NOTES
TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(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, 2019, 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, 2019,
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, 2019
|
|
$
|
2,443,747
|
|
|
$
|
10,350,538
|
|
|
$
|
12,794,285
|
|
Foreign currency translation
|
|
|
119,687
|
|
|
|
—
|
|
|
|
119,687
|
|
As at December 31, 2019
|
|
$
|
2,563,434
|
|
|
$
|
10,350,538
|
|
|
$
|
12,913,972
|
|
Addition
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Foreign currency translation
|
|
|
(213,369
|
)
|
|
|
—
|
|
|
|
(213,369
|
)
|
As at March 31, 2020
|
|
$
|
2,350,065
|
|
|
$
|
10,350,538
|
|
|
$
|
12,700,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
As at January 1, 2019
|
|
|
413,657
|
|
|
|
61,551
|
|
|
|
475,208
|
|
Dispositions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of oil and gas properties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Depletion
|
|
|
1,004,832
|
|
|
|
—
|
|
|
|
1,004,832
|
|
Foreign currency translation
|
|
|
40,487
|
|
|
|
—
|
|
|
|
40,487
|
|
As at December 31, 2019
|
|
$
|
1,458,976
|
|
|
$
|
61,551
|
|
|
$
|
1,520,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion
|
|
|
294,331
|
|
|
|
—
|
|
|
|
294,331
|
|
Foreign currency translation
|
|
|
(137,019
|
)
|
|
|
—
|
|
|
|
(137,019
|
)
|
As at March 31, 2020
|
|
$
|
1,616,288
|
|
|
$
|
61,551
|
|
|
$
|
1,677,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2019
|
|
$
|
1,104,458
|
|
|
$
|
10,288,987
|
|
|
$
|
11,393,445
|
|
Net book value as at March 31, 2020
|
|
$
|
733,777
|
|
|
$
|
10,288,987
|
|
|
$
|
11,022,764
|
|
On
August 6, 2019, the Company entered into a Purchase and Sale Agreement (“PSA”) for the sale of the same NOACK property with
Flowtex Energy LLC. (“FT”). The purchaser agreed to pay $400,000 for the NOACK Assets including a $20,000 deposit that was
received on August 15, 2019 and the remaining balance of $380,000 to be received by September 30, 2019. By December 31, 2019, FT had
made cumulative payments of $375,000, resulting in a $25,000 account receivable to the Company at September 30, 2019 which is included
in other current assets. The $400,000 was recorded as a gain on sale of properties. On July 6, 2021, the remaining $25,000 accounts receivable
was settled via the following: the purchaser remitted a cash payment of $8,995, as well as paying (on the Company’s behalf) $16,005
of outstanding property tax invoices previously incurred by the Company.
5.
NOTES PAYABLE
The
following table summarizes the Company’s notes payable:
|
|
|
|
|
|
|
Balance at:
|
|
|
|
Interest rate
|
|
|
Date of maturity
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Truck loan (ii)
|
|
|
5.49
|
%
|
|
January 20, 2022
|
|
|
14,304
|
|
|
|
16,141
|
|
Lee Lytton
|
|
|
—
|
|
|
On demand
|
|
|
3,500
|
|
|
|
—
|
|
Credit note I (iii)
|
|
|
12
|
%
|
|
May 11, 2021
|
|
|
800,000
|
|
|
|
800,000
|
|
Credit note II (iv)
|
|
|
12
|
%
|
|
October 17, 2019
|
|
|
346,040
|
|
|
|
346,038
|
|
Credit note III (v)
|
|
|
15
|
%
|
|
April 25, 2021
|
|
|
750,000
|
|
|
|
750,000
|
|
Discount on Credit Note III
|
|
|
—
|
|
|
April 25, 2021
|
|
|
(20,320
|
)
|
|
|
(25,101
|
)
|
Credit Note IV (vi)
|
|
|
10
|
%
|
|
January 02, 2023
|
|
|
1,120,000
|
|
|
|
—
|
|
Discount on Credit Note IV
|
|
|
—
|
|
|
January 02, 2023
|
|
|
(233,340
|
)
|
|
|
—
|
|
Credit Note V (vii)
|
|
|
10
|
%
|
|
June 1, 2020
|
|
|
100,000
|
|
|
|
—
|
|
Discount on Credit Note V
|
|
|
—
|
|
|
June 1, 2020
|
|
|
(24,324
|
)
|
|
|
—
|
|
Credit Note VI (viii)
|
|
|
10
|
%
|
|
May 14, 2020
|
|
|
125,000
|
|
|
|
—
|
|
Discount on Credit Note VI
|
|
|
—
|
|
|
May 14, 2020
|
|
|
(30,405
|
)
|
|
|
—
|
|
SUDS Development Funding Note
|
|
|
10
|
%
|
|
June 1, 2020
|
|
|
62,000
|
|
|
|
—
|
