NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
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.
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 and
Petrolia Canada Corporation. 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.
The
Company accounts for its investment in companies in which it has significant influence by the equity method. The Company’s
proportionate share of earnings is included in earnings and added to or deducted from the cost of the investment.
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.
Cash
equivalents
The
Company considers all highly liquid instruments purchased with an original maturity date of three months or less to be cash equivalents.
At September 30, 2018, the Company did not hold any cash equivalents.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers. The Company adopted this standard on a 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 Accounting Standards
Codification (“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.
Receivables
and allowance for doubtful accounts
Oil
revenues receivable do not bear any interest. These receivables are primarily comprised of joint interest billings. We regularly
review collectability and establish or adjust an allowance for uncollectible amounts as necessary using the specific identification
method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Management has determined that a reserve for uncollectible amounts was not required in the
periods presented.
Asset
Retirement Obligations
The
Company records a liability for asset retirement obligations (“ARO”) associated with its oil and gas wells when those
assets are placed in service. The corresponding cost is capitalized as an asset and included in the carrying amount of oil and
gas properties and is depleted over the useful life of the properties. Subsequently, the ARO liability is accreted to its then-present
value.
Inherent
in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation
factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded
as a gain or loss upon settlement.
Debt
Issuance Costs
Costs
incurred in connection with the issuance of long-term debt are presented as a direct deduction from the carrying value of the
related debt and amortized over the term of the related debt.
Stock-Based
Compensation
The
Company accounts for stock-based compensation to employees in accordance with FASB ASC 718. Stock-based compensation to employees
is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee
service period. The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50.
Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services,
based on the fair value of the equity instruments, and is recognized as expense over the service period. The Company estimates
the fair value of stock-based payments using the Black-Sholes option-pricing model for common stock options and warrants and the
closing price of the Company’s common stock for common share issuances. The Company may grant stock to employees and contractors
in exchange for services rendered.
Derivative
Financial Instruments
The
Company’s derivative financial instruments consist of warrants with an exercise price denominated in a currency other than
the Company’s functional currency. These derivative financial instruments are measured at their fair value at the end of
each reporting period. Changes in fair value are recorded in net income.
Fair
Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. The hierarchy is broken down into three levels
based on the observability of inputs as follows:
|
●
|
Level
1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are
based on quoted prices that are readily and regularly available in an active market, valuation of these products does not
entail a significant degree of judgment;
|
|
●
|
Level
2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs
are observable, either directly or indirectly; and
|
|
●
|
Level
3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The
carrying value of cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, as reflected in the
consolidated balance sheets, approximate fair value due to the short-term maturity of these instruments. The carrying value of
notes payable approximates their fair value due to immaterial changes in market interest rates and the Company’s credit
risk since issuance of the instruments.
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 Petrolia Canada Corporation is
the Canadian dollar. 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.
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.
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.
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 Canadian company
which was then publicly traded on the Toronto Venture Exchange (“Bow” and the “Acquisition”). Bow is considered
a related party due to the fact that the largest shareholder of Bow, BSIH Ltd. (“BSIH”), is affiliated with Petrolia’s
CEO, Zel C. Khan. Bow’s offices are in Calgary, Alberta, Canada.
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.
None of the related party shareholders were included in this meeting. The vote was strictly between the non-affiliated shareholders
and final approval of the Arrangement was granted by the Court of Queen’s Bench of Alberta on February 23, 2018.
BSIH’s
Chief Executive Officer, Ilyas Chaudhary, is related to Mr. Khan. Mr. Chaudhary had a controlling interest in BSIH prior to the
acquisition of Bow. Therefore, the Bow acquisition is a related party transaction.
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 and certain options to purchase
shares of common stock of Bow 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., 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 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 consideration for the acquisition of Bow ($34,607,088) was determined based
on the acquisition date fair value of the shares.
