The accompanying notes are an integral
part of these unaudited interim financial statements.
The accompanying notes are an integral
part of these unaudited interim financial statements.
The accompanying notes are an integral
part of these unaudited interim financial statements.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 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.
Basis of Presentation
The accompanying unaudited interim
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, have been omitted.
NOTE 2: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Askarii Resources, Petrolia Canada Corporation., Bow Energy
Ltd., Blue Sky Langsa Inc., Bow Energy Pte. Ltd., Renco Elang Energy Pte. Ltd. Bow Energy International Holdings Inc., Bukit Energy
Central Sumatra (Mahato) Pte. Ltd., Bukit Energy Palmerah Baru Pte. Ltd., Bukit Energy Resources Palmerah Deep Pte. Ltd., Bukit
Energy Bohorok Pte. Ltd., and Bukit Energy Resources North Sumatra Pte. Ltd. All significant intercompany transactions are eliminated
in the consolidation process. All non-intercompany balances are included in the consolidated financial statement balances and all
significant intercompany transactions are eliminated in the consolidation process.
Use of Estimates
The preparation of these 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 consolidated financial statements in the period they are determined.
Revenue Recognition
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).
The Company adopted this standard on modified retroactive 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.
Foreign Currency Translation
The Company’s functional
and reporting currency is the U.S. dollar. The functional currency of Bow Energy Ltd. and Petrolia Canada Corporation is in Canadian
dollars. Assets and liabilities of these entities are translated from their functional currency of Canadian dollars into the reporting
currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated
at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction
occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of
stockholders' equity in the statement of stockholders' equity.
The accounts of Bow Energy Ltd. and Petrolia
Canada Corporation are translated to U.S. dollars using the current rate method. Accordingly, assets and liabilities are translated
into U.S. dollars at the period-end exchange rate while revenues and expenses are translated at the average exchange rates during
the period. Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated
other comprehensive income (loss).
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., 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 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.
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 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.
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 Energy Ltd., Bow
Energy Pte. Ltd. (“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
consolidated financial statements. The fair value was assessed based on the volume weighted average share price of Bow
Energy Ltd. 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 fair 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 ($37,000) of common stock 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 period ended June 30, 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 June 30, 2018
|
|
$
|
—
|
|
|
$
|
(12,525
|
)
|
Supplemental pro forma from January 1, 2018 to June 30, 2018
|
|
$
|
53,741
|
|
|
$
|
(30,912,230
|
)
|
Supplemental pro forma from January 1, 2017 to June 30, 2017
|
|
$
|
3,104,316
|
|
|
$
|
(1,814,334
|
)
|
Impairment loss
On March 31, 2018, the Company recorded an impairment to
goodwill of $27,129,963. The impairment was assessed based on future cash flow as of June 30, 2018 and no further impairment was
recorded during the second period.
NOTE 5: PAYMENTS FOR ACQUISITION OF WORKING INTEREST
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 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. Payments recorded were booked to the
balance sheet as Payments for acquisition of working interest.
NOTE 6: NOTES PAYABLE
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
Nominal
interestrate
|
|
Date of
maturity
|
|
Face value
|
|
Carrying
amount
|
|
Face value
|
|
Carrying
amount
|
Truck loan (i)
|
|
|
5.49
|
%
|
|
January 6, 2022
|
|
$
|
59,923
|
|
|
$
|
59,923
|
|
|
$
|
56,786
|
|
|
$
|
56,786
|
|
Promissory note (ii)
|
|
|
12
|
%
|
|
September 30, 2018
|
|
|
36,830
|
|
|
|
42,350
|
|
|
|
—
|
|
|
|
—
|
|
Promissory note (iii)
|
|
|
12
|
%
|
|
September 30, 2018
|
|
|
35,692
|
|
|
|
39,987
|
|
|
|
—
|
|
|
|
—
|
|
Bukit Energy Inc.(iv)
|
|
|
8.5
|
%
|
|
December 15, 2017
|
|
|
470,000
|
|
|
|
519,302
|
|
|
|
—
|
|
|
|
—
|
|
Credit note (v)
|
|
|
12
|
%
|
|
May 11, 2021
|
|
|
1,530,000
|
|
|
|
1,556,366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
2,132,445
|
|
|
|
2,217,928
|
|
|
|
56,786
|
|
|
|
56,786
|
|
Long term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck loan
|
|
|
|
|
|
|
|
|
|
|
|
|
20,926
|
|
|
|
|
|
|
|
24,204
|
|
Credit note (v)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,079,544
|
|
|
|
|
|
|
|
—
|
|
Total long-term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100,470
|
|
|
|
24,204
|
|
|
|
24,204
|
|
Current portion of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,117,458
|
|
|
$
|
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 $59,923 for a term of five years at 5.49% APR. Current portion of this note is $38,997.
