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iso4217:USD
xbrli:shares
iso4217:USD
xbrli:shares
xbrli:pure
utr:acre
iso4217:CAD
iso4217:CAD
xbrli:shares
BBLS:Integer
utr:bbl
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,
“and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
PART
I
Glossary
of Oil and Gas Terms
DEVELOPED
ACREAGE. The number of acres that are allocated or assignable to productive wells or wells capable of production.
DISPOSAL
WELL. A well employed for the reinjection of salt water produced with oil into an underground formation.
HELD
BY PRODUCTION. A provision in an oil, gas and mineral lease that perpetuates an entity’s right to operate a property or concession
as long as the property or concession produces a minimum paying quantity of oil or gas.
INJECTION
WELL. A well employed for the injection into an underground formation of water, gas or other fluid to maintain underground pressures
which would otherwise be reduced by the production of oil or gas.
LANDOWNER’S
ROYALTY. A percentage share of production, or the value derived from production, which is granted to the lessor or landowner in the oil
and gas lease, and which is free of the costs of drilling, completing, and operating an oil or gas well.
LEASE.
Full or partial interests in an oil and gas lease, authorizing the owner thereof to drill for, reduce to possession and produce oil and
gas upon payment of rentals, bonuses and/or royalties. Oil and gas leases are generally acquired from private landowners and federal
and state governments. The term of an oil and gas lease typically ranges from three to ten years and requires annual lease rental payments.
If a producing oil or gas well is drilled on the lease prior to the expiration of the lease, the lease will generally remain in effect
until the oil or gas production from the well ends. The owner of the lease is required to pay the owner of the leased property a royalty
which is usually between 12.5% and 25% of the gross amount received from the sale of the oil or gas produced from the well.
LEASE
OPERATING EXPENSES. The expenses of producing oil or gas from a formation, consisting of the costs incurred to operate and maintain wells
and related equipment and facilities, including labor costs, repair and maintenance, supplies, insurance, production, severance and other
production excise taxes.
NET
ACRES OR WELLS. A net well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or acres
equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres expressed as
whole numbers and fractions.
NET
REVENUE INTEREST. A percentage share of production, or the value derived from production, from an oil or gas well and which is free of
the costs of drilling, completing and operating the well.
OVERRIDING
ROYALTY. A percentage share of production, or the value derived from production, which is free of all costs of drilling, completing and
operating an oil or gas well, and is created by the lessee or working interest owner and paid by the lessee or working interest owner
to the owner of the overriding royalty.
PRODUCING
PROPERTY. A property (or interest therein) producing oil or gas in commercial quantities or that is shut-in but capable of producing
oil or gas in commercial quantities. Interests in a property may include working interests, production payments, royalty interests and
other non-working interests.
PROSPECT.
An area in which a party owns or intends to acquire one or more oil and gas interests, which is geographically defined on the basis of
geological data and which is reasonably anticipated to contain at least one reservoir of oil, gas or other hydrocarbons.
PROVED
RESERVES. Those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty
to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods,
and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that
renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for the estimation.
SHUT-IN
WELL. A well which is capable of producing oil or gas, but which is temporarily not producing due to mechanical problems or a lack of
market for the well’s oil or gas.
UNDEVELOPED
ACREAGE. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether or not such acreage contains proved reserves. Undeveloped acreage should not be confused with undrilled
acreage which is “Held by Production” under the terms of a lease.
WORKING
INTEREST. A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from
a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing
and operating a well. After royalties are paid, the working interest also entitles its owner to share in production revenues with other
working interest owners, based on the percentage of the working interest owned.
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 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 above the “Glossary of Oil and Gas Terms”, for a list of abbreviations and definitions used throughout this report.