The
purchase price allocation can be summarized as follows:
Cash
|
|
$
|
3,784
|
|
Accounts receivable
|
|
|
432,973
|
|
Other current assets
|
|
|
4,763
|
|
Deposits
|
|
|
337,997
|
|
Furniture, equipment & software
|
|
|
12,059
|
|
Unproved properties and properties not
subject to amortization
|
|
|
3,403,250
|
|
Accounts payable
|
|
|
(1,157,876
|
)
|
Note payable
|
|
|
(1,429,192
|
)
|
Loss on acquisition
|
|
$
|
32,999,330
|
|
As
a result of the related party nature of the acquisition, the identifiable assets and liabilities acquired were measured at their
carrying value, immediately prior to the acquisition with no gain or step-up in fair value. The consideration paid in excess of
the net assets acquired was recorded to loss on acquisition. Actual amounts recognized by the Company once the acquisition accounting
is finalized may differ materially from these estimates.
Acquisition
costs included a 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 revenue and loss included in Petrolia’s consolidated income statement for the period ended September
30, 2018; and the revenue and 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 September 30, 2018
|
|
|
$
|
—
|
|
|
$
|
(211,676
|
)
|
Supplemental pro forma
from January 1, 2018 to September 30, 2018
|
|
|
|
—
|
|
|
|
(36,186,545
|
)
|
Supplemental pro forma
from January 1, 2017 to September 30, 2017
|
|
|
$
|
3,144,949
|
|
|
$
|
(3,290,379
|
)
|
5.
DISPOSITION OF BOW ENERGY LTD., A RELATED PARTY
Effective
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 Company’s Chief Executive Officer. As described above in Note 4, Mr. Chaudhary
indirectly owns and controls BSIH, which controlled Bow prior to the acquisition of Bow as described in Note 4.
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 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, including $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 BEIH, which was wholly-owned by Bow (which entity’s subsidiaries own certain PSCs 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 BEIH and the PSC assets, with any profits from BEIH being distributed 80% to Bow
and 20% to the Company, pursuant to a Petrolia 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 BEIH in the
Bohorok, Indonesia PSC since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s share of the prior sunk cost
of Bohorok, which royalty is evidenced by an Assignment of Petrolia Royalty).
|
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 canceled the shares following the closing and returned such shares to the status
of authorized but unissued shares of common stock. A total of 53,105,563 of the shares were cancelled during the three months
ended September 30, 2018, and a total of 17,701,854 of the shares were cancelled in November 2018.
The
gain on sale is summarized as follows:
Cash
|
|
$
|
100,000
|
|
Shares returned to treasury (70,807,417
shares at $0.07 per share)
|
|
|
4,956,519
|
|
Total consideration received
|
|
|
5,056,519
|
|
Less: Carrying value of net assets disposed
|
|
|
(1,376,743
|
)
|
Fair value of
retained non-controlling interest (20% of $4,683,893 net liabilities of BEIH)
|
|
|
—
|
(1)
|
Gain on disposition
of Bow Energy Ltd.
|
|
$
|
3,679,776
|
|
(1)
Initially
recognized at $nil as the entity is in a net liability position.
The
fair value of the 70,807,417 common shares to be returned as part of the consideration paid for Bow was determined on the closing
price of the stock on August 31, 2018 at $0.07 per share for a fair value of $4,956,519.
The
retained non-controlling 20% interest in BEIH was initially recognized at fair value with a minimum value of $nil and is accounted
for using the equity method. During the quarter ended September 30, 2018, the Company’s share of loss on its investment
in BEIH was $11,247, which was not recorded against the carrying value as the investment is in a net liability position. The carrying
value of the investment at September 30, 2018 is $nil.
The
gain on disposition of Bow was recorded to offset the loss on acquisition of Bow incurred in the year.
6.
ACQUISITION OF CANADIAN PROPERTIES
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 (a related party, as described in Note 5, above). 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 $1,096,216 in U.S. dollars) of which CAD $1,022,400 (approximately $782,441 in U.S.
dollars) was paid in cash (the “Cash Payment”) and CAD $406,181 (approximately $313,775 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.
