Item
1. Financial Statements
PETROLIA
ENERGY CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,684
|
|
|
$
|
13,779
|
|
Accounts
receivable
|
|
|
195,184
|
|
|
|
-
|
|
Other
current assets
|
|
|
132,543
|
|
|
|
255,180
|
|
Total
current assets
|
|
|
338,411
|
|
|
|
268,959
|
|
|
|
|
|
|
|
|
|
|
Property
& equipment
|
|
|
|
|
|
|
|
|
Oil
and gas, on the basis of full cost accounting
|
|
|
|
|
|
|
|
|
Evaluated
properties
|
|
|
12,847,294
|
|
|
|
12,794,285
|
|
Furniture,
equipment & software
|
|
|
201,110
|
|
|
|
201,110
|
|
Less
accumulated depreciation and depletion
|
|
|
(799,863
|
)
|
|
|
(586,488
|
)
|
Net
property and equipment
|
|
|
12,248,541
|
|
|
|
12,408,907
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
12,586,952
|
|
|
$
|
12,677,866
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
381,136
|
|
|
$
|
264,654
|
|
Accounts
payable – related parties
|
|
|
42,766
|
|
|
|
42,494
|
|
Accrued
liabilities
|
|
|
607,776
|
|
|
|
608,357
|
|
Accrued
liabilities – related parties
|
|
|
730,436
|
|
|
|
649,633
|
|
Notes
payable
|
|
|
423,963
|
|
|
|
335,877
|
|
Notes
payable – related parties
|
|
|
550,242
|
|
|
|
610,748
|
|
Total
current liabilities
|
|
|
2,736,319
|
|
|
|
2,511,763
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
1,546,386
|
|
|
|
1,509,622
|
|
Notes
payable
|
|
|
724,295
|
|
|
|
725,999
|
|
Derivative
liability
|
|
|
17,938
|
|
|
|
37,013
|
|
Total
Liabilities
|
|
|
5,024,938
|
|
|
|
4,784,397
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 1,000,000 shares authorized;
199,100 shares issued and outstanding
|
|
$
|
199
|
|
|
$
|
199
|
|
Common
stock, $0.001 par value; 400,000,000 shares authorized;
162,673,726 shares issued and outstanding
|
|
|
162,674
|
|
|
|
162,674
|
|
Additional
paid in capital
|
|
|
57,391,179
|
|
|
|
57,253,595
|
|
Accumulated
other comprehensive income
|
|
|
(2,982
|
)
|
|
|
8,273
|
|
Accumulated
deficit
|
|
|
(49,989,056
|
)
|
|
|
(49,531,272
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
7,562,014
|
|
|
|
7,893,469
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
12,586,952
|
|
|
$
|
12,677,866
|
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements.
PETROLIA
ENERGY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
|
|
Three
months
ended
March 31, 2019
|
|
|
Three
months
ended
March 31, 2018
(revised
- Note 12)z
|
|
Oil and gas sales
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
819,340
|
|
|
$
|
29,980
|
|
Total
revenue
|
|
|
819,340
|
|
|
|
29,980
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Lease operating
expense
|
|
|
694,945
|
|
|
|
73,562
|
|
Production tax
|
|
|
1,168
|
|
|
|
1,799
|
|
General and administrative
expenses
|
|
|
329,707
|
|
|
|
1,897,123
|
|
Depreciation, depletion
and amortization
|
|
|
205,215
|
|
|
|
19,157
|
|
Asset
retirement obligation
|
|
|
9,479
|
|
|
|
5,639
|
|
Total
operating expenses
|
|
|
1,240,514
|
|
|
|
1,997,280
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(421,174
|
)
|
|
|
(1,967,300
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(38,926
|
)
|
|
|
(29,764
|
)
|
Foreign exchange
gain
|
|
|
17,425
|
|
|
|
53,338
|
|
Change in fair value
of derivative liabilities
|
|
|
19,075
|
|
|
|
—
|
|
Other income
|
|
|
10,000
|
|
|
|
—
|
|
Loss on acquisition
of Bow Energy Ltd.
|
|
|
—
|
|
|
|
(32,999,330
|
)
|
Loss
on related party debt settlement
|
|
|
—
|
|
|
|
(203,349
|
)
|
Total
other income (expenses)
|
|
|
7,574
|
|
|
|
(33,179,105
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(413,600
|
)
|
|
|
(35,146,405
|
)
|
|
|
|
|
|
|
|
|
|
Series A preferred
dividends
|
|
|
(44,184
|
)
|
|
|
(44,006
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable
to common stockholders
|
|
$
|
(457,784
|
)
|
|
$
|
(35,190,411
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
(Basic and diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
of common stock outstanding - Basic
|
|
|
162,673,726
|
|
|
|
120,214,408
|
|
Weighted average number of shares
of common stock outstanding - Diluted
|
|
|
162,673,726
|
|
|
|
120,214,408
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income, net of tax
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
|
$
|
(11,255
|
)
|
|
$
|
(46,647
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(469,039
|
)
|
|
$
|
(35,237,058
|
)
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements.