|
Mark Allen (not related party at
balance sheet date)
|
|
|
12
|
%
|
|
June 30, 2021
|
|
|
200,000
|
|
|
|
200,000
|
|
M. Hortwitz
|
|
|
10
|
%
|
|
October 14, 2016
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
3,222,455
|
|
|
|
2,097,078
|
|
Current portion:
|
|
|
|
|
|
|
|
|
(453,540
|
)
|
|
|
(653,540
|
)
|
Long-term notes payable
|
|
|
|
|
|
|
|
$
|
2,768,915
|
|
|
$
|
1,443,538
|
|
|
(i)
|
Not
used.
|
|
|
|
|
(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.
|
|
|
|
|
(v)
|
On
April 25, 2019, the Company entered into a promissory note (an “Acquisition Note”) with a third-party in the amount of
$750,000 to acquire working interests in the Utikuma oil field in Alberta Canada. The Note bears interest at 15% per annum
and is due in full at maturity on April 25, 2021. No payments are required on the note until maturity while interest is accrued.
In addition, warrants to purchase 500,000 shares of common stock with an exercise price of $0.12 per share expiring on May 1, 2021
were issued associated with the note. The fair value of issued warrants were recorded as a debt discount of $38,249 and amortization
of $8,366. The notes hold a security guarantee of a 50% working interest in the Utikuma oil field and a 100% working interest in
the TLSAU field.
|
|
|
|
|
(vi)
|
On
January 2, 2020, the Company entered into a loan agreement in the amount of $1,000,000 with a third party (including a $120,000 origination
fee). The note bore interest at an interest rate of $10% per annum and matures on June 30, 2020, with warrants to purchase 5,000,000
shares of common stock (the “Loan Warrants”), in Canadian dollars at an exercise price of $0.10 per share and expire
in January 2, 2023. The fair value of issued warrants were recorded as a debt discount of $266,674 and monthly amortization of $11,111.
These funds were placed in escrow for the future purchase of the Utikuma oil field (see Note 13: Subsequent Events)
|
|
|
|
|
(vii)
|
On
January 3, 2020, the Company entered into a loan agreement in the amount of $100,000 with
a third party. The note bore interest at an interest rate of $10% per annum and matures on
June 1, 2020, with warrants to purchase 400,000 shares of common stock (the “Loan Warrants”),
at an exercise price of $0.10 per share and expire in January 3, 2023. The fair value of
issued warrants were recorded as a debt discount of $31,946 and monthly amortization of $1,775.
|
|
(viii)
|
On
February 14, 2020, the Company entered into a loan agreement in the amount of $125,000 with
a third party. The note bore interest at an interest rate of $10% per annum and matures on
June 1, 2020, with warrants to purchase 750,000 shares of common stock (the “Loan Warrants”),
at an exercise price of $0.10 per share and expire in February 14, 2022. The fair value of
issued warrants were recorded as a debt discount of $34,261 and monthly amortization
of $1,903.
|
On
January 15, 2019, the Company entered into a loan agreement in the amount of $125,000 with a third party. The note bore interest at an
interest rate of $4% per annum and was to mature on January 15, 2020. On September 30, 2019, Jovian Petroleum Corporation reimbursed
the $125,000 to the third party. Consequently, the $125,000 debt balances were transferred into the Jovian LOC and are now included in
the $481,266 at March 31, 2020 (see Note 6: Related Party Notes Payable)
On
January 6, 2020, the Company entered into a consulting agreement, with a third party, that included a funding clause where the Company
borrowed $62,000 from a third party. The third party is responsible for the future oversight and management of the SUDS field located
in Creek County, Oklahoma. The note bore interest at an interest rate of $10% per annum and matures on June 30, 2020.
