PART
I
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 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, for a list of abbreviations and definitions used throughout
this report.
Except
where context otherwise requires and for purposes of the Annual Report on Form 10-K only:
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“we”,
“us”, “our company”, “our”, “the company” refer to Petrolia Energy Corporation,
and its subsidiaries;
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“Exchange
Act” refers to the Securities Exchange Act of 1934, as amended;
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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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Available
Information
We
are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and
information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the
reports, proxy statements and other information may be examined on the Internet at http://www.sec.gov.
Financial
and other information about the Company is available on our website (http://www.petroliaenergy.com/). Information on our
website is not incorporated by reference into this Report. We make available on our website, free of charge, copies of our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.
ITEM
1. BUSINESS.
Background
We
were incorporated in Colorado on January 16, 2002. In February 2012, we decided it would be in the best interests of our shareholders
to no longer pursue our original business plan (the sale of custom framed artwork, art accessories and interior design consulting)
and, in April 2012, we became active in the exploration and development of oil and gas properties.
Effective
September 2, 2016, we formally changed our name to Petrolia Energy Corporation, pursuant to the filing of a Statement of Conversion
with the Secretary of State of Colorado and a Certificate of Conversion with the Secretary of State of Texas, authorized by the
Plan of Conversion which was approved by our stockholders at our April 14, 2016, annual meeting of stockholders, each of which
are described in greater detail in the Definitive Proxy Statement on Schedule 14A, which was filed with the Securities and Exchange
Commission on March 23, 2016. In addition to the Certificate of Conversion filing, we filed a Certificate of Correction filing
with the Secretary of State of Texas (correcting certain errors in our originally filed Certificate of Formation) on August 24,
2016.
As
previously reported, although the stockholders approved the Plan of Conversion at the annual meeting, pursuant to which our corporate
jurisdiction was to be changed from the State of Colorado to the State of Texas by means of a process called a “Conversion”
and our name was to be changed to “Petrolia Energy Corporation”, those filings were not immediately made and the Conversion
did not become legally effective until September 2, 2016. Specifically, on June 15, 2016, the Company filed a Certificate of Conversion
with the Texas Secretary of State, affecting the Conversion and the name change, and including a Certificate of Formation as a
converted Texas corporation; however, the Statement of Conversion was not filed with the State of Colorado until a later date.
As a result, and because FINRA and the Depository Trust Company (DTC) had advised us that they would not recognize the Conversion
or name change, or update such related information in the marketplace until we became current in our periodic filings with the
Securities and Exchange Commission and they had a chance to review and approve such transactions, we took the position that the
Conversion and name change were not legally effective until September 2, 2016.
As
a result of the filings described above, and FINRA and the Depository Trust Company (DTC) formally recognizing and reflecting
the events described above in the marketplace, the Company has formally converted from a Colorado corporation to a Texas corporation,
and has formally changed its name to “Petrolia Energy Corporation”.
Two
significant acquisitions were made in 2015 and additional working interests in the same properties were acquired in 2016 and 2017,
as described in greater detail in the “Plan of Operation” section below. Additionally, in February 2018, we acquired
Bow Energy Ltd. and its assets (“Bow”), provided that in September 2018, we divested Bow, each as discussed in greater
detail below, including in “Note 4. Acquisition of Bow Energy Ltd., a Related Party” and “Note 5. Disposition
of Bow Energy Ltd., a Related Party”, in the consolidated audited financial statements included herein.
Plan
of Operation
Since
2015, we have established a clearly defined strategy to acquire, enhance and redevelop high-quality, resource in place assets.
The Company has been focusing on acquisitions in the Southwest United States and Canada while actively pursuing our strategy to
offer low-cost operational solutions in established Oil and Gas regions. We believe our mix of assets-oil-in-place conventional
plays, low-risk resource plays and the redevelopment of our late-stage plays is a solid foundation for continued growth and future
revenue growth.
Our
strategy is to acquire low risk, conventionally producing oil fields. This strategy allows us to incorporate new technology to
minimize risk and maximize the recoverability of existing reservoirs. This approach allows us to minimize the environmental impact
caused by exploratory development.
Our
activities will primarily be dependent upon available financing.
Oil
and gas leases are considered real property. Title to properties which we may acquire will be subject to landowner’s royalties,
overriding royalties, carried working and other similar interests and contractual arrangements customary in the oil and gas industry,
to liens for current taxes not yet due, liens for amounts owing to persons operating wells, and other encumbrances. As is customary
in the industry, in the case of undeveloped properties, little investigation of record title will be made at the time of acquisition
(other than a preliminary review of local records). However, drilling title opinions may be obtained before commencement of drilling
operations.
Minerva-Rockdale
(“NOACK”) Field
The
Minerva-Rockdale Field, which is located approximately 30 miles Northeast of Austin, Texas, was first discovered in 1921 and is
approximately 50 square miles in size. The main producing formation for this field is the Upper Cretaceous Navarro Group of sands
and shales. The Navarro is typically subdivided into several producing zones from the uppermost “A” and “B”
sands to the lower “C” and “D” sands. The “B” sand is the primary producing zone. These sands
are commonly fine grained and poorly sorted and were deposited close to a shoreline during a cycle of marine regression.
In
April 2013, the Company entered into a lease pertaining to a 423-acre tract in Milam County, Texas, which is adjacent to the Company’s
original 200 acre lease. The Company issued 500,000 shares of its common stock as consideration for a 100% working interest (83.33%
net revenue interest) in such lease.
In
August 2013, we became an oil and gas operator and took over the operation of 100% of our wells. During the fourth quarter of
2014, the Company hired Jovian Petroleum Corporation (“Jovian”) to survey the operations and well performance at the
NOACK field. Their report identified paraffin buildup problems in the well bores and gathering lines as the main production issue
for the Company to overcome. In December 2014, the Company signed an operating agreement with Jovian to assume full operational
responsibility for the NOACK field under a fixed fee agreement of $10,000 per month for full operating field services. On March
1, 2015, the Company hired Zel C. Khan, our current CEO and director, who is a stockholder and former employee of Jovian. The
CEO and President of Jovian is Quinten Beasley, our former director (resigned October 31, 2018).
During
the period from our inception to December 31, 2011, we did not drill any oil or gas wells. During the year-ended December 31,
2012, we drilled and completed six (6) oil wells. During 2013, the Company drilled and completed three (3) wells of which one
(1) was converted to an injection well. During 2014, the Company drilled seven (7) new wells. In 2015, six (6) of the wells were
completed, five (5) wells produced, one (1) did not produce, and one (1) well was not completed. During 2016, the Company had
three (3) wells producing, ten (10) wells to workover, with one (1) injection well, one (1) that did not produce, and one (1)
well not completed. During 2017, the Company had four (4) wells producing, ten (10) wells to workover, with one (1) injection
well, and one (1) well not completed. During 2018, the Company had six (6) wells producing, eight (8) wells to workover, with
one (1) injection well, and one (1) well not completed.
On
November 1, 2018, the Company entered into a Purchase and Sale Agreement (“PSA”) with Crossroads Petroleum L.L.C.
and Houston Gulf Energy. 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 included 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 was 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 was
not paid. The sale had an effective date of November 1, 2018. Until paid in full, the Company maintained a secured lien against
the assets sold which could be foreclosed upon after a 30-day cure period. The Company recognized impairment on the property of
$2,322,255 on September 30, 2018, to write it down to its sale price. Upon sale, the Company derecognized the cost and accumulated
depletion and impairment with no gain or loss and removed the carrying value of the ARO of $246,263 from the cost pool of the
United States properties. The balance receivable for the sale of $240,000 is included in other current assets.
Crossroads
defaulted on the PSA as described above and the Company took proper measures to foreclose on the NOACK Assets on April 3, 2019
and reclaimed title to the property. The property was subsequently sold to FlowTex Energy L.L.C. for $400,000 with an effective
closing date of September 1, 2019. The Sale Agreement includes customary indemnification obligations of the parties. As per the
Sale Agreement, a $20,000 deposit was received on August 15, 2019 and a $355,000 payment was due on close of the
sale of which $155,000 was received on August 30, 2019 and the balance remains outstanding; and (c) $25,000 one
year after close on August 30, 2020.
Slick
Unit Dutcher Sands (“SUDS”) Field
The
SUDS oilfield consists of 2,600 acres located in Creek County, Oklahoma and carries a 76.5% net revenue interest (NRI). The first
oil producer was completed in 1918 by Standard Oil of Ohio (“Sohio”), which at that time was owned by John D. Rockefeller.
By 1959, approximately 14,000,000 barrels of oil had been recovered at an average well depth of 3,100 feet and over 100 wells
in production. Through a series of events, the infrastructure had deteriorated, and the field suffered a lot of neglect. Since
2011, Jovian has invested an estimated $1.6 million into the restoration of the field; rebuilding the infrastructure and putting
wells back in production. To date, 22 wells have been worked over and 9 are fully operational with considerable reserves remaining.
The
Company has developed a new well drill plan alongside its consultant geologist, RKR Services Company, LLC. (“RKR”).
RKR interpreted the Initial Potential Flow map, the Net Dutcher Sands map, and the top of Dutcher Sand Structure map for the optimum
locations of five proposed new drill wells in the SUDS field. The new well locations are situated in those locations where
oil saturations are projected to be the highest. The Company intends to drill these 5 wells in the 1st Quarter
of 2020, funding permitted.
SUDS
10% Acquisition
The
Company acquired a 10% working interest in the SUDS field located in Creek County, Oklahoma on September 23, 2015, in exchange
for 10,586,805 shares of restricted common stock. Based on the then current market value of our common stock, $0.068 per share,
the price paid was $719,903 or $4.77 dollars per barrel of oil (Bbl). Through this transaction, the Company increased its reserve
base by approximately 151,000 Bbls of (1P) proven reserves. Concurrently with the purchase, Jovian agreed to assign to the Company
the right to be the operator of record of the SUDS field, governed by an American Association of Professional Landmen (AAPL) standard
Joint Operating Agreement (JOA).
SUDS
90% Acquisition
On
the effective date of September 28, 2016, the Company acquired a 90% net working interest in the SUDS field as a result of two
separate agreements, Purchase and Sale Agreement and the Share Exchange Agreement, both between the Company and Jovian.
The
Company issued two notes for a combined value of $4,000,000 in exchange for a cumulative 50% working interest in SUDS. A Promissory
Note to Jovian for $1,000,000 was executed bearing interest at 5% and due on December 31, 2016 related to the acquisition of a
50% working interest in the SUDS field. The Promissory Note was secured by a 12.5% undivided working interest in the SUDS field.
In addition, a Production Payment Note was executed for the same 50% working interest in the SUDS field. This note was for $3,000,000,
paid out of twenty percent (20%) of the 50% undivided interest of net revenues received by the Company that is attributable to
the SUDS field assets. The Production Payment Note was secured by a 12.5% undivided working interest in the SUDS field.
The
Company issued 24,308,985 shares of its restricted common stock to Jovian to acquire an additional 40% working interest ownership
of SUDS. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799 per share market price of our common
stock on September 28, 2016 (the effective date of the transaction).
Jovian
converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second
tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated
together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the
second in July 2017.
Tranche
1 - On May 30, 2017, Jovian converted $2 million of its $4 million debt into 10 million shares of the Company’s
common stock. The $2 million debt included a $1 million Promissory Note and $1 million of the $3 million Production Payment Note
as well as interest payable of $33,151.
Tranche
2 - On July 19, 2017, Jovian converted $2 million of its remaining debt (outstanding under a Production Payment Note)
into 12,749,286 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.
The
consideration for the debt extinguished consisted of the following:
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10
million shares of common stock which were valued using the market price on the date of issuance of $0.14 per share ($1,400,000).
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Warrants
to purchase 6 million shares of common stock with an exercise price of $0.20 per share based on a $0.12 valuation, volatility
of 293%, a discount rate of 1.09% and warrants to purchase 4 million shares of common stock with an exercise price of $0.35
per share based on a $0.12 valuation, volatility of 293%, and a discount rate of 1.09%. All warrants expire in 3 years. The
6 million warrants were valued at $709,776 while the 4 million warrants were valued at $471,104, totaling $1,180,880.
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12,749,286
shares of common stock which were valued using the market price on the date of issuance of $0.104 per share ($1,325,926).
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The
Preferred Stock was valued at $10.00 per share, the cash price paid by third party investors for the same stock with an aggregate
value of $215,100.
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The
combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment
of tranche 2 was recognized in the third quarter of 2017, with no impact on the consolidated statement of operations.
The
Company is currently working on a 5 well drill program where 5 infill locations have been identified already and will be drilled
in the 1st Quarter of 2020, funding permitting.
Twin
Lakes San Andres Unit (“TLSAU”) Field
TLSAU
is located 45 miles from Roswell, Chaves County, New Mexico and consists of 4,864 acres with 130 wells. The last independent reserve
report prepared by MKM Engineering on December 31, 2018, reflects approximately 1.6 million barrels of proven oil reserves remaining
for the 100% working interest. As of December 31, 2018, the Company took control of thirty-eight (38) wells of which twenty-one
(21) were re-worked of which eight (8) wells remain producing and thirteen (13) wells experienced a
repairable mechanical failure after several weeks of production. Six (6) of these wells did not show signs of production and were
dedicated for injection purpose. Petrolia owns a 100% working interest in the field and is the designated Operator.
TLSAU
15% Acquisition
On
November 4, 2015, the Company acquired a 15% net working interest in the TLSAU field located in Chaves County, New Mexico (the
“Net Working Interest”) and all operating equipment on the field. Through this transaction, the Company increased
its reserve base by approximately 384,800 Bbls of (1P) proven reserves. The Company was also assigned all rights to be the operator
of the TLSAU unit under a standard operating agreement.
The
total purchase price for the acquisition of the Net Working Interest and equipment rights was $196,875 or $0.52 per barrel of
oil (Bbl) and was paid to Blue Sky NM, Inc. (“BSNM”). The Company paid $50,000 in cash and gave a promissory note
in the amount of $146,875. The $50,000 was paid by the CEO of the Company for the benefit of the Company and recorded as a shareholder
advance. Subsequently, the $50,000 advance was converted into 800,000 shares of common stock at $0.06 per share and warrants to
purchase 800,000 shares of common stock that have since expired as they had a three (3) year term at an exercise price of $0.10.
In addition, a $1.3 million face value note payable to BSNM was purchased for $316,800 (the “BSNM Note”) (6,000,000
shares of common stock valued at $0.0528 per share). With the inclusion of the note receivable, the price per barrel would have
been $1.33 dollars per barrel oil (Bbl).
TLSAU
25% Acquisition
On
September 1, 2016, the Company acquired an additional 25% working interest ownership in the TLSAU field in consideration for the
issuance of 3,500,000 shares of its restricted common stock to an unrelated party. The purchase price of the shares equates to
a $350,000 value, based on the $0.10 per share market price of Petrolia’s shares on September 1, 2016. After the purchase,
the Company owned a total working interest ownership of 40%. The final purchase price allocation of the transaction is as follows:
oil and gas properties acquired $392,252, and asset retirement obligations assumed of $42,252.
TLSAU
60% Acquisition
Effective
February 12, 2017, the Company acquired an additional 60% working interest ownership in the TLSAU field (the “Net Working
Interest”) resulting from the execution of a Settlement Agreement on February 12, 2017. The agreement assigned Dead Aim
Investments’ (“Dead Aim’s”) 60% ownership interests to the Company. As a result of this transaction, Petrolia
now owns a 100% working interest in TLSAU. Consideration of $465,788 was given in exchange for Dead Aim’s working interest.
The consideration includes the forgiveness of the BSNM Note of $316,800 (with a $1.3 million face value) which we acquired in
November 2015 and the write-off of $148,988 of Dead Aim’s outstanding accounts receivable to Petrolia. Dead Aim assumed
liability (prior to the acquisition) for the forgiveness of the Orbit Petroleum Inc Bankruptcy Estate (“OPBE”) note
that the Company previously purchased.
Since
the acquisition of this field, the Company has worked on various environmental remediation and compliance items required by the
New Mexico Energy Department. To date, the Company has worked over twenty-one (21) wells. As of the end of the 3rd
Quarter of 2019, the Company has resumed its workover plan to bring additional wells online and update the
general facility infrastructure, such as electric lines, flow lines and roadways.
The
Company is actively seeking a partnership in developing the San Andres formation at this lease.
Askarii
Resources, LLC
Effective
February 1, 2016, the Company acquired 100% of the issued and outstanding interests of Askarii Resources LLC (“Askarii”),
a private Texas based oil & gas service company. The Company acquired Askarii by issuing one (1) million restricted shares
of common stock. Based on the then market value of the Company’s common stock of $0.05 per share, the aggregate value of
the transaction was $50,000.
Askarii,
while dormant for the last few years, has a significant history with major oil companies providing services both onshore and offshore-
Gulf of Mexico. Using Askarii, the Company plans to engage in the oil field service business as well as the leasing of field related
heavy equipment. It is also contemplated that Askarii will research various enhanced oil recovery (EOR) technologies and methods
which it can use for the benefit of the Company’s oil fields.
Bow
Energy Ltd., a related party
On
February 27, 2018, we acquired all of the issued and outstanding shares in Bow Energy Ltd., which has contracts covering a total
land position in Indonesia of 948,029 net acres, as described in greater detail below.
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”) to sell Bow Energy Ltd while retaining a
20% interest in Bow’s subsidiary, Bow Energy International Holdings Inc. (“BEIH”). 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.
The
acquisition of Bow in February 2018 and the disposition of Bow in September 2018 are each discussed in greater detail in “Note
4. Acquisition of Bow Energy Ltd., a Related Party” and “Note 5. Disposition of Bow Energy Ltd., a Related Party”,
in the consolidated audited financial statements included herein.
In
connection with the closing of the Exchange Agreement, the Company cancelled shares of common stock previously held by Blue Sky
(and affiliates) and returned such shares to the status of authorized but unissued shares of common stock. The 70,807,417 shares
returned to treasury were subsequently cancelled.
Canadian
properties – Luseland, Hearts Hill and Cuthbert fields
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 above). Blue Sky had previously acquired an 80% working interest from Georox Resources
Inc., who had acquired the Canadian Properties from Cona Resources Ltd.
On
September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky to obtain 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.
The
following table shows our producing wells, developed acreage, and undeveloped acreage as of April 12, 2019, for the Texas,
Oklahoma and New Mexico properties and as of September 22, 2019, for the Alberta/Saskatchewan properties:
State/Province
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Productive Wells
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Developed Acreage
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Undeveloped Acreage (1)
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Gross
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Net
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Gross
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Net
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Gross
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Net
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Texas
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16
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16
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260
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260
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363
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363
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Oklahoma
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26
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(2)
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26
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1,040
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1,040
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1,564
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1,564
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New Mexico
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38
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(3)
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32
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500
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500
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4,364
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4,364
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Alberta/Saskatchewan
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252
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186
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41,526
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41,526
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21,760
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21,760
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(1)
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Undeveloped
acreage includes leasehold interests on which wells have not been drilled or completed to the point that would permit the
production of commercial quantities of natural gas and oil regardless of whether the leasehold interest is classified as containing
proved undeveloped reserves.
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(2)
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Represents
twenty-six (26) wells that were worked-over and capable of producing oil. Seventeen (17) of those wells experienced a repairable
mechanical failure after producing for a few weeks and by the use of varying downhole equipment, the Company is working
to bring each well back online in sequence. Note that there were other wells that were worked over that
never produce oil and are excluded from these reported amounts.
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(3)
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Represents
seventeen (17) wells already worked-over from the prior year; and an additional twenty-one (21) wells which
were worked-over and capable of producing oil in 2018. Eight (8) of those wells produced and thirteen (13) experienced
a repairable mechanical failure after a month of production. Six (6) of these wells were worked-over and did not show signs
of production. Further analysis indicates these non-producing wells can be converted into injection wells. Note that there
were other wells that were worked over that never produced oil and are excluded from all of these reported amounts as they
are either slated to convert into injection wells or scheduled for future plugging and abandonment.
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The
following table shows the status of our gross acreage as of April 12, 2019, for the Texas, Oklahoma and New Mexico properties,
and as of September 22, 2019, for the Alberta/Saskatchewan properties:
State/Province
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Held by
Production
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Not Held by
Production
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Texas
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623
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—
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Oklahoma
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2,604
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—
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New Mexico
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4,864
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—
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Alberta/Saskatchewan
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41,526
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—
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Leases
on acres that are Held by Production remain in force so long as oil or gas is produced from one or more wells on the particular
lease. Leased acres that are not held by Production require annual rental payments to maintain the lease until the first to occur
of the following: the expiration of the lease or the time oil or gas is produced from one or more wells drilled on the leased
acreage. At the time oil or gas is produced from wells drilled on the leased acreage, the lease is considered to be Held by Production.
Proved
Reserves
Below
is a table that provides historical average sales price per barrel and average production cost per barrel by geographical location
and by year, for the last three (3) fiscal years.
|
|
Average
Sales
Price
(per
Bbls)
($)
|
|
|
Average
Production Cost
(per
Bbls)
($)
|
|
|
Oil
Production
(Bbls)
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
34.49
|
|
|
|
35.52
|
|
|
|
3,401
|
|
2017
|
|
|
37.90
|
|
|
|
57.94
|
|
|
|
2,322
|
|
2018
|
|
|
55.00
|
|
|
|
65.78
|
|
|
|
1,011
|
|
Oklahoma
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
38.14
|
|
|
|
81.47
|
|
|
|
2,400
|
|
2017
|
|
|
32.51
|
|
|
|
133.25
|
|
|
|
885
|
|
2018
|
|
|
45.55
|
|
|
|
3,341.49
|
|
|
|
31
|
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
29.10
|
|
|
|
186.25
|
|
|
|
842
|
|
2017
|
|
|
39.08
|
|
|
|
251.23
|
|
|
|
464
|
|
2018
|
|
|
48.87
|
|
|
|
1,146.90
|
|
|
|
106
|
|
Alberta/ Saskatchewan
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
22.27
|
|
|
|
24.56
|
|
|
|
50,765
|
|
Below
are estimates of our net proved reserves as of December 31, 2018, net to our interest. Our proved reserves are located in Texas,
Oklahoma, New Mexico and Canada.