PETROLIA
ENERGY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Shares
to be
|
|
|
other
comprehensive
|
|
|
Accumulated
|
|
|
Stockholders’
equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
issued
|
|
|
income
|
|
|
deficit
|
|
|
(deficit)
|
|
Balance at January 1, 2018
|
|
|
197,100
|
|
|
$
|
197
|
|
|
|
111,698,222
|
|
|
$
|
111,698
|
|
|
$
|
22,730,974
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,323,383
|
)
|
|
$
|
11,519,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares issued
|
|
|
2,000
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,998
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
Common shares issued
|
|
|
—
|
|
|
|
—
|
|
|
|
1,166,667
|
|
|
|
1,167
|
|
|
|
148,833
|
|
|
|
22,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,500
|
|
Exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
2,100,000
|
|
|
|
2,100
|
|
|
|
199,165
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201,265
|
|
Shares issued to settle liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
716,209
|
|
|
|
716
|
|
|
|
254,254
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
254,970
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
600,000
|
|
|
|
600
|
|
|
|
1,573,584
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,574,184
|
|
Acquisition of Bow Energy Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
106,156,712
|
|
|
|
106,157
|
|
|
|
34,500,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,607,088
|
|
Warrants issued related to acquisition
of Bow Energy Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,633
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,633
|
|
Series A preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,006
|
)
|
|
|
(44,006
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(46,647
|
)
|
|
|
—
|
|
|
|
(46,647
|
)
|
Net
loss (revised - Note 12)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(35,146,405
|
)
|
|
|
(35,146,405
|
)
|
Balance at March 31, 2018
|
|
|
199,100
|
|
|
$
|
199
|
|
|
|
222,437,810
|
|
|
$
|
222,438
|
|
|
$
|
59,531,372
|
|
|
$
|
22,500
|
|
|
$
|
(46,647
|
)
|
|
$
|
(46,513,794
|
)
|
|
$
|
13,216,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
|
199,100
|
|
|
$
|
199
|
|
|
|
162,673,726
|
|
|
$
|
162,674
|
|
|
$
|
57,253,595
|
|
|
$
|
—
|
|
|
$
|
8,273
|
|
|
$
|
(49,531,272
|
)
|
|
$
|
7,893,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121,680
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121,680
|
|
Warrants issued as financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,904
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,904
|
|
Series A preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,184
|
)
|
|
|
(44,184
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,255
|
)
|
|
|
—
|
|
|
|
(11,255
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(413,600
|
)
|
|
|
(413,600
|
)
|
Balance at March 31, 2019
|
|
|
199,100
|
|
|
$
|
199
|
|
|
|
162,673,726
|
|
|
$
|
162,674
|
|
|
$
|
57,391,179
|
|
|
$
|
—
|
|
|
$
|
(2,982
|
)
|
|
$
|
(49,989,056
|
)
|
|
$
|
7,562,014
|
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements.
PETROLIA
ENERGY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
months
ended
March
31, 2019
|
|
|
Three
months
ended
March
31, 2018
(revised
- Note 12)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(413,600
|
)
|
|
$
|
(35,146,405
|
)
|
Adjustment
to reconcile net loss to net cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
205,215
|
|
|
|
19,157
|
|
Asset
retirement obligation accretion
|
|
|
9,479
|
|
|
|
5,639
|
|
Change
in fair value of derivative liabilities
|
|
|
(19,075
|
)
|
|
|
—
|
|
Warrants
issued as financing fees
|
|
|
15,904
|
|
|
|
—
|
|
Stock-based
compensation
|
|
|
121,680
|
|
|
|
1,574,185
|
|
Loss
on acquisition of Bow Energy Ltd.
|
|
|
—
|
|
|
|
32,999,330
|
|
Loss
on related party debt settlement
|
|
|
—
|
|
|
|
203,349
|
|
Warrant
expense related to business combination
|
|
|
—
|
|
|
|
103,632
|
|
Foreign
currency remeasurement gain
|
|
|
(25,269
|
)
|
|
|
(53,338)
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(225,046
|
)
|
|
|
(31,268)
|
|
Other
current assets
|
|
|
2,637
|
|
|
|
(634)
|
|
Accounts
payable
|
|
|
101,482
|
|
|
|
17,278
|
|
Accounts
payable – related parties
|
|
|
272
|
|
|
|
—
|
|
Accrued
liabilities
|
|
|
(44,765
|
)
|
|
|
—
|
|
Accrued
liabilities – related parties
|
|
|
80,803
|
|
|
|
—
|
|
Net
cash flows from operating activities
|
|
|
(190,283
|
)
|
|
|
(309,075
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Payments
on sale of NOACK property
|
|
|
120,000
|
|
|
|
—
|
|
Net
cash acquired in acquisition of Bow Energy Ltd.