The
following is a schedule of future minimum repayments of notes payable as of March 31:
2020
|
|
$
|
453,540
|
|
2021
|
|
|
2,768,915
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
3,222,455
|
|
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, 2020
|
|
|
December 31, 2019
|
|
Lee Lytton
|
|
|
—
|
|
|
On demand
|
|
|
—
|
|
|
|
3,500
|
|
Quinten Beasley
|
|
|
10
|
%
|
|
October 14, 2016
|
|
|
10,000
|
|
|
|
10,000
|
|
Joel Oppenheim (i)
|
|
|
—
|
|
|
On demand
|
|
|
176,900
|
|
|
|
217,208
|
|
Joel Oppenheim (i)
|
|
|
—
|
|
|
On demand
|
|
|
15,000
|
|
|
|
15,000
|
|
Jovian Petroleum Corporation(ii)
|
|
|
3.5
|
%
|
|
December 31, 2021
|
|
|
475,543
|
|
|
|
362,583
|
|
Ivar Siem (iii)
|
|
|
12
|
%
|
|
On demand
|
|
|
100,000
|
|
|
|
100,000
|
|
Ivar Siem (iii)
|
|
|
12
|
%
|
|
On demand
|
|
|
75,000
|
|
|
|
75,000
|
|
Ivar Siem
|
|
|
—
|
|
|
|
|
|
50,000
|
|
|
|
—
|
|
Joel Oppenheim (iii)
|
|
|
12
|
%
|
|
October 17, 2018
|
|
|
240,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
$
|
1,142,443
|
|
|
$
|
983,291
|
|
|
(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. Subsequent to period-end this LOC has been extended
until December 31, 2020.
|
|
(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 (an “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 Nine 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.
|
During
2019, $120,000 of related party notes and payables were converted to shares. Specifically, Leo Womack for $ 20,000, Joel Oppenheim for
$40,000, Jovian for $40,000 and American Resources for $20,000. See Note 10 for further explanation.
On January 20, 2020, Jovian, a related party,
purchased 1 unit of the debt private placement of $12,500 that was funded through their LOC. At maturity, the holder has the option to
either collect the principal or convert the balance into shares/warrants. The conversion would be for 156,250 shares ($0.08 per share)
of common stock and warrants to purchase 312,500 shares of common stock at a price of $0.08 per unit. Jovian converted the debt into
shares during 2020. During the three months ended March 31, 2020 the shares were issued to Jovian.
The
following is a schedule of future minimum repayments of related party notes payable as of March 31, 2020:
2020
|
|
$
|
1,142,443
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
1,142,443
|
|
7.
DERIVATIVE FINANCIAL INSTRUMENTS
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.
|
Our
derivative liabilities are measured at fair value on a recurring basis and estimated as follows:
March 31, 2020
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
151,184
|
|
|
|
151,184
|
|
ARO liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,649,728
|
|
|
|
1,649,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
24,509
|
|
|
|
24,509
|
|
ARO liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,723,364
|
|
|
|
1,723,364
|
|
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 $30,013.
On
January 2, 2020, as an inducement to enter into a Loan Agreement, the Company issued warrants to purchase 5,000,000 shares of common
stock with an exercise price of $0.10 per share in Canadian dollars (see Note 5) and expire in 36 months. 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 fair value of issued
warrants were recorded as a debt discount of $266,674 and monthly amortization of $11,111. The Company valued the related derivative
liability at initial recognition as $144,259.