On
September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky. Pursuant to the
MOU, the Company obtained the rights to acquire an additional 3% working interest in the Canadian Properties, increasing our Working
Interest to 28%. Total consideration paid from the Company to Blue Sky for the additional 3% Working Interest was $150,000.
7.
EVALUATED PROPERTIES
The
acquired properties and current properties can be summarized as follows.
Cost
|
|
Canadian
properties
|
|
|
US
properties
|
|
|
Askari
|
|
|
Total
|
|
As at January 1, 2018
|
|
$
|
—
|
|
|
$
|
14,199,049
|
|
|
$
|
113,531
|
|
|
$
|
14,312,580
|
|
Additions
|
|
|
1,246,216
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,246,216
|
|
Asset retirement cost additions
|
|
|
1,313,982
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,313,982
|
|
Foreign currency
translation
|
|
|
15,238
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,238
|
|
As at September 30, 2018
|
|
|
2,575,436
|
|
|
|
14,199,049
|
|
|
|
113,531
|
|
|
|
16,888,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at January 1, 2018
|
|
|
—
|
|
|
|
1,068,795
|
|
|
|
24,000
|
|
|
|
1,092,795
|
|
Impairment of oil and gas properties
|
|
|
—
|
|
|
|
2,322,255
|
|
|
|
—
|
|
|
|
2,322,255
|
|
Depletion
|
|
|
37,404
|
|
|
|
11,280
|
|
|
|
—
|
|
|
|
48,684
|
|
Depreciation
|
|
|
—
|
|
|
|
—
|
|
|
|
12,000
|
|
|
|
12,000
|
|
Foreign currency
translation
|
|
|
357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
357
|
|
As at September 30, 2018
|
|
$
|
37,761
|
|
|
|
3,402,330
|
|
|
|
36,000
|
|
|
|
3,476,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at September 30, 2018
|
|
$
|
2,537,675
|
|
|
$
|
10,796,719
|
|
|
$
|
77,531
|
|
|
$
|
13,411,925
|
|
8.
NOTES PAYABLE
|
|
Nominal
|
|
|
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
interest
rate
|
|
|
Date
of
maturity
|
|
|
Face
value
|
|
|
Carrying
amount
|
|
|
Face
value
|
|
|
Carrying
amount
|
|
Truck loan
(i)
|
|
|
5.49
|
%
|
|
|
January
6, 2022
|
|
|
$
|
59,367
|
|
|
$
|
59,367
|
|
|
$
|
56,786
|
|
|
$
|
56,786
|
|
Credit note I (ii)
|
|
|
12
|
%
|
|
|
May
11, 2021
|
|
|
|
800,000
|
|
|
|
789,804
|
|
|
|
—
|
|
|
|
—
|
|
Credit note II (iii)
|
|
|
12
|
%
|
|
|
October
17, 2019
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,059,367
|
|
|
|
1,049,171
|
|
|
$
|
56,786
|
|
|
|
56,786
|
|
Long term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,370
|
|
|
|
|
|
|
|
24,204
|
|
Credit note I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710,000
|
|
|
|
|
|
|
|
—
|
|
Credit note II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,703
|
|
|
|
|
|
|
|
—
|
|
Current portion of notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,098
|
|
|
|
|
|
|
$
|
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 an annual percentage rate (APR) of 5.49%. The current portion of this note is $38,997.
|
|
|
|
|
ii.
|
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 the Working
Interest in the Canadian Properties described above in Note 6.
|
|
|
|
|
|
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 in May 15, 2021, (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
valued at $47,500. The fair value of the Canadian dollar denominated warrants issued were assessed at $30,012 using the Black
Scholes Option Pricing Model. The fair value of the U.S. dollar denominated warrants issued were assessed at $182,650 using
the Black Scholes Option Pricing Model. The Company determined the debt modification to be an extinguishment of debt and recorded
a total loss on extinguishment of debt of $260,162.