|
|
(ii)
|
The note was extended and matures on September 30, 2018 and carries interest at 12% per annum.
|
|
(iii)
|
The note was extended and matures on September 30, 2018 and carries interest at 12% per annum.
|
|
(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. The Company repaid $30,000 of principal during the period ended June 30, 2018. The note is currently
under negotiation for settlements and is in default.
|
|
(v)
|
On May 9, 2018, Bow entered into an Amended and Restated Loan Agreement with a third party. 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 for a period of 36 months towards
the amount owed beginning on July 15, 2018; these payments were extended to begin on September 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 was used by the Company to acquire 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 acquisition agreement
was entered on June 29, 2018 with an effective date of June 1, 2018.
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 when the Loan Agreement is repaid; (b) 500,000 shares of common stock have an exercise price of $0.12 per share in U.S. dollars,
and expire 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.
The fair value of the 500,000
common shares issued were assessed at the market price of the stock on the date of issuance and fair valued at $47,500. In connection
with warrants issued in Canadian dollars, the Company has assessed an initial derivative liability of $30,401. The derivative is
fair valued at the end of each reporting period. The Company recorded a gain for the period ended June 30, 2018 of $3,556 to adjust
the liability to its fair value at the end of the reporting period of $26,845.
The fair value of the warrants
issued were assessed at $182,650. The Company determined the debt modification to be an extinguishment of debt and recorded a total loss on extinguishment of debt of $260,162.
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 when the Company’s common stock market price equals or exceeds $0.28 per share for 30 consecutive 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 shares of Series A Preferred Stock by remitting payment of $20,000. As of June 30, 2018,
there were 199,100 Series A Preferred Stock shares outstanding.
In accordance with the terms of the
Series A Preferred Stock, a dividend was declared of $88,947 for the six months ended June 30, 2018.
Common Stock
During the six months ended June 30,
2018, the Company issued an aggregate of 116,910,422 shares of common stock. As of June 30, 2018, there were 228,608,644 shares
of common stock outstanding.
On January 24, 2018, 350,000 shares
of common stock, 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.
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 June 30, 2018,
the Company closed private placements at $0.12 per unit for a total of 2,187,500 units and gross proceeds of $262,500. Units were
comprised of one common share and one warrant entitling the holder to exercise for one common share for a period of two years from
the date of issuance.
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 warrant holder
exercised warrants to purchase a total of 360,000 shares of common stock by remitting payment of $36,875 at an average share price
of $0.102 per share.
On February 28, 2018, Director Joel
Oppenheim exercised warrants to purchase 630,000 shares of common stock by remitting payment of $61,800 at an average share price
of $0.098 per share.
On March 31, 2018, 350,000 shares, valued
at $35,000, were issued in accordance with Mr. Burns common stock related salary compensation.
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 paid Mr. Burns $33,000, and granted
Mr. Burns warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.10 per share. The Company also issued
2,000,000 shares of restricted common stock to Mr. Burns pursuant to the agreement of the Company on May 14, 2018. The fair value
of the warrants ($221,401), was calculated using a Black Scholes model and the restricted shares were valued at the closing price
of Petrolia’s stock, or $180,000 and recorded to stock compensation expense.
On
April 20, 2018, the Company entered into an agreement to offer the position of Chairman of the Board of Directors 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 issued
500,000 shares of restricted common stock to Mr. Burns 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 was granted warrants to purchase
2,000,000 shares of common stock exercisable at $0.10 per share, expiring in 36 months, which were fully-vested upon their grant.