Except
where context otherwise requires and for purposes of the Annual Report on Form 10-K only:
|
● |
“we”,
“us”, “our company”, “our”, “the company” refer to Petrolia Energy Corporation, and
its subsidiaries; |
|
● |
“Exchange
Act” refers to the Securities Exchange Act of 1934, as amended; |
|
● |
“SEC”
or the “Commission” refers to the United States Securities and Exchange Commission; and |
|
● |
“Securities
Act” refers to the Securities Act of 1933, as amended. |
Available
Information
We
are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and information
statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements
and other information may be examined on the Internet at http://www.sec.gov.
Financial
and other information about the Company is available on our website (http://www.petroliaenergy.com/). Information on our website
is not incorporated by reference into this Report. We make available on our website, free of charge, copies of our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing
it to the SEC.
ITEM
1. BUSINESS.
Background
We
were incorporated in Colorado on January 16, 2002. In 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 and moved the corporation from Colorado to Texas, 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.
Plan
of Operation
Since
2015, we have established a strategy to acquire, enhance and redevelop high-quality, resource in place assets. As of 2018, the Company
has included strategic acquisitions in western Canada while actively pursuing the strategy to execute low-cost operational solutions,
and affordable technology. We believe our conventional, low-risk resource plays and the redevelopment of our late-stage plays is a solid
foundation for continued oil production growth and future revenue growth.
Slick
Unit Dutcher Sands (“SUDS”) Field
The
SUDS oilfield consists of 2,604 acres located in Creek County, Oklahoma and Petrolia owns a 100% Working Interest (“WI”)
with a 76.5% net revenue interest (NRI). Our engineering reports and analysis indicate there is still considerable recoverable reserves
remaining.
A
capital project was completed to rebuild our field tank battery, consisting of two free water knockout units, four oil stock tanks and
one fiberglass saltwater tank. We also have one disposal well. The SUDS field is currently shut-in while awaiting sufficient capital
to recomplete the wells and repair the flow lines.
Twin
Lakes San Andres Unit (“TLSAU”) Field
TLSAU
is located 45 miles from Roswell, Chaves County, New Mexico. TLSAU is currently shut-in awaiting confirmation of lease acreage held,
then capital allocation to complete some regulatory plugging requirements.
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 for the aggregate value of $50,000.
Canadian
properties – Luseland, Hearts Hill and Cuthbert fields
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. Additionally, there
are several idle wells with potential for reactivation and 34 sections of undeveloped land (approximately 21,760 acres). The Canadian
Properties and the Working Interest were acquired from Blue Sky Resources (a related party). Blue Sky Resources 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 Resources 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 Resources for the additional 3% Working Interest was $150,000.
On
February 16, 2022, Petrolia Canada Corporation (PCC), a wholly owned subsidiary of Petrolia Energy Corporation (PEC), entered into a
Purchase and Sale Agreement (PSA) and Debt Settlement Agreement (DSA) with Prospera Energy, Inc. whereby PCC sold its 28% working interest
in the Luseland, Hearts Hill and Cuthbert fields.
Utikuma
Lake field
On
May 1, 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 bpd of light oil. The working interest
was acquired from Blue Sky Resources. in an affiliated party transaction as Zel C. Khan, the Company’s former Chief Executive Officer,
is related to the ownership of Blue Sky Resources.
Blue
Sky Resources 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. The total purchase price of the property was $2,000,000 (CAD), with
$1,000,000 of that total due initially. The additional $1,000,000 was contingent on the future price of WTI crude. At the time WTI price
exceeded $50/bbl, the Company would pay an additional $750,000. In addition, at the time WTI price exceeded $57/bbl the Company would
pay an additional $250,000 (for a cumulative contingent total of $1,000,000). Note that WTI crude prices did not exceed those price thresholds
until 2021, so the contingent $1,000,000 will not be recorded until 2021. Included in the terms of the agreement, the Company also funded
their portion of the Alberta Energy Regulator (“AER”) bond fund requirement ($560,441 USD), necessary for the wells to continue
in production after the acquisition. Additional funds ($385,337 USD) remain in the other current asset balance for future payments
to BSR, related to the acquisition.