|
|
|
|
|
|
Upon
the disposition of Bow pursuant to the Exchange Agreement described above under Note 5, a total of $730,000 of the obligations
owed under the Loan Agreement transferred to Blue Sky.
|
|
|
|
|
iii.
|
On
September 17, 2018, the Company entered into a loan agreement with a third party for $200,000 for the purpose of acquiring
an additional 3% working interest in the Canadian Properties (note 6). The loan bears interest at 12% per annum and has a
maturity date of October 17, 2019. Payments of principal and interest are due monthly, commencing on October 17, 2018. The
loan is secured against the Company’s 3% Working Interest in the Canadian Properties and has no financial covenants.
|
9.
ASSET RETIREMENT OBLIGATIONS
Asset
retirement obligations (“AROs”) associated with the retirement of tangible long-lived assets are recognized as liabilities
with an increase to the carrying amounts of the related long-lived assets in the period incurred. The fair value of AROs is recognized
as of the acquisition date of the working interest (see Note 6). The cost of the tangible asset, including the asset retirement
cost, is depleted over the life of the asset. AROs are recorded at estimated fair value, measured by reference to the expected
future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted risk-free
interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement
value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the long-lived asset. Revisions
to estimated AROs can result from changes in retirement cost estimates, revisions to estimated discount rates and changes in the
estimated timing of abandonment.
Our
ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates
of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well
as current estimated costs. For the Canadian property additions, abandonment and reclamation liabilities are prescribed by the
province in which the Company operates in.
The
following is a description of the Company’s asset retirement obligations:
|
|
United
States properties
|
|
|
Canadian
properties
|
|
|
Total
|
|
Asset retirement obligations
at beginning of period
|
|
$
|
473,868
|
|
|
$
|
—
|
|
|
$
|
473,868
|
|
Additions
|
|
|
—
|
|
|
|
1,313,982
|
|
|
|
1,313,982
|
|
Accretion expense
|
|
|
17,476
|
|
|
|
1,011
|
|
|
|
18,487
|
|
Foreign currency
translation
|
|
|
—
|
|
|
|
7,885
|
|
|
|
7,885
|
|
Asset retirement
obligations at end of period
|
|
$
|
491,344
|
|
|
$
|
1,322,878
|
|
|
$
|
1,814,222
|
|
10.
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 September 30, 2018, there were 199,100 Series A Preferred Stock shares outstanding.
In
accordance with the terms of the Series A Preferred Stock, cumulative dividends of $134,113 were declared for the nine months
ended September 30, 2018.
Common
Stock
During
the nine months ended September 30, 2018, the Company issued and repurchased an aggregate of 117,220,422 and 70,807,417 shares
of common stock, respectively. As of September 30, 2018, there were 158,111,227 shares of common stock outstanding. The number
of shares of common stock outstanding reflects 17,701,854 shares of common stock repurchased in the sale of Bow and held in treasury
at period end. These shares were cancelled in November 2018 (see note 5).
From
January 1, 2018 to September 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 purchase one
common share for a period of two years from the date of issuance. The proceeds were allocated to common stock based on the par
value of shares issued and additional paid in capital based on the residual value of proceeds received.
On
January 24, 2018, 350,000 shares of common stock, valued at $59,500 based on their grant date fair value, 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. The shares were valued at $264,970 based on their grant date fair value. 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 a private placement resulting in the issuance of 208,333 shares of common
stock and warrants for gross proceeds of $25,000 at a price of $0.12 per unit.
On
February 1, 2018, our then director Quinten Beasley, 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.
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) of the Company’s common stock as disclosed in Note 4.
The shares were valued based on their grant date fair value.
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 23, 2018, director, Joel Oppenheim subscribed for a private placement resulting in the issuance of 104,167 shares of common
stock and warrants for gross proceeds of $12,500 at a price of $0.12 per unit.