A
summary of the activity of the Company’s derivative liabilities is shown below:
Balance, January 1, 2019
|
|
$
|
37,013
|
|
Additions
|
|
|
—
|
|
Fair value adjustments
|
|
|
(12,504
|
)
|
As at December 31, 2019
|
|
|
24,509
|
|
Additions
|
|
|
144,259
|
|
Fair value adjustment
|
|
|
(17,584
|
)
|
As at March 31, 2020
|
|
$
|
151,184
|
|
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, 2020
|
|
|
December
31, 2019
|
|
Risk-free
interest rate
|
|
|
2.27
|
%
|
|
|
1.58%
- 2.27%
|
|
Expected
life
|
|
|
2.1
years
|
|
|
|
1.4
– 2.1 years
|
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
208
|
%
|
|
|
208%
- 240%
|
|
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:
|
|
|
March 31, 2020
|
|
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, 2018
|
|
$
|
1,258,399
|
|
|
$
|
251,223
|
|
|
$
|
1,509,622
|
|
Accretion expense
|
|
|
123,474
|
|
|
|
26,150
|
|
|
|
149,624
|
|
Foreign currency translation
|
|
|
64,118
|
|
|
|
—
|
|
|
|
64,118
|
|
Asset retirement obligations, December 31, 2019
|
|
|
1,445,991
|
|
|
|
277,373
|
|
|
|
1,723,364
|
|
Accretion expense
|
|
|
41,992
|
|
|
|
6,953
|
|
|
|
48,945
|
|
Foreign currency translation
|
|
|
(122,581
|
)
|
|
|
—
|
|
|
|
(122,581
|
)
|
Asset retirement obligations, March 31, 2020
|
|
$
|
1,365,402
|
|
|
$
|
284,326
|
|
|
$
|
1,649,728
|
|
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 $44,675 were declared for the three months ended March 31,
2020.
Common
stock
As
of year ended December 31, 2019, the Company closed private placements for $0.08 per unit for a total of 1,875,000 units and gross proceeds
of $150,000 (the “2019 Units”). Each 2019 Unit was comprised of one common share and two warrants 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 price of $0.10
per share. See additional description of the detail transactions concerning those warrants in Note 10: Related Party Transactions, below.
During
2019, a warrant holder exercised warrants to purchase 275,000 shares of common stock for cash proceeds of $26,875 at an average exercise
price of $0.098 per share. These shares were issued in January 2020.
On
August 8, 2019, director Joel Oppenheim exercised warrants to purchase 150,000 shares of common stock for cash proceeds of $15,000
at an exercise price of $0.10 per share. The shares were issued in January 2020.
On
August 14, 2019, director Joel Oppenheim exercised warrants to purchase 10,000 shares of common stock for cash proceeds of $1,000
at an exercise price of $0.10 per share. The shares were issued in January 2020.
On
July 23, 2019, Joel Oppenheim, a related party, purchased 1 unit of the debt private placement with gross proceeds of $12,500. At maturity,
the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion would be for 156,250
shares of common stock and warrants to purchase 312,500 shares of common stock at a price of $0.08 per unit. The warrants fair value
was determined to be $15,517 via the Black Sholes Option Pricing Model. Consideration for the purchase was provided though a cash payment
of $2,500 as well as the forgiving of an outstanding bridge loan of $10,000. The shares were issued in January 2020.
On
January 20, 2020, Jovian, a related party, purchased 1 unit of the debt private placement of $12,500 that was funded through their LOC.
At maturity, the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion would
be for 156,250 shares ($0.08 per share) of common stock and warrants to purchase 312,500 shares of common stock at a price of $0.08 per
unit. Jovian converted the debt into shares during 2020. During the three months ended March 31, 2020 the shares were issued to Jovian.
On
February 29, 2020, the Company signed a consulting agreement with a third party to provide management services related to the
SUDS field. The compensation related terms included the issuance of 250,000 shares of Common Stock. The shares were not issued until
December 15, 2020.