|
|
|
—
|
|
|
|
3,784
|
|
Cash
flows from investing activities
|
|
|
120,000
|
|
|
|
3,784
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
88,125
|
|
|
|
—
|
|
Repayments
on notes payable
|
|
|
(1,743
|
)
|
|
|
—
|
|
Proceeds
from related party notes payable
|
|
|
137,136
|
|
|
|
—
|
|
Repayments
on related party notes payable
|
|
|
(156,330
|
)
|
|
|
(49,295
|
)
|
Advances
for the purchase of common stock
|
|
|
—
|
|
|
|
22,500
|
|
Proceed
from issuance of common stock
|
|
|
—
|
|
|
|
238,675
|
|
Proceed
from issuance of preferred stock
|
|
|
—
|
|
|
|
20,000
|
|
Cash
flows from financing activities
|
|
|
67,188
|
|
|
|
231,880
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(3,095
|
)
|
|
|
(73,377
|
)
|
Cash
at beginning of period
|
|
|
13,779
|
|
|
|
82,593
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
10,684
|
|
|
$
|
9,216
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
Three
Months
Ended
March 31, 2019
|
|
|
Three
Months
Ended
March 31, 2018
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
309
|
|
|
$
|
376
|
|
Income
taxes paid
|
|
|
—
|
|
|
|
—
|
|
NON-CASH
INVESTING AND FINANCIAL DISCLOSURES
|
|
|
|
|
|
|
|
|
Common
shares issued for acquisition of Bow Energy Ltd.
|
|
|
—
|
|
|
|
34,607,088
|
|
Settlement
of accrued salaries for related parties with common shares
|
|
|
—
|
|
|
|
61,621
|
|
Settlement
of account payable – related parties for common shares, related party
|
|
|
—
|
|
|
|
102,590
|
|
Series
A preferred dividends accrued
|
|
|
44,184
|
|
|
|
44,006
|
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements.
PETROLIA
ENERGY CORPORATION
NOTES
TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited)
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 unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities
and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes
thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the
interim periods presented have been reflected herein. The results of operations for such interim periods are not necessarily indicative
of operations for a full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the year ended December 31, 2018, as reported in Form 10-K, have been omitted.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases
Leases
are classified as operating leases or financing leases based on the lease term and fair value associated with the lease. The assessment
is done at lease commencement and reassessed only when a modification occurs that is not considered a separate contract.
Lessee
arrangements
Where
the Company is the lessee, leases classified as operating leases are recorded as lease liabilities based on the present value
of minimum lease payments over the lease term, discounted using the lessor’s rate implicit in the lease or the Company’s
incremental borrowing rate, if the lessor’s implicit rate is not readily determinable. The lease term includes all periods
covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise
the termination options. Corresponding right-of-use assets are recognized consisting of the lease liabilities, initial direct
costs and any lease incentive payments.
Lease
liabilities are drawn down as lease payments are made and right-of-use assets are depreciated over the term of the lease. Operating
lease expenses are recognized on a straight-line basis over the term of the lease, consisting of interest accrued on the lease
liability and depreciation of the right-of-use asset, adjusted for changes in index-based variable lease payments in the period
of change.
Lease
payments on short-term operating leases with lease terms twelve months or less are expensed as incurred.
Recent
Accounting Pronouncements
Adopted
in the current year
Effective
January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, “Leases”, using the
modified retrospective method, whereby a cumulative effect adjustment was made as of the date of initial application. The Company
elected the practical expedient to use the effective date of adoption as the date of initial application. Accordingly, financial
information and disclosures in the comparative period were not restated. The Company also elected to apply the package of practical
expedients such that for any expired or existing leases, it did not reassess lease classification, initial direct costs or whether
the relevant contracts are or contain leases. The Company did not use hindsight to reassess lease term or for the determination
of impairment of right-of-use assets.
Adoption
of ASU 2016-02 did not have any impact on the Company as all its leases are short-term operating leases with lease terms twelve
months or less.
To
be Adopted in Future Years
In
June 2016, Financial Account Standards Board (“FASB”) issued ASU 2016-13, “Measurement of Credit Loss on financial
Instruments”. ASU 2016-13 replaces the current incurred loss impairment methodology with the expected credit loss impairment
model, which requires consideration of a broader range of reasonable and supportable information to estimate expected credit losses
over the life of the instrument instead of only when losses are incurred. This standard applies to financial assets measured at
amortized cost basis and investments in leases recognized by the lessor. This standard is effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating this standard
to determine the impact it will have on its consolidated financial statements.
3.
GOING CONCERN
The
Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. The Company plans to generate profits by reworking its existing oil or gas wells. The Company
will need to raise funds through either the sale of its securities or through debt funding to accomplish its goals. If additional
financing is not available when needed, the Company may not be able to rework existing oil wells. Management believes that actions
presently being taken to secure additional funding for the reworking of its existing infrastructure will provide the opportunity
for the Company to continue as a going concern. Since the Company has an oil producing asset, its goal is to increase the production
rate by optimizing its current infrastructure. The accompanying financial statements have been prepared assuming the Company will
continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
4.
EVALUATED PROPERTIES
The
Company’s current properties can be summarized as follows.