On
March 31, 2018, 350,000 shares, valued at $35,000 based on their grant date fair value, 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 ($220,801), 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 ($147,201) 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, director Joel Oppenheim 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 a debt financing, 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 Tariq Chaudhary, who had served as the Chief Financial
Officer of the Company, 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 based on their grant date fair value.
On
August 31, 2018, the Company entered into an Exchange Agreement with Blue Sky whereby it and its affiliates would return 70,807,417
shares to treasury for the purchase of Bow Energy Ltd. The fair value of the cancelled shares was determined based on the closing
price of the Company’s common stock on August 31, 2018, which was $0.07 per share for a fair value of $4,956,519. A total
of 53,105,563 of the shares were cancelled during the three months ended September 30, 2018, and a total of 17,701,854 of the
shares were cancelled in November 2018.
On
September 27, 2018, the Company issued 310,000 shares of common stock in connection with the exercise of warrants to purchase
310,000 shares of common stock at an exercise price of $0.10 per share, upon receipt of the $31,000 aggregate exercise price of
such warrants.
Warrants
Summary
information regarding common stock warrants granted and outstanding as of September 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
|
|
|
|
17,454,666
|
|
|
|
0.11
|
|
|
|
1.92
|
|
Exercised
|
|
|
|
(2,910,000
|
)
|
|
|
0.10
|
|
|
|
—
|
|
Expired
|
|
|
|
(4,900,000
|
)
|
|
|
0.09
|
|
|
|
—
|
|
Outstanding
at nine months ended September 30, 2018
|
|
|
|
44,731,864
|
|
|
$
|
0.22
|
|
|
|
1.17
|
|
The
intrinsic value of warrants as of September 30, 2018 is $256,708 and as of December 31, 2017 is $1,106,583.
The
table below summarizes the warrants granted during the nine month period ended September 30, 2018:
|
|
Number
of
Warrants
|
|
|
Exercise
Price
|
|
Board of Director service
|
|
|
5,750,000
|
|
|
$
|
0.10
|
|
Pursuant to acquisition of Bow Energy
Ltd., a related party
|
|
|
368,000
|
|
|
$
|
0.18
|
|
Note payable issuance
|
|
|
2,590,000
|
|
|
$
|
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 a director (Joel Oppenheim)
|
|
|
970,000
|
|
|
$
|
0.14
|
|
|
|
|
17,454,666
|
|
|
|
|
|
The
5,750,000 warrants granted to directors and the advisory board for the nine months ended September 30, 2018 were fair valued at
$539,214. In conjunction with the acquisition of Bow, warrants to acquire 320,000 shares of Bow common stock were exchanged for
368,000 warrants to acquire shares of common stock of the Company. The warrants are exercisable at $0.08 per share, 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 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 the Working
Interest in the Canadian Properties described above in Note 6.
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 On May 18, 2018, as an inducement to enter
into an Amended and Restated Loan Agreement, the Company issued, among other instruments, 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 dollars and expire on May 15, 2021; (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 (see note 8). 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, dated January 19, 2018, with the Company’s former CFO, Paul Deputy, the Company issued 250,000
warrants exercisable at $0.20 expiring in 36 months. The fair value of warrants issued was $109,021.
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; and 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 nine months ended September 30, 2018 were
fair valued at $34,478.
Pursuant
to a loan agreement with director Joel Oppenheim, warrants to purchase 250,000 shares of common stock each were granted at March
31, June 30, and September 30, 2018. The warrants granted at March 31, 2018 were granted at an exercise price of $0.23 per share
and fair valued at $24,623. The warrants granted at June 30, 2018 were granted at an exercise price of $0.10 per share and fair
valued at $20,853. The warrants granted at September 30, 2018 were granted at an exercise price of $0.10 per share and fair valued
at $27,011. The warrants were valued using the Black-Scholes Option Pricing Model.
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.
11.
DERIVATIVE FINANCIAL INSTRUMENTS
On
May 18, 2018, as an inducement to enter into an Amended and Restated Loan Agreement, the Company issued, among other instruments,
warrants to acquire 320,000 shares of common stock with an exercise price of $0.10 per share in Canadian dollars (see note 8).