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, 2019
|
|
|
51,066,864
|
|
|
$
|
0.20
|
|
Granted
|
|
|
12,250,000
|
|
|
|
0.15
|
|
Exercised
|
|
|
(125,000
|
)
|
|
|
0.09
|
|
Expired
|
|
|
(6,148,028
|
)
|
|
|
0.25
|
|
Outstanding at December 31, 2019
|
|
|
57,043,836
|
|
|
$
|
0.14
|
|
Granted
|
|
|
8,400,000
|
|
|
|
0.16
|
|
Exercised
|
|
|
(1,650,000
|
)
|
|
|
0.08
|
|
Expired
|
|
|
(2,005,000
|
)
|
|
|
0.23
|
|
Outstanding at March 31, 2020
|
|
|
61,788,836
|
|
|
$
|
0.16
|
|
As
of March 31, 2020, the weighted-average remaining contractual life of warrants outstanding was 1.02 years (December 31, 2019 –
1.04 years).
As
of March 31, 2020, the intrinsic value of warrants outstanding is $0.0 (December 31, 2019 - $8,256).
The
table below summarizes warrant issuances during the three months ended March 31, 2020 and year ended December 31, 2019:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Warrants granted:
|
|
|
|
|
|
|
|
|
Board of Directors and Advisory Board service
|
|
|
1,750,000
|
|
|
|
7,000,000
|
|
Private placements
|
|
|
—
|
|
|
|
3,750,000
|
|
Pursuant to financing arrangements
|
|
|
6,400,000
|
|
|
|
1,500,000
|
|
Pursuant to consulting agreements
|
|
|
250,000
|
|
|
|
—
|
|
Total
|
|
|
8,400,000
|
|
|
|
12,250,000
|
|
The
warrants 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, 2020
|
|
|
December
31, 2019
|
|
Risk-free
interest rate
|
|
1.40%
to 1.59
|
%
|
|
1.94%
to 2.39
|
%
|
Expected
life
|
|
2.0
-3.0 years
|
|
|
1.0
- 3.0 years
|
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
224%
- 226
|
%
|
|
|
240%
- 283
|
%
|
10.
RELATED PARTY TRANSACTIONS
On
August 21, 2019, Jovian, a related party, purchased 4 units of the debt private placement with gross proceeds of $50,000. At maturity,
the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion would be for 625,000
shares of common stock and warrants to purchase 1,250,000 shares of common stock at a price of $0.08 per unit. The warrants fair value
was determined to be $62,066 via the Black Sholes Option Pricing Model. Consideration for the purchase was provided though a cash payment
and the conversion of the related party’s prior notes payable and accrued payables.
On
August 21, 2019, Joel Oppenheim, a related party, purchased 4 units of the debt private placement with gross proceeds of $50,000. At
maturity, the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion would
be for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock at a price of $0.08 per unit. The warrants
fair value was determined to be $62,066 via the Black Sholes Option Pricing Model. Consideration for the purchase was provided though
a cash payment and the conversion of the related party’s prior notes payable and accrued payables.
On
August 21, 2019, American Resources Offshore, Inc., a related party, purchased 2 units of the debt private placement with gross proceeds
of $25,000. At maturity, the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion
would be for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock at a price of $0.08 per unit. The
warrants fair value was determined to be $31,033 via the Black Sholes Option Pricing Model. Consideration for the purchase was provided
though a cash payment and the conversion of the related party’s prior notes payable and accrued payables.
On
August 21, 2019, Leo Womack, a related party, purchased 2 units of the debt private placement with gross proceeds of $25,000. At maturity,
the holder has the option to either collect the principal or convert the balance into shares/warrants. The conversion would be for 312,500
shares of common stock and warrants to purchase 625,000 shares of common stock at a price of $0.08 per unit. The warrants fair value
was determined to be $31,033 via the Black Sholes Option Pricing Model. Consideration for the purchase was provided though a cash payment
and the conversion of the related party’s prior notes payable and accrued payables.
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
474,632
|
|
|
$
|
6,489
|
|
|
$
|
481,121
|
|
Production costs
|
|
|
(481,447
|
)
|
|
|
(122,660
|
)
|
|
|
(604,107
|
)
|
Depreciation, depletion, amortization and accretion
|
|
|
(294,331
|
)
|
|
|
(8,047
|
)
|
|
|
(302,378
|
)
|
Results of operations from producing activities
|
|
$
|
(301,146
|
)
|
|
$
|
(124,218
|
)
|
|
$
|
(425,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets, March 31, 2020
|
|
$
|
733,777
|
|
|
$
|
10,340,504
|
|
|
$
|
11,074,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, December 31, 2019
|
|
$
|
1,877,771
|
|
|
$
|
10,370,770
|
|
|
$
|
12,248,541
|
|
13.