Cost
|
|
Canadian
properties
|
|
|
United
States 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
|
|
Foreign
currency translation
|
|
|
53,009
|
|
|
|
-
|
|
|
|
53,009
|
|
As
at March 31, 2019
|
|
$
|
2,496,756
|
|
|
$
|
10,350,538
|
|
|
$
|
12,847,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Impairment
of oil and gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion
|
|
|
197,168
|
|
|
|
—
|
|
|
|
197,168
|
|
Foreign
currency translation
|
|
|
8,160
|
|
|
|
—
|
|
|
|
8,160
|
|
As
at March 31, 2019
|
|
$
|
618,985
|
|
|
$
|
61,551
|
|
|
$
|
680,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value as at December 31, 2018
|
|
$
|
2,030,090
|
|
|
$
|
10,288,987
|
|
|
$
|
12,319,077
|
|
Net
book value as at March 31, 2019
|
|
$
|
1,877,771
|
|
|
$
|
10,288,987
|
|
|
$
|
12,166,758
|
|
5.
NOTES PAYABLE
The
following table summarizes the Company’s notes payable:
|
|
|
|
|
|
|
|
Balance
at:
|
|
|
|
Interest
rate
|
|
|
Date
of maturity
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Backhoe
loan (i)
|
|
|
2.9
|
%
|
|
|
May
8, 2017
|
|
|
$
|
32,600
|
|
|
$
|
32,601
|
|
Truck
loan (ii)
|
|
|
5.49
|
%
|
|
|
January
20, 2022
|
|
|
|
21,495
|
|
|
|
23,237
|
|
Credit
note I (iii)
|
|
|
12
|
%
|
|
|
May
11, 2021
|
|
|
|
800,000
|
|
|
|
800,000
|
|
Credit
note II (iv)
|
|
|
12
|
%
|
|
|
October
17, 2019
|
|
|
|
196,038
|
|
|
|
196,038
|
|
M.
Hortwitz
|
|
|
10
|
%
|
|
|
October
14, 2016
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Credit
note III
|
|
|
4
|
%
|
|
|
January
15, 2020
|
|
|
|
88,125
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148,258
|
|
|
|
1,061,876
|
|
Current
portion:
|
|
|
|
|
|
|
|
|
|
|
(423,963
|
)
|
|
|
(335,877
|
)
|
Long-term
notes payable
|
|
|
|
|
|
|
|
|
|
$
|
724,295
|
|
|
$
|
725,999
|
|
|
(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 Energy Ltd. (“Bow”), a former wholly-owned subsidiary of the Company, 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 its 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 the Company and Bow, and the occurrence of any event which would have
a material adverse effect on the Company 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 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”).
|
|
|
|
|
|
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, a total of $730,000 of the obligations owed under the Loan Agreement were transferred to Blue Sky
Resources Ltd. (“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. 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 at March 31, 2019:
2019
|
|
$
|
422,259
|
|
2020
|
|
|
7,502
|
|
2021
|
|
|
717,925
|
|
2022
|
|
|
572
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
1,148,258
|
|
6.
RELATED PARTY NOTES PAYABLE
The
following table summarizes the Company’s related party notes payable:
|
|
|
|
|
|
|
Balance
at:
|
|
|
|
Interest
rate
|
|
|
Date
of maturity
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Leo Womack
(i)
|
|
|
—
|
|
|
On demand
|
|
$
|
3,000
|
|
|
$
|
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
|
|
|
205,333
|
|
|
|
215,333
|
|
Bow (i)
|
|
|
—
|
|
|
On demand
|
|
|
33,144
|
|
|
|
33,144
|
|
Blue Sky Resources
Ltd. (i)
|
|
|
—
|
|
|
On demand
|
|
|
82,421
|
|
|
|
131,699
|
|
Jovian Petroleum Corporation
(ii)
|
|
|
3.5
|
%
|
|
February 9, 2019
|
|
|
137,846
|
|
|
|
35,210
|
|
Ivar Siem (iii)
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
20,000
|
|
|
|
20,000
|
|
Joel Oppenheim (iii)
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
10,000
|
|
|
|
10,000
|
|
Blue
Sky Resources Ltd. (iv)
|
|
|
9
|
%
|
|
May 31, 2019
|
|
|
44,998
|
|
|
|
148,862
|
|
|
|
|
|
|
|
|
|
$
|
550,242
|
|
|
$
|
610,748
|
|
|
(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 (“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 was for a period of 6 months and it 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. On
December 31, 2018 the due date of this LOC was 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 a promissory note (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 March 31, 2019:
2019
|
|
$
|
560,242
|
|
2020
|
|
|
—
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
560,242
|
|
7.
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 5).
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 Company’s derivative liabilities is shown below:
|
|
|
|
Balance, January 1, 2018
|
|
$
|
—
|
|
Additions
|
|
|
30,012
|
|
Fair value adjustments
|
|
|
7,001
|
|
As at December 31, 2018
|
|
|
37,013
|
|
Fair value adjustments
|
|
|
(19,075
|
)
|
As at March 31, 2019
|
|
$
|
17,938
|
|
Derivative
liability classified warrants 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.