The
following table shows our producing wells, developed acreage, and undeveloped acreage as of December 31, 2020, for the Oklahoma, New
Mexico and Alberta/Saskatchewan properties:
State/Province | |
Productive
Wells | | |
Developed
Acreage | | |
Undeveloped
Acreage (1) | |
| |
Gross | | |
Net | | |
Gross | | |
Net | | |
Gross | | |
Net | |
Oklahoma | |
| 101 | (2) | |
| 3 | | |
| 2,604 | | |
| 2,604 | | |
| 0 | | |
| 0 | |
New
Mexico | |
| 38 | (3) | |
| 0 | | |
| 1,080 | | |
| 1,080 | | |
| 0 | | |
| 0 | |
Alberta/Saskatchewan | |
| 316 | | |
| 218 | | |
| 47,766 | | |
| 36,766 | | |
| 21,760 | | |
| 21,760 | |
|
(1) |
Undeveloped
acreage includes leasehold interests on which wells have not been drilled or completed to the point that would permit the production
of commercial quantities of natural gas and oil regardless of whether the leasehold interest is classified as containing proved undeveloped
reserves. |
|
|
|
|
(2) |
Represents
three (3) wells that were worked-over and capable of producing oil. |
|
|
|
|
(3) |
The
field was shut in for repairs and remediation work for the majority of 2020. |
The
following table shows the status of our gross acreage as of December 31, 2020, for the Oklahoma, New Mexico and Alberta/Saskatchewan
properties:
State/Province | |
Held
by Production | | |
Not
Held by Production | |
Oklahoma | |
| 2,604 | | |
| — | |
New Mexico | |
| 1,080 | | |
| — | |
Alberta/Saskatchewan | |
| 47,766 | | |
| — | |
Leases
on acres that are Held by Production remain in force so long as oil or gas is produced from one or more wells on the particular lease.
Leased acres that are not held by Production require annual rental payments to maintain the lease until the first to occur of the following:
the expiration of the lease or the time that oil or gas is produced from one or more wells drilled on the leased acreage. At the time
oil or gas is produced from wells drilled on the leased acreage, the lease is considered to be Held by Production.
Proved
Reserves
Below
is a table that provides historical average sales price per barrel and average production cost per barrel by geographical location and
by year, for the last three (3) fiscal years.
| |
Average
Sales Price (per
Bbls) ($) | | |
Average
Production Cost (per
Bbls) ($) | | |
Oil
Production (Bbls) | |
Oklahoma | |
| | | |
| | | |
| | |
2018 | |
| 45.55 | | |
| 3,341.49 | | |
| 31 | |
2019 | |
| (1 | ) | |
| (1 | ) | |
| (1 | ) |
2020 | |
| 38.18 | | |
| 319.75 | | |
| 810 | |
New Mexico | |
| | | |
| | | |
| | |
2018 | |
| 48.87 | | |
| 1,146.90 | | |
| 106 | |
2019 | |
| (1 | ) | |
| (1 | ) | |
| (1 | ) |
2020 | |
| 33.31 | | |
| 94.16 | | |
| 309 | |
Alberta/ Saskatchewan | |
| | | |
| | | |
| | |
2018 | |
| 22.27 | | |
| 24.56 | | |
| 50,765 | |
2019 | |
| 37.62 | | |
| 30.71 | | |
| 91,917 | |
2020 | |
| 30.42 | | |
| 35.92 | | |
| 94,016 | |
|
(1) |
Note
that in 2019, no sales or production occurred for the Oklahoma and New Mexico properties. |
Below
are estimates of our cumulative net proved reserves of all fields, as of December 31, 2020, net to our interest. Our proved reserves
are located in Oklahoma, New Mexico and Canada.