Estimates
of volumes of proved reserves at December 31, 2018 are presented in barrels (Bbls) for oil and, for natural gas, in thousands
of cubic feet (Mcf) at the official temperature and pressure bases of the areas in which the gas reserves are located.
|
|
Oil(Bbls)
|
|
|
Gas(Mcf)
|
|
Proved:
|
|
|
|
|
|
|
|
|
Developed
|
|
|
1,773,800
|
|
|
|
40,180
|
|
Undeveloped
|
|
|
120,380
|
|
|
|
—
|
|
Total
|
|
|
1,894,180
|
|
|
|
40,180
|
|
Proved
developed and proved undeveloped reserves increased from December 31, 2017 to December 31, 2018, primarily due to the acquisition
of the Canadian Properties and revision of prior estimates, partially offset by the disposition of reserves and production in
the current year.
|
●
|
Bbl
- refers to one stock tank barrel, or 42 U.S. gallons liquid volume, in reference to crude oil or other liquid hydrocarbons.
|
|
●
|
Mcf
- refers to one thousand cubic feet.
|
|
●
|
A
BOE (i.e., barrel of oil equivalent) combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl of oil.
|
Below
are estimates of our present value of estimated future net revenues from our proved reserves based upon the standardized measure
of discounted future net cash flows relating to proved oil and gas reserves in accordance with the provisions of Accounting Standards
Codification Topic 932, Extractive Activities—Oil and Gas. The standardized measure of discounted future net cash flows
is determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and
produced based on period-end economic conditions. The estimated future production is based upon benchmark prices that reflect
the unweighted arithmetic average of the first-day-of-the-month price for oil and gas during the twelve-month period ended December
31, 2018. The resulting estimated future cash inflows are then reduced by estimated future costs to develop and produce reserves
based on period-end cost levels. No deduction has been made for depletion, depreciation or for indirect costs, such as general
corporate overhead. Present values were computed by discounting future net revenues by 10% per year.
Future cash inflows
|
|
$
|
89,797,082
|
|
Deductions (including estimated taxes)
|
|
$
|
(39,415,222
|
)
|
Future net cash flow
|
|
$
|
50,381,861
|
|
Discounted future net cash flow
|
|
$
|
23,638,725
|
|
MKM
Engineering prepared the estimates of our proved reserves, future production and income attributable to our leasehold interests
in the United States and Canada as of December 31, 2018. Michele Mudrone was the technical person primarily responsible
for overseeing the preparation of the 2018 reserve report. Ms. Mudrone has more than 25 years of practical experience in the estimation
and evaluation of petroleum reserves. MKM Engineering is an independent petroleum engineering firm that provides petroleum consulting
services to the oil and gas industry. The estimates of drilled reserves, future production and income attributable to certain
leasehold and royalty interests are based on technical analysis conducted by engineers employed at MKM Engineering.
Zel
C. Khan, our CEO, oversaw preparation of the reserve estimates by MKM Engineering. We do not have a reserve committee and we do
not have any specific internal controls regarding the estimates of our reserves.
Our
proved reserves include only those amounts which we reasonably expect to recover in the future from known oil and gas reservoirs
under existing economic and operating conditions, at current prices and costs, under existing regulatory practices and with existing
technology. Accordingly, any changes in prices, operating and development costs, regulations, technology or other factors could
significantly increase or decrease estimates of proved reserves.
Proved
reserves were estimated by performance methods, the volumetric method, analogy, or a combination of methods utilizing present
economic conditions and limited to those proved reserves economically recoverable. The performance methods include decline curve
analysis that utilize extrapolations of historical production and pressure data available through December 31, 2018 in those cases
where such data was considered to be definitive.
Forecasts
for future production rates are based on historical performance from wells currently on production in the region with an economic
cut-off for production based upon the projected net revenue being equal to the projected operating expenses. No further reserves
or valuation were given to any wells beyond their economic cut-off. Where no production decline trends have been established due
to the limited historical production records from wells on the properties, surrounding wells historical production records were
used and extrapolated to wells of the property. Where applicable, the actual calculated present decline rate of any well was used
to determine future production volumes to be economically recovered. The calculated present rate of decline was then used to determine
the present economic life of the production from the reservoir.
For
wells currently on production, forecasts of future production rates were based on historical performance data. If no production
decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where
appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to economic
depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future production
rates.
Proved
developed non-producing and undeveloped reserves were estimated primarily by the performance and historical extrapolation methods.
Test data and other related information were used to estimate the anticipated initial production rates from those wells or locations
that are not currently producing. For reserves not yet on production, sales were estimated to commence at a date we determined
to be reasonable.
In
general, the volume of production from our oil and gas properties declines as reserves are depleted. Except to the extent we acquire
additional properties containing proved reserves or conduct successful exploration and development activities, or both, our proved
reserves will decline as reserves are produced. Accordingly, volumes generated from our future activities are highly dependent
upon the level of success in acquiring or finding additional reserves and the costs incurred in doing so.
Government
Regulation
Various
state and federal agencies regulate the production and sale of oil and natural gas. All states in which we plan to operate impose
restrictions on the drilling, production, transportation and sale of oil and natural gas.
The
Federal Energy Regulatory Commission (the “FERC”) regulates the interstate transportation and the sale in interstate
commerce for resale of natural gas. The FERC’s jurisdiction over interstate natural gas sales has been substantially modified
by the Natural Gas Policy Act under which the FERC continued to regulate the maximum selling prices of certain categories of gas
sold in “first sales” in interstate and intrastate commerce.
FERC
has pursued policy initiatives that have affected natural gas marketing. Most notable are (1) the large-scale divestiture of interstate
pipeline-owned gas gathering facilities to affiliated or non-affiliated companies; (2) further development of rules governing
the relationship of the pipelines with their marketing affiliates; (3) the publication of standards relating to the use of electronic
bulletin boards and electronic data exchange by the pipelines to make available transaction information on a timely basis and
to enable transactions to occur on a purely electronic basis; (4) further review of the role of the secondary market for released
pipeline capacity and its relationship to open access service in the primary market; and (5) development of policy and promulgation
of orders pertaining to its authorization of market-based rates (rather than traditional cost-of-service based rates) for transportation
or transportation-related services upon the pipeline’s demonstration of lack of market control in the relevant service market.
We do not know what effect the FERC’s other activities will have on the access to markets, the fostering of competition
and the cost of doing business.
Our
sale of oil and natural gas liquids will not be regulated and will be at market prices. The price received from the sale of these
products will be affected by the cost of transporting the products to market. Much of that transportation is through interstate
common carrier pipelines.
Federal,
state, and local agencies have promulgated extensive rules and regulations applicable to our oil and natural gas exploration,
production and related operations. Most states require permits for drilling operations, drilling bonds and the filing of reports
concerning operations, and impose other requirements relating to the exploration of oil and natural gas. Many states also have
statutes or regulations addressing conservation matters including provisions for the unitization or pooling of oil and natural
gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of spacing,
plugging and abandonment of such wells. The statutes and regulations of some states limit the rate at which oil and natural gas
is produced from our properties. The federal and state regulatory burden on the oil and natural gas industry increases our cost
of doing business and affects our profitability. Because these rules and regulations are amended or reinterpreted frequently,
we are unable to predict the future cost or impact of complying with those laws.
Competition
and Marketing
We
will be faced with strong competition from many other companies and individuals engaged in the oil and gas business, many are
very large, well established energy companies with substantial capabilities and established earnings records. We will be at a
competitive disadvantage in acquiring oil and gas prospects since we must compete with these individuals and companies, many of
which have greater financial resources and larger technical staffs. It is nearly impossible to estimate the number of competitors;
however, it is known that there are a large number of companies and individuals in the oil and gas business.
Exploration
for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil
field equipment including drilling rigs and tools. We will depend upon independent drilling contractors to furnish rigs, equipment
and tools to drill our wells. Higher prices for oil and gas may result in competition among operators for drilling equipment,
tubular goods and drilling crews which may affect our ability to expeditiously drill, complete, recomplete and work-over wells.
The
market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted.
These factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic
production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand,
and governmental regulation. In addition, there is always the possibility that new legislation may be enacted that would impose
price controls or additional excise taxes upon crude oil or natural gas, or both. Oversupplies of natural gas can be expected
to recur from time to time and may result in the gas producing wells being shut-in. Imports of natural gas may adversely affect
the market for domestic natural gas.
The
market price for crude oil is significantly affected by policies adopted by the member nations of Organization of Petroleum Exporting
Countries (“OPEC”). Members of OPEC establish prices and production quotas among themselves for petroleum products
from time to time with the intent of controlling the current global supply and consequently price levels. We are unable to predict
the effect, if any, that OPEC or other countries will have on the amount of, or the prices received for, crude oil and natural
gas.
Glossary
of Oil and Gas Terms
DEVELOPED
ACREAGE. The number of acres that are allocated or assignable to productive wells or wells capable of production.
DISPOSAL
WELL. A well employed for the reinjection of salt water produced with oil into an underground formation.
HELD
BY PRODUCTION. A provision in an oil, gas and mineral lease that perpetuates an entity’s right to operate a property or
concession as long as the property or concession produces a minimum paying quantity of oil or gas.
INJECTION
WELL. A well employed for the injection into an underground formation of water, gas or other fluid to maintain underground pressures
which would otherwise be reduced by the production of oil or gas.
LANDOWNER’S
ROYALTY. A percentage share of production, or the value derived from production, which is granted to the lessor or landowner in
the oil and gas lease, and which is free of the costs of drilling, completing, and operating an oil or gas well.
LEASE.
Full or partial interests in an oil and gas lease, authorizing the owner thereof to drill for, reduce to possession and produce
oil and gas upon payment of rentals, bonuses and/or royalties. Oil and gas leases are generally acquired from private landowners
and federal and state governments. The term of an oil and gas lease typically ranges from three to ten years and requires annual
lease rental payments of $1.00 to $2.00 per acre. If a producing oil or gas well is drilled on the lease prior to the expiration
of the lease, the lease will generally remain in effect until the oil or gas production from the well ends. The owner of the lease
is required to pay the owner of the leased property a royalty which is usually between 12.5% and 25% of the gross amount received
from the sale of the oil or gas produced from the well.
LEASE
OPERATING EXPENSES. The expenses of producing oil or gas from a formation, consisting of the costs incurred to operate and maintain
wells and related equipment and facilities, including labor costs, repair and maintenance, supplies, insurance, production, severance
and other production excise taxes.
NET
ACRES OR WELLS. A net well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or
acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres
expressed as whole numbers and fractions.
NET
REVENUE INTEREST. A percentage share of production, or the value derived from production, from an oil or gas well and which is
free of the costs of drilling, completing and operating the well.
OVERRIDING
ROYALTY. A percentage share of production, or the value derived from production, which is free of all costs of drilling, completing
and operating an oil or gas well, and is created by the lessee or working interest owner and paid by the lessee or working interest
owner to the owner of the overriding royalty.
PRODUCING
PROPERTY. A property (or interest therein) producing oil or gas in commercial quantities or that is shut-in but capable of producing
oil or gas in commercial quantities. Interests in a property may include working interests, production payments, royalty interests
and other non-working interests.
PROSPECT.
An area in which a party owns or intends to acquire one or more oil and gas interests, which is geographically defined on the
basis of geological data and which is reasonably anticipated to contain at least one reservoir of oil, gas or other hydrocarbons.
PROVED
RESERVES. Those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable
certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless
evidence indicates that renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for
the estimation.
SHUT-IN
WELL. A well which is capable of producing oil or gas but which is temporarily not producing due to mechanical problems or a lack
of market for the well’s oil or gas.
UNDEVELOPED
ACREAGE. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether or not such acreage contains proved reserves. Undeveloped acreage should not be
confused with undrilled acreage which is “Held by Production” under the terms of a lease.
WORKING
INTEREST. A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and
gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing,
drilling, producing and operating a well. After royalties are paid, the working interest also entitles its owner to share in production
revenues with other working interest owners, based on the percentage of the working interest owned.
Employees
As
of October 15, 2019, we have six (6) full-time employees and no part-time employees.
ITEM
1A. RISK FACTORS
In
addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that
are specific to us and our industry could materially impact our future performance and results of operations. We have provided
below a list of known material risk factors that should be reviewed when considering buying or selling our securities. These are
not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.
We
will need to raise funds from additional financing in the future to complete our business plan and may need to raise additional
funding in the future to support our operations. We have no commitments for any financing and any financing commitments may result
in dilution to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms
that would adversely affect our stockholders. For example, the terms of any future financings may impose restrictions on our right
to declare dividends or on the manner in which we conduct our business. Additionally, we may raise funding by issuing convertible
notes, which if converted into shares of our common stock would dilute our then stockholders’ interests. Lending institutions
or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant
asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.
The
price we receive for our oil directly affects our revenues, profitability, access to capital and future rate of growth. Oil is
a commodity that is subject to wide price fluctuations in response to relatively minor changes in supply and demand. Lower prices
for our oil may not only decrease our revenues but may also reduce the amount of oil that we can produce economically. Historically,
the markets for oil have been volatile and will likely continue to be volatile in the future. The prices we receive for our production
and the volume of our production depend on numerous factors beyond our control. These factors include the following: changes in
global supply and demand for oil, the actions of OPEC, the price and quantity of imports of foreign oil, acts of war, terrorism
or political instability in oil producing countries and economic conditions.
The
price of West Texas Intermediate (“WTI”) crude oil has decreased from $107 per barrel in the middle of June 2014 to
as low as $28 per barrel in February 2016. This decrease in prices has impacted all oil and gas producers to varying degrees depending
on hedging strategies and debt obligations. The 2017 WTI price increased to an average of $50.88 per barrel and ended the year
at $60 per barrel. The 2018 WTI price increased to an average $64.90 per barrel and ended the year at $45.33 per barrel.
Accounting
rules applicable to us require that we periodically review the carrying value of our oil properties for possible impairment. Based
on specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development
plans, production data, economics and other factors, we will likely be required to write down the carrying value of our oil and
natural gas properties. Such write-downs constitute a non-cash charge to earnings. Impairment of proved properties under our full
cost oil accounting method is largely driven by the present values of future net revenues of proved reserves estimated using SEC
mandated 12-month un-weighted first-day-of-the-month commodity prices. No assurance can be given that we will not experience ceiling
test impairments in future periods, which could have a material adverse effect on our results of operations in the periods taken.
As a result of lower oil prices, we may also reduce our estimates of the reserve volumes that may be economically recovered, which
would reduce the total value of our proved reserves.
Our
undeveloped proved reserves and developed non-producing proved reserves require additional expenditures and/or activities to convert
these into producing reserves. We cannot provide assurance these expenditures will be made and that activities will be entirely
successful in converting these reserves. Furthermore, there can be no assurance that all of our undeveloped and developed non-producing
reserves will ultimately be produced during the time periods we have planned, at the costs we have budgeted, or at all, which
could result in the write-off of previously recognized reserves.
Our
future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically
recoverable. Unless we replace the reserves we produce through successful exploration, development or acquisition activities,
our proved reserves and production will decline over time. Our exploration, development and acquisition activities require substantial
capital expenditures. The capital markets we have historically accessed are currently constrained, but we believe we could access
other capital markets if the need arises. These limitations in the capital markets may affect our ability to grow and changes
in our capitalization structure may significantly affect our financial risk profile. Furthermore, we cannot be certain that financing
for future capital expenditures will be available if needed, and to the extent required, on acceptable terms.
Future
cash flows are subject to a number of variables, such as the level of production from existing wells, the prices of oil and our
success in developing and producing new reserves. Any reductions in our capital expenditures to stay within internally generated
cash flow (which could be adversely affected by declining commodity prices) and cash on hand will make replacing produced reserves
more difficult. If our cash flow from operations and cash on hand are not sufficient to fund our capital expenditure budget, we
may be limited in our ability to access additional debt, equity or other methods of financing on an economic or timely basis to
replace our proved reserves.
The
Environmental Protection Agency (EPA) has adopted new regulations under the Clean Air Act (CAA) that, among other things, require
additional emissions controls for the production of oil, including New Source Performance Standards to address emissions of sulfur
dioxide and Volatile Organic Compounds (VOCs) and a separate set of emission standards to address hazardous air pollutants frequently
associated with such production activities. For well completion operations occurring at such well sites before January 1, 2015,
the final regulations allow operators to capture and direct flowback emissions to completion combustion devices, such as flares,
in lieu of performing green completions. These regulations also establish specific new requirements regarding emissions from dehydrators,
storage tanks and other production equipment. Compliance with these requirements could significantly increase our costs of development
and production.
We
are required to record a liability for the present value of our asset retirement obligation (“ARO”) to plug and abandon
inactive non-producing wells, facilities and equipment, and to restore the land at the end of oil production operations. As a
result, we may make significant increases or decreases to our estimated ARO in future periods. Accordingly, our estimate of future
ARO could differ dramatically from what we may ultimately incur.
Our
development activities may be unsuccessful for many reasons, including adverse weather conditions, cost overruns, equipment shortages,
geological issues and mechanical difficulties. Moreover, the successful drilling of an oil well does not assure us that we will
realize a profit on our investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical
or only marginally economical. In addition to their costs, unsuccessful wells hinder our efforts to replace reserves.
Our
oil exploration and production activities, including well stimulation and completion activities which include, among other things,
hydraulic fracturing, involve a variety of operating risks, including fires, explosions, blow-outs and surface craters, uncontrollable
flows of oil and formation water, natural disasters. If we experience any of these problems, well bores, platforms, gathering
systems and processing facilities could be affected, which could adversely affect our ability to conduct operations. We could
also incur substantial losses as a result of injury or loss of life, damage to and destruction of property, natural resources
and equipment, pollution and other environmental damage.
Our
business strategy includes growing by making acquisitions (for example our acquisition of Bow), which may include acquisitions
of exploration and production companies, producing properties and undeveloped leasehold interests. Our acquisition of oil and
natural gas properties requires assessments of many factors that are inherently inexact and may be inaccurate, including the acceptable
prices for available properties, amounts of recoverable reserves, estimates of future oil prices, estimates of future exploratory,
development and operating costs, estimates of the costs and timing of plugging, and abandonment and estimates of potential environmental
and other liabilities.
If
we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have
difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any
acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key
personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core
business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business,
distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied
by a number of inherent risks, including, without limitation, the following: the difficulty of integrating acquired products,
services or operations; the potential disruption of the ongoing businesses and distraction of our management and the management
of acquired companies; difficulties in maintaining uniform standards, controls, procedures and policies; the potential impairment
of relationships with employees and customers as a result of any integration of new management personnel; the potential inability
or failure to achieve additional sales; the effect of any government regulations which relate to the business acquired; potential
unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool,
reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or
not successful, resulting from actions of the acquired company prior to our acquisition; and potential expenses under the labor,
environmental and other laws of various jurisdictions. Our business could be severely impaired if and to the extent that we are
unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which
cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees,
increase our expenses and adversely affect our results of operations.
Exploring
for and developing hydrocarbon reserves involves a high degree of operational and financial risk, which precludes us from definitively
predicting the costs involved and time required to reach certain objectives. The budgeted costs of planning, drilling, completing
and operating wells are often exceeded and such costs can increase significantly due to various complications that may arise during
the drilling and operating processes. Before a well is spud, we may incur significant geological and geophysical (seismic) costs,
which are incurred whether a well eventually produces commercial quantities of hydrocarbons or is drilled at all. Exploration
wells bear a much greater risk of loss than development wells. The analogies we draw from available data from other wells, more
fully explored locations or producing fields may not be applicable to our drilling locations. If our actual drilling and development
costs are significantly more than our estimated costs, we may not be able to continue our operations as proposed and could be
forced to modify our drilling plans accordingly.
If
we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found
or produced. We may drill or participate in new wells that are not productive. We may drill wells that are productive, but that
do not produce sufficient net revenues to return a profit after drilling, operating and other costs. There is no way to predict
in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient quantities to recover
exploration, drilling or completion costs or to be economically viable. Even if sufficient amounts of oil or natural gas exist,
we may damage the potentially productive hydrocarbon-bearing formation or experience mechanical difficulties while drilling or
completing the well, resulting in a reduction in production and reserves from the well or abandonment of the well. Whether a well
is ultimately productive and profitable depends on a number of additional factors, including the following: general economic and
industry conditions, including the prices received for oil and natural gas; shortages of, or delays in, obtaining equipment, including
hydraulic fracturing equipment, and qualified personnel; potential drainage by operators on adjacent properties; loss of or damage
to oilfield development and service tools; problems with title to the underlying properties; increases in severance taxes; adverse
weather conditions that delay drilling activities or cause producing wells to be shut down; domestic and foreign governmental
regulations; and proximity to and capacity of transportation facilities. If we do not drill productive and profitable wells in
the future, our business, financial condition and results of operations could be materially and adversely affected.
We
review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment
at least annually on December 31 of each year, or when events or changes in the business environment indicate that the carrying
value of a reporting unit may exceed its fair value. If conditions in any of the businesses in which we compete were to deteriorate,
we could determine that certain of our assets were impaired and we would then be required to write-off all or a portion of our
costs for such assets. Any such significant write-offs would adversely affect our balance sheet and results of operations.
Concerns
over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit, the United
States mortgage market and a declining real estate market in the United States have contributed to increased economic uncertainty
and diminished expectations for the global economy. These factors, combined with volatile prices of oil and natural gas, declining
business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a recession. Concerns
about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic
climate in the United States or abroad continues to deteriorate, demand for petroleum products could diminish, which could impact
the price at which we can sell our oil, natural gas and natural gas liquids, affect the ability of our vendors, suppliers and
customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition.
Our
exploration and development activities are capital intensive. We make and expect to continue to make substantial capital expenditures
in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. Our cash on hand,
our operating cash flows and future potential borrowings may not be adequate to fund our future acquisitions or future capital
expenditure requirements. The rate of our future growth may be dependent, at least in part, on our ability to access capital at
rates and on terms we determine to be acceptable.
Our
cash flows from operations and access to capital are subject to a number of variables, including: our estimated proved oil and
natural gas reserves; the amount of oil and natural gas we produce from existing wells; the prices at which we sell our production;
the costs of developing and producing our oil and natural gas reserves; our ability to acquire, locate and produce new reserves;
the ability and willingness of banks to lend to us; and our ability to access the equity and debt capital markets. In addition,
future events, such as terrorist attacks, wars or combat peace-keeping missions, financial market disruptions, general economic
recessions, oil and natural gas industry recessions, large company bankruptcies, accounting scandals, overstated reserves estimates
by major public oil companies and disruptions in the financial and capital markets have caused financial institutions, credit
rating agencies and the public to more closely review the financial statements, capital structures and earnings of public companies,
including energy companies. Such events have constrained the capital available to the energy industry in the past, and such events
or similar events could adversely affect our access to funding for our operations in the future.
If
our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any
other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels, further
develop and exploit our current properties or invest in additional exploration opportunities. Alternatively, a significant improvement
in oil and natural gas prices or other factors could result in an increase in our capital expenditures and we may be required
to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production
payments, the sale or farm out of interests in our assets, the borrowing of funds or otherwise to meet any increase in capital
needs. If we are unable to raise additional capital from available sources at acceptable terms, our business, financial condition
and results of operations could be adversely affected. Further, future debt financings may require that a portion of our cash
flows provided by operating activities be used for the payment of principal and interest on our debt, thereby reducing our ability
to use cash flows to fund working capital, capital expenditures and acquisitions. Debt financing may involve covenants that restrict
our business activities. If we succeed in selling additional equity securities to raise funds, at such time the ownership percentage
of our existing shareholders would be diluted, and new investors may demand rights, preferences or privileges senior to those
of existing shareholders. If we choose to farm-out interests in our prospects, we may lose operating control over such prospects.