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Risk-free interest rate
|
|
|
2.27
|
%
|
|
|
2.48%
- 2.88
|
%
|
Expected life
|
|
|
2.1
years
|
|
|
|
2.4
- 3.0 years
|
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
208
|
%
|
|
|
202%
- 293
|
%
|
8.
ASSET RETIREMENT OBLIGATIONS
The
Company has a number of oil and gas wells in production and will have Asset Retirement Obligations (“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:
|
|
Canadian
properties
|
|
|
United
States properties
|
|
|
Total
|
|
Asset retirement obligations,
December 31, 2017
|
|
$
|
—
|
|
|
$
|
473,868
|
|
|
$
|
473,868
|
|
Additions
|
|
|
1,313,882
|
|
|
|
—
|
|
|
|
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
|
|
Accretion expense
|
|
|
3,183
|
|
|
|
6,296
|
|
|
|
9,479
|
|
Foreign currency
translation
|
|
|
27,285
|
|
|
|
—
|
|
|
|
27,285
|
|
Asset retirement
obligations, March 31, 2019
|
|
$
|
1,288,867
|
|
|
$
|
257,519
|
|
|
$
|
1,546,386
|
|
9.
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).
In
accordance with the terms of the Preferred Stock, cumulative dividends of $44,184 were declared for the three months ended March
31, 2019.
Common
stock
During
the three months ended March 31, 2019, there was no common stock activity.
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 January 1, 2018
|
|
|
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 December 31, 2018
|
|
|
51,066,864
|
|
|
$
|
0.20
|
|
Granted
|
|
|
2,250,000
|
|
|
|
0.10
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(635,000
|
)
|
|
|
0.07
|
|
Outstanding at March 31, 2019
|
|
|
52,681,864
|
|
|
$
|
0.20
|
|
As
of March 31, 2019, the weighted-average remaining contractual life of warrants outstanding was 1.51 years (December 31, 2018 –
1.71 years).
As
of March 31, 2019, the intrinsic value of warrants outstanding is $1,403 (December 31, 2018 - $711,978).
The
table below summarizes warrant issuances during the three months ended March 31, 2019 and year ended December 31, 2018:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants granted:
|
|
|
|
|
|
|
|
|
Board
of Directors and Advisory Board service
|
|
|
2,000,000
|
|
|
|
7,750,000
|
|
Private placements
|
|
|
—
|
|
|
|
5,312,500
|
|
Pursuant to termination
agreements
|
|
|
—
|
|
|
|
5,250,000
|
|
Pursuant to financing
arrangements
|
|
|
250,000
|
|
|
|
3,810,000
|
|
Pursuant to consulting
agreements
|
|
|
—
|
|
|
|
2,000,000
|
|
Pursuant to acquisition
of Bow Energy Ltd., a related party
|
|
|
—
|
|
|
|
368,000
|
|
Deferred
salary – CEO, CFO
|
|
|
—
|
|
|
|
339,166
|
|
Total
|
|
|
2,250,000
|
|
|
|
24,829,666
|
|
Warrants
granted during the three months ended March 31, 2019 and the year 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 data of the Company.
|
|
March
31,
2019
|
|
|
December
31, 2018
|
|
Risk-free interest rate
|
|
|
2.39
|
%
|
|
|
2.39
|
%
|
Expected life
|
|
|
2.0
-3.0 years
|
|
|
|
1.0
- 3.0 years
|
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
274
|
%
|
|
|
274%
- 283
|
%
|
Stock
options
Upon
closing of the acquisition of Bow on February 27, 2018, 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.
10.
RELATED PARTY TRANSACTIONS
During
the three months ended March 31, 2019, warrants to purchase 250,000 shares of common stock with a fair value of $15,904 were granted
to director Joel Oppenheim, pursuant to a loan agreement. Each warrant is exercisable for one share of common stock at an exercise
price of $0.10 per share and has a contractual life of three years. The warrants were valued using the Black-Scholes Option Pricing
Model.
11.
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:
|
|
Canada
|
|
|
United
States
|
|
|
Total
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
796,776
|
|
|
$
|
22,564
|
|
|
$
|
819,340
|
|
Production costs
|
|
|
(636,239
|
)
|
|
|
(59,874
|
)
|
|
|
(696,113
|
)
|
Depreciation,
depletion, amortization and accretion
|
|
|
(200,351
|
)
|
|
|
(10,296
|
)
|
|
|
(210,647
|
)
|
Results of operations
from producing activities
|
|
$
|
(39,814
|
)
|
|
$
|
(47,606
|
)
|
|
$
|
(87,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived
assets, March 31, 2019
|
|
$
|
1,877,771
|
|
|
$
|
10,370,770
|
|
|
$
|
12,248,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
29,980
|
|
|
$
|
29,980
|
|
Production costs
|
|
|
—
|
|
|
|
(75,361
|
)
|
|
|
(75,361
|
)
|
Depreciation,
depletion, amortization and accretion
|
|
|
—
|
|
|
|
(15,176
|
)
|
|
|
(15,176
|
)
|
Results of operations
from producing activities
|
|
$
|
—
|
|
|
$
|
(60,557
|
)
|
|
$
|
(60,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived
assets, December 31, 2018
|
|
$
|
2,030,090
|
|
|
$
|
10,378,817
|
|
|
$
|
12,408,907
|
|
The
Company’s revenues are derived from the following major customers:
|
|
Three
months ended
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Customer A
|
|
$
|
796,776
|
|
|
$
|
—
|
|
Customer B
|
|
|
22,564
|
|
|
|
29,980
|
|
Total revenues
|
|
$
|
819,340
|
|
|
$
|
29,980
|
|
12.