Estimates
of volumes of proved reserves at December 31, 2020 are presented in barrels (Bbls) for oil and, for natural gas, in thousands of cubic
feet (Mcf) at the official temperature and pressure bases of the areas in which the gas reserves are located.
| |
Oil
(Bbls) | | |
Gas
(Mcf) | |
Proved: | |
| | | |
| | |
Developed | |
| 1,091,520 | | |
| 63,190 | |
Undeveloped | |
| 66,160 | | |
| | |
Total | |
| 1,157,680 | | |
| 63,190 | |
|
● |
Bbl
- refers to one barrel, or 42 U.S. gallons liquid volume, in reference to crude oil or other liquid hydrocarbons. |
|
● |
Mcf
- refers to one thousand cubic feet. |
|
● |
A
BOE (i.e., barrel of oil equivalent) combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl of oil. |
Below
are estimates of our present value of estimated future net revenues from our proved reserves based upon the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves in accordance with the provisions of Accounting Standards Codification
Topic 932, Extractive Activities—Oil and Gas. The standardized measure of discounted future net cash flows is determined by using
estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on period-end economic
conditions. The estimated future production is based upon benchmark prices that reflect the unweighted arithmetic average of the first
day-of-the-month price for oil and gas during the twelve-month period ended December 31, 2020. The resulting estimated future cash inflows
are then reduced by estimated future costs to develop and produce reserves based on period-end cost levels. No deduction has been made
for depletion, depreciation or for indirect costs, such as general corporate overhead. Present values were computed by discounting future
net revenues by 10% per year.
Future cash inflows | |
$ | 47,647,500 | |
Deductions (including estimated taxes) | |
$ | (27,352,340 | ) |
Future net cash flow | |
$ | 20,295,160 | |
Discounted future net cash flow | |
$ | 7,956,920 | |
MKM
Engineering prepared the estimates of our proved reserves, future production and income attributable to our leasehold interests in the
United States and Canada as of December 31, 2020. Michele Mudrone was the technical person primarily responsible for overseeing the preparation
of the reserve report. Ms. Mudrone has more than 25 years of practical experience in the estimation and evaluation of petroleum reserves.
MKM Engineering is an independent petroleum engineering firm that provides petroleum consulting services to the oil and gas industry.
The estimates of drilled reserves, future production and income attributable to certain leasehold and royalty interests are based on
technical analysis conducted by engineers employed at MKM Engineering.
Mark
Allen, our CEO, oversaw preparation of the reserve estimates by MKM Engineering. We do not have a reserve committee and we do not have
any specific internal controls regarding the estimates of our reserves.
Our
proved reserves include only those amounts which we reasonably expect to recover in the future from known oil and gas reservoirs under
existing economic and operating conditions, at current prices and costs, under existing regulatory practices and with existing technology.
Accordingly, any changes in prices, operating and development costs, regulations, technology or other factors could significantly increase
or decrease estimates of proved reserves.
Proved
reserves were estimated by performance methods, the volumetric method, analogy, or a combination of methods utilizing present economic
conditions and limited to those proved reserves economically recoverable. The performance methods include decline curve analysis that
utilize extrapolations of historical production and pressure data available through December 31, 2020 in those cases where such data
was considered to be definitive.
Forecasts
for future production rates are based on historical performance from wells currently on production in the region with an economic cut-off
for production based upon the projected net revenue being equal to the projected operating expenses. No further reserves or valuation
were given to any wells beyond their economic cut-off. Where no production decline trends have been established due to the limited historical
production records from wells on the properties, surrounding wells historical production records were used and extrapolated to wells
of the property. Where applicable, the actual calculated present decline rate of any well was used to determine future production volumes
to be economically recovered. The calculated present rate of decline was then used to determine the present economic life of the production
from the reservoir.
For
wells currently on production, forecasts of future production rates were based on historical performance data. If no production decline
trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate,
until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to economic depletion of the reserves.
If a decline trend has been established, this trend was used as the basis for estimating future production rates.
Proved
developed non-producing and undeveloped reserves were estimated primarily by the performance and historical extrapolation methods. Test
data and other related information were used to estimate the anticipated initial production rates from those wells or locations that
are not currently producing. For reserves not yet on production, sales were estimated to commence at a date we determined to be reasonable.
In
general, the volume of production from our oil and gas properties declines as reserves are depleted. Except to the extent we acquire
additional properties containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves
will decline as reserves are produced. Accordingly, volumes generated from our future activities are highly dependent upon the level
of success in acquiring or finding additional reserves and the costs incurred in doing so.