The warrants are valued using the Black Scholes Option Pricing Model and the derivative is fair valued at the end of each reporting
period. The Company assessed an initial derivative liability of $30,012. The Company recorded a loss for the period ended September
30, 2018 of $4,357 to adjust the liability to its fair value at the end of the reporting period of $34,369.
12.
RELATED PARTY TRANSACTIONS
The
chart below summarize the Notes Payable of related party as of September 30, 2018 and December 31, 2017.
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Nominal
interest rate
|
|
|
Date of
maturity
|
|
Carrying
amount
|
|
|
Carrying
amount
|
|
M Hortwitz
|
|
|
|
|
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Leo Womack
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
-
|
|
Lee Lytton
|
|
|
|
|
|
|
|
|
3,500
|
|
|
|
3,500
|
|
Quinten Beasley
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Joel Oppenheim
|
|
|
|
|
|
|
|
|
162,000
|
|
|
|
47,000
|
|
Jovian Petroleum Resources
|
|
|
3.5
|
%
|
|
|
|
|
45,910
|
|
|
|
-
|
|
Jovian Petroleum Resources
|
|
|
|
|
|
|
|
|
-
|
|
|
|
146,600
|
|
Blue Sky Resources
|
|
|
|
|
|
|
|
|
55,075
|
|
|
|
-
|
|
Blue Sky Resources
|
|
|
9
|
%
|
|
December 29, 2019
|
|
|
160,391
|
|
|
|
-
|
|
Leo Womack
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
60,000
|
|
|
|
-
|
|
Ivar Siem
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
20,000
|
|
|
|
-
|
|
Joel Oppenheim
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
539,876
|
|
|
$
|
217,100
|
|
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. The outstanding balance of severance payable is included in accrued
liabilities – related parties.
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 was to 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 was to be $120,000 per year. Also, the CFO was to 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 October 31, 2018, Tariq Chaudhary, who
had served as the Chief Financial Officer of the Company since January 16, 2018, tendered his resignation as Chief Financial Officer,
effective immediately.
On
February 1, 2018, our then director Quinten Beasley, exercised warrants to purchase 1,110,000 shares of common stock by settling
$102,590 of Accounts Payable to a company controlled by our then 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 a private placement resulting in the issuance of 208,333 shares of common
stock and warrants for gross proceeds of $25,000 at a price of $0.12 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. The CEO of Jovian is Quinten Beasley, our former director
(resigned October 31, 2018), and 25% of Jovian is owned by Zel C. Khan, our CEO and director. 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 September 30,
2018, $45,910 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 was the largest shareholder of Bow.
On
March 23, 2018, director, Joel Oppenheim subscribed for a private placement resulting in the issuance of 104,167 shares of common
stock and warrants for gross proceeds of $12,500 at a price of $0.12 per unit.
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 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 granted at
fair value using a Black Scholes model for $147,600 and the restricted shares were valued at the closing price of the Company’s
common stock on the date of the agreement for $45,000.
On
May 22, 2018, 500,000 shares of restricted common stock were issued to the then CFO, Tariq Chaudhary, as per his employment offer
letter.
As
described in Note 6, above, 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, from
Blue Sky. The President of Blue Sky is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer.
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 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”). The
warrants have a contractual life of one year. 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. The Company fair valued the warrants issued using a Black
Scholes model for a total fair value of $6,249.
As
described above in Note 5, effective on August 31, 2018, the Company entered into and closed the transactions contemplated by
a Share Exchange Agreement with Blue Sky, pursuant to which, among other things, we sold Blue Sky 100% of our ownership of Bow
and 70,807,417 shares of the Company’s common stock owned and controlled by Blue Sky and BSIH were returned to the Company
for cancellation. A total of 53,105,563 of the shares were cancelled during the three months ended September 30, 2018, and a total
of 17,701,854 of the shares were cancelled in November 2018.