SUBSEQUENT EVENTS
All
of the transactions/events mentioned below occurred subsequent to March 31, 2020.
On February 29, 2020, the Company signed a consulting
agreement with a third party to provide management services related to the SUDS field. The compensation related terms included the issuance
of 250,000 shares of Common Stock. The shares were not issued until December 15, 2020.
Effective
July 13, 2020, Richard Dole, Joel Oppenheim and Saleem Nizami resigned as Directors on the Board. This reduced the size of the Board
from seven to four members, which is helping to streamline the Company.
On
May 29, 2020, Petrolia Energy Corporation acquired a 50% working interest in approximately 28,000 acres located in the Utikuma Lake area
in Alberta, Canada. The property is an oil-weighted asset currently producing approximately 500 bopd of low decline light oil. The working
interest was acquired from Blue Sky Resources Ltd. in an affiliated party transaction as Zel C. Khan, the Company’s Chief Executive
Officer, is related to the ownership of Blue Sky. Blue Sky acquired a 100% working interest in the Canadian Property from Vermilion Energy
Inc. via Vermilion’s subsidiary Vermilion Resources. The effective date of the acquisition was May 1, 2020.
On
September 1, 2020, the Board of Directors approved a contractual Employment Agreement between the Company and Mark Allen to appoint him
as the new President of the Company. Mr. Allen’s contract term is 6 months, with a cash payment of $90,000 in equal monthly installments
of $15,000, including an option to extend. In addition, Mr. Allen is due to receive incentive compensation of 2,000,000 shares of common
stock (1,000,000 were issued at signing and the remining shares are yet to be issued). He also is to receive 1,000,000 warrants at $0.08
per share that expire in 36 months and vest over a two-year period. Mr. Allen has been in the oil and gas industry for over 25 years,
most recently as Vice President, Oil and Gas Consulting for Wipro Limited, a leading global consulting and information technology services
firm. Prior to Wipro Limited, Mr. Allen was Vice President, Exploration and Production Services for SAIC, a Fortune 500 company.
On
September 16, 2020, Zel C.Khan resigned as a member of the Board to solely focus on his role as the Chief Executive Officer of Petrolia
Energy Corporation.
Company
President, Mark Allen, was issued 1,650,000 common shares for exercising warrants at $0.05 per share with cash proceeds of $82,500.
The
Company signed an Executive Salary Payable Agreement with Zel Khan as the Chief Executive Officer. All of Mr. Khan’s previous salary
obligation will be satisfied by the issuance of 1,992,272 shares of the Company, within 15 days of the signed agreement.
The
Company entered into a promissory note with American Resources for $125,000. The Note bears interest at 10% per annum and is due in full
at maturity on June 1, 2020. In addition, 500,000 shares of common stock were granted in association with the note.
Paul
Deputy was reinstated as Interim Chief Financial Officer. He also signed a Settlement and Mutual Release Agreement. In exchange
for releasing the Company for any current, outstanding payroll and/or service-related liability at January 29, 2021, the Company agreed
to pay Mr. Deputy $50,000, to be paid in $2,500 monthly increments, starting April 1, 2021. In addition, he was issued 250,000 shares
of Petrolia common stock.
Mark
Allen converted $30,000 of unpaid contract wages from early 2020 into 333,333 common shares of common stock at a rate of $0.09 per share.
Mark
Allen converted a defaulted secured loan of $270,000 that was due on December 15, 2019. The debt was converted at a rate of $0.05 per
share and resulted in the issuance of 5,400,000 shares of common stock and 5,400,000 warrants to purchase common stock. The warrants
have a strike price of $0.08 per share and expire in 36 months.
Joel
Oppenheim, former Director, was issued 316,491 shares in January 2021 pursuant to a Director’s Fees Payable Agreement. The agreement
stated that the shares were issued in full satisfaction of all outstanding director fees payable.
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.
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 2019 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 Nine 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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