Government
Regulation
Various
state, province and federal agencies regulate the production and sale of oil and natural gas. All states and provinces in which we plan
to operate impose restrictions on the drilling, production, transportation and sale of oil and natural gas.
The
Federal Energy Regulatory Commission (the “FERC”) regulates the interstate transportation and the sale in interstate commerce
for resale of natural gas. The FERC’s jurisdiction over interstate natural gas sales has been substantially modified by the Natural
Gas Policy Act under which the FERC continued to regulate the maximum selling prices of certain categories of gas sold in “first
sales” in interstate and intrastate commerce.
Our
sale of oil and natural gas liquids will not be regulated and will be at market prices. The price received from the sale of these products
will be affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier
pipelines.
Federal,
state, and local agencies have promulgated extensive rules and regulations applicable to our oil and natural gas exploration, production
and related operations. Most states require permits for drilling operations, drilling bonds and the filing of reports concerning operations,
and impose other requirements relating to the exploration of oil and natural gas. Many states also have statutes or regulations addressing
conservation matters including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum
rates of production from oil and natural gas wells and the regulation of spacing, plugging and abandonment of such wells. The statutes
and regulations of some states limit the rate at which oil and natural gas is produced from our properties. The federal and state regulatory
burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Because these rules and
regulations are amended or reinterpreted frequently, we are unable to predict the future cost or impact of complying with those laws.
Competition
and Marketing
We
will be faced with strong competition from many other companies and individuals engaged in the oil and gas business, many are very large,
well established energy companies with substantial capabilities and established earnings records. We will be at a competitive disadvantage
in acquiring oil and gas prospects since we must compete with these individuals and companies, many of which have greater financial resources
and larger technical staffs. It is nearly impossible to estimate the number of competitors; however, it is known that there are a large
number of companies and individuals in the oil and gas business.
Exploration
for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil field
equipment including drilling rigs and tools. We will depend upon independent drilling contractors to furnish rigs, equipment and tools
to drill our wells. Higher prices for oil and gas may result in competition among operators for drilling equipment, tubular goods and
drilling crews which may affect our ability to expeditiously drill, complete, recomplete and work-over wells.
The
market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted. These
factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic production
and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental
regulation. In addition, there is always the possibility that new legislation may be enacted that would impose price controls or additional
excise taxes upon crude oil or natural gas, or both. Oversupplies of natural gas can be expected to recur from time to time and may result
in the gas producing wells being shut-in. Imports of natural gas may adversely affect the market for domestic natural gas.
Employees
As
of December 31, 2020, we have two full-time employees and no part-time employees. As of May 12, 2022, the Company has zero full-time
employees and zero part-time employees, and two contractors.
ITEM
1A. RISK FACTORS
In
addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are
specific to us and our industry could materially impact our future performance and results of operations. We have provided below a list
of known material risk factors that should be reviewed when considering buying or selling our securities. These are not all the risks
we face and other factors currently considered immaterial or unknown to us may impact our future operations.
Capital
Requirements
We
will need to raise funds from additional financing in the future to complete our business plan and may need to raise additional funding
in the future to support our operations. We have no commitments for any financing and any financing commitments may result in dilution
to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely
affect our stockholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or
on the manner in which we conduct our business. Additionally, we may raise funding by issuing convertible notes, which if converted into
shares of our common stock would dilute our then stockholders’ interests. If we are unable to raise additional funds, we may be
forced to curtail or even abandon our business plan.
Commodity
Prices
The
price we receive for our oil directly affects our revenues, profitability, access to capital and future rate of growth. Oil is a commodity
that is subject to wide price fluctuations in response to relatively minor changes in supply and demand. Lower prices for our oil may
not only decrease our revenues but may also reduce the amount of oil that we can produce economically. Historically, the markets for
oil have been volatile and will likely continue to be volatile in the future. The prices we receive for our production and the volume
of our production depend on numerous factors beyond our control. These factors include the following: changes in global supply and demand
for oil, the actions of OPEC, the price and quantity of imports of foreign oil, acts of war, terrorism or political instability in oil
producing countries and economic conditions.