On
September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky. Pursuant to the
MOU, the Company acquired an additional 3% working interest in the Canadian Properties, increasing our Working Interest to 28%.
Total consideration paid from the Company to Blue Sky for the additional 3% Working Interest was $150,000.
13.
SUPPLEMENTAL DISCLOSURES – CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
Nine Months
Ended
September 30, 2018
|
|
|
Nine Months
Ended
September 30, 2017
|
|
Interest Paid
|
|
$
|
25,452
|
|
|
$
|
22,782
|
|
NON-CASH INVESTING AND FINANCIAL DISCLOSURES
|
|
|
|
|
|
|
|
|
Common shares issued for purchase Bow Energy Ltd. (note 4)
|
|
|
34,607,088
|
|
|
|
—
|
|
Shares cancelled as proceeds in sale of Bow Energy Ltd. (note 5)
|
|
|
4,956,519
|
|
|
|
—
|
|
Settlement of accrued salaries for related parties with common shares
|
|
|
61,621
|
|
|
|
—
|
|
Settlement of account payable – related parties for common shares, related party
|
|
|
102,590
|
|
|
|
—
|
|
Series A preferred dividend
|
|
|
134,113
|
|
|
|
—
|
|
Proceeds from notes payable paid directly by the related party creditor to seller for acquisition of working interests
|
|
|
313,775
|
|
|
|
—
|
|
Sale of vehicle to related party
|
|
|
—
|
|
|
|
8,677
|
|
Note payable for vehicle purchase
|
|
|
—
|
|
|
|
35,677
|
|
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
|
|
|
—
|
|
|
|
925,900
|
|
Settlement of debt with common shares
|
|
|
—
|
|
|
|
32,532
|
|
Settlement of ORRI investments with preferred shares
|
|
|
—
|
|
|
|
405,000
|
|
Settlement of related party debt with shares of common stock and warrants
|
|
|
—
|
|
|
|
4,033,151
|
|
14.
SUBSEQUENT EVENTS
On
October 17, 2018, director Quinten Beasley tendered his resignation, the Board accepted Mr. Beasley’s resignation and issued
Mr. Beasley 2,000,000 shares of common stock, with a value of $150,000 in consideration for past services rendered to the Company.
On
October 17, 2018, the Board approved the appointment of Mr. Richard Dole as a Director of the Company.
On
October 26, 2018, director Leo Womack exercised warrants to purchase 1,000,000 shares of common stock at an exercise price of
$0.06 per share, by remitting payment of $60,000.
On
October 31, 2018, the Company commenced a private offering of its securities under Regulation D to accredited investors. Each
unit at a price of $25,000, is comprised of (a) 312,500 shares of common stock and (b) one warrant to purchase an additional 625,000
shares of common stock at a price of $0.10 per share at any time prior to November 1, 2020.
On
October 31, 2018, Tariq Chaudhary, who had served as the Chief Financial Officer of the Company since January 16, 2018, tendered
his resignation as Chief Financial Officer, effective immediately. The resignation was not due to a disagreement with the Company
or in connection with any matter relating to the Company’s operations, policies or practices. Effective on October 31, 2018,
Horacio Alfredo Fernandez was appointed as the interim Chief Financial Officer of the Company to fill the vacancy left by Mr.
Chaudhary’s resignation.
On
November 1, 2018, the Company entered into a Purchase and Sale Agreement with Crossroads Petroleum L.L.C. (“Crossroads”
and the “Sale Agreement”). Pursuant to the Sale Agreement, the Company sold Crossroads an 83% leasehold net revenue
interest and 100% working interest, in the NOACK Field Assets, i.e., the Company’s leasehold in the Noack Farms, Minera
Lease and all related leases and assets located in Milam County, Texas (the “Noack Assets”). The Sale Agreement includes
customary indemnification obligations of the parties. Crossroads agreed to pay $375,000 for the Noack Assets plus $5,000 per month,
on a month-to-month basis, until they are granted official operatorship by the Railroad Commission, the payment plan is as follows:
(a) a $13,500 deposit which was made on October 12, 2018; (b) $121,500 which was paid on November 7, 2018, (c) $60,000 which was
paid on February 8, 2019; (d) $65,000 which was paid on February 28, 2019; and (e) $125,000 which was due March 31, 2019 and this
payment was not made. The sale had an effective date of November 1, 2018, which date was further amended to April 30, 2019 .