We
cannot assess the extent of either the threat or the potential impact of future terrorist attacks on the energy industry in general,
and on us in particular, either in the short-term or in the long-term. Uncertainty surrounding such hostilities may affect our
operations in unpredictable ways, including the possibility that infrastructure facilities, including pipelines and gathering
systems, production facilities, processing plants and refineries, could be targets of, or indirect casualties of, an act of terror,
a cyber-attack or electronic security breach, or an act of war.
There
are numerous operational hazards inherent in oil and natural gas exploration, development, production and gathering, including:
unusual or unexpected geologic formations; natural disasters; adverse weather conditions; unanticipated pressures; loss of drilling
fluid circulation; blowouts where oil or natural gas flows uncontrolled at a wellhead; cratering or collapse of the formation;
pipe or cement leaks, failures or casing collapses; fires or explosions; releases of hazardous substances or other waste materials
that cause environmental damage; pressures or irregularities in formations; and equipment failures or accidents.
In
addition, there is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations,
some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground
injection or other disposal of our wastes, the use of hydraulic fracturing fluids and historical industry operations and waste
disposal practices.
The
rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural
gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing
and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or
acquiring additional oil and natural gas producing properties. In the future, we may have difficulty acquiring new properties.
During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion
activities. If we are unable to replace our production, our reserves will decrease, and our business, financial condition and
results of operations would be adversely affected.
Our
ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate
and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing
oil and natural gas and securing trained personnel. Also, there is substantial competition for capital available for investment
in the oil and natural gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially
greater than ours, and many of our competitors have more established presences in the United States and in foreign locations than
we have. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit.
In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than
we are able to offer. The cost to attract and retain qualified personnel has increased in recent years due to competition and
may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves,
developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which
could have a material adverse effect on our business, financial condition and results of operations.
Our
industry is subject to rapid and significant advancements in technology, including the introduction of new products and services
using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage,
and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors
will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the
future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies
on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement
in the future may become obsolete, and we may be adversely affected.
Our
results of operations are materially affected by the conditions of the global economies and the credit, commodities and stock
markets. Among other things, we may be adversely impacted if consumers of oil and gas are not able to access sufficient capital
to continue to operate their businesses or to operate them at prior levels. A decline in consumer confidence or changing patterns
in the availability and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result
our results of operations.
Because
our operations depend on the demand for oil and used oil, any improvement in or new discoveries of alternative energy technologies
(such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the
demand for oil, gas and oil and gas related products could have a material adverse impact on our business, financial condition
and results of operations.
The
process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including
assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially
affect the estimated quantities and the calculation of the present value of our reserves. In order to prepare our year-end reserve
estimates, our independent petroleum consultant projected our production rates and timing of development expenditures. Our independent
petroleum consultant also analyzed available geological, geophysical, production and engineering data. The extent, quality and
reliability of this data can vary and may not be under our control. The process also requires economic assumptions about matters
such as oil and natural gas prices, operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates
of oil and natural gas reserves are inherently imprecise.
You
should not assume that the present value of future net revenues from our proved oil and natural gas reserves is the current market
value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future
net cash flows from our proved reserves on the 12-month un-weighted first-day-of-the-month average price for each product and
costs in effect on the date of the estimate. Actual future prices and costs may differ materially from those used in the present
value estimate.
Our
operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration,
development, production and transportation of oil and natural gas and operational safety. Future laws or regulations, any adverse
change in the interpretation of existing laws and regulations or our failure to comply with such legal requirements may harm our
business, results of operations and financial condition.
To
a large extent, we depend on the services of our senior management. The loss of the services of any of our senior management,
could have a negative impact on our operations. We do not maintain or plan to obtain for the benefit of the Company any insurance
against the loss of any of these individuals.
Wherever
possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of shares of our common stock, preferred stock or warrants to purchase shares of
our common stock. Our board of directors has authority, without action or vote of the shareholders to issue all or part of the
authorized but unissued shares of common stock, preferred stock or warrants to purchase such shares of common stock. In addition,
we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions
will result in dilution of the ownership interests of existing shareholders and may further dilute common stock book value, and
that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control
of us, because the shares may be issued to parties or entities committed to supporting existing management.
We
currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic,
illiquid and volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or
trading volume of our common stock include:
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●
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our
actual or anticipated operating and financial performance and drilling locations, including reserves estimates;
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●
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quarterly
variations in the rate of growth of our financial indicators, such as net income per share, net income and cash flows, or
those of companies that are perceived to be similar to us;
|
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●
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changes
in revenue, cash flows or earnings estimates or publication of reports by equity research analysts;
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speculation
in the press or investment community;
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●
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public
reaction to our press releases, announcements and filings with the SEC;
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●
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sales
of our common stock by us or other shareholders, or the perception that such sales may occur;
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●
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the
limited amount of our freely tradable common stock available in the public marketplace;
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●
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general
financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices;
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●
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the
realization of any of the risk factors presented in this Annual Report;
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●
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the
recruitment or departure of key personnel;
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●
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commencement
of, or involvement in, litigation;
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●
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the
prices of oil and natural gas;
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●
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the
success of our exploration and development operations, and the marketing of any oil and natural gas we produce;
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●
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changes
in market valuations of companies similar to ours; and
|
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●
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domestic
and international economic, legal and regulatory factors unrelated to our performance.
|
Our
stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets
in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political
and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market
price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and
closing prices) may not be related to our actual value, and not reflect the actual value of our common stock. Shareholders and
potential investors in our common stock should exercise caution before making an investment in us.
Additionally,
as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the
inability to acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect
on the market price of our common stock. In addition, a shareholder may not be able to borrow funds using our common stock as
collateral because lenders may be unwilling to accept the pledge of securities having such a limited market. We cannot assure
you that an active trading market for our common stock will develop or, if one develops, be sustained.
Our
common stock will be subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our
common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior
to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure
in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any
equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required
penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market
and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability
of purchasers to sell their securities in the secondary market. In addition, various state securities laws impose restrictions
on transferring “penny stocks” and as a result, investors in the common stock may have their ability to sell their
shares of the common stock impaired.
ITEM
2. PROPERTIES.
Our
principal office is located at 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024.
We
lease our principal office space, consisting of approximately 1,000 square feet, at a rate which is currently $1,500 per month
on a month-to-month basis.
The
Company’s oil and gas properties are described under “Item 1. Business”, above, and below under “Note
16. Supplemental Information Relating to Oil and Gas Producing Activities (Unaudited)” in the consolidated audited financial
statements attached hereto.
ITEM
3. LEGAL PROCEEDINGS.
We
may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We
are not currently a party to any material legal proceeding. In addition, we are not aware of any material legal or governmental
proceedings against us, or contemplated to be brought against us.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following information sets forth the names, ages, and positions of our current directors and executive officers as of the date
of this Report.
Name
|
|
Age
|
|
Position
|
|
Director/Officer
Since
|
Zel
C. Khan
|
|
45
|
|
Chief
Executive Officer and Director
|
|
April
2016
|
Horacio
Alfredo Fernandez
|
|
65
|
|
Interim
Chief Financial Officer
|
|
October
2018
|
Leo
Womack
|
|
75
|
|
Director
|
|
August
2014
|
Joel
Oppenheim
|
|
75
|
|
Director
|
|
June
2015
|
James
Edward Burns
|
|
49
|
|
Chairman
|
|
April
2017
|
Saleem
Nizami
|
|
67
|
|
Director
|
|
April
2017
|
Ivar
Siem
|
|
71
|
|
Director
|
|
April
2018
|
Richard
Dole
|
|
73
|
|
Director
|
|
October
2018
|
Set
forth below is a brief description of the background and business experience of each of our current executive officers and directors:
Zel
C. Khan is an oilfield operator with over 25 years of experience in the Oil & Gas industry. He has successfully operated,
both on and offshore, in Texas, Oklahoma, New Mexico and California. Mr. Khan has served as the CEO of the Company since February
2015. Prior to joining the Company, from March 2010 to February 2015, Mr. Khan was the CEO of Jovian Petroleum Corporation, an
oil and gas operator in California, Oklahoma, New Mexico, and Texas. From August 2006 to March 2010, Mr. Khan served as Operating
Manager of Pyramid GOM Inc., an offshore deep-water operator. He has established a reputation for reducing operating costs
on various projects, including a former ConocoPhillips offshore facility located in deep water Gulf of Mexico where he was the
Operating Manager. Mr. Khan has also operated in Kern County, California and Alberta, Canada, both are heavy oil fields requiring
special operational procedures to maintain low lift costs and strict environmental policies as set by the respective governmental
agencies. Mr. Khan holds a Bachelor of Science degree and a Master’s degree from Chapman University, California.
Horacio
Alfredo Fernandez has over 35 years of experience working in the accounting and financial field, working with private, and
public U.S. companies, and multi-jurisdictional public companies. Mr. Fernandez has served as the controller of the Company from
May 2015 to October 2018. In October 2018, Mr. Fernandez was appointed Interim CFO of the Company, the position that he
continues to hold. Prior to joining the Company, Mr. Fernandez served as Controller of Rhino Offshore LLC –an offshore
oil and gas service company - based in Houston, Texas, from January 2010 to April 2015. Mr. Fernandez served as Controller of
Pyramid GOM Inc., an offshore deepwater operator, from March 2007 to February 2010. Mr. Fernandez served as a Senior Auditor/Accountant
with Becker Tax Service & Financial Management from April 2004 to October 2006. As part of Mr. Fernandez’s international
experience, he served as Forensic Auditor in the federal courts of Argentina from 1998 to 2002. Mr. Fernandez served as CFO of
Tecsalco SA, a subsidiary of the Luksic Group, from 1995 to 1997. Mr. Fernandez has a Bachelor’s degree in accounting and
a post graduate diploma in Strategic Planning from University of Buenos Aires, Argentina and holds a Certified Public Accountant
degree from the same University. Mr. Fernandez has been a member of the Professional Advice of Economic Sciences –Consejo
Profesional de Ciencias Economicas- of Buenos Aires since 1984.
Leo
Womack has over 40 years of experience in advising and serving as Director of small micro-capitalization public and private
companies. Mr. Womack has been the President of Gulf Equities Realty Advisors, Inc., a diversified real estate portfolio management
company, since 1986. For more than five (5) years, from March 1986 to the present, Mr. Womack has been and continues to
be employed as the President of Gulf Equities Realty Advisors Inc. He has been the Chairman of Fairway Medical Technologies, Inc.,
a medical device company and a portfolio company of the Baylor College of Medicine Venture Fund since 1996. From 1969 to 1978,
he was the managing partner of a local and later national CPA firm. He has served on the Board and as Chairman of the Houston
Angel Network and on National Committees of the Angel Capital Association. Prior to its acquisition by ITT Corporation in 2010,
he served as a board member and the audit committee chair for OI Corporation (NASDAQ:OICO). Mr. Womack continues to serve on the
Boards of Directors of five early stage companies that he or his Family Trust have invested in. Mr. Womack earned a Bachelor of
Business Administration in Accounting from Texas A&M University-Kingsville in 1965 and holds a Series 7 Securities License.
Mr. Womack is also a licensed Certified Public Accountant (CPA).
Joel
Oppenheim currently owns and has operated the Oppenheim Group since 1991. Mr. Oppenheim has served as a partner and manager
of Oppenheim Group since 1991. The Oppenheim Group is a real estate consulting firm that has represented multiple Fortune
10 and Fortune 100 Companies on their commercial real estate needs throughout the United States. In 2014, Mr. Oppenheim began
concentrating on the Oppenheim Group’s investment portfolio including several successful oil and gas investments both in
Texas and California. Mr. Oppenheim is a licensed Commercial Real Estate Broker in Texas and graduated from City College of New
York - Bernard Baruch School of Business, with a degree in accounting. Mr. Oppenheim has been an active member of the Houston
Angel Network since 2009. He has successfully started and sold numerous businesses throughout his career, including some of the
most successful restaurants and clubs in Houston.
James
Edward Burns is an oil and gas executive who brings more than 25 years of energy experience to Petrolia Energy’s Board.
Most recently, he served as President of BLU LNG, a domestic LNG provider, from December 2014 to February 2016, where he
created a coherent commercial and operational strategy serving as catalyst for renewed efficiency and effectiveness. Prior to
his role at BLU LNG, Mr. Burns was President of Fortress Energy Partners a division of Fortress Investment Group and worked in
various executive roles globally at Royal Dutch Shell, and Texaco. Mr. Burns also serves as a member of the Houston Angel Network’s
Energy Council and is the chairman of the board of Triple E Real Estate Investments. He holds a BS in Business Administration
from California State University and an Executive MBA from the University of Houston.
Saleem
Nizami is a Petroleum Geologist with over 40 years of Oil & Gas experience. Prior to founding APEC, Inc., an Oklahoma-based
Petroleum and Environmental Consulting firm in 1989. Mr. Nizami served as a Senior Geologist and Manager in the Division of Oil
& Gas at the Oklahoma Corporate Commission. Mr. Nizami has worked with numerous small to mid-sized Oil & Gas companies
along with Major’s such as Chevron, ExxonMobil and Chesapeake Energy Corp. Mr. Nizami holds an MSc. in Petroleum Geology
from Osmania University.
Ivar
Siem is the Chairman of American Resources Inc. (“American”). Mr. Siem previously also served as the Chairman
and CEO of American and its predecessor from September 2000 to August 1, 2017. Mr. Siem has broad experience from both the upstream
and the service segments of the oil and gas industry. He has been the founder of several companies and involved in multiple roll-ups
and restructuring processes throughout his career. These include Fred Olsen, Inc., Dolphin International, Inc., Blue Dolphin Energy,
Seateam Technology ASA, DI Industries/Grey Wolf Drilling, American Resources Offshore, Inc., and Equimavenca SA. He has served
on a number of public and private company boards including Frupor SA, Avenir ASA, Wellcem AS, and Siem Industries, Inc. Since
July 2018, Mr. Siem has served as a member of the Board of Directors of PEDEVCO Corp. (NYSE American:PED), a company with securities
registered under the Exchange Act.
Richard
Dole has served as Chief Executive Officer of RDD Consulting, LLC since April 2015, which entity advises energy related companies
on strategic and financial options. He served as President and CEO (beginning in 2008) and as a director of the Double Eagle Petroleum
Co. (Double Eagle) from 2005 to March 2014. Mr. Dole also served as Chairman, President and CEO of Petrosearch Energy Corporation
from 2004 until August 2014, when Petrosearch was merged with Double Eagle. He served on the Board of Directors; served as a member
of the Board’s Audit Committee and as a designated financial expert of Westport Resources Corporation from March 2000, until
Westport was merged into Kerr McGee Corp in 2004. Mr. Dole previously served as Vice President and Chief Financial Officer for
Burlington Resources International from 1998-2000. Mr. Dole was employed by PricewaterhouseCoopers (formerly Coopers & Lybrand)
where he served as Assurance and Business Advisory Partner for nearly 20 years. During that period, he served in numerous senior
management roles, including National Chairman for the Energy and Natural Resources Industry practices for over 15 years, Vice
Chairman for the U.S. Process Management business unit and created the Southwest region Corporate Finance and Strategic Planning
Group. He was also the National Partner-in-Charge of Business Process Solutions at KPMG from 1995-1998. These positions reported
to executive management committees. Mr. Dole has been in the energy and finance businesses for nearly 40 years. He has worked
in most sectors of the energy industry including exploration, production, transportation and marketing, both domestically and
internationally. He also has broad functional knowledge in strategy, business processes, and finance, - with significant experience
in leading business units, working with capital markets, evaluating alternative financings, risk management programs, economic
analysis, acquisitions and divestitures and corporate mergers. His projects have entailed billions of dollars. He has written
and spoken on hundreds of energy and finance topics during his career. He graduated from Colorado State University with a degree
in business and was a business school commencement speaker as Alumni of the Year.
Term
of Office
Our
Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until
removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until
removed by the board.
CORPORATE
GOVERNANCE
The
Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely
and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications
made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.
Board
Leadership Structure
The
roles of Chairman and Chief Executive Officer of the Company are currently held separately. Mr. Burns serves as Chairman and Mr.
Khan serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an
independent director, an affiliated director, or a member of management. Our Board believes that the Company’s current leadership
structure is appropriate because it effectively allocates authority, responsibility, and oversight between management (the Company’s
Chief Executive Officer, Mr. Khan and the Company’s Interim Chief Financial Officer, Mr. Fernandez) and the members of our
Board (currently Mr. Burns as Chairman). It does this by giving primary responsibility for the operational leadership and strategic
direction of the Company to its Chief Executive Officer, while enabling our Chairman to facilitate our Board’s oversight
of management, promote communication between management and our Board, and support our Board’s consideration of key governance
matters. The Board believes that its programs for overseeing risk, as described below, would be effective under a variety of leadership
frameworks and therefore do not materially affect its choice of structure.
Risk
Oversight
Effective
risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision,
the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board
of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy,
evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate
culture of integrity and compliance with legal responsibilities. The directors exercise direct oversight of strategic risks to
the Company.
Family
Relationships
None
of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
Arrangements
Between Officers and Directors
To
our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors,
pursuant to which the officer was selected to serve as an officer.
Other
Directorships
No
directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange
Act (or which otherwise are required to file periodic reports under the Exchange Act), except as discussed in their bios above.
Director
Qualifications
The
Board believes that each of our directors is highly qualified to serve as a member of the Board. Each of the directors has contributed
to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board,
the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective,
good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive
track records of success in what we believe are highly relevant positions.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our executive officers or directors has been involved in any of the following events during
the past ten years:
(1)
|
any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
|
(2)
|
any
conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations
and minor offenses);
|
(3)
|
being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities;
|
(4)
|
being
found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law;
|
(5)
|
being
the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law
or regulation; (ii) any law or regulation respecting financial institutions or insurance companies, including, but not limited
to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition order, or (iii) any law or regulation prohibiting mail or wire fraud or
fraud in connection with any business entity; or
|
(6)
|
being
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section (1a)(40) of
the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority
over its members or persons associated with a member.
|
Board
of Directors Meetings
The
Company had six (6) official meetings of the Board of Directors during the fiscal year 2018 and nine (9) during the previous fiscal
year ending December 31, 2017. All directors attended at least 75% of the meetings of the Board of Directors and meetings of Committees
of the Board of Directors, for committees on which they served. The Company has not adopted a policy requiring its directors to
attend its annual meeting. The Company’s majority shareholders took action via written consent during fiscal 2018, in lieu
of a meeting of shareholders.
COMMITTEES
OF THE BOARD
Board
Committee Membership
|
|
Independent
|
|
Audit
Committee
|
|
Compensation Committee
|
|
Nominating
and
Corporate
Governance
Committee
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James E. Burns (1)
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Zel C. Khan
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Leo Womack
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X
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C
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M
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Joel Oppenheim
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X
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M
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C
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Richard Dole
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X
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Saleem Nizami
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X
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M
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M
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Ivar Siem
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X
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C
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(1)
Chairman of Board of Directors.
C
- Chairman of Committee.
M
- Member.
The
charter for each committee of the Board identified below is available on our website at www.petroliaenergy.com. Copies of the
committee charters are also available for free upon written request to our Corporate Secretary. Additionally, the committee charters
are filed as exhibits to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 24, 2018 (the
“Form 8-K”).
Audit
Committee
The
Audit Committee, which is comprised exclusively of independent directors, has been established by the Board to oversee our accounting
and financial reporting processes and the audits of our financial statements.
The
Board has selected the members of the Audit Committee based on the Board’s determination that the members are financially
literate (as required by NASDAQ rules) and qualified to monitor the performance of management and the independent auditors and
to monitor our disclosures so that our disclosures fairly present our business, financial condition and results of operations.
The
Board has also determined that Mr. Womack, is an “audit committee financial expert” (as defined in the SEC rules)
because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States
of America (“GAAP”) and financial statements; (ii) the ability to assess the general application of such principles
in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements
that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity
of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control
over financial reporting; and (v) an understanding of audit committee functions. Mr. Womack has acquired these attributes by means
of having held various positions that provided relevant experience, as described in his biographical above.
The
Audit Committee has the sole authority, at its discretion and at our expense, to retain, compensate, evaluate and terminate our
independent auditors and to review, as it deems appropriate, the scope of our annual audits, our accounting policies and reporting
practices, our system of internal controls, our compliance with policies regarding business conduct and other matters. In addition,
the Audit Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors
to advise the Audit Committee.
The
Audit Committee was formed on May 21, 2018.
The
Audit Committee Charter is filed as Exhibit 99.1 to the Form 8-K filed on May 24, 2018.
Compensation
Committee
The
Compensation Committee, which is comprised exclusively of independent directors, is responsible for the administration of our
stock compensation plans, approval, review and evaluation of the compensation arrangements for our executive officers and directors
and oversees and advises the Board on the adoption of policies that govern the Company’s compensation and benefit programs.
In addition, the Compensation Committee has the authority, at its discretion and at our expense, to retain special legal, accounting
or other advisors to advise the Compensation Committee.
The
Compensation Committee was formed on May 21, 2018.
The
Compensation Committee Charter is filed as Exhibit 99.2 to the Form 8-K filed on May 24, 2018.
Nominating
and Governance Committee
The
Nominating and Governance Committee, which is comprised exclusively of independent directors, is responsible for identifying prospective
qualified candidates to fill vacancies on the Board, recommending director nominees (including chairpersons) for each of our committees,
developing and recommending appropriate corporate governance guidelines and overseeing the self-evaluation of the Board.
In
considering individual director nominees and Board committee appointments, our Nominating and Governance Committee seeks to achieve
a balance of knowledge, experience and capability on the Board and Board committees and to identify individuals who can effectively
assist the Company in achieving our short-term and long-term goals, protecting our stockholders’ interests and creating
and enhancing value for our stockholders. In so doing, the Nominating and Governance Committee considers a person’s diversity
attributes (e.g., professional experiences, skills, background, race and gender) as a whole and does not necessarily attribute
any greater weight to one attribute. Moreover, diversity in professional experience, skills and background, and diversity in race
and gender, are just a few of the attributes that the Nominating and Governance Committee takes into account. In evaluating prospective
candidates, the Nominating and Governance Committee also considers whether the individual has personal and professional integrity,
good business judgment and relevant experience and skills, and whether such individual is willing and able to commit the time
necessary for Board and Board committee service.