Accounting
Rules
Accounting
rules applicable to us require that we periodically review the carrying value of our oil properties for possible impairment. Based on
specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development
plans, production data, economics and other factors, we could be required to write down the carrying value of our oil and natural gas
properties. Such write-downs constitute a non-cash charge to earnings. Impairment of proved properties under our full cost oil accounting
method is largely driven by the present values of future net revenues of proved reserves estimated using SEC mandated 12-month un-weighted
first-day-of-the-month commodity prices. No assurance can be given that we will not experience ceiling test impairments in future periods,
which could have a material adverse effect on our results of operations in the periods taken. As a result of lower oil prices, we may
also reduce our estimates of the reserve volumes that may be economically recovered, which would reduce the total value of our proved
reserves.
Our
undeveloped proved reserves and developed non-producing proved reserves require additional expenditures and/or activities to convert
these into producing reserves. We cannot provide assurance these expenditures will be made and that activities will be entirely successful
in converting these reserves. Furthermore, there can be no assurance that all of our undeveloped and developed non-producing reserves
will ultimately be produced during the time periods we have planned, at the costs we have budgeted, or at all, which could result in
the write-off of previously recognized reserves.
Reserve
Replacement
Our
future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically
recoverable. Unless we replace the reserves we produce through successful exploration, development or acquisition activities, our proved
reserves and production will decline over time. Our exploration, development and acquisition activities require substantial capital expenditures.
The capital markets we have historically accessed are currently constrained, but we believe we could access other capital markets if
the need arises. These limitations in the capital markets may affect our ability to grow and changes in our capitalization structure
may significantly affect our financial risk profile. Furthermore, we cannot be certain that financing for future capital expenditures
will be available if needed, and to the extent required, on acceptable terms.
Future
cash flows are subject to a number of variables, such as the level of production from existing wells, the prices of oil and our success
in developing and producing new reserves. Any reductions in our capital expenditures to stay within internally generated cash flow (which
could be adversely affected by declining commodity prices) and cash on hand will make replacing produced reserves more difficult. If
our cash flow from operations and cash on hand are not sufficient to fund our capital expenditure budget, we may be limited in our ability
to access additional debt, equity or other methods of financing on an economic or timely basis to replace our proved reserves.
Regulatory
Requirements
The
Environmental Protection Agency (EPA) has adopted new regulations under the Clean Air Act (CAA) that, among other things, require additional
emissions controls for the production of oil, including New Source Performance Standards to address emissions of sulfur dioxide and Volatile
Organic Compounds (VOCs) and a separate set of emission standards to address hazardous air pollutants frequently associated with such
production activities. For well completion operations occurring at such well sites before January 1, 2015, the final regulations allow
operators to capture and direct flowback emissions to completion combustion devices, such as flares, in lieu of performing green completions.
These regulations also establish specific new requirements regarding emissions from dehydrators, storage tanks and other production equipment.
Compliance with these requirements could significantly increase our costs of development and production.
We
are required to record a liability for the present value of our asset retirement obligation (“ARO”) to plug and abandon inactive
non-producing wells, facilities and equipment, and to restore the land at the end of oil production operations. As a result, we may make
significant increases or decreases to our estimated ARO in future periods. Accordingly, our estimate of future ARO could differ dramatically
from what we may ultimately incur.
Drilling
and Well Completion Success
Our
development activities may be unsuccessful for many reasons, including adverse weather conditions, cost overruns, equipment shortages,
geological issues and mechanical difficulties. Moreover, the successful drilling of an oil well does not assure us that we will realize
a profit on our investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only
marginally economical. In addition to their costs, unsuccessful wells hinder our efforts to replace reserves.