The fair value of the warrants was calculated using a Black Scholes model ($147,600) and the restricted shares were valued at the
closing price of Petrolia on the date of the agreement ($45,000) and were recorded to stock compensation expense.
On April 26, 2018, the Company issued
200,000 shares of restricted common stock as a bonus to a vendor valued at $20,000 based on the closing price of the Company’s
common stock.
On April 26, 2018, an officer exercised
warrants to purchase 500,000 shares of common stock at a strike price of $0.10 for gross proceeds of $50,000.
On May 9, 2018, in conjunction with
the debt financing disclosed under the Note 6 (v), the Company issued 500,000 shares, fair valued at $47,456 as a financing fee.
On May 22, 2018, 500,000 shares of common
stock were issued to an officer as part of his compensation package. These shares were fair valued based on the value of the closing
price of Petrolia’s stock, or $50,000.
On June 25, 2018, the Company issued
600,000 shares of restricted common stock to consultants for services rendered. These shares had a fair value of $45,000.
Warrants
Summary information regarding common stock warrants granted
and outstanding as of June 30, 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
|
|
|
14,714,666
|
|
|
|
0.11
|
|
|
|
2.32
|
|
Exercised
|
|
|
(2,600,000
|
)
|
|
|
0.10
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at six months ended June 30, 2018
|
|
|
47,201,864
|
|
|
$
|
0.21
|
|
|
|
1.94
|
|
The intrinsic value of warrants as of June 30, 2018 is $91,143
and as of December 31, 2017: $1,106,583.
The table below summarizes the warrants granted during the
six month period ended June 30, 2018:
|
|
Number of
Warrants
|
|
Exercise
Price
|
Board of Director Service
|
|
|
3,750,000
|
|
|
$
|
0.10
|
|
Pursuant to acquisition of Bow Energy Ltd., a related party
|
|
|
368,000
|
|
|
$
|
0.18
|
|
Note payable issuance
|
|
|
2,320,000
|
|
|
$
|
0.10
|
|
Private placements
|
|
|
2,187,500
|
|
|
$
|
0.20
|
|
Pursuant to employment termination agreement
|
|
|
3,000,000
|
|
|
$
|
0.10
|
|
Pursuant to consulting agreement
|
|
|
2,000,000
|
|
|
$
|
0.10
|
|
Pursuant to employment termination agreement
|
|
|
250,000
|
|
|
$
|
0.20
|
|
Deferred salary – CEO, former CFO
|
|
|
339,166
|
|
|
$
|
0.14
|
|
Pursuant to settlement of loan from director (Joel Oppenheim)
|
|
|
500,000
|
|
|
$
|
0.14
|
|
|
|
|
14,714,666
|
|
|
|
|
|
The 3,750,000 warrants granted to
directors and the advisory board for the six months ended June 30, 2018 were fair valued at $329,438. In conjunction with the
acquisition of Bow, warrants to purchase 320,000 shares of common stock were assumed for a total of $368,000. The warrants
are exercisable at CDN $0.10, mature upon repayment of a debt agreement and were fair valued at $103,632.
On May 9, 2018, Bow entered into an
Amended and Restated Loan Agreement with a third party. 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 was used by the Company to acquire 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 acquisition agreement
was entered on June 29, 2018 with an effective date of June 1, 2018.
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 when the Loan Agreement is repaid; (b) 500,000 shares of common stock have an exercise price of $0.12 per share in U.S. dollars,
and expire 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.
The fair value of the 500,000 common
shares issued were assessed at the market price of the stock on the date of issuance and fair valued at $47,500. In connection
with warrants issued in Canadian dollars, the Company has assessed an initial derivative liability of $30,401. The derivative is
fair valued at the end of each reporting period. The Company recorded a gain for the period ended June 30, 2018 of $3,556 to adjust
the liability to its fair value at the end of the reporting period of $26,845.
The fair value of the warrants issued
were assessed at $182,650 and recorded a total loss on extinguishment of debt of $260,162.