While
there are no specific minimum requirements that the Nominating and Governance Committee believes must be met by a prospective
director nominee, the Nominating and Governance Committee does believe that director nominees should possess personal and professional
integrity, have good business judgment, have relevant experience and skills, and be willing and able to commit the necessary time
for Board and Board committee service. Furthermore, the Nominating and Governance Committee evaluates each individual in the context
of the Board as a whole, with the objective of recommending individuals that can best perpetuate the success of our business and
represent stockholder interests through the exercise of sound business judgment using their diversity of experience in various
areas. We believe our current directors possess diverse professional experiences, skills and backgrounds, in addition to (among
other characteristics) high standards of personal and professional ethics, proven records of success in their respective fields
and valuable knowledge of our business and our industry.
The
Nominating and Governance Committee uses a variety of methods for identifying and evaluating director nominees. The Nominating
and Governance Committee also regularly assesses the appropriate size of the Board and whether any vacancies on the Board are
expected due to retirement or other circumstances. In addition, the Nominating and Governance Committee considers, from time to
time, various potential candidates for directorships. Candidates may come to the attention of the Nominating and Governance Committee
through current Board members, professional search firms, stockholders or other persons. These candidates may be evaluated at
regular or special meetings of the Nominating and Governance Committee and may be considered at any point during the year.
The
Committee evaluates director nominees at regular or special Committee meetings pursuant to the criteria described above and reviews
qualified director nominees with the Board. The Committee selects nominees that best suit the Board’s current needs and
recommends one or more of such individuals for election to the Board.
The
Nominating and Governance Committee was formed on May 21, 2018.
The
Nominating and Governance Committee Charter is filed as Exhibit 99.3 to the Form 8-K filed on May 24, 2018.
Stockholder
Communications with the Board
Our
Company has defined policy and procedural requirements for stockholders to submit recommendations or nominations for directors
as set forth in the Company’s Bylaws and described below. Our Company does not currently have any specific or minimum criteria
for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such
nominees. The Nominating and Governance Committee will assess all candidates, whether submitted by management or stockholders,
and make recommendations for election or appointment.
The
Nominating and Governance Committee will consider candidates recommended by stockholders, provided the names of such persons,
accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance
with the manner described below. The Secretary will send properly submitted stockholder recommendations to the Nominating and
Governance Committee. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration
received by individuals identified to the Nominating and Governance Committee through other means. The Nominating and Governance
Committee also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical
information, if submitted in writing to the Secretary.
Our
stockholders and other interested parties may communicate with members of the Board of Directors by submitting such communications
in writing to our Corporate Secretary, 710 N. Post Oak Rd., Suite 512, Houston, Texas 77024, who, upon receipt of any communication
other than one that is clearly marked “Confidential,” will note the date the communication was received, open the
communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed.
Upon receipt of any communication that is clearly marked “Confidential,” our Corporate Secretary will not open the
communication, but will note the date the communication was received and promptly forward the communication to the director(s)
to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication will
be forwarded to a Board member to bring to the attention of the Board.
Code
of Conduct
We
have adopted a Code of Ethical Business Conduct (“ Code of Conduct ”) that applies to all of our directors, officers
and employees.
Any
stockholder who so requests may obtain a free copy of our Code of Conduct by submitting a written request to our Corporate Secretary.
Additionally, the Code of Conduct was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2015, filed with the SEC on November 23, 2015, as Exhibit 14.1.
We
intend to disclose any amendments to our Code of Conduct and any waivers with respect to our Code of Conduct granted to our principal
executive officer, our principal financial officer, or any of our other employees performing similar functions on our website
at www.petroliaenergy.com within four business days after the amendment or waiver. In such case, the disclosure regarding the
amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been
no waivers granted with respect to our Code of Conduct to any such officers or employees.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than ten percent
of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent
beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based
solely upon a review by us of Forms 3 and 4 relating to fiscal year 2018 (and fiscal 2019 to date) as furnished to us under Rule
16a-3(d) under the Securities Act, and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2018 (and fiscal
2019 to date), we believe that during fiscal 2018 (and fiscal 2019 to date), that no director, executive officer, or beneficial
owner of more than 10% of our common stock failed to file a report on a timely basis during 2018 (and fiscal 2019 to date), except
for: (i) James E. Burns, who inadvertently failed to timely file five Form 4s to report 12 transactions on Form 4; (ii) Leo Womack,
who inadvertently failed to timely file two Form 4s to report seven transactions on Form 4; (iii) Joel Oppenheim, who inadvertently
failed to timely file four Form 4s to report 19 transactions on Form 4; (iv) Tariq Chaudhary, who inadvertently failed to timely
file one Form 4 to report one transaction on Form 4; (v) Ivar Siem, who inadvertently failed to timely file three Form 4s to report
20 transactions on Form 4; (vi) Quinten Beasley, who inadvertently failed to timely file two Form 4s to report four transactions
on Form 4; (vii) Richard Dole, who inadvertently failed to timely file two Form 4s to report four transactions on Form 4; and
(viii) Zel C. Khan, who inadvertently failed to timely file one Form 4 to report seven transactions on Form 4.
Pursuant
to SEC rules, we are not required to disclose in this filing any failure to timely file a Section 16(a) report that has been disclosed
by us in a prior annual report or proxy statement.
ITEM
11. EXECUTIVE COMPENSATION
The
following table sets forth information concerning the compensation of (i) all individuals serving as our principal executive officer
or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level; (ii)
our two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the
last completed fiscal year and who were paid more than $100,000 of total compensation; and (iii) up to two additional individuals
for whom disclosure would have been provided pursuant to paragraph (ii) but for the fact that the individual was not serving as
an executive officer at the end of the last completed fiscal year (collectively, the “Named Executive Officers”).
The
following table summarizes all compensation paid or accrued to our former or current executive officers during the years ended
December 31, 2018 and December 31, 2017:
Name
and Principal Position
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Fiscal
Year
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Salary
(1)
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Bonus
(2)
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Stock
Awards (3)
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Option
and Warrant Awards (4)
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All
Other Compensation (5)
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Total
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Zel
Khan (Current Principal Executive Officer) (6)
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2018
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$
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10
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$
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—
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$
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—
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$
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100,851
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$
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—
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$
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100,861
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2017
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10
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—
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25,500
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—
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—
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25,510
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Horacio
Alfredo Fernandez (Current interim Principal Financial and Accounting Officer) (7)
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2018
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68,000
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—
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—
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—
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—
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68,000
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—
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—
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—
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—
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—
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—
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Tariq
Chaudhary (Former Principal Financial and Accounting Officer) (8)
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2018
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|
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77,500
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|
|
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—
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50,000
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|
|
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—
|
|
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—
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127,500
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|
|
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|
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—
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—
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—
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—
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—
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—
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James
E. Burns (Former President) (9)
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2018
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|
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29,167
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—
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|
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215,000
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|
|
|
252,731
|
|
|
|
—
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|
|
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496,898
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2017
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|
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61,621
|
|
|
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197,000
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|
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—
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|
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86,254
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|
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—
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|
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344,875
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|
Paul
Deputy (Former Principal Financial and Accounting Officer) (10)
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2018
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|
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5,833
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|
|
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—
|
|
|
|
—
|
|
|
|
111,569
|
|
|
|
—
|
|
|
|
117,402
|
|
|
|
2017
|
|
|
$
|
140,000
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,993
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|
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$
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—
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|
|
$
|
156,993
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|
Does
not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than
$10,000. None of our executive officers received any change in pension value and nonqualified deferred compensation earnings during
the periods presented.
|
(1)
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The
dollar value of base salary (cash and non-cash) earned. Executive salaries in 2017 were accrued but not paid, except $5,833
paid to Mr. Deputy, included in the $140,000 total salary.
|
|
(2)
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The
dollar value of bonus (cash and non-cash) earned.
|
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(3)
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The
fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
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(4)
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The
fair value of options and warrants granted computed in accordance with ASC 718 on the date of grant.
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(5)
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All
other compensation received that we could not properly report in any other column of the table.
|
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(6)
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Zel
C. Khan was appointed as President and Chief Executive Officer of the Company, on March 1, 2015.
|
|
(7)
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Horacio
Alfredo Fernandez was appointed as interim Chief Financial Officer on October 31, 2018.
|
|
(8)
|
Tariq
Chaudhary was appointed as Chief Financial Officer on January 16, 2018 and resigned on October 31, 2018. On May 22, 2018,
Tariq Chaudhary received 500,000 shares of common stock in consideration for agreeing to serve as Chief Financial Officer
of the Company.
|
|
(9)
|
Appointed
as Chief Executive Officer on April 18, 2017. Also, on April 18, 2017, the Board of Directors granted James E. Burns
1,000,000 shares of our restricted common stock in consideration for agreeing to serve as President of the Company. James
E. Burns resigned as President on May 1, 2018. On April 19, 2018, James E. Burns received warrants to purchase 3,000,000 shares
of common stock and 2,000,000 shares of restricted common stock pursuant to a termination agreement and his cessation as Chief
Executive Officer.
|
|
(10)
|
Appointed
as Chief Financial Officer July 1, 2016 and resigned as Chief Financial Officer on January 16, 2018. On March 31, 2018, Paul
Deputy received warrants to purchase 250,000 shares of common stock pursuant to a termination agreement and his cessation
as Chief Financial Officer.
|
We
do not provide our officers or employees with pension, stock appreciation rights, long-term incentive, profit sharing, retirement
or other plans, although we may adopt one or more of such plans in the future.
We
do not maintain any life or disability insurance on any of our officers.
Employment
Agreements
Zel
C. Khan (CEO)
On
September 23, 2015, Zel C. Khan, entered into an employment agreement with the Company effective October 1, 2015 to serve as our
President and Chief Executive Officer for an initial term of twenty-four (24) months (automatically renewable thereafter for additional
one-year terms), which agreement automatically extended from October 1, 2017 to September 30, 2018 and from October 1, 2018 to
September 30, 2019. The agreement provides that the Company will pay Mr. Khan an annual base salary of $160,000, with a provision
for deferral of current payments until such time that the Company is cash flow positive. The Company will issue one warrant to
purchase one share of the Company’s restricted common stock at an exercise price of $0.20 per share for each dollar of gross
salary that is deferred. The Warrants will have a term of 36 months from date of grant, which will vest quarterly.
Mr.
Khan also received a one-time grant of one million (1,000,000) restricted shares of the Company’s common stock (the “Shares”),
effective October 1, 2015.
In
the event Mr. Khan’s employment is terminated by the Company without cause, he is required to receive severance pay equal
to two months of his base salary. “Cause” means (i) the commission of a felony or other crime involving moral
turpitude or the commission of any other act or omission involving misappropriation, dishonesty, unethical business conduct, disloyalty,
fraud or breach of fiduciary duty, (ii) reporting to work under the influence of alcohol, (iii) the use of illegal drugs (whether
or not at the workplace) or other conduct, which could reasonably be expected to, or which does, cause the Company or any of its
affiliates public disgrace or disrepute or economic harm, (iv) repeated failure to perform duties as reasonably directed by the
Board of Directors, (v) gross negligence or willful misconduct with respect to the Company or its affiliates or in the performance
of Mr. Khan’s duties under the agreement, (vi) obtaining any personal profit not thoroughly disclosed to and approved by
the board in connection with any transaction entered into by, or on behalf of, the Company or any of its affiliates, or (vii)
violating any of the terms of the Company’s or its affiliates’ rules or policies applicable to Mr. Khan which, if
curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to Mr.
Khan, or any other material breach of the agreement or any other agreement between Mr. Khan and the Company or any of its affiliates
which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof
to Mr. Khan.
The
employment agreement includes a non-solicitation/non-interference clause which applies for two years after the termination date
of the employment agreement. The employment agreement also requires Mr. Khan to submit to the board all business, commercial and
investment opportunities or offers presented to Mr. Khan or of which Mr. Khan becomes aware which relate to the business of the
Company or its affiliates.
On
April 18, 2017, Mr. Khan agreed to amend his agreement so that his salary was reduced to $10 per annum.
There
are no family relationships between Mr. Khan and any of our other directors or executive officers.
The
following shows the amount of time Mr. Khan expects to devote to our business:
Name
|
|
Percent
|
|
|
|
|
|
|
Zel
C. Khan
|
|
|
90
|
%
|
Paul
Deputy (Former CFO))
On
July 1, 2016, Paul Deputy, entered into an employment agreement with the Company effective July 1, 2016 to serve as our Chief
Financial Officer for an initial term of twelve (12) months (automatically renewable thereafter for additional one-year terms),
which agreement automatically renewed on July 1, 2017. The agreement provides that the Company will pay Mr. Deputy an annual base
salary of $140,000, with a provision for deferral of 90 days. After the 90 days Mr. Deputy is issued one warrant for each dollar
of gross salary that is deferred. The exercise price of the warrants is the market price of the Company’s shares at each
quarter end.
Mr.
Deputy also received a one-time grant of warrants to purchase five hundred fifty thousand (550,000) shares of the Company’s
common stock (the “Shares”), effective July 1, 2016. These warrants will be exercisable for a three-year period
beginning July 1, 2016 at a strike price of $0.07 cents.
Effective
January 16, 2018, Paul Deputy tendered his resignation as the Chief Financial Officer of the Company.
James
E. Burns (Former President)
On
April 18, 2017, James E. Burns was appointed President of the Company and entered into an employment agreement with the Company
to serve as President. The agreement provides that the Company will pay Mr. Burns $300,000 per year in base salary. For the first
year of employment, $100,000 of the salary will be paid in cash, the remaining amount will be paid by the issuance of 1,400,000
shares of common stock. On June 30, 2017, 350,000 shares, valued at $35,000, were issued in accordance with Mr. Burns’ common
stock related salary compensation. On September 30, 2017, 350,000 shares, valued at $42,000, were issued in accordance with Mr.
Burns’ common stock related salary compensation. The $100,000 cash salary will commence after $1,000,000 is raised from
the Series A Preferred Offering or a material event that brings cash into the Company. A one-time signing bonus of 1,000,000 shares
of common stock, valued at $120,000, was granted to Mr. Burns upon execution of the agreement. Mr. Burns will also receive an
annual bonus based on the percentage increase in stock price during the year. For every percentage point increase in stock price,
Mr. Burns will be paid that percentage times his base salary. For example, if the stock price increased by 20%, then a $60,000
bonus ($300,000 * 20% = $60,000) would be paid. On an annual basis, Mr. Burns will also receive service related warrants to purchase
1,000,000 shares of common stock with an exercise price of $0.14 per share. At September 30, 2017, warrants to purchase 250,000
shares of common stock were granted, valued at $29,580, related to his 3rd quarter service bonus. These warrants are based on
a $0.12 price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. In addition, warrants to purchase
166,667 shares of common stock were granted, valued at $14,758, related to his 2nd quarter service bonus. These warrants are based
on a $0.09 price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. On December 31, 2017, warrants
to purchase 250,000 shares of common stock were granted, at a $0.17 price per share valuation, related to his 4th quarter
service, volatility of 284%, and a discount rate of 1.09%, valued at $41,916.
On
April 19, 2018, we entered into a Separation and Release Agreement with Mr. Burns (the “Separation Agreement”).
Pursuant to the Separation Agreement, Mr. Burns and the Company agreed:
|
(a)
|
that
Mr. Burns would resign as President of the Company, effective May 1, 2018;
|
|
(b)
|
that
the Company would pay Mr. Burns $33,000 in cash, issue him a warrant to purchase 3,000,000 shares of common stock (the “Separation
Warrants” (which have a term of three years and an exercise price of $0.10 per share)) and issue him 2,000,000 shares
of restricted common stock (the “Separation Shares”);
|
|
(c)
|
that
Mr. Burns would release the Company from any further obligations under his prior employment agreement and release the Company
from any other liabilities or claims; and
|
|
(d)
|
that
Mr. Burns would refrain from using the Company’s confidential information, pursuant to the terms of the Separation Agreement.
|
Effective
on May 1, 2018, the Board of Directors of the Company (a) appointed Zel C. Khan (the current Chief Executive Officer and Director
of the Company) as President of the Company; and (b) appointed James E. Burns, the Company’s President prior to May 1, 2018,
as Chairman of the Board of Directors of the Company.
On
April 26, 2018, and effective May 1, 2018, the Company entered into a letter agreement with Mr. Burns dated April 20, 2018, pursuant
to which, he agreed to serve as Chairman of the Company and the Company agreed to pay him (a) $500 per month as an automobile
allowance, (b) up to $25,000 per year for he and his family’s health insurance, (c) $65,000 per year for compensation as
Chairman (provided that such compensation is accrued until the Company has sufficient available capital to pay such amounts in
cash and Mr. Burns is to receive 1-for-1 warrant coverage, with a $0.10 per share exercise price, for all accrued salary, issuable
at the end of each calendar quarter), (d) 500,000 shares of the Company’s restricted common stock (the “Letter
Shares”), (e) warrants to purchase 2,000,000 shares of the Company’s common stock, vesting at the rate of 750,000
of such warrants per quarter, upon completing and filing of each of the following four periodic filings with the Securities and
Exchange Commission, having a term of 36 months, and an exercise price of $0.10 per share (the “Letter Warrants”),
and (f) the right to earn bonuses as approved by the Board of Directors in its discretion from time to time. 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. The letter agreement has a
term through April 30, 2019, provided that Mr. Burn’s position as Chairman and/or director can be terminated at any time
if he is not re-nominated to serve as Chairman/director, at which time the Company is required to pay the compensation due to
Mr. Burns pursuant to the terms of the agreement for the lesser of three months and until the end of the term.
Tariq
Chaudhary (Former CFO)
On
January 12, 2018, the Company entered into an employment agreement with Tariq Chaudhary, the Company’s former CFO, for a
period of one year. The former 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 former 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 $0.12 per share equally vesting over 36 months upon successful completion of the probationary period. Mr. Chaudhary successfully
completed the probationary period and was issued the compensation described above. On October 31, 2018, Tariq Chaudhary, tendered
his resignation as CFO, effective immediately.
Director
Compensation
The
table below summarizes all compensation of our directors for the year ended December 31, 2018, other than Mr. Khan, whose compensation
is included in the executive compensation table above:
Name
|
|
Fees
Earned or Paid in Cash (1)
|
|
|
Stock
Awards (2)
|
|
|
Option
and Warrant Awards (3)
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
|
Non-Qualified
Deferred Compensation Earnings
|
|
|
All
Other Compensation
|
|
|
Total ($)
|
|
James
E. Burns
|
|
$
|
47,333
|
(6)
|
|
$
|
37,500
|
|
|
$
|
100,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185,684
|
|
Leo
Womack
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
Lee
H. Lytton (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
23,890
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,890
|
|
Joel
Oppenheim
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
Quinten
Beasley (5)
|
|
|
—
|
|
|
|
256,000
|
|
|
|
70,297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
326,297
|
|
Saleem
Nizami
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,851
|
|
Richard
Dole
|
|
|
—
|
|
|
|
—
|
|
|
|
30,554
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,554
|
|
Ivar
Siem
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,961
|
|
The
notes below summarizes all compensation of our directors for the year ended December 31, 2018.
|
(1)
|
Fees
earned due to retainers, meetings, committees and chairman services. These fees were not paid in cash to date but were accrued.
|
|
(2)
|
The
fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
|
|
(3)
|
The
fair value of warrants granted computed in accordance with ASC 718 on the date of grant.
|
|
(4)
|
On
March 31, 2018, Mr. Lytton passed away unexpectedly.
|
|
(5)
|
On
October 17, 2018, 2,000,000 shares of common stock with a fair value of $256,000 were granted to a company controlled by a
former director Quinten Beasley, Critical Communications Limited, pursuant to a separation agreement and his resignation as
a member of the Board of Directors.
|
|
(6)
|
Includes $43,333 which was accrued and not paid
for salary and $4,000 which was accrued and not paid for fees.
|
The
fair value of stock issued for services computed in accordance with Financial Accounting Standards Board Accounting Standards
Codification Topic 718 on the date of grant.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding the beneficial ownership of our common stock and preferred stock by (i)
each person who is known by the Company to own beneficially more than five percent (5%) of our outstanding voting stock; (ii)
each of our directors and director nominees; (iii) each of our executive officers and significant employees; and (iv) all of our
current executive officers, significant employees and directors as a group, as of October 15, 2019 (the “Date of
Determination”).
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities.
These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are
currently exercisable or convertible, or exercisable or convertible within 60 days of the Date of Determination, are deemed to
be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities
for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person or group.
We
believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following
table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person.
Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 710 N. Post Oak Rd.,
Suite 512, Houston, Texas 77024.
|
|
Number
of Common
Stock
Shares (1)
|
|
|
Percent
of
Common Stock (2)
|
|
|
Number
of Series A
Convertible
Preferred
Stock
Shares
|
|
|
Percent
of
Series
A
Convertible
Preferred
Stock (2)
|
|
|
Total
Beneficial
Ownership
|
|
|
Percent
of Total Voting Shares (3)
|
|
Named
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zel
C. Khan
|
|
|
4,284,643
|
(4)
|
|
|
2.6
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
4,284,643
|
|
|
|
2.6
|
%
|
Joel
Oppenheim
|
|
|
12,815,039
|
(5)
|
|
|
7.5
|
%
|
|
|
20,490
|
|
|
|
10.3
|
%
|
|
|
12,815,039
|
|
|
|
7.5
|
%
|
Leo
Womack
|
|
|
7,323,063
|
(6)
|
|
|
4.4
|
%
|
|
|
8,400
|
|
|
|
4.2
|
%
|
|
|
7,923,067
|
|
|
|
4.7
|
%
|
James
E. Burns
|
|
|
13,574,566
|
(7)
|
|
|
7.9
|
%
|
|
|
16,400
|
|
|
|
8.2
|
%
|
|
|
13,574,566
|
|
|
|
7.9
|
%
|
Saleem
Nizami
|
|
|
1,750,000
|
(8)
|
|
|
1.1
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
1,750,000
|
|
|
|
1.1
|
%
|
Ivar
Siem
|
|
|
3,540,834
|
(9)
|
|
|
2.1
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
3,540,834
|
|
|
|
2.1
|
%
|
Richard
Dole
|
|
|
1,687,500
|
(10)
|
|
|
1.0
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
1,687,500
|
|
|
|
1.0
|
%
|
Horacio
Alfredo Fernandez
|
|
|
100,000
|
(11)
|
|
|
*
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
100,000
|
|
|
|
*
|
%
|
All
Named Executive Officers and Directors as a Group (8 persons)
|
|
|
45,075,645
|
|
|
|
26.6
|
%
|
|
|
45,290
|
|
|
|
22.7
|
%
|
|
|
45,675,649
|
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quinten
Beasley (12)
|
|
|
65,518,225
|
(12)
|
|
|
36.7
|
%
|
|
|
24,410
|
|
|
|
12.3
|
%
|
|
|
65,518,225
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rick
Wilber (13)
|
|
|
1,500,000
|
|
|
|
*
|
%
|
|
|
55,000
|
|
|
|
27.6
|
%
|
|
|
5,428,595
|
|
|
|
3.2
|
%
|
*
Less than 1%.