Our
oil exploration and production activities, including well stimulation and completion activities which include, among other things, hydraulic
fracturing, involve a variety of operating risks, including fires, explosions, blow-outs and surface craters, uncontrollable flows of
oil and formation water. If we experience any of these problems, well bores, platforms, gathering systems and processing facilities could
be affected, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of injury
or loss of life, damage to and destruction of property, natural resources and equipment, pollution and other environmental damage.
Acquisition
Success
Our
business strategy includes growing by making acquisitions, which may include acquisitions of exploration and production companies, producing
properties and undeveloped leasehold interests. Our acquisition of oil and natural gas properties requires assessments of many factors
that are inherently inexact and may be inaccurate, including the acceptable prices for available properties, amounts of recoverable reserves,
estimates of future oil prices, estimates of future exploratory, development and operating costs, estimates of the costs and timing of
plugging, and abandonment and estimates of potential environmental and other liabilities.
If
we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty
integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or
mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired
business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether
we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees
and increase our expenses.
In
addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the
following: the difficulty of integrating acquired products, services or operations; the potential disruption of the ongoing businesses
and distraction of our management and the management of acquired companies; difficulties in maintaining uniform standards, controls,
procedures and policies; the potential impairment of relationships with employees and customers as a result of any integration of new
management personnel; the potential inability or failure to achieve additional sales; the effect of any government regulations which
relate to the business acquired; potential unknown liabilities associated with acquired businesses or product lines, or the need to spend
significant amounts to retool, reposition or modify the marketing and sales of acquired products or operations, or the defense of any
litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition; and potential expenses
under the labor, environmental and other laws of various jurisdictions.
Capital
Deployment Risk
Exploring
for and developing hydrocarbon reserves involves a high degree of operational and financial risk, which precludes us from definitively
predicting the costs involved and time required to reach certain objectives. The budgeted costs of planning, drilling, completing, and
operating wells are often exceeded, and such costs can increase significantly due to various complications that may arise during the
drilling and operating processes. Before a well is spud, we may incur significant geological and geophysical (seismic) costs, which are
incurred whether a well eventually produces commercial quantities of hydrocarbons or is drilled at all. Exploration wells bear a much
greater risk of loss than development wells. The analogies we draw from available data from other wells, more fully explored locations
or producing fields may not be applicable to our drilling locations. If our actual drilling and development costs are significantly more
than our estimated costs, we may not be able to continue our operations as proposed and could be forced to modify our drilling plans
accordingly.
If
we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found or
produced. We may drill or participate in new wells that are not productive. We may drill wells that are productive, but that do not produce
sufficient net revenues to return a profit after drilling, operating and other costs. There is no way to predict in advance of drilling
and testing whether any location will yield oil or natural gas in sufficient quantities to recover exploration, drilling or completion
costs or to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive
hydrocarbon-bearing formation or experience mechanical difficulties while drilling or completing the well, resulting in a reduction in
production and reserves from the well or abandonment of the well.
Whether
a well is ultimately productive and profitable depends on a number of additional factors, including the following: general economic and
industry conditions, including the prices received for oil and natural gas; shortages of, or delays in, obtaining equipment, including
hydraulic fracturing equipment, and qualified personnel; potential drainage by operators on adjacent properties; loss of or damage to
oilfield development and service tools; problems with title to the underlying properties; increases in severance taxes; adverse weather
conditions that delay drilling activities or cause producing wells to be shut down; domestic and foreign governmental regulations; and
proximity to and capacity of transportation facilities. If we do not drill productive and profitable wells in the future, our business,
financial condition and results of operations could be materially and adversely affected.
We
review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment at least annually
on December 31 of each year, or when events or changes in the business environment indicate that the carrying value of a reporting unit
may exceed its fair value. If conditions in any of the businesses in which we compete were to deteriorate, we could determine that certain
of our assets were impaired and we would then be required to write-off all or a portion of our costs for such assets. Any such significant
write-offs would adversely affect our balance sheet and results of operations.
Economic
Uncertainty
Concerns
over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit, the United States
mortgage market and a volatile real estate market