Pursuant to a termination agreement
with the Company’s former CFO, the Company issued 250,000 warrants exercisable at $0.20 expiring in 36 months. The fair value
of warrants issued was $109,021.
On March 31, 2018, 350,000 shares, valued
at $35,000, were issued in accordance with Mr. Burns common stock related salary compensation.
Pursuant to a termination agreement
with Mr. Burns, warrants to purchase 3,000,000 shares of common stock were issued at an exercise price of $0.10 per share; the
warrants were fair valued using a Black Scholes model for $221,401.
James Burns was 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 fair
valued at $147,600.
The warrants to purchase 339,166 shares
of common stock granted as deferred salary for the six month ended June 30, 2018 were fair valued at $34,478.
Pursuant to the loan agreement with
director Joel Oppenheim, warrants to purchase 250,000 shares of common stock each were granted at March 31 and June 30, 2018. The
warrants issued at March 31, 2018 were issued at an exercise price of $0.23 per share and fair valued at $24,623. The warrants
issued at June 30, 2018 were issued at an exercise price of $0.10 per share and fair valued at $20,853.
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, expiring 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.
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 June 30, 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.
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. As at June 30, 2018,
$41,000 was outstanding on the LOC and the balance was recorded to related party notes payable.
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 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.
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 $147,600
and the restricted shares were valued at the closing price of Petrolia on the date of the agreement for $45,000.
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 $147,600 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.
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 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: SUPPLEMENTAL DISCLOSURES –
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Interest Paid
|
|
$
|
25,452
|
|
|
$
|
22,782
|
|
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
|
|
Preferred shares issued for purchase of related party’s equipment
|
|
|
—
|
|
|
|
30,000
|
|
Settlement of accounts receivable and other assets for oil and gas properties
|
|
|
—
|
|
|
|
465,798
|
|
Settlement of debt with preferred shares
|
|
|
—
|
|
|
|
154,000
|
|
Settlement of debt with preferred shares – related parties
|
|
|
—
|
|
|
|
375,900
|
|
Settlement of ORRI investments with preferred shares
|
|
|
—
|
|
|
|
405,000
|
|
Settlement of related party debt with shares of common stock and warrants
|
|
|
—
|
|
|
|
2,033,152
|
|
Sale of vehicle to related party
|
|
|
—
|
|
|
|
8,677
|
|
Note payable for vehicle purchase
|
|
|
—
|
|
|
|
35,677
|
|
Series A preferred dividend
|
|
|
88,947
|
|
|
|
—
|
|
Proceeds from notes payable paid directly by the third-party creditor to seller for acquisition of working interests
|
|
|
800,000
|
|
|
|
—
|
|
Proceeds from notes payable paid directly by the related party creditor to seller for acquisition of working interests
|
|
|
314,412
|
|
|
|
—
|
|
NOTE 11: SUBSEQUENT EVENTS
Luseland working interest
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 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 $314,412 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.
Slick Unit Exploration and Development Agreement
On July 24, 2018, the Company announced the
signing of the Slick Unit Exploration and Development Agreement (the "Agreement") with Boone Operating Inc. ("Boone"),
a private Exploration & Production company, to explore and develop the Misener and Simpson Formations at the Slick Unit Dutcher
Sands Field (“SUDS Field”). Under the terms of the Agreement, the development area consists of 480 Acres where Boone
will carry the cost of drilling the first well and will earn a 75% Working Interest (“WI”) position in that well. If
the first well is successful, Boone will have the right to further develop the zone and Petrolia will maintain the right to participate
in further drills, up to a 25% WI in each new well. The current producing Dutcher Sands formation is excluded from this Agreement,
which Petrolia will continue developing.
The SUDS Field is a 2600-acre lease
located in Creek County, 36 miles SW of Tulsa, Oklahoma. The field was first discovered in 1918 by SOHIO Oil Company utilizing
over 100 wells with the primary objective to produce from the Dutcher Sands at an average well depth of 3100 ft.
Director Convertible Notes
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.
Bow Energy/Blue Sky Share Exchange
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:
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(a)
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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)
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$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)
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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)
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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)
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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)
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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.
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, 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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