Under
Rule 13d-3 of the Exchange Act, a beneficial owner of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to
vote, or to direct the voting of shares, and/or (ii) investment power, which includes the power to dispose or direct the disposition
of shares. Also under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days
of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares
is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s
actual voting power at any particular date.
|
(1)
|
Not
including shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by each holder.
|
|
(2)
|
Except
as otherwise indicated, all shares are owned directly and the percentage shown is based on 164,548,726 shares of common stock
and 199,100 shares of Series A Convertible Preferred Stock issued and outstanding as of the Date of Determination. The Series
A Preferred Stock (and accrued and unpaid dividends thereon) are convertible into shares of common stock of the Company on
a 71.429-for-one basis. The Series A Preferred Stock includes a blocker prohibiting the conversion of the Series A Preferred
Stock into common stock of the Company, if upon such conversion/exercise the holder thereof would beneficially own more than
4.999% of the Company’s then outstanding common stock, provided such limitation shall not apply in the event of an automatic
conversion of the Series A Preferred Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership
Limitation also limits the voting rights of any holders of the Series A Preferred Stock, the effects of which have been reflected
in the table above. The Beneficial Ownership Limitation may be waived by any holder with 61 days prior written notice to the
Company.
|
|
(3)
|
Includes
all shares of common stock beneficially owned by each named person, all shares of common stock issuable upon exercise of warrants
which have vested or which will vest within 60 days of the Date of Determination to the named person, and all shares of common
stock issuable upon conversion of Series A Preferred Stock held by the named person, subject to the Beneficial Ownership Limitation.
|
|
|
|
|
(4)
|
Includes
all shares of common stock and warrants to purchase shares of common stock held
by Mr. Khan, which have vested or which will vest within 60 days of the Date of Determination.
|
|
(5)
|
Includes
all shares of common stock beneficially owned by Mr. Oppenheim, all shares of common stock issuable upon exercise of warrants
which have vested or which will vest within 60 days of the Date of Determination to Mr. Oppenheim, and for the “Total
Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A
Preferred Stock held by Mr. Oppenheim, subject to the Beneficial Ownership Limitation.
|
|
|
|
|
(6)
|
Includes
all shares of common stock beneficially owned by Mr. Womack and the Leo B. Womack Family Trust, which Mr. Womack is deemed
to beneficially own (the “Trust”), all shares of common stock issuable upon exercise of warrants which
have vested or which will vest within 60 days of the Date of Determination to Mr. Womack and the Trust, and for the “Total
Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A
Preferred Stock held by Mr. Womack and the Trust, subject to the Beneficial Ownership Limitation.
|
|
(7)
|
Includes
all shares of common stock beneficially owned by Mr. Burns, all shares of common stock issuable upon exercise of warrants
which have vested or which will vest within 60 days of the Date of Determination to Mr. Burns, and for the “Total
Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A
Preferred Stock held by Mr. Burns, subject to the Beneficial Ownership Limitation.
|
|
|
|
|
(8)
|
Includes
all shares of common stock and warrants to purchase shares of common stock held by Mr. Nizami, which have vested or which
will vest within 60 days of the Date of Determination.
|
|
|
|
|
(9)
|
Includes
all shares of common stock beneficially owned by Mr. Siem and American Resources Offshore Inc. (“American Resources”)
and all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the
Date of Determination to Mr. Siem and American Resources. Mr. Siem is deemed to beneficially own the securities held by American
Resources due to his position as Director and CEO of American Resources.
|
|
|
|
|
(10)
|
Includes
all shares of common stock and warrants to purchase shares of common stock held by Mr. Dole, which have vested or which will
vest within 60 days of the Date of Determination.
|
|
|
|
|
(11)
|
Includes
all shares of common stock and warrants to purchase shares of common stock held by Mr. Fernandez, which have vested or which
will vest within 60 days of the Date of Determination.
|
|
|
|
|
(12)
|
Address:
710 N. Post Oak Rd., Suite 510, Houston, Texas 77024. Includes all shares of common stock beneficially owned by Mr. Beasley,
Critical Communication LLC (“Critical”) and Jovian Petroleum Corporation
(“Jovian”), all shares of common stock issuable upon exercise of warrants which have vested or which
will vest within 60 days of the Date of Determination to Mr. Beasley, Critical and Jovian, and for the “Total Beneficial
Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock
held by Mr. Beasley, Critical and Jovian, subject to the Beneficial Ownership Limitation. Mr. Beasley is deemed to beneficially
own the securities held by Critical due to his position as Managing Director of Critical. Mr. Beasley is deemed to beneficially
own the securities held by Jovian due to his position as CEO of Jovian.
|
|
|
|
|
(13)
|
Address:
10360 Kestrel Street, Plantation, Florida, 33324.
|
Changes
in Control
The
Company is not aware of any arrangements, which may at a subsequent date result in a change of control of the Company.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Except
as discussed below or otherwise disclosed above under “Item 11. Executive Compensation,” or in Note 4 –
Acquisition of Bow Energy, Ltd., a Related Party, Note 5 – Disposition of Bow Energy, Ltd., a Related Party, Note 8 –
Related Party Notes Payable, Note 11 - Equity and Note 12 - Related Party Transactions, of the consolidated audited financial
statements included herein, all of which information is incorporated by reference into this Item 13, there have been no transactions
since the beginning of the Company’s last fiscal year, and there is not currently any proposed transaction, in which the
Company was or is to be a participant, where the amount involved exceeds the lesser of $120,000 or one percent of the average
of the Company’s total assets at year end, for the last two completed fiscal years, and in which any officer, director,
or any stockholder owning greater than five percent (5%) of our outstanding voting shares, nor any member of the above referenced
individual’s immediate family, had or will have a direct or indirect material interest.
On
April 18, 2017, Mr. James Burns and Mr. Saleem Nizami were elected as Directors of the Company. In exchange for accepting their
appointments, each individual was granted 100,000 shares of common stock valued at $0.13 per share. Each Director’s shares
were valued at $13,000.
On
June 8, 2017, the Company sold a 2007 Toyota Tundra truck to Jovian for $5,000. The payment was made through a $5,000 reduction
of Jovian’s shareholder advance balance. The transaction resulted in a loss of $3,677 based on an original cost of $10,625
and accumulated depreciation of $1,948.
During
2017, shareholders advanced an additional $361,600 to the Company, the Company made payments back to shareholders of $74,000 ($5,000
out of the $74,000 related to the truck purchase disclosed above) and $262,500 of outstanding debt was converted to Series A Preferred
Stock. This resulted in an increase to the shareholder advance liability from $192,000 at December 31, 2016 to $217,100 at December
31, 2017. The following related parties (Leo Womack - $55,000, Lee Lytton - $25,000, Joel Oppenheim - $167,500 and Paul Deputy
- $15,000) converted their shareholder advances into Preferred Stock.
For
their service as Directors on the Company’s Board of Directors, on May 23, 2017, the Board granted Leo B. Womack, the former
Chairman of the Board of Directors of the Company, warrants to purchase 1,000,000 shares of the Company’s common stock at
an exercise price of $0.12 per share, which vested immediately, and are exercisable for 36 months thereafter. The Board also granted
Lee Lytton, Joel Oppenheim, Quinten Beasley and Saleem Nizami, members of the Board of Directors, each a warrant to purchase 500,000
shares of the Company’s common stock at an exercise price of $0.12 per share, which vested immediately, and are exercisable
for 36 months thereafter. The fair value of the warrants granted on May 23, 2017 is $356,027, based on a $0.12 valuation, volatility
of 235%, a discount rate of 1.09% and a 3-year term. The total amount of the warrants was expensed during December 31, 2017. These
warrants are subject to a clawback provision which would be ratably invoked if a director did not complete his 2017 service term.
Beginning
February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest offering (“ORRI”) on behalf of
the SUDS field to raise $300,000 to purchase and install pump jacks for twenty-two (22) previously drilled wells at the field.
Under the terms of the offering, investors received 1% of the gross revenue from the field monthly, based on their investment
of $20,000 until such time they receive a cumulative revenue amount of $30,000. At its completion, the ORRI raised a total of
$300,000. Effective April 18, 2017, all owners of SUDS ORRI interests were authorized to convert their interests, at their sole
discretion, to Preferred Stock in the Company in conjunction with the Company’s current Series A Preferred Stock Offering.
Included in this conversion offering each investor converted ORRI interests equal to the cumulative revenue amount of $30,000,
less their revenue received since inception. During the second quarter of 2017, 14% of the 15% outstanding SUDS ORRI interests
were converted to Preferred Stock of the Company. This conversion resulted in 40,500 shares of Preferred Stock being issued to
those holders who chose to convert, with a value of $405,000. The transaction resulted in an increase to Oil and Gas Property
assets by $280,000 and an increase to interest expense of $128,229 and a cash true-up payment of $3,230. Related parties (James
Burns, Joel Oppenheim, Paul Deputy (former CFO), Lee Lytton (former Secretary and Director), Leo Womack and Jovian) converted
6% in ORRI interests and received a total of 17,400 shares of Preferred Stock (2,900 shares of Preferred Stock each), with the
total valued at $174,000.
On
May 23, 2017, related party debt holders were offered the option to convert their outstanding loan balances of $362,500 and accrued
interest of $13,400 (totaling $375,900) into Preferred Stock. As a result, the following Preferred Stock shares were issued: Leo
Womack 5,500 shares, Joel Oppenheim 17,590 shares, Lee Lytton 2,500 shares, James Burns 10,500 shares, and Paul Deputy 1,500 shares.
In addition, any holder of any non-interest bearing loan converted also received warrants to purchase four shares of common stock
for each dollar converted. Consequently, a total of warrants to purchase 400,000 shares of common stock were granted (Leo Womack
70,000 shares, Joel Oppenheim 270,000 shares, Lee Lytton 30,000 shares and Paul Deputy (former CFO) 30,000 shares) as part of
the conversion, which each had an exercise price of $0.20 per share and a term of 3 years. The warrants were valued at $47,319.
Any loan that had received warrants when initially issued did not receive additional warrants in this conversion offering.
Jovian
converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second
tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated
together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the
second in July 2017.
Tranche
1 - On May 30, 2017, Jovian converted $2 million of its $4 million debt into 10 million shares of the Company’s
common stock. The $2 million debt included a $1 million Promissory Note and $1 million of the $3 million Production Payment Note
as well as interest payable of $33,151.
Tranche
2 - On July 19, 2017, Jovian converted $2 million of its remaining debt (outstanding under a Production Payment Note)
into 12,749,285 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.
The
consideration for the debt extinguished consisted of the following:
|
●
|
10
million shares of common stock which were valued using the market price on the date of issuance of $0.14 per share ($1,400,000).
|
|
●
|
Warrants
to purchase 6 million shares of common stock with an exercise price of $0.20 per share based on a $0.12 valuation, volatility
of 293%, a discount rate of 1.09% and warrants to purchase 4 million shares of common stock with an exercise price of $0.35
per share based on a $0.12 valuation, volatility of 293%, and a discount rate of 1.09%. All warrants expire in 3 years.
The 6 million warrants were valued at $709,776 while the 4 million warrants were valued at $471,104, totaling $1,180,880.
|
|
●
|
12,749,285
shares of common stock which were valued using the market price on the date of issuance of $0.104 per share ($1,325,926).
|
|
●
|
The
Preferred Stock was valued at $10.00 per share, the cash price paid by third party investors for the same stock with an aggregate
value of $215,100.
|
The
combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment
of tranche 2 was recognized in the third quarter, with no impact on the consolidated statement of operations.
On
May 23, 2017, James E. Burns, the President of the Company, sold a Caterpillar D6 Dozer to the Company in exchange for 3,000 shares
of Preferred Stock. The equipment was valued at $30,000.
On
August 1, 2017, Mr. Joel Oppenheim provided a Letter of Credit (LOC), which was posted as collateral, in order for the Company
to issue operating bonds with the State of New Mexico for the operation of 25 Twin Lakes San Andres Unit wells. In exchange for
the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000 and warrants to purchase 2,000,000
shares of common stock valued at $236,586 with an exercise price of $0.14 per share. The warrants are based on a $0.12 price per
share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. For each quarter following the initial advance
until the LOC is revoked an additional two hundred fifty thousand (250,000) warrants will be granted. The exercise price of those
warrants will be the average common stock market price over the previous 90 days. In addition, the Company will provide a security
interest in the form of a 100% undivided working interest in the NOACK field. On December 31, 2017, warrants to purchase 250,000
shares of common stock were granted, at $0.17 price per share valuation, related to the Letter of Credit (LOC) provided for the
4th quarter, volatility of 284%, a discount rate of 1.09%, and a 3 year term, valued at $41,916.
On
September 26, 2017, Mr. Oppenheim was issued 1,035,000 shares of common stock. These shares were the result of exercising warrants
to purchase 1,035,000 shares of common stock, at an exercise price of $0.06 per share, which included the remittance of $62,065
as the aggregate exercise price.
On
October 1, 2017, the Company initiated a new $500,000 private placement offering consisting of 10 units to “accredited
investors”, with each unit consisting of (1) 416,667 shares of restricted common stock and (2) warrants to purchase
416,667 additional shares of common stock at an exercise price of $0.20 per share at any time prior to October 1, 2020. Each unit
was sold for $50,000. In 2017, the Company sold 6.5 (six and a half) Units (2,708,336 restricted shares of common stock and warrants
to purchase 2,708,336 shares of common stock) for aggregate consideration of $325,000. Included as purchasers in the offering
were Leo Womack, our Director, who purchased 0.8 (8/10 part) of a Unit for an aggregate of $40,000; and Joel Oppenheim, our Director,
who acquired one fifth of one (1/5 part) Unit for an aggregate of $10,000.
On
February 1, 2018, former director Quinten Beasley, exercised warrants to purchase 1,110,000 shares of common stock by settling
$102,590 of accounts payable, due to a company controlled by the former director, at an average share price of $0.092 per share.
No gain or loss was recorded on 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. 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 LOC currently has a term
through December 31, 2019.
On
February 23, 2018, director Saleem Nizami was issued 100,000 shares of common stock, valued at $13,000 or $0.13 per share,
in exchange for his professional consulting services at the SUDS, Oklahoma lease.
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., was the largest shareholder of Bow. BSIH’s Chief Executive Officer, Ilyas Chaudhary, is the father of
Petrolia’s CEO, Zel C. Khan. Mr. Chaudhary had a controlling interest in BSIH prior to the acquisition of Bow. Therefore,
the Bow acquisition is a related party transaction.
On
February 28, 2018, director Joel Oppenheim exercised warrants to purchase 630,000 shares of common stock for cash proceed of $61,800
at an average exercise price of $0.098 per share.
On
March 23, 2018, director, Joel Oppenheim subscribed in a private placement for 104,167 shares of common stock and warrants to
purchase 104,167 shares of common stock, for gross proceeds of $12,500 at a price of $0.12 per unit. The warrants have a contractual
life of two years and an exercise price of $0.20 per warrant.
On
March 31, 2018, 350,000 shares of common stock, valued at $35,000 or $0.10 per share, were issued in accordance with Mr. James
Burns’ common stock related salary compensation.
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, a related party, which establishes a revolving line of credit in the amount of
$500,000 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 26, 2018, Joel Oppenheim, Director, exercised warrants to purchase 500,000 shares of common stock for cash proceed of $50,000
at an average exercise price of $0.10 per share.
On
May 22, 2018, the Company issued 500,000 shares of common stock to officer Tariq Chaudhary, who had served as the Chief Financial
Officer, as part of his compensation package. The shares had a fair value of $50,000, or $0.10 per share, based on the closing
price of Petrolia’s stock on the grant date.
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.
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, the Company 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 and cancelled.
On
September 14, 2018, warrants to purchase 150,000 shares of common stock with a fair value of $11,242 were granted to director
Joel Oppenheim pursuant to a loan agreement. Each warrant is exercisable into shares of common stock at an exercise price of $0.10
per share and has a contractual life of two years. The warrants were valued using the Black-Scholes Option Pricing Model.
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.
On
October 17, 2018, 2,000,000 shares of common stock with a fair value of $256,000 were granted to a company controlled by a former
director Quinten Beasley, Critical Communications Limited, pursuant to a separation agreement and his resignation as a member
of the Board of Directors. Furthermore, warrants to purchase 2,000,000 shares of common stock with a fair value of $244,429 were
granted. Each warrant is exercisable into shares of common stock at an exercise price of $0.10 per share and has a contractual
life of two years. The warrants were valued using the Black-Scholes Option Pricing Model.
On
October 22, 2018, director Leo B. Womack exercised warrants to purchase 1,000,000 shares of common stock. The exercise price of
$60,000 or $0.06 per share was satisfied by forgiving debt outstanding and due to the holder of $60,000, with no gain
or loss recognized.
On
October 31, 2018, director Joel Oppenheim subscribed in a private placement for 312,500 shares of common stock and warrants to
purchase 625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit. Each warrant has an exercise
of $0.10 per share and expires on November 1, 2020.
On
November 1, 2018, director Richard Dole subscribed in a private placement for 312,500 shares of common stock and warrants to purchase
625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit. Each warrant has an exercise of $0.10
per share and expires on November 1, 2020.
On
November 2, 2018, Jovian, a related party, subscribed in a private placement for 625,000 shares of common stock and warrants to
purchase 1,250,000 shares of common stock for gross proceeds of $50,000 at a price of $0.08 per unit. Each warrant has an exercise
of $0.10 per share and expires on November 1, 2020.
On
December 14, 2018, director Joel Oppenheim subscribed in a private placement for 156,250 shares of common stock and warrants to
purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per unit. Each warrant has an exercise
of $0.10 per share and expires on November 1, 2020.
On
December 14, 2018, American Resources Offshore Inc., a related party, subscribed in a private placement for 156,250 shares
of common stock and warrants to purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per
unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.
During
the year ended December 31, 2018, warrants to purchase 1,000,000 shares of common stock with an aggregate fair value of $104,009
were granted to director Joel Oppenheim, pursuant to a loan agreement. Each warrant is exercisable into shares of common stock
of the Company at an exercise price of $0.10 - $0.14 per share and has a contractual life of three years. The warrants were valued
using the Black-Scholes Option Pricing Model.
On
August 21, 2019, the Company closed private placements with related parties for gross proceeds of $150,000, consisting of 1,875,000
shares of common stock and 3,750,000 warrants to purchase shares of common stock, exercisable at a price of $0.10 per share
at any time prior to November 1, 2020. American Resources Offshore Inc. (of which Ivar Siem, our director) subscribed for 312,500 shares of common
stock and warrants to purchase 625,000 shares of common stock. Leo Womack, our director, subscribed for 312,500 shares of common
stock and warrants to purchase 625,000 shares of common stock. Jovian Petroleum Corporation, a greater than 5% shareholder of the
Company, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock. Joel Martin Oppenheim,
our director, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock.
Review,
Approval and Ratification of Related Party Transactions
On
August 22, 2018, the Company adopted a formal related party transaction policy (the “Policy”) for the review, approval
or ratification of transactions, such as those described above, with our directors, nominees for director, executive officers
and significant shareholders or certain entities or persons related to them.
Under
the terms of the Policy, the Audit Committee shall review the material facts of all related party transactions and may approve
or disapprove of the entry into the related party transaction. Where advance Audit Committee review of a related party transaction
is not feasible or has otherwise not been obtained, then the related party transaction shall be reviewed subsequently by the Audit
Committee (and such transaction may be ratified subsequently by the Audit Committee). The Audit Committee may also disapprove
of a previously entered into related party transaction and may require that management of the Company take all reasonable efforts
to terminate, unwind, cancel or annul the related party transaction. The Audit Committee shall be authorized to review in advance
and provide standing pre-approval in advance of certain related party transactions or categories of related party transactions
which include employment of executive officers, director compensation and others. The Audit Committee or the Board of Directors
may recommend the creation of a special Audit Committee to review any related party transaction.
Each
officer and/or director who is a related party with respect to a particular related party transaction shall disclose all material
information to the Audit Committee concerning such related party transaction and his or her interest in such transaction. Any
member of the Audit Committee who has a potential interest in any related party transaction shall recuse himself or herself and
abstain from voting on the approval or ratification of the related party transaction, but may participate in all or a portion
of the Audit Committee’s discussions of the related party transaction, if requested by the Audit Committee.
In
connection with its review of a related party transaction, the Audit Committee shall take into account, among other factors it
deems appropriate, including the following factors, among others, to the extent relevant to the related party transaction:
●
Whether the terms of the related party transaction are fair to the Company and would apply on the same basis if the transaction
did not involve a related party, i.e., whether the terms of the transaction would be the same if the transaction was undertaken
on an arms-length basis;
●
Whether there are any compelling business reasons for the Company to enter into the related party transaction and the nature of
alternative transactions, if any;
●
Whether the related party transaction would impair the independence of an otherwise independent director or nominee for director;
●
Whether the Company was notified about the related party transaction before its commencement and if not, why pre-approval was
not sought and whether subsequent ratification would be detrimental to the Company; and
●
Whether the related party transaction would present an improper conflict of interest for any related party, taking into account
the size of the transaction, the overall financial position of the related party, the direct or indirect nature of the related
party’s interest in the transaction and the ongoing nature of any proposed relationship and any other factors the Audit
Committee deems relevant.
If
a related party transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to
follow in its ongoing dealings with the related party. Thereafter, the Audit Committee shall periodically review and assess ongoing
relationships with the related party. Any material amendment, renewal or extension of a transaction, arrangement or relationship
previously reviewed under the Policy shall also be subject to subsequent review under the Policy.
In
addition to guidelines for ongoing related party transactions, the Audit Committee may, as it deems appropriate and reasonable,
establish from time to time guidelines regarding the review of other related party transactions including those that (i) involve
de minimus amounts, (ii) do not require public disclosure, or (iii) involve transactions that have primarily a charitable purpose.