REVISION OF PRIOR PERIOD INTERIM FINANCIAL STATEMENTS
While
preparing the interim condensed consolidated financial statements for the period ending September 30, 2018, Management identified
that it had made an incorrect judgment in accounting for the acquisition of Bow on February 27, 2018. Accordingly, the Company
has revised the comparative figures for three months ended March 31, 2018 to reflect this revision. The revision had no impact
on the financial statements for the three and nine months ended September 30, 2018 and for the year ended December 31, 2018.
In
accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin
No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”,
the Company has determined that the impact of adjustments relating to the correction of this accounting error was derived from
a judgment, has no impact on compliance with regulatory requirements or loan covenants and has no impact on the Company’s
cash flows. Accordingly, these changes are disclosed herein and have been disclosed prospectively.
The
impact of the revision for the three months ended March 31, 2018 is summarized below:
Condensed
Consolidated Statement of Operations and Comprehensive Loss
|
|
Three
months ended March 31, 2018
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
Impairment of goodwill
|
|
$
|
27,129,963
|
|
|
$
|
(27,129,963
|
)
|
|
$
|
—
|
|
Loss on acquisition of Bow Energy Ltd.
|
|
|
—
|
|
|
|
32,999,330
|
|
|
|
32,999,330
|
|
Net loss
|
|
|
(29,277,038
|
)
|
|
|
(5,869,367
|
)
|
|
|
(35,146,405
|
)
|
Net loss attributable to common stockholders
|
|
|
(29,321,044
|
)
|
|
|
(5,869,367
|
)
|
|
|
(35,190,411
|
)
|
Loss per share – Basic and diluted
|
|
|
(0.24
|
)
|
|
|
(0.05
|
)
|
|
|
(0.29
|
)
|
Comprehensive loss
|
|
$
|
(29,367,691
|
)
|
|
$
|
(5,869,367
|
)
|
|
$
|
(35,237,058
|
)
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity
|
|
As
at March 31, 2018
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
Accumulated deficit
|
|
$
|
(40,644,427
|
)
|
|
$
|
(5,869,367
|
)
|
|
$
|
(46,513,794
|
)
|
Total stockholders' equity
|
|
$
|
19,085,435
|
|
|
$
|
(5,869,367
|
)
|
|
$
|
13,216,068
|
|
Consolidated
Statement of Cash Flows
|
|
Three
months ended March 31, 2018
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(29,277,038
|
)
|
|
$
|
(5,869,367
|
)
|
|
$
|
(35,146,405
|
)
|
Adjustment to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
27,129,963
|
|
|
|
(27,129,963
|
)
|
|
|
—
|
|
Loss on acquisition
of Bow Energy Ltd.
|
|
$
|
—
|
|
|
$
|
32,999,330
|
|
|
$
|
32,999,330
|
|
13.
SUBSEQUENT EVENTS
Subsequent
to March 31, 2019, the Company granted warrants to purchase an aggregate of 8,250,000 shares of common stock for director compensation,
financing arrangements and private placements of units. The warrants have a contractual life ranging from one to two years and
an exercise price of $0.10 per warrant.
On
April 1, 2019, the Company utilized its LOC with Jovian to settle 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.
On
August 21, 2019, the Company closed private placements with related parties for gross proceeds of $150,000, and issued 1,875,000
shares of common stock and warrants to purchase 3,750,000 shares of common stock, exercisable at a price of $0.10 per share, at
any time prior to November 1, 2020.
FORWARD
LOOKING STATEMENTS
This
Report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements.
These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include
the words “may,” “will,” “could,” “should,” “would,” “believe,”
“expect,” “anticipate,” “estimate,” “intend,” “plan” or other words
or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events.
The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations,
anticipations and intentions with respect to our financial condition, results of operations, future performance and business,
including statements relating to our business strategy and our current and future development plans.
The
potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance
to differ materially from those expressed or implied in this report include:
|
●
|
The
sale prices of crude oil;
|
|
●
|
The
amount of production from oil wells in which we have an interest;
|
|
●
|
Lease
operating expenses;
|
|
●
|
International
conflict or acts of terrorism;
|
|
●
|
General
economic conditions; and
|
|
●
|
Other
factors disclosed in this report.
|
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will
be important in determining our future performance. Consequently, actual results may differ materially from those that might be
anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion
of a forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you
should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law.
You
should read the matters described in “Risk Factors” and the other cautionary statements made in, and incorporated
by reference in, this Report as being applicable to all related forward-looking statements wherever they appear in this Report.