Until paid in full, the Company maintains a secured lien against the assets sold which may be foreclosed upon after a 30-day cure
period. The Company has recorded an impairment to the Noack cash generating unit of $2,322,255 in the period ended September 30,
2018 to impair the carrying value of the property to the expected sale price.
On
November 13, 2018, director Joel Oppenheim subscribed and purchased one (1) unit in our private offering securities, by remitting
payment of $25,000.
On
November 13, 2018, Richard Dole, who subsequently became a director of the Company, subscribed and purchased one (1) unit in our
private offering securities, by remitting payment of $25,000.
On
November 13, 2018, the related party company Jovian subscribed and purchased two (2) units in our private offering securities,
by remitting payment of $50,000.
On
December 19, 2018, director Joel Oppenheim subscribed and purchased an aggregate of one half (0.5) unit in our private offering
of securities, by remitting payment of $12,500.
On
December 19, 2018, an affiliated company, American Resources Offshore, a company controlled by our director Ivar Siem, subscribed
and purchased one half (0.5) unit in our private offering of securities, by remitting payment of $12,500.
FORWARD
LOOKING STATEMENTS
This
report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements.
These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include
the words “may,” “will,” “could,” “should,” “would,” “believe,”
“expect,” “anticipate,” “estimate,” “intend,” “plan” or other words
or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events.
The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations,
anticipations and intentions with respect to our financial condition, results of operations, future performance and business,
including statements relating to our business strategy and our current and future development plans.
The
potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance
to differ materially from those expressed or implied in this report include:
|
●
|
The sale prices of crude oil;
|
|
●
|
The amount of production from oil wells in which
we have an interest;
|
|
●
|
Lease operating expenses;
|
|
●
|
International conflict or acts of terrorism;
|
|
●
|
General economic conditions; and
|
|
●
|
Other factors disclosed in this report.
|
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will
be important in determining our future performance. Consequently, actual results may differ materially from those that might be
anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion
of a forward-looking statement in this report as a representation by us that our plans and objectives will be achieved, and you
should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law.
You
should read the matters described in “Risk Factors” and the other cautionary statements made in, and incorporated
by reference in, this report as being applicable to all related forward-looking statements wherever they appear in this report.
We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore prospective investors
are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation
to update or revise these forward-looking statements, even though our situation may change in the future.
Please
see the “Glossary of Oil and Gas Terms” on page 9 of our Annual Report on Form 10-K for the year ended December 31,
2017, filed with the SEC on April 17, 2018 (the “2017 Annual Report”) for a list of abbreviations and definitions
used throughout this report.
This
information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this
Quarterly Report on Form 10-Q, and the unaudited financial statements and notes thereto and Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our 2017 Annual Report.
Certain
capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated
financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.
Unless
the context requires otherwise, references to the “
Company,
” “
we,
” “
us,
”
“
our,
” “
Petrolia
” and “
Petrolia Energy Corp.
” refer specifically to Petrolia
Energy Corp. and its wholly-owned subsidiaries.
In
addition, unless the context otherwise requires and for the purposes of this report only:
|
●
|
“
Bbl
”
refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other
liquid hydrocarbons;
|
|
●
|
“
Boe
”
barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf
of natural gas;
|
|
●
|
“Mcf”
refers to a thousand cubic feet of natural gas;
|
|
●
|
“SEC”
or the “Commission” refers to the United States Securities and Exchange Commission; and
|
|
●
|
“Securities
Act” refers to the Securities Act of 1933, as amended.
|