Director
Independence
Our
common stock is quoted for trading on the OTC Pink market operated by OTC Markets Group and we are not required to have independent
members of our Board of Directors pursuant to OTC Pink market rules. Notwithstanding that we currently consider Leo Womack, Joel
Oppenheim, Saleem Nizami, Ivar Siem and Richard Dole as independent directors.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
M&K
CPAS, PLLC (“M&K”) served as our independent registered public accounting firm for the year ended December 31,
2018. MaloneBailey, LLP (“MaloneBailey”) served as our independent registered public accounting firm for the year
ended December 31, 2017 and resigned effective January 29, 2019. The following table shows the aggregate fees billed to us for
these years by M&K and MaloneBailey.
|
|
Year
Ended
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
95,500
|
|
|
$
|
64,000
|
|
Audit-Related
Fees
|
|
|
—
|
|
|
|
—
|
|
Tax
Fees
|
|
|
—
|
|
|
|
2,500
|
|
All
Other Fees
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
95,500
|
|
|
$
|
64,000
|
|
Audit
fees represent amounts billed for professional services rendered for the audit of our annual consolidated financial statements
and the reviews of the financial statements included in our Form 10-Q reports. Prior to contracting with M&K and MaloneBailey
to render audit or non-audit services, each engagement was approved by our directors.
It
is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm,
including audit services and permitted audit-related and non-audit services, must be pre-approved by our Board of Directors. Our
Board of Directors pre-approved all services, audit and non-audit related, provided to us by M&K and MaloneBailey for 2018
and 2017.
In
order to assure continuing auditor independence, the Board of Directors periodically considers the independent auditor’s
qualifications, performance and independence and whether there should be a regular rotation of our independent external audit
firm.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Petrolia
Energy Corporation (the “Company”) is in the business of oil and gas exploration, development and production.
Basis
of presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the United States
Securities and Exchange Commission (“SEC”). A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
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 and
Petrolia Canada Corporation. All significant intercompany balances and transactions have been eliminated upon consolidation.
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.
Foreign
currency translation
The
functional and reporting currency of the Company is the United States dollar. The functional currencies of the Company’s
wholly-owned subsidiaries, Askarii Resources and Petrolia Canada Corporation, are the United States dollar and the Canadian dollar,
respectively. Transactions involving foreign currencies are converted into the Company’s functional currency using the exchange
rates in effect at the time of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated
in currencies other than the Company’s functional currency are translated using exchange rates at that date. Exchange gains
and losses are included in net earnings. On consolidation, Petrolia Canada Corporation’s income statement amounts are translated
at average exchange rates for the year, while the assets and liabilities are translated at year-end exchange rates. Translation
adjustments are accumulated as a separate component of stockholders’ equity in other comprehensive income.
Management
estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and 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. Significant estimates made in preparing these financial statements include depreciation of
furniture, equipment and software, asset retirement obligations (“AROs”) (Note 10), income taxes (Note 14) and the
estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom (Note 16).
Cash
and 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 December 31, 2018, the Company did not hold any cash equivalents.
Receivables
and allowance for doubtful accounts
Oil
revenues receivable do not bear any interest. These receivables are primarily comprised of joint interest billings. Management
regularly reviews collectability and establishes or adjusts 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.
Oil
and gas properties
The
Company follows the full cost accounting method to account for oil and natural gas properties, whereby costs incurred in the acquisition,
exploration and development of oil and gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical
activities, rentals on nonproducing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly
attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction
of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between
capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to operations.
The
capitalized costs of oil and gas properties, excluding unevaluated and unproved properties, are amortized as depreciation, depletion
and amortization expense using the units-of-production method based on estimated proved recoverable oil and gas reserves.
The
costs associated with unevaluated and unproved properties, initially excluded from the amortization base, relate to unproved leasehold
acreage, wells and production facilities in progress and wells pending determination of the existence of proved reserves, together
with capitalized interest costs for these projects. Unproved leasehold costs are transferred to the amortization base with the
costs of drilling the related well once a determination of the existence of proved reserves has been made or upon impairment of
a lease. Costs associated with wells in progress and completed wells that have yet to be evaluated are transferred to the amortization
base once a determination is made whether or not proved reserves can be assigned to the property. Costs of dry wells are transferred
to the amortization base immediately upon determination that the well is unsuccessful.
All
items classified as unproved property are assessed on a quarterly basis for possible impairment or reduction in value. Properties
are assessed on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration
of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves
are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date
for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject
to amortization.
Under
full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement
costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the “cost ceiling”)
equal to the sum of (a) the present value of future net cash flows from estimated production of proved oil and gas reserves, based
on current prices and operating conditions, discounted at ten percent (10%), plus (b) the cost of properties not being amortized,
plus (c) the lower of cost or estimated fair value of any unproved properties included in the costs being amortized, less (d)
any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs
exceed this limit, the excess is charged to operations. For purposes of the ceiling test calculation, current prices are defined
as the un-weighted arithmetic average of the first day of the month price for each month within the 12 month period prior to the
end of the reporting period. Prices are adjusted for basis or location differentials. Unless sales contracts specify otherwise,
prices are held constant for the productive life of each well. Similarly, current costs are assumed to remain constant over the
entire calculation period.
Given
the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved
oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period
of time, it is possible that impairments of oil and gas properties could occur. In addition, it is reasonably possible that impairments
could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and
gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas
reserves.
Furniture,
equipment and software
Furniture,
equipment, and software are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the related asset, generally three to five years. Fully depreciated assets are retained in
property and accumulated depreciation accounts until they are removed from service. Management performs ongoing evaluations of
the estimated useful lives of the property and equipment for depreciation purposes. Maintenance and repairs are expensed as incurred.
Management periodically reviews long-lived assets, other than oil and gas property, for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment
is measured as the difference between the asset’s estimated fair value and its book value.
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.
Asset
retirement obligations
The
Company records a liability for AROs 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.
Revenue
recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers. This update creates a five-step model that requires entities to exercise judgment
when considering the terms of the contract(s) which includes (i) identifying the contract(s) with the customer, (ii) identifying
the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction
price to the separate performance obligations, and (v) recognizing revenue as each performance obligation is satisfied. 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
The
Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue
is measured based on the consideration the Company expects to receive in exchange for those products.
Performance
obligations and significant judgments
The
Company sells oil and natural gas products in the United States through a single reportable segment. The Company enters 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. The Company recognizes 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 the Company sells to a processor,
management has determined that the Company is the principal in the arrangement and the processors are customers. The Company recognizes
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 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 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, the Company uses 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, the Company has utilized the practical expedient in ASC 606-10-50-14(a)
which states the Company is 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. The Company has no unsatisfied performance obligations at
the end of each reporting period.
Management
does 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.
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 non-employees
in exchange for goods, services or for settlement of liabilities. Shares granted to employees in exchange for goods, services
or settlement of liabilities are measured based on the fair value of the shares issued. Shares granted to non-employees in exchange
for goods or services are measured based on the fair value of the consideration received or the fair value of the shares issued,
whichever is more reliably measurable.
Income
taxes
Income
taxes are accounted for pursuant to ASC 740, Income Taxes, which requires recognition of deferred income tax liabilities
and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements
or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis
of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected
to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to
be realized.
Uncertain
tax positions are recognized in the financial statements only if that position is more likely than not of being sustained upon
examination by taxing authorities, based on the technical merits of the position. The Company recognizes interest and penalties
related to uncertain tax positions in the income tax provision. There are currently no unrecognized tax benefits that if recognized
would affect the tax rate. There was no interest or penalties recognized for the twelve months ended December 31, 2018 and 2017.
The
Company is required to file federal income tax returns in the United States and Canada, and in various state and local jurisdictions.
The Company’s tax returns filed since the 2016 tax year are subject to examination by taxing authorities in the jurisdictions
in which it operates in accordance with the normal statutes of limitations in the applicable jurisdiction.
Earnings
(loss) per share
Basic
earnings (loss) per share has been calculated based on the weighted-average number of common shares outstanding. The treasury
stock method is used to compute the dilutive effect of the Company’s share-based compensation awards. Under this method,
the incremental number of shares used in computing diluted earnings per share (“EPS”) is the difference between the
number of shares assumed issued and purchased using assumed proceeds. Diluted EPS amounts would include the effect of outstanding
stock options, warrants, and other convertible securities if including such potential shares of common stock is dilutive. Basic
and diluted earnings per share are the same in all periods presented as all outstanding instruments are anti-dilutive.
Concentration
of credit risk
The
Company is subject to credit risk resulting from the concentration of its oil receivables with significant purchasers. Two purchasers
accounted for all of the Company’s oil sales revenues for 2018 and 2017. The Company does not require collateral. While
the Company believes its recorded receivables will be collected, in the event of default the Company would follow normal collection
procedures. The Company does not believe the loss of a purchaser would materially impact its operating results as oil is a fungible
product with a well-established market and numerous purchasers.
At
times, the Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management
monitors the credit ratings and concentration of risk with these financial institutions on a continuing basis to safeguard cash
deposits.
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, other current assets, accounts payable, accounts payable – related parties,
accrued liabilities and accrued liabilities – related parties, 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 or due
to their short-term nature. Derivative liabilities are remeasured at fair value every reporting period. The fair values are determined
based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.
Therefore, derivative liabilities are considered level 2 financial instruments.
Related
parties
The
Audit Committee approves all material related party transactions. The Audit Committee is provided with the details of each new,
existing or proposed related party transaction, including the terms of the transaction, the business purpose of the transaction,
and the benefits to the Company and the relevant related party. In determining whether to approve a related party transaction,
the following factors are considered: (1) if the terms are fair to the Company, (2) if there are business reasons to enter into
the transaction, (3) if the transaction would impair independence of an outside Director, or (4) if the transaction would present
an improper conflict of interest for any Director or executive officer. Any member of the Audit Committee who has an interest
in the transaction will abstain from voting on the approval of the related party transaction.
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.
The Company adopted this standard on January 1, 2018. ASU 2017-01 did not have a material impact on our financial statements on
adoption.
Reclassifications
Certain
amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications
had no effect on net loss, working capital or equity previously reported.
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 other than those discussed below.
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize all rights and obligations
created by those leases, including operating leases, with a term greater than 12 months on the balance sheet. The accounting for
lessors will remain largely unchanged from the existing accounting standards. The standard is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years.
Under
ASU 2016-02, each lease agreement will be evaluated to identify the lease components and non-lease components at lease inception.
The total consideration in the lease agreement will be allocated to the lease and non-lease components based on their relative
standalone selling prices.
In
July 2018, the FASB issued ASU 2018-11, “Leases – Targeted Improvements” that allows lessors to elect, as a
practical expedient, to not separate lease and non-lease components and allows these components to be accounted for as a single
lease component if both (1) the timing and pattern of transfer to the lessee of the lease component and the related non-lease
component are the same and (2) the lease component, if accounted for separately, would be classified as an operating lease. In
addition, a company is permitted to use its effective date as the date of initial application. Therefore, a company electing this
option will not restate comparative period financial information, will not make the new required lease disclosures in comparative
periods beginning before the effective date and will recognize its cumulative effect transition adjustment as of the effective
date. Under the practical expedient mentioned above, it is expected that revenue will be presented under a single lease component
presentation. The Company will elect this expedient upon adoption.
The
Company intends to adopt ASU 2016-02 on January 1, 2019 using the modified retrospective method, whereby a cumulative effect adjustment
will be made as of that day with no retrospective effect. The Company also intends to elect to apply the package of practical
expedients such that for any expired or existing leases it will not reassess lease classification, initial direct costs or whether
any expired or existing contracts are or contain leases.
NOTE
3. GOING CONCERN
The
Company has suffered recurring losses from operations and currently has a working capital deficit. 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, funding permitting. 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.
If additional financing is not available when needed, we 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 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”), was 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 the father of Petrolia’s CEO, Zel C. 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, the Company 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
|
|
Other
current assets
|
|
|
4,763
|
|
Deposits
|
|
|
337,997
|
|
Furniture,
equipment & software
|
|
|
12,059
|
|
Unproved
properties and properties not subject to amortization and excess purchase price
|
|
|
36,835,553
|
|
Accounts
payable
|
|
|
(1,157,876
|
)
|
Note
payable
|
|
$
|
(1,429,192
|
)
|
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 loss included in Petrolia’s consolidated income statement for the year ended December 31, 2018 and
the loss of the combined entity had the acquisition date been January 1, 2017, are as follows:
|
|
Revenue
|
|
|
Earnings
(Loss)
|
|
February
28, 2018 to December 31, 2018
|
|
$
|
—
|
|
|
$
|
(211,676
|
)
|
Supplemental
pro forma from January 1, 2018 to December 31, 2018
|
|
|
—
|
|
|
|
(38,079,663
|
)
|
Supplemental
pro forma from January 1, 2017 to December 31, 2017
|
|
$
|
3,103,394
|
|
|
$
|
(3,961,356
|
)
|
NOTE
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 father of Zel C. Khan, 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, the Company 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, 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 is wholly-owned by Bow (which entity’s subsidiaries own certain PCSs 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 survived for six months following
the closing) and closing conditions. The Company canceled the Blue Sky Shares following the closing and returned such shares to
the status of authorized but unissued shares of common stock.
The
total consideration received for the sale of Bow is summarized as follows:
Cash
|
|
$
|
100,000
|
|
Shares
returned to treasury (70,807,417 shares at $0.07 per share)
|
|
|
4,956,519
|
|
Fair value of retained non-controlling interest
(20% of $4,683,893 net liabilities of BEIH)
|
|
|
—
|
(1)
|
Total
consideration received
|
|
$
|
5,056,519
|
|
(1)Initially
recognized at $0 as the entity is in a net liability position.
The
fair value of the 70,807,417 common shares returned as part of the consideration paid for Bow was determined on the closing price
of the stock on August 31, 2018, which was $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 $0 and is accounted
for using the equity method. During the year ended December 31, 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 December 31, 2018 is $0.
The
total loss on acquisition and disposition of Bow is summarized as follows:
Total
consideration paid for the acquisition of Bow
|
|
$
|
34,607,088
|
|
Total
consideration received for the disposition of Bow
|
|
|
(5,056,519
|
)
|
Change
in net assets of Bow during the ownership period
|
|
|
(231,015
|
)
|
Loss
on acquisition and disposition of Bow
|
|
$
|
29,319,554
|
|
NOTE
6. EVALUATED PROPERTIES
The
acquired properties and current properties can be summarized as follows:
Cost
|
|
Canadian
properties
|
|
|
US
properties
|
|
|
Total
|
|
As
at January 1, 2018
|
|
$
|
—
|
|
|
$
|
14,312,580
|
|
|
$
|
14,312,580
|
|
Additions
|
|
|
1,246,216
|
|
|
|
—
|
|
|
|
1,246,216
|
|
Dispositions
|
|
|
—
|
|
|
|
(3,962,042
|
)
|
|
|
(3,962,042
|
)
|
Asset
retirement cost additions
|
|
|
1,313,982
|
|
|
|
—
|
|
|
|
1,313,982
|
|
Foreign
currency translation
|
|
|
(116,451
|
)
|
|
|
—
|
|
|
|
(116,451
|
)
|
As
at December 31, 2018
|
|
|
2,443,747
|
|
|
|
10,350,538
|
|
|
|
12,794,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
As
at January 1, 2018
|
|
|
—
|
|
|
|
1,068,795
|
|
|
|
1,068,795
|
|
Dispositions
|
|
|
—
|
|
|
|
(3,340,779
|
)
|
|
|
(3,340,779
|
)
|
Impairment
of oil and gas properties
|
|
|
—
|
|
|
|
2,322,255
|
|
|
|
2,322,255
|
|
Depletion
|
|
|
435,722
|
|
|
|
11,280
|
|
|
|
447,002
|
|
Foreign
currency translation
|
|
|
(22,065
|
)
|
|
|
—
|
|
|
|
(22,065
|
)
|
As
at December 31, 2018
|
|
$
|
413,657
|
|
|
|
61,551
|
|
|
|
475,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value as at December 31, 2018
|
|
$
|
2,030,090
|
|
|
$
|
10,288,987
|
|
|
$
|
12,319,077
|
|
U.S.
Properties – Slick Unit Dutcher Sands (“SUDS”) Field
On
September 23, 2015, the Company entered into a Purchase and Sale Agreement with SUDS Properties, LLC (“SUDS” and the
“Purchase Agreement”). SUDS is 100% owned by Jovian Resources LLC, a wholly-owned subsidiary of Jovian Petroleum
Corporation (“Jovian”). Mr. Zel C. Khan, our present CEO, is the former CEO of Jovian and continues to own a 25% stake
in Jovian. As a result, Jovian is considered a related party to Petrolia. Pursuant to the Purchase Agreement, the Company
acquired a 10% working interest (carrying a 7.8% net revenue interest (NRI)) in the Slick Unit Dutcher Sands Field (“SUDS
Field”) located in Creek County, Oklahoma, in exchange for 10,586,805 shares of restricted common stock. Based on that current
market value of Company common stock at $0.068 per share, the price paid was $719,903. Concurrently with the purchase, Jovian
Resources agreed to assign the Company all rights to be the operator of the SUDS unit under a standard operating agreement. The
Company did not prepare an unaudited pro-forma income statement table for 2015, related to this SUDS purchase, because the net
income effect of those transactions was considered to be immaterial.
On
September 28, 2016, the Company acquired an additional 90% working interest ownership in SUDS through the issuance of a note payable
for $4,000,000 and the issuance of 24,308,985 shares of its restricted common stock. The purchase price of the shares equates
to a $4,373,186 value, based on the $0.1799 per share market price of the Company’s common stock on September 28, 2016.
After the acquisition, the Company holds a total working interest ownership of 100%. The final purchase price allocation of the
combined transactions is as follows: oil and gas properties acquired $8,401,318 and ARO assumed of $28,132.
On
July 24, 2018, the Company announced the signing of the Slick Unit Exploration and Development Agreement (the “Development
Agreement”) with Boone Operating Inc. (“Boone”), a private Exploration & Production company, to explore
and develop the Misener and Simpson Formations at the SUDS Field. The Development Agreement expired and was not renewed. The Company’s
primary focus remains to develop the Dutcher Sands formation.
The
SUDS Field is a 2600-acre lease located in Creek County, 36 miles Southwest 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 3,100 ft.
U.S.
properties – Twin Lakes San Andres Unit (“TLSAU”) Field
On
November 4, 2015, the Company acquired a 15% net working interest in the TLSAU field located 45 miles from Roswell, in Chaves
County, New Mexico (the “Net Working Interest”) and all operating equipment on the field, pursuant to the terms of
a Memorandum of Agreement between the Company and Blue Sky NM, Inc. (“BSNM”), which was dated November 4, 2015 (the
“Purchase Agreement”).
On
September 1, 2016, the Company acquired an additional 25% working interest ownership of the TLSAU field, through the issuance
of 3,500,000 shares of its restricted common stock to an unrelated party. The purchase price of the shares equates to a $350,000
value, based on the $0.10 per share market price of the Company’s shares on September 1, 2016. After the purchase, the Company
held a total working interest ownership of 40% in the TLSAU. The final purchase price allocation of the transaction was as follows:
oil and gas properties acquired $392,252, and ARO assumed of $42,252.
Effective
February 12, 2017, the Company acquired an additional 60% working interest ownership in the TLSAU field (the “Net Working
Interest”) in connection with the execution of a Settlement Agreement on February 12, 2017. The agreement assigned Dead
Aim Investments’ (“Dead Aim’s”) 60% ownership interest in the TLSAU to the Company. As a result of this
transaction, the Company now owns a 100% working interest in the TLSAU. Consideration of $465,788 was given in exchange for Dead
Aim’s working interest. The consideration includes the forgiveness of the Orbit Petroleum Inc Bankruptcy Estate (“OPBE”)
note of $316,800 (with a $1.3 million face value) which the Company acquired in November 2015 and the write-off of $148,988 of
Dead Aim’s outstanding accounts receivable to the Company. Dead Aim assumed liability (prior to the acquisition) for the
OPBE note that the Company purchased.
Minerva-Rockdale
(“NOACK”) Field
On
November 1, 2018, the Company entered into a Purchase and Sale Agreement (“PSA”) with Crossroads Petroleum L.L.C.
(“Crossroads”) and Houston Gulf Energy. 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 which was not paid. The sale had an effective date of November 1, 2018. Until paid in full, the Company maintained
a secured lien against the assets sold which could be foreclosed upon after a 30-day cure period. The Company recognized impairment
on the property of $2,322,255 on September 30 2018 to write it down to its sale price. Upon sale, the Company derecognized the
cost and accumulated depletion and impairment with no gain or loss and removed the carrying value of the ARO of $246,263 from
the cost pool of the United States properties. The balance receivable for the sale of $240,000 is included in other current assets.
Crossroads
defaulted on the PSA as described above and the Company took proper measures to foreclose on the NOACK Assets on April 3, 2019
and reclaimed title to the property. The property was subsequently sold to FlowTex Energy L.L.C. for $400,000 with an effective
closing date of September 1, 2019. The Sale Agreement includes customary indemnification obligations of the parties. As per the
Sale Agreement, a $20,000 deposit was received on August 15, 2019 and a $355,000 payment was due on the close
of the sale of which $155,000 was received on August 30, 2019 and the balance of which remains outstanding; and
(c) $25,000 one year after close on August 30, 2020.
Canadian
properties – Luseland, Hearts Hill and Cuthbert fields
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). 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 wholly-owned Alberta, Canada, subsidiary, Petrolia Canada Corporation.
The Acquisition Note (Note 8), 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 the Company has the right to extend the maturity
date for a period six months with 10 days’ notice to Blue Sky, in the event the Company pays 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.
NOTE
7. NOTES PAYABLE
|
|
Interest
rate
|
|
|
Date
of maturity
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Backhoe
loan (i)
|
|
|
2.9
|
%
|
|
|
May
8, 2017
|
|
|
$
|
32,601
|
|
|
$
|
26,186
|
|
Truck
loan (ii)
|
|
|
5.49
|
%
|
|
|
January
20, 2022
|
|
|
|
23,237
|
|
|
|
30,600
|
|
Credit
note I (iii)
|
|
|
12
|
%
|
|
|
May
11, 2021
|
|
|
|
800,000
|
|
|
|
—
|
|
Credit
note II (iv)
|
|
|
12
|
%
|
|
|
October
17, 2019
|
|
|
|
196,038
|
|
|
|
—
|
|
M.
Hortwitz
|
|
|
10
|
%
|
|
|
October
14, 2016
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061,876
|
|
|
|
66,786
|
|
Long
term portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backhoe
loan
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Truck
loan
|
|
|
|
|
|
|
|
|
|
|
15,999
|
|
|
|
24,204
|
|
Credit
note I
|
|
|
|
|
|
|
|
|
|
|
710,000
|
|
|
|
—
|
|
Credit
note II
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
M.
