which royalty is evidenced by an Assignment of Petrolia Royalty (the “Royalty Assignment”).
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The Exchange Agreement closed on
August 31, 2018 and has an effective date of July 1, 2018. The Exchange Agreement contains customary and standard representations
and warranties of the parties, indemnification obligations (which survive for six months following the closing) and closing conditions.
The Company is in the process of cancelling the Blue Sky Shares and returning such shares to the status of authorized but unissued
shares of common stock.
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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:
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The sale prices of crude oil;
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The amount of production from oil wells in which we have an interest;
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Lease operating expenses;
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International conflict or acts of terrorism;
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General economic conditions; and
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Other factors disclosed in this report.
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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/A, 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:
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“
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;
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“
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;
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“
Mcf
” refers to a thousand cubic feet of natural gas;
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“
SEC
” or the “ Commission ” refers to the United States Securities and Exchange Commission; and
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“
Securities Act
” refers to the Securities Act of 1933, as amended.
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