We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors
are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation
to update or revise these forward-looking statements, even though our situation may change in the future.
Please
see the “Glossary of Oil and Gas Terms” on page 9 of our Annual Report on Form 10-K for the year ended December
31, 2018, filed with the SEC on October 16, 2019 (the “2018 Annual Report”) for a list of abbreviations and definitions
used throughout this Report.
This
information should be read in conjunction with the unaudited condensed consolidated interim financial statements and the notes
thereto included in this Quarterly Report on Form 10-Q and Part II, Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations contained in our 2018 Annual Report.
Certain
capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated
financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.
Unless
the context requires otherwise, references to the “Company,” “we,” “us,”
“our,” “Petrolia” and “Petrolia Energy Corp.” refer specifically to Petrolia
Energy Corp. and its wholly-owned subsidiaries.
In
addition, unless the context otherwise requires and for the purposes of this Report only:
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“Bbl”
refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this Report in reference to crude oil or other
liquid hydrocarbons;
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“Boe”
barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf
of natural gas;
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“Mcf”
refers to a thousand cubic feet of natural gas;
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“SEC”
or the “Commission” refers to the United States Securities and Exchange Commission; and
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“Securities
Act” refers to the Securities Act of 1933, as amended.
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Item
2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 described in greater
detail in the “Plan of Operation” section below. During 2018, we acquired an aggregate of a 28% working interest in
properties consisting of approximately 41,526 acres located in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest
Saskatchewan and Eastern Alberta, Canada, as described in greater detail in the “Plan of Operation” section below.
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
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. During 2019 to date, 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 (“HGE”) to sell 100% working interest in the NOACK field assets located in Milam County, Texas
(the “NOACK Assets”). The Sale Agreement included customary indemnification obligations of the parties. HGE 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. As of March 31, 2019, the balance receivable
for the sale of $120,000 is included in other current assets.
HGE
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 on August 30, 2019; a $25,000 payment
is due 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 are planned to
be drilled in the first 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 March 31, 2019, the Company took control of thirty-eight (38) wells of which twenty-one (21)
were re-worked of which three (3) wells remain producing and the remaining wells experienced repairable mechanical failure after
several weeks of production. Five (5) wells were dedicated for injection purpose and are awaiting permits from the New Mexico
Energy, Minerals and Natural Resources Department. 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 of 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.
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.
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.
Results
of Operations
Revenues
Our
oil and gas revenue reported for the three months ended March 31, 2019 was $819,340, an increase of $789,360 from the three months
ended March 31, 2018. A total of $796,776 of the increase was attributable to the new operations associated with the Canadian
Properties which were acquired after March 31, 2018. Revenues associated with our U.S. properties totaled $22,564.
Operating
Expenses
Operating
expenses decreased by $756,766, to $1,240,514 for the three-month period ended March 31, 2019, compared to $1,997,280 for the
three months ended March 31, 2018. Operating expenses decreased over the comparative period due to a significant decrease of $1,567,416
in general and administrative costs from highs in the prior period associated with stock-based compensation. The decrease was
partially offset by an increase in lease operating expenses of $621,383 for the three months ended March 31, 2019, compared to
the prior period and an increase in depreciation, depletion and amortization expense for $186,058, both related to the acquisition
of the Canadian properties on June 29, 2018.
Other
income (expense)
Foreign
exchange gain decreased by $35,913, to $17,425 for the three-month period ended March 31, 2019, compared to $53,338 for the three
months ended March 31, 2018. The decrease resulted from fluctuations in the value of the United States dollar against the Canadian
dollar.
Interest
expense increased for the three-month period ended March 31, 2019, compared to the three-month period ended March 31, 2018, by
$9,162. The increase for the three months ended March 31, 2018, was due to a decrease in debt carried during the relevant period.
The
Company incurred a gain of $19,075 for the three-month ended March 31, 2019, relating to the change in fair value of derivative
liabilities. A derivative liability was recognized upon issuing Canadian dollar denominated warrants to a debt holder. The gain
resulted primarily from time decay.
The
Company recorded a loss on related party debt settlement of $203,349 for the three months ended March 31, 2018, relating to accrued
salaries. No such loss was incurred in the three months ended March 31, 2019.
The
Company incurred a loss of $32,999,330 for the three-month ended March 31, 2018, relating to the acquisition of Bow Energy Ltd.
No such loss was incurred in the three months ended March 31, 2019.
Net
Income (Loss)
Net
loss for the three months ended March 31, 2019 was $413,600, compared to a net loss of $35,146,405 for the three months ended
March 31, 2018. The primary reason for the decrease in net loss is due to the loss on disposition of Bow Energy Ltd. of $32,999,330,
which was incurred during the three months ended March 31, 2018.
Liquidity
and Capital Resources
The
financial condition of the Company has not changed significantly throughout the period from December 31, 2018, to March 31, 2019.