Hortwitz
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Current
portion of notes payable
|
|
|
|
|
|
|
|
|
|
$
|
335,877
|
|
|
$
|
44,582
|
|
|
(i)
|
On
May 8, 2014, the Company, with the primary guarantee provided by the Company’s former CEO, David Baker, purchased a
backhoe to use at the Texas field. David Baker entered into an installment note in the amount of $57,613 for a term of three
years and interest at 2.9% per annum. On June 1, 2018, the equipment was returned to the seller with no further action taken
by the Company, Mr. Baker, or the lender.
|
|
|
|
|
(ii)
|
On
January 6, 2017, the Company purchased a truck and entered into an installment note in the amount of $35,677 for a term of
five years and interest at 5.49% per annum. Payments of principal and interest in the amount of $683 are due monthly.
|
|
|
|
|
(iii)
|
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 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 gives the Lender 10 days’ notice of our intent to repay and pays the
Lender the interest which would have been due through the maturity date at the time of repayment. 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 Company is required to make principal
payments of $10,000 per month from January through September 2019 with the remaining balance of $710,000 due at maturity on
May 11, 2021.
|
|
|
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 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 under Note 5, a total of $730,000 of the obligations owed
under the Loan Agreement were transferred to Blue Sky.
|
|
|
|
|
(iv)
|
On
September 17, 2018, the Company entered into a loan agreement with a third party for $200,000 to acquire an additional 3%
working interest in the Canadian Properties (See Note 6). The loan bears interest at 12% per annum and has a maturity date
of October 17, 2019. Payments of principal and interest in the amount of $6,000 are due monthly. The loan is secured against
the Company’s 3% Working Interest in the Canadian Properties and has no financial covenants.
|
The
following is a schedule of future minimum repayments of notes payable as of December 31, 2018:
2019
|
|
$
|
335,877
|
|
2020
|
|
|
7,502
|
|
2021
|
|
|
717,925
|
|
2022
|
|
|
572
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
1,061,876
|
|
NOTE
8. RELATED PARTY NOTES PAYABLE
The
chart below summarizes the related party Notes Payable as of December 31, 2018 and 2017.
|
|
Interest
rate
|
|
|
Date
of maturity
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Leo
Womack (i)
|
|
|
—
|
|
|
On
demand
|
|
|
3,000
|
|
|
|
—
|
|
Lee
Lytton (i)
|
|
|
—
|
|
|
On
demand
|
|
|
3,500
|
|
|
|
3,500
|
|
Quinten
Beasley
|
|
|
10
|
%
|
|
October
14, 2016
|
|
|
10,000
|
|
|
|
10,000
|
|
Joel
Oppenheim (i)
|
|
|
—
|
|
|
On
demand
|
|
|
215,333
|
|
|
|
47,000
|
|
Jovian
Petroleum Resources (i)
|
|
|
—
|
|
|
On
demand
|
|
|
—
|
|
|
|
146,600
|
|
Bow
(i)
|
|
|
—
|
|
|
On
demand
|
|
|
33,144
|
|
|
|
—
|
|
Blue
Sky Resources (i)
|
|
|
—
|
|
|
On
demand
|
|
|
131,699
|
|
|
|
—
|
|
Jovian
Petroleum Resources (ii)
|
|
|
3.5
|
%
|
|
February
9, 2019
|
|
|
35,210
|
|
|
|
—
|
|
Ivar
Siem (iii)
|
|
|
12
|
%
|
|
October
17, 2018
|
|
|
20,000
|
|
|
|
—
|
|
Joel
Oppenheim (iii)
|
|
|
12
|
%
|
|
October
17, 2018
|
|
|
10,000
|
|
|
|
—
|
|
Blue
Sky Resources (iv)
|
|
|
9
|
%
|
|
May
31, 2019
|
|
|
148,862
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
610,748
|
|
|
$
|
207,100
|
|
|
(i)
|
Balances
are non-interest bearing and due on demand.
|
|
(ii)
|
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. Subsequent to year-end this
LOC has been extended until December 31, 2019.
|
|
(iii)
|
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 were 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 had 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 the Black-Scholes Option Pricing Model for a total fair value of $6,249. On October 22, 2018,
$60,000 in Director Convertible Notes were settled by offsetting against $60,000 proceeds required for the exercise of warrants.
|
|
(iv)
|
On
June 8, 2018, the Company entered into the Acquisition Note with Blue Sky in the amount of CAD$406,181. The Note bears interest
at 9% per annum and is due in full at maturity on November 30, 2018. The Company may, at its sole discretion, extend the maturity
date for a period of six months with notice to the lender and payment of 25% of the principal amount. At December 31, 2018,
the maturity date had been extended to May 31, 2019. On April 1, 2019, the Company utilized its LOC with Jovian to pay off
in its entirety the June 8, 2018 Acquisition Note with Blue Sky.
|
The
following is a schedule of future minimum repayments of related party notes payable as of December 31, 2018:
2019
|
|
$
|
610,748
|
|
2020
|
|
|
—
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
610,748
|
|
NOTE
9. 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 7).
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 valued the derivative liability at initial recognition as $30,012.
A
summary of the activity of the derivative liabilities is shown below:
|
|
|
|
Balance, January 1, 2018
|
|
$
|
—
|
|
Additions
|
|
|
30,012
|
|
Fair value adjustments
|
|
|
7,001
|
|
As at December 31, 2018
|
|
$
|
37,013
|
|
Derivative
liability classified warrants in the years ended December 31, 2018 were valued using the Black Scholes Option Pricing Model with
the range of assumptions outlined below. Expected life was determined based on historical exercise data of the Company.
|
|
December 31, 2018
|
|
Risk-free interest rate
|
|
|
2.48%
- 2.88%
|
|
Expected life
|
|
|
2.4
- 3.0 years
|
|
Expected dividend rate
|
|
|
0
|
%
|
Expected volatility
|
|
|
202%
- 293%
|
|
NOTE
10. ASSET RETIREMENT OBLIGATIONS
The
Company has a number of oil and gas wells in production and will have AROs once the wells are permanently removed from service.
The primary obligations involve the removal and disposal of surface equipment, plugging and abandoning the wells and site restoration.
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. 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.
The
Company’s 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 properties, abandonment and reclamation liabilities are prescribed by
the province in which the Company operates in. For the purpose of determining the fair value of AROs incurred during the years
presented, the Company used the following assumptions:
|
|
|
December
31, 2018
|
Inflation
rate
|
|
|
1.92
- 2.15
|
%
|
Estimated
asset life
|
|
|
15
- 21 years
|
The
following table shows the change in the Company’s ARO liability for the years ended December 31, 2018 and 2017:
|
|
Canadian
properties
|
|
|
United
States properties
|
|
|
Total
|
|
Asset
retirement obligations, December 31, 2016
|
|
$
|
—
|
|
|
$
|
322,710
|
|
|
$
|
322,710
|
|
Additions
|
|
|
—
|
|
|
|
101,405
|
|
|
|
101,405
|
|
Accretion
expense
|
|
|
—
|
|
|
|
49,753
|
|
|
|
49,753
|
|
Asset
retirement obligations, December 31, 2017
|
|
|
—
|
|
|
|
473,868
|
|
|
|
473,868
|
|
Additions
|
|
|
1,313,982
|
|
|
|
—
|
|
|
|
1,313,982
|
|
Accretion
expense
|
|
|
4,353
|
|
|
|
23,618
|
|
|
|
27,971
|
|
Disposition
|
|
|
—
|
|
|
|
(246,263
|
)
|
|
|
(246,263
|
)
|
Foreign
currency translation
|
|
|
(59,936
|
)
|
|
|
—
|
|
|
|
(59,936
|
)
|
Asset
retirement obligations, December 31, 2018
|
|
$
|
1,258,399
|
|
|
$
|
251,223
|
|
|
$
|
1,509,622
|
|
NOTE
11. 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).
From
April to June 2017, the Company issued an aggregate of 120,590 Preferred Shares priced at $10 per share or $1,205,900 in aggregate.
The 120,590 shares were issued as follows: conversion of TORRI (40,500 shares), conversion of debt (28,900 shares - 25,900 related
to short term notes and 3,000 related to equipment purchase), conversion of shareholder advances (27,090 shares of which 840 was
for accrued interest) and cash (24,100 shares). Of the 120,590 shares, 57,990 of the shares were issued to related parties while
62,600 of the shares were issued to third parties.
On
July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred Stock.
The outstanding debt included the following: a $350,000 Convertible Secured Note dated June 17, 2013, a $100,000 Convertible Secured
Note dated September 30, 2013 and a $100,000 Convertible Secured Note dated December 31, 2013. Subsequent to this conversion,
all of the Company’s debt with Mr. Wilber is deemed cancelled and it is no longer due and payable. In connection with the
settlement, Mr. Wilber retained both the warrants and shares that were previously issued by the Company related to the original
sale of these notes (and their respective amendments).
On
July 19, 2017, Jovian Petroleum Corporation, a related party, converted $2 million in debt into 12,749,285 shares of the Company’s
common stock and 21,510 shares of the Company’s Preferred Stock. The Preferred Stock was priced at $10 per share with a
value of $215,100. The CEO of Jovian is Quinten Beasley, our former director, and the 25% owner of Jovian is Zel C. Khan, our
CEO and director.
During
the year ended December 31, 2018, 2,000 shares of Preferred Stock were issued to an accredited investor for gross proceeds of
$20,000.
In
accordance with the terms of the Preferred Stock, cumulative dividends of $179,279 were declared for the year ended December 31,
2018.
Common
stock
On
November 7, 2017, the majority stockholders of the Company, via written consent to action without meeting, approved the filing
of a Certificate of Amendment to the Company’s Certificate of Formation with the Secretary of State of Texas to (a) increase
the number of authorized shares of common stock, par value $0.001 per share of the Company, to 400,000,000 shares of common stock;
and (b) amend the par value of the Company’s preferred stock, from $0.10 per share to $0.001 per share, which amendment
was subsequently filed with the Secretary of State of Texas. The financial statements have been retroactively adjusted to give
effect to the change in par value.
All shares granted for goods or services
and settlement of liabilities during the years ended December 31, 2018 and 2017, were valued based on the fair value of the shares
issued.
During
the year ended December 31, 2017, the Company issued 2,708,336 shares of common stock along with 2,708,336 attached warrants to
purchase shares of common stock to various accredited investors for gross proceeds of $325,000.
During
the year ended December 31, 2017, the Company issued a total of 22,749,285 shares of common stock with a fair value of $3,906,806
for the conversion of notes payable to a related party.
During
the year ended December 31, 2017, the Company issued a total of 1,900,000 shares of common stock with a fair value of $243,200
to directors and employees as compensation for their services.
On
May 12, 2017, a warrant holder exercised warrants to purchase 600,000 shares of common stock for cash proceeds of $48,000 at an
average exercise price of $0.08 per share.
On
July 6, 2017, the Company compensated a consultant for its services to the Company with 150,000 shares of common stock valued
at $15,000.
On
July 31, 2017, based on the terms of the agreement, $25,000 in convertible bridge notes were mandatorily converted to 271,096
shares of common stock. Based on the agreement, the debt was converted at $0.10 per share. This included the principal balance
of $25,000 and accrued interest of $2,110. The market price of the shares on the conversion date was $0.12 per share resulting
in a loss on conversion of $5,422.
On
August 1, 2017, the Company issued 2,000,000 shares of common stock with a fair value of $246,000 to Joel Oppenheim, a director,
in exchange for entering into a Letter of Credit arrangement.
On
August 15, 2017, in exchange for services related to negotiations concerning New Mexico operating bond requirements, the Company
paid a law firm 500,000 shares of common stock valued at $65,000. Such shares were provided as a bonus for the successful closing
of the Twin Lakes San Andres Unit, New Mexico acquisition.
On
September 26, 2017, director Joel Oppenheim exercised warrants to purchase 1,035,000 shares of common stock for cash proceed of
$62,065 at an average exercise price of $0.06 per share.
From
October to December 2017, the Company issued an aggregate of 750,000 shares of common stock to various parties for consulting
services valued at $78,000.
During
the year ended December 31, 2018, the Company closed private placements ranging from $0.08 to $0.12 per unit for a total of 3,750,000
units and gross proceeds of $397,500 (the “2018 Units”). Each 2018 Unit was comprised of one common share and one
warrant entitling the holder to exercise such warrant for one common share for a period of two years from the date of issuance.
The warrants have exercise prices ranging from $0.10 to $0.20 per share.
On
January 24, 2018, 350,000 shares of common stock, valued at $59,500 or $0.17 per share, were issued in accordance with Mr. James
Burns’ common stock related salary compensation.
On
January 24, 2018, Mr. James Burns was issued 616,209 shares of restricted common stock, valued at $264,970 or $0.43 per share,
in consideration for 2017 deferred salary of $61,621. A debt settlement loss of $203,349 was recorded.
On
February 1, 2018, 100,000 shares of common stock, valued at $37,000 or $0.37 per share, were granted to a law firm as a bonus
for the Bow Energy acquisition.
On
February 1, 2018, a geologist consultant was issued 150,000 shares of common stock, valued at $45,900 or $0.31 per
share, in exchange for professional consulting services.
On
February 1, 2018, former director Quinten Beasley, exercised warrants to purchase 1,110,000 shares of common stock by settling
$102,590 of accounts payable, due to a company controlled by the former director, at an average share price of $0.092 per share.
No gain or loss was recorded on settlement.
On
February 23, 2018, director Saleem Nizami was issued 100,000 shares of common stock, valued
at $13,000 or $0.13 per share, in exchange for his professional consulting services at the SUDS, Oklahoma lease.
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 of common stock with a fair value of $34,607,088. See Note 4.
On
February 28, 2018, a warrant holder exercised warrants to purchase 360,000 shares of common stock for cash proceeds of $36,875
at an average exercise price of $0.102 per share.
On
February 28, 2018, director Joel Oppenheim exercised warrants to purchase 630,000 shares of common stock for cash proceed of $61,800
at an average exercise price of $0.098 per share.
On
March 31, 2018, 350,000 shares of common stock, valued at $35,000 or $0.10 per share, were issued in accordance with Mr. James
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
($180,000) were valued at the closing price of Petrolia’s shares on the grant date and were 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 benefits. 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 ($147,600)
were calculated using a Black Scholes model and the restricted shares ($45,000) were valued at the closing price of Petrolia’s
shares on the date of the agreement 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
or $0.10 per share, 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 for cash proceed of $50,000
at an average exercise price of $0.10 per share.
On
May 9, 2018, in conjunction with a debt financing, the Company issued 500,000 shares of common stock, valued at $47,747
or $0.09 per share, as a financing fee.
On
May 22, 2018, the Company issued 500,000 shares of common stock to then officer Tariq Chaudhary, who had served as the Chief Financial
Officer, as part of his compensation package. The shares had a fair value of $50,000, or $0.10 per share, based on the closing
price of the Company’s common stock on the grant date.
On
June 25, 2018, the Company issued 600,000 shares of restricted common stock to consultants for services rendered. The shares had
a fair value of $45,000, or $0.08 per share.
On
August 31, 2018, the Company entered into an Exchange Agreement with Blue Sky, whose President is Ilyas Chaudhary, the father
of Zel C. Khan, the Company’s Chief Executive Officer. Mr. Chaudhary and his affiliates would return 70,807,417 shares of
common stock 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.
The 70,807,417 shares returned to treasury were subsequently cancelled.
On
September 27, 2018, a warrant holder exercised warrants to purchase 310,000 shares of common stock for cash proceeds of $31,000
at an average exercise price of $0.10 per share.
On
October 17, 2018, 2,000,000 shares of common stock with a fair value of $256,000 or $0.13 per share, were granted
to a company controlled by a former director Quinten Beasley, Critical Communications Limited, pursuant to a separation agreement
and his resignation as a member of the Board of Directors.
On
October 22, 2018, director Leo B. Womack exercised warrants to purchase 1,000,000 shares of common stock. The exercise price of
$60,000 or $0.06 per share was satisfied by forgiving debt outstanding to the holder of $60,000, with no gain or loss
recognized.
Warrants
On
September 24, 2015, the Board of Directors of the Company approved the adoption of the 2015 Stock Incentive Plan (the “Plan”).
The Plan provides an opportunity, subject to approval of our Board of Directors, of individual grants and awards, for any employee,
officer, director or consultant of the Company. The maximum aggregate number of shares of common stock which may be issued pursuant
to awards under the Plan, as amended on November 7, 2017, was 40,000,000 shares. The plan was ratified by the stockholders of
the Company on April 14, 2016.
Continuity
of the Company’s common stock purchase warrants issued and outstanding is as follows:
|
|
Warrants
|
|
|
Weighted
average exercise price
|
|
Outstanding
at year ended December 31, 2016
|
|
|
16,825,527
|
|
|
|
0.26
|
|
Granted
|
|
|
19,896,670
|
|
|
|
0.19
|
|
Exercised
|
|
|
(1,635,000
|
)
|
|
|
0.07
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at year ended December 31, 2017
|
|
|
35,087,197
|
|
|
$
|
0.24
|
|
Granted
|
|
|
24,829,666
|
|
|
|
0.11
|
|
Exercised
|
|
|
(3,910,000
|
)
|
|
|
0.09
|
|
Expired
|
|
|
(4,940,000
|
)
|
|
|
0.10
|
|
Outstanding
at quarter ended December 31, 2018
|
|
|
51,066,864
|
|
|
|
0.20
|
|
As
at December 31, 2018, the weighted-average remaining contractual life of warrants outstanding was 1.71 years (2017 - 2.15 years).
As
at December 31 2018, the intrinsic value of warrants outstanding is $711,978 (2017 - $1,106,583).
The
table below summarizes warrant issuances during the years ended December 31, 2018 and 2017:
|
|
Year
ended
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
granted:
|
|
|
|
|
|
|
|
|
Board
of directors and advisory board service
|
|
|
7,750,000
|
|
|
|
3,207,500
|
|
Private
placements
|
|
|
5,312,500
|
|
|
|
2,708,336
|
|
Pursuant
to termination agreements
|
|
|
5,250,000
|
|
|
|
—
|
|
Pursuant
to financing arrangements
|
|
|
3,810,000
|
|
|
|
—
|
|
Pursuant
to consulting agreements
|
|
|
2,000,000
|
|
|
|
50,000
|
|
Pursuant
to acquisition of Bow Energy Ltd., a related party
|
|
|
368,000
|
|
|
|
—
|
|
Deferred
salary – CEO, CFO
|
|
|
339,166
|
|
|
|
134,167
|
|
Conversion
of debt
|
|
|
—
|
|
|
|
10,400,000
|
|
Providing
bond related collateral
|
|
|
—
|
|
|
|
2,250,000
|
|
Performance
bonus – President
|
|
|
—
|
|
|
|
666,667
|
|
Rick
Wilber loan
|
|
|
—
|
|
|
|
480,000
|
|
Total
|
|
|
24,829,666
|
|
|
|
19,896,670
|
|
Warrants
granted in the years ended December 31, 2018 and 2017 were valued using the Black Scholes Option Pricing Model with the range
of assumptions outlined below. Expected life was determined based on historical exercise data of the Company.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Risk-free
interest rate
|
|
|
2.39
|
%
|
|
|
1.44%
- 1.98
|
%
|
Expected
life
|
|
|
1.0
- 3.0 years
|
|
|
|
3.0
- 5.0 years
|
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
274%
- 283
|
%
|
|
|
309%
- 321
|
%
|
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 Option Pricing Model with expected volatility of 283%, a discount rate of 2.42%, a dividend yield of 0% and an expected
life of three years.
NOTE
12. RELATED PARTY TRANSACTIONS
On
April 18, 2017, James E. Burns was appointed President of the Company and entered into an employment agreement with the Company
to serve as President. The agreement provided that the Company would pay Mr. Burns $300,000 per year in base salary. For the first
year of employment, $100,000 of the salary was to be paid in cash, the remaining amount was to be paid by the issuance of 1,400,000
shares of common stock. On June 30, 2017, 350,000 shares, valued at $35,000, were issued in accordance with Mr. Burns common stock
related salary compensation. On September 30, 2017, 350,000 shares, valued at $42,000, were issued in accordance with Mr. Burns
common stock related salary compensation. The $100,000 cash salary was to commence after $1,000,000 was raised from the Series
A Preferred Offering or a material event that brings cash into the Company. A one-time signing bonus of 1,000,000 shares of common
stock, valued at $120,000, was granted to Mr. Burns upon execution of the agreement. Mr. Burns was also to receive an annual bonus
based on the percentage increase in stock price during the year. For every percentage point increase in stock price, Mr. Burns
was to be paid that percentage times his base salary. For example, if the stock price increased by 20%, then a $60,000 bonus ($300,000
* 20% = $60,000) would be paid. On an annual basis, Mr. Burns was also to receive service related warrants to purchase 1,000,000
shares of common stock with an exercise price of $0.14 per share. At September 30, 2017, warrants to purchase 250,000 shares of
common stock were granted, valued at $29,580, related to his 3rd quarter service bonus. These warrants were based on a $0.12 price
per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. In addition, warrants to purchase 166,667
shares of common stock were granted, valued at $14,758, related to his 2nd quarter service bonus. These warrants are based on
a $0.09 price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. On December 31, 2017, warrants
to purchase 250,000 shares of common stock were granted, at $0.17 price per share valuation, related to his 4 th quarter
service, volatility of 284%, a discount rate of 1.09%, valued at $41,916.
On
June 8, 2017, the Company sold a 2007 Toyota Tundra truck to Jovian for $5,000. The payment was made through a $5,000 reduction
of Jovian’s shareholder advance balance. The transaction resulted in a loss of $3,677, based on an original cost of $10,625
and accumulated depreciation of $1,948.
During
the year ended December 31, 2017, shareholders advanced an additional $361,600 to the Company, the Company made payments to shareholders
of $74,000 ($5,000 out of the $74,000 related to the truck purchase disclosed previously) and $262,500 of outstanding debt was
converted to Series A Preferred Stock. This resulted in an increase to the shareholder advance liability from $192,000 at December
31, 2016 to $217,100 at December 31, 2017. The following related parties (Leo Womack – $55,000, Lee Lytton – $25,000,
Joel Oppenheim – $167,500 and Paul Deputy - $15,000) converted their shareholder advances into Preferred Stock.
For
service as Directors on the Company’s Board of Directors, on May 23, 2017, the Board granted Leo B. Womack warrants to purchase
1,000,000 shares of the Company’s common stock at an exercise price of $0.12 per share, which vested immediately, and are
exercisable for 36 months thereafter. The Board also granted Lee Lytton, Joel Oppenheim, Quinten Beasley and Saleem Nizami, then
members of the Board of Directors each warrants to purchase 500,000 shares of the Company’s common stock at an exercise
price of $0.12 per share, which vested immediately, and are exercisable for 36 months thereafter. The fair value of the warrants
granted on May 23, 2017 is $356,027, based on a $0.12 valuation, a volatility of 235%, a discount rate of 1.09% and a 3 year term.
The total amount of the warrants was expensed during the year ended December 31, 2017. These warrants are subject to a clawback
provision which would be ratably invoked if a director did not complete his 2017 service term.
Beginning
February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest offering (“ORRI”) on behalf of
the SUDS field to raise $300,000 to purchase and install pump jacks for twenty-two (22) previously drilled wells at the field.
Under the terms of the offering, investors received 1% of the gross revenue from the field monthly, based on their investment
of $20,000 until such time they receive a cumulative revenue amount of $30,000. At its completion, the ORRI raised a total of
$300,000. Effective April 18, 2017, all owners of SUDS ORRI interests were authorized to convert their interests, at their sole
discretion, to Preferred Stock in the Company in conjunction with the Company’s Series A Preferred Stock Offering. Included
in this conversion offering, each investor converted ORRI interests equal to the cumulative revenue amount of $30,000, less their
revenue received since inception. During the second quarter of 2017, 14% of the 15% outstanding SUDS ORRI interests were converted
to Preferred Stock of the Company. This conversion resulted in 40,500 shares of Preferred Stock being issued to those holders
who chose to convert, with a value of $405,000. The transaction resulted in an increase to Oil and Gas Property assets by $280,000,
an increase to interest expense of $128,229 and a cash true-up payment of $3,230. Related parties (James Burns, Joel Oppenheim,
Paul Deputy, Lee Lytton, Leo Womack and Jovian) converted 6% in ORRI interests and received a total of 17,400 shares of Preferred
Stock (2,900 shares of Preferred Stock each), with the total valued at $174,000.
On
April 18, 2017, Mr. James Burns and Mr. Saleem Nizami were elected Directors of the Company. In exchange for accepting their appointments,
each individual was granted 100,000 shares of common stock valued at $0.13 per share. Each Director’s shares were valued
at $13,000.
On
May 23, 2017, related party debt holders were offered the option to convert their outstanding loan balances of $362,500 and accrued
interest of $13,400 (totaling $375,900) into Preferred Stock. As a result, the following Preferred Stock shares were issued: Leo
Womack - 5,500 shares, Joel Oppenheim - 17,590 shares, Lee Lytton - 2,500 shares, James Burns - 10,500 shares and Paul Deputy
(former CFO) - 1,500 shares. In addition, any holder of any non-interest bearing loan converted also received warrants to purchase
four shares of common stock for each dollar converted. Consequently, a total of warrants to purchase 400,000 shares of common
stock were granted (Leo Womack - warrants to purchase 70,000 shares, Joel Oppenheim - warrants to purchase 270,000 shares, Lee
Lytton - warrants to purchase 30,000 shares and Paul Deputy (former CFO) - warrants to purchase 30,000 shares) as part of the
conversion, which each had an exercise price of $0.20 per share and a term of 3 years. The warrants were valued at $47,319. Any
loan that had received warrants when initially issued did not receive additional warrants in this conversion offering.
Jovian
converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second
tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated
together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the
second in July 2017 (See Note 6. Notes Payable, for the details of these transactions).
The
combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment
of tranche 2 was recognized in the third quarter of 2017, with no impact on the consolidated statement of operations.
On
May 23, 2017, James E. Burns, the President of the Company, sold a Caterpillar D6 Dozer to the Company in exchange for 3,000 shares
of Preferred Stock. The equipment was valued at $30,000.
On
August 1, 2017 Mr. Joel Oppenheim, a director, provided a Letter of Credit (LOC), which was posted as collateral, in order for
the Company to issue operating bonds with the State of New Mexico for the operation of 25 Twin Lakes San Andres Unit wells. In
exchange for the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000 and warrants to purchase
2,000,000 shares of common stock valued at $236,586 with an exercise price of $0.14 per share. The warrants are based on a $0.12
price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. For each quarter following the initial
advance until the LOC is revoked an additional two hundred fifty thousand (250,000) warrants will be granted. The exercise price
of those warrants will be the average common stock market price over the previous 90 days. In addition, Petrolia will provide
a security interest in the form of a 100% undivided working interest in the NOACK field. On December 31, 2017, warrants to purchase
250,000 shares of common stock were granted, at $0.17 price per share valuation, related to the Letter of Credit (LOC) provided
for the 4th quarter, volatility of 284%, a discount rate of 1.09%, and a 3 year term, valued at $41,916.
On
September 26, 2017, Mr. Oppenheim was issued 1,035,000 shares of common stock. These shares were the result of exercising warrants
to purchase 1,035,000 shares of common stock, at an exercise price of $0.06 per share, which included the remittance of $62,065
as the aggregate exercise price.
During
the year ended December 31, 2017, the Company sold 2,708,336 restricted shares of common stock and warrants to purchase 2,708,336
shares of common stock for aggregate consideration of $325,000. Included as purchases in the offering were Leo Womack, director
and former Chairman, who purchased 333,334 restricted shares of common stock and warrants for an aggregate price of $40,000; and
Joel Oppenheim, director, who acquired 83,333 restricted shares of common stock and warrants for an aggregate price of $10,000.
The warrants can be exercised to acquire shares of common stock at an exercise price of $0.20 per share for a period of three
years.
On
January 15, 2018, Paul Deputy, the former CFO, terminated his employment with the Company. The Company 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 grant Mr. Deputy 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 former CFO, for a
period of one year. The former 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 former 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 CFO of the Company since January 16, 2018, tendered his resignation as CFO, effective immediately.
On
February 1, 2018, former director Quinten Beasley, exercised warrants to purchase 1,110,000 shares of common stock by settling
$102,590 of accounts payable, due to a company controlled by the former director, at an average share price of $0.092 per share.
No gain or loss was recorded on 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. Subsequent to year-end this LOC has been extended until December
31, 2019.
On
February 23, 2018, director Saleem Nizami was issued 100,000 shares of common stock, valued at $13,000 or $0.13 per share,
in exchange for his professional consulting services at the SUDS, Oklahoma lease.
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
February 28, 2018, director Joel Oppenheim exercised warrants to purchase 630,000 shares of common stock for cash proceed of $61,800
at an average exercise 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 of common stock, valued at $35,000 or $0.10 per share, were issued in accordance with Mr. James
Burns’ common stock related salary compensation.
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 the Company.
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 the
Company’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
April 26, 2018, Joel Oppenheim, Director, exercised warrants to purchase 500,000 shares of common stock for cash proceeds of $50,000
at an average exercise price of $0.10 per share.
On
May 22, 2018, the Company issued 500,000 shares of common stock to officer Tariq Chaudhary, who then served as the Chief Financial
Officer, as part of his compensation package. The shares had a fair value of $50,000, or $0.10 per share, based on the closing
price of the Company’s stock on the issuance date.
As
described in Note 6, 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, the Company 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 and cancelled.
On
September 14, 2018, warrants to purchase 150,000 shares of common stock with a fair value of $11,242 were granted to director
Joel Oppenheim pursuant to a loan agreement. Each warrant is exercisable into shares of common stock at an exercise price of $0.10
per share and has a contractual life of two years. The warrants were valued using the Black-Scholes Option Pricing Model.
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.
On
October 17, 2018, 2,000,000 shares of common stock with a fair value of $256,000 were granted to a company controlled by a former
director Quinten Beasley, Critical Communications Limited, pursuant to a separation agreement and his resignation as a member
of the Board of Directors. Furthermore, 2,000,000 warrants with a fair value of $244,429 were granted. Each warrant is exercisable
into shares of common stock at an exercise price of $0.10 per share and have a contractual life of two years. The warrants were
valued using the Black-Scholes Option Pricing Model.
On
October 22, 2018, director Leo B. Womack exercised warrants to purchase 1,000,000 shares of common stock. The exercise price of
$60,000 or $0.06 per share was satisfied by settling debt outstanding debt due to the holder of $60,000, with no gain
or loss recognized.
On
October 31, 2018, director Joel Oppenheim subscribed in a private placement for 312,500 shares of common stock and warrants to
purchase 625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit. Each warrant has an exercise
of $0.10 per share and expires on November 1, 2020.
On
November 1, 2018, director Richard Dole subscribed in a private placement for 312,500 shares of common stock and warrants to purchase
625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit.
On
November 2, 2018, Jovian, a related party, subscribed in a private placement for 625,000 shares of common stock and warrants to
purchase 1,250,000 shares of common stock for gross proceeds of $50,000 at a price of $0.08 per unit.
On
December 14, 2018, director Joel Oppenheim subscribed in a private placement for 156,250 shares of common stock and warrants to
purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per unit.
On
December 14, 2018, American Resources Offshore Inc., a related party, subscribed in a private placement for 156,250 shares of
common stock and warrants to purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per unit.
During
the year ended December 31, 2018, warrants to purchase 1,000,000 shares of common stock, with an aggregate fair value of $104,009
were granted to director Joel Oppenheim, pursuant to a loan agreement. Each warrant is exercisable into shares of common stock
of the Company at an exercise price of $0.10 - $0.14 per share and have a contractual life of three years. The warrants were valued
using the Black-Scholes Option Pricing Model.
NOTE
13. COMMITMENTS AND CONTINGENCIES
Environmental
Matters – The Company, as a lessee of oil and gas properties, is subject to various federal, provincial, 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 lessee under an oil and gas lease for the cost of pollution clean-up resulting from
operations and subject the lessee 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 December 31, 2018,
which have not been provided for, covered by insurance or otherwise 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 – As of December 31, 2018, the Company has one annually renewable office lease in Houston with minimum contractual
lease payments of $2,038 per month. Subsequent to year end, this lease was reduced to $1,500 per month, and changed to be on a
month-to-month basis.
During
2017, one Director provided personal guarantees to the bank. The bank, relying on those guarantees, issued letters of credit to
bonding authorities to meet regulatory bonding requirements.
NOTE
14. INCOME TAXES
There
was no provision for income taxes for 2018 and 2017 due to net operating losses and doubt as to the entity’s ability to
continue as a going concern resulting in a 100% valuation allowance. Years from 2016 forward are open to examination by tax authorities
in the United States. Years from 2018 forward are open to examination by Canadian tax authorities.
The
provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 21% (2017 - 21%)
on operations due primarily to permanent differences attributable to organizational expenses.
|
|
Fiscal
Year Ended
December 31,2018
|
|
|
Fiscal
Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense computed at statutory rates
|
|
$
|
(7,986,000
|
)
|
|
$
|
(1,141,449
|
)
|
Non-deductible
items
|
|
|
3,807,000
|
|
|
|
536,470
|
|
Change
in statutory, foreign tax, foreign exchange rates and other
|
|
|
943,000
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
3,236,000
|
|
|
|
604,979
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
The
significant components of the net deferred tax asset were as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets
|
|
|
|
|
|
$
|
|
|
Net
operating loss carryforwards
|
|
$
|
5,410,000
|
|
|
$
|
1,874,000
|
|
Asset
retirement obligation
|
|
|
236,000
|
|
|
|
—
|
|
Oil
and gas properties
|
|
|
(716,000
|
)
|
|
|
(187,000
|
)
|
Property
and equipment
|
|
|
(7,000
|
)
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total
deferred tax assets (liabilities)
|
|
|
4,923,000
|
|
|
|
1,687,000
|
|
Less:
Valuation allowance
|
|
|
(4,923,000
|
)
|
|
|
(1,687,000
|
)
|
Net
deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
A
valuation allowance has been established to offset deferred tax assets. The Company’s accumulated net operating losses in
the United States were approximately $25.5 million at December 31, 2018 and begin to expire if not utilized beginning in the year
2033. The Company’s accumulated non-capital tax losses in Canada were approximately $200,000 at December 31, 2018 and will
expire in 2038. The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and reduced the corporate income tax rate
from 34% to 21%. The Company’s deferred tax assets, liabilities, and valuation allowance have been adjusted to reflect the
impact of the new tax law.
NOTE
15. SEGMENT REPORTING
The
Company has a single reportable operating segment, Oil and Gas Exploration and Production, which includes exploration, development,
and production of current and potential oil and gas properties. Results of operations from producing activities were as follows
for the years ended December 31, 2018 and 2017:
|
|
Canada
|
|
|
United
States
|
|
|
Total
|
|
Year
ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,118,283
|
|
|
$
|
54,777
|
|
|
$
|
1,173,060
|
|
Production
costs
|
|
|
(1,239,317
|
)
|
|
|
(302,102
|
)
|
|
|
(1,541,419
|
)
|
Depreciation,
depletion, amortization and accretion
|
|
|
(440,075
|
)
|
|
|
(50,898
|
)
|
|
|
(490,973
|
)
|
Results
of operations from producing activities
|
|
$
|
(561,109
|
)
|
|
$
|
(298,223
|
)
|
|
$
|
(859,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-lived assets
|
|
$
|
2,030,090
|
|
|
$
|
10,625,080
|
|
|
$
|
12,408,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
148,835
|
|
|
$
|
148,835
|
|
Production
costs
|
|
|
—
|
|
|
|
(416,232
|
)
|
|
|
(416,232
|
)
|
Depreciation,
depletion, amortization and accretion
|
|
|
—
|
|
|
|
(71,982
|
)
|
|
|
(71,982
|
)
|
Results
of operations from producing activities
|
|
$
|
—
|
|
|
$
|
(339,379
|
)
|
|
$
|
(339,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-lived assets
|
|
$
|
—
|
|
|
$
|
13,434,960
|
|
|
$
|
13,434,960
|
|
The
Company’s revenues are derived from the following major customers:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Customer
A
|
|
$
|
1,118,283
|
|
|
$
|
—
|
|
Customer
B
|
|
|
54,777
|
|
|
|
137,635
|
|
Other
customers
|
|
|
—
|
|
|
|
11,200
|
|
Total
revenues
|
|
$
|
1,173,060
|
|
|
$
|
148,835
|
|
NOTE
16. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Costs
Incurred in Oil and Gas Property Acquisition, Exploration and Development
Amounts
reported as costs incurred include both capitalized costs and costs charged to expense during the year for oil and gas property
acquisition, exploration and development activities. Costs incurred also include new ARO established in the current year, as well
as increases or decreases to the ARO resulting from changes to cost estimates during the year. Exploration costs presented below
include the costs of drilling and equipping successful exploration wells, as well as dry hole costs, leasehold impairments, geological
and geophysical expenses, and the costs of retaining undeveloped leaseholds. Development costs include the costs of drilling and
equipping development wells, and construction of related production facilities.
In
2017, the Company purchased a 60% working interest in the TLSAU field in the amount of $745,788. With this purchase the Company
obtained a 100% working interest in the TLSAU field.
In
2018, the Company purchased a total of a 28% working interest in the Canadian Properties in a series of acquisitions for an aggregate
purchase price of $1,246,216. In connection with the acquisition, the Company recognized an asset retirement obligation of $1,313,982.
|
|
Fiscal
Year Ended
December 31, 2018
|
|
|
Fiscal
Year Ended
December 31, 2017
|
|
Property
acquisitions
|
|
$
|
1,189,480
|
|
|
$
|
745,788
|
|
Unevaluated
|
|
|
—
|
|
|
|
—
|
|
Evaluated
|
|
|
—
|
|
|
|
—
|
|
Exploration
|
|
|
—
|
|
|
|
—
|
|
Development
|
|
|
—
|
|
|
|
—
|
|
Total
costs incurred
|
|
$
|
1,189,480
|
|
|
$
|
745,788
|
|
Capitalized
costs
Capitalized
costs include the cost of properties, equipment and facilities for oil and natural-gas producing activities, excluding any asset
retirement obligations. Capitalized costs for proved properties include costs for oil and natural-gas leaseholds where proved
reserves have been identified, development wells, and related equipment and facilities, including development wells in progress.
Capitalized costs for unproved properties include costs for acquiring oil and gas leaseholds and geological and geophysical expenses
where no proved reserves have been identified.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Capitalized
costs:
|
|
|
|
|
|
|
|
|
Unevaluated
properties
|
|
$
|
—
|
|
|
$
|
—
|
|
Evaluated
properties
|
|
|
11,342,028
|
|
|
|
13,837,800
|
|
|
|
|
11,342,028
|
|
|
|
13,837,800
|
|
Less:
Accumulated DD&A
|
|
|
(475,208
|
)
|
|
|
(1,068,795
|
)
|
Net
capitalized costs
|
|
$
|
10,866,820
|
|
|
$
|
12,769,005
|
|
Oil
and Gas Reserve Information.
MKM
Engineering (“MKM”), an independent engineering firm, prepared the estimates of the proved reserves, future production,
and income attributable to the Chaves County, New Mexico and Creek County, Oklahoma and Canadian property leasehold interests
as of December 31, 2018 and the estimates of the proved reserves, future production, and income attributable to the Milam County,
Texas, Chaves County, New Mexico and Creek County, Oklahoma leasehold interests as of December 31, 2017. The estimated proved
net recoverable reserves presented below include only those quantities that were expected to be commercially recoverable at prices
and costs in effect at the balance sheet dates under the then existing regulatory practices and with conventional equipment and
operating methods. Proved Developed Reserves represent only those reserves estimated to be recovered through existing wells. Proved
Undeveloped Reserves include those reserves that may be recovered from new wells on undrilled acreage or from existing wells on
which a relatively major expenditure for recompletion or secondary recovery operations is required. All of the Company’s
Proved Reserves are located onshore in the continental United States of America and Canada.
Discounted
future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider unproved reserves, anticipated future oil and gas prices, interest rates, changes
in development and production costs and risks associated with future production. Because of these and other considerations, any
estimate of fair value is subjective and imprecise.
The
following table sets forth estimates of the proved oil and gas reserves (net of royalty interests) for the Company and changes
therein, for the periods indicated.
|
|
Oil
(Bbls)
|
|
|
|
|
|
December
31, 2016
|
|
|
2,227,240
|
|
Revisions
of prior estimates
|
|
|
(2,186,554
|
)
|
Purchases
of reserves in place
|
|
|
1,600,935
|
|
Production
|
|
|
(3,421
|
)
|
December
31, 2017
|
|
|
1,638,200
|
|
Revisions
of prior estimates
|
|
|
181,678
|
|
Purchases
of reserves in place
|
|
|
320,865
|
|
Disposition
of mineral in place
|
|
|
(194,650
|
)
|
Production
|
|
|
(51,913
|
)
|
December
31, 2018
|
|
|
1,894,180
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Estimated
quantities of proved developed reserves – Oil (Bbls)
|
|
|
1,773,800
|
|
|
|
1,598,010
|
|
Estimated
quantities of proved undeveloped reserves – Oil (Bbls)
|
|
|
120,380
|
|
|
|
40,190
|
|
Proved
developed and proved undeveloped reserves increased from December 31, 2017 to December 31, 2018, primarily due to the acquisition
of the Canadian Properties and revision of prior estimates, partially offset by disposition of reserves and production in the
current year.
The
following table sets forth estimates of the proved developed and proved undeveloped oil and gas reserves (net of royalty interests)
for the Company and changes therein, for the period indicates.
Proved
developed producing and non-producing reserve
|
|
|
Oil
(bbls)
|
|
December
31, 2017
|
|
|
1,598,010
|
|
Acquired
reserves
|
|
|
320,865
|
|
Disposition
of reserves
|
|
|
(194,650
|
)
|
Revision
of prior estimates
|
|
|
101,488
|
|
Production
|
|
|
(51,913
|
)
|
December
31, 2018
|
|
|
1,773,800
|
|
Proved
undeveloped reserves
|
|
|
Oil
(bbls)
|
|
December
31, 2017
|
|
|
40,190
|
|
Acquired
reserves
|
|
|
—
|
|
Revisions
to prior estimates
|
|
|
80,190
|
|
December
31, 2018
|
|
|
120,380
|
|
Standardized
Measure of Discounted Future Net Cash Flows
The
Standardized Measure related to proved oil and gas reserves is summarized below. Future cash inflows were computed by applying
a twelve month average of the first day of the month prices to estimated future production, less estimated future expenditures
(based on year end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expense.
Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows, less the
tax basis of properties involved. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure
of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market
value or the present value of the Company.
Standardized
Measure of Oil and Gas
The
following table sets forth the changes in standardized measure of discounted future net cash flows relating to proved oil and
gas reserves for the periods indicated.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$
|
89,797,082
|
|
|
$
|
62,964,150
|
|
Future
production costs
|
|
|
(37,021,141
|
)
|
|
|
(27,336,630
|
)
|
Future
development costs
|
|
|
(2,394,081
|
)
|
|
|
(1,491,500
|
)
|
Future
income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Future
net cash flows
|
|
|
50,381,861
|
|
|
|
34,136,020
|
|
Discount
of future net cash flows at 10% per annum
|
|
|
(26,743,136
|
)
|
|
|
(17,530,040
|
)
|
|
|
|
|
|
|
|
|
|
Standardized
measure of discounted future net cash flows
|
|
$
|
23,638,725
|
|
|
$
|
16,605,980
|
|
Changes
in standardized measure of discounted future cash flows
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$
|
16,605,980
|
|
|
$
|
13,564,480
|
|
Sales
and transfers of oil & gas produced, net of production costs
|
|
|
368,421
|
|
|
|
267,997
|
|
Net
changes in prices and production costs
|
|
|
4,178,977
|
|
|
|
1,967,068
|
|
Changes
in estimated future development costs
|
|
|
(5,742,027
|
)
|
|
|
1,806,404
|
|
Acquisitions/dispositions
of minerals in place, net of production costs
|
|
|
1,544,720
|
|
|
|
7,645,722
|
|
Revision
of previous estimates
|
|
|
2,462,457
|
|
|
|
(19,654,723
|
)
|
Change
in discount
|
|
|
286,849
|
|
|
|
732,656
|
|
Change
in production rate or other
|
|
|
3,933,348
|
|
|
|
10,276,376
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$
|
23,638,725
|
|
|
$
|
16,605,980
|
|
NOTE
17. SUBSEQUENT EVENTS
On
April 1, 2019, the Company utilized its LOC with Jovian to pay off in its entirety the June 8, 2018 Acquisition Note with Blue
Sky.
On
April 3, 2019, the Company’s foreclosed on its promissory note receivable for the sale of the NOACK field, which was secured
by lien under the note. On August 6, 2019, the Company entered into a Purchase and Sale Agreement (“PSA”) for the
sale of the 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. The purchaser agreed to pay
$400,000 for the NOACK Assets with a $20,000 deposit received on August 15, 2019 and the entire balance of $355,000 to be received
by September 30, 2019 (of which $155,000 was received on August 30, 2019 and the balance remains outstanding) with a final
payment of $25,000 to be received on August 30, 2020. The sale had an effective date of September 1, 2019.
Subsequent
to December 31, 2018, the Company granted warrants to purchase an aggregate of 4,500,000 shares of common stock for director compensation
and financing arrangements. The warrants have a contractual life ranging from one to two years and an exercise price of
$0.10 per warrant.
On
August 21, 2019, the Company closed private placements with related parties for gross proceeds of $150,000, consisting of 1,875,000
shares of common stock and 3,750,000 warrants to purchase shares of common stock, exercisable at a price of $0.10 per share
at any time prior to November 1, 2020.