As
of March 31, 2019, we had total current assets of $338,411 and total assets of $12,586,952. Our total current liabilities as of
March 31, 2019 were $2,736,319 and our total liabilities as of March 31, 2019 were $5,024,938. We had negative working capital
of $2,397,908 as of March 31, 2019.
Our
material asset balances are made up of oil and gas properties and related equipment. Our most significant liabilities are accounts
payable and accrued liabilities, including amounts due to related parties, mainly consisting of accrued officer salaries of $1,840,239,
in addition to asset retirement obligations and note payables of $1,546,386 and $1,640,375, respectively (see “Part I –
Item 1. Financial Statements - Note 5. Notes Payable”, above for information regarding outstanding debt obligations).
Net
cash used in operating activities was $190,283 and $309,075 for the three months ended March 31, 2019 and 2018, respectively.
The decrease was primarily due to reductions in net loss.
Net
cash provided by investing activities was $120,000 and $3,784 for the three months ended March 31, 2019 and 2018, respectively.
The increase was primarily due to the funds used to acquire the Canadian Properties.
Net
cash provided by financing activities was $67,188 and $231,880 for the three months ended March 31, 2019 and 2018, respectively.
The decrease was primarily due to repayments of the notes payable of $156,330. Additionally, during the three-month period ended
March 31, 2019, the Company did not sell securities, while the Company raised $238,675 during the prior comparative period through
the sale of securities.
The
Company continues to operate at a negative cash flow of approximately $35,000 per month which raises substantial doubt about our
ability to continue as a going concern. Management is pursuing several initiatives to secure funding to increase production at
both the SUDS and TLSAUs fields which together with anticipated increases in the price of crude oil may reduce the Company’s
monthly cash shortfall. The total amount required by the Company to accomplish this objective is approximately $500,000. The sale
of the NOACK field and the addition of the revenue from our 28% ownership of the Canadian Properties has enhanced cashflow and
allowed the Company to allocate funds for SUDS and TLSAU development plans. The Company has resumed workover activities at SUDS
and TLSAU and expects progress to continue past the first quarter of 2020, funding permitting.
The
Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. We plan to generate profits by working over existing wells and drilling productive oil or gas
wells. However, we will need to raise additional funds to workover or drill new wells through the sale of our securities, through
loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any
commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available
when needed, we may need to cease operations. There can be no assurance that we will be successful in raising the capital needed
to drill oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all. Any wells
which we may drill may not be productive of oil or gas. Management believes that actions presently being taken to obtain additional
funding provide the opportunity for the Company to continue as a going concern. 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. Moving forward we may sell certain of our oil and gas properties in an effort to raise funds to support
our operations and future planned oil and gas operations.
Off-Balance
Sheet Arrangements
As
of March 31, 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, results of operations, liquidity or capital resources or change our financial condition.
Trends
Affecting Future Operations
The
factors that will most significantly affect our results of operations will be (i) the sale prices of crude oil and natural gas,
(ii) the amount of production from oil or gas wells in which we have an interest, and (iii) lease operating expenses. Our revenues
will also be significantly impacted by our ability to maintain or increase oil or gas production through exploration and development
activities, and the availability of funding to complete such activities.
It
is expected that our principal source of cash flow will be from the production and sale of crude oil and natural gas reserves
which are depleting assets. Cash flow from the sale of oil and gas production depends upon the quantity of production and the
price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally
generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining
financing. However, price increases heighten the competition for oil and gas prospects, increase the costs of exploration and
development, and, because of potential price declines, increase the risks associated with the purchase of producing properties
during times that prices are at higher levels.
A
decline in oil and gas prices (i) will reduce the cash flow internally generated by the Company which in turn will reduce the
funds available for exploring for and replacing oil and gas reserves, (ii) will increase the difficulty of obtaining equity and
debt financing and worsen the terms on which such financing may be obtained, (iii) will reduce the number of oil and gas prospects
which have reasonable economic terms, (iv) may cause us to permit leases to expire based upon the value of potential oil and gas
reserves in relation to the costs of exploration, (v) may result in marginally productive oil and gas wells being abandoned as
non-commercial, and (vi) may increase the difficulty of obtaining financing. However, price declines reduce the competition for
oil and gas properties and correspondingly reduce the prices paid for leases and prospects. During the last 5 months, oil prices
have trended upward to approximately $58.00 per barrel.
Other
than the foregoing, we do not know of any trends, events or uncertainties that will have, or are reasonably expected to have,
a material impact on our sales, revenues or expenses.
Critical
Accounting Policies and New Accounting Pronouncements
See
Note 2 to the financial statements included in the 2018 Annual Report for a description of our critical accounting policies. See
Note 2 to the unaudited condensed consolidated interim financial statements and the notes thereto included in this Quarterly Report
on Form 10-Q for a description of the impact of recently adopted accounting pronouncements and the potential impact of the adoption
of any new accounting pronouncements.
Going
concern – The accompanying financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative
net losses since its inception and requires capital for its contemplated operational and marketing activities to take place. The
Company’s ability to raise additional capital through the future sales of common stock and other securities is unknown.
The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and
its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The
ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going
concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome
of these aforementioned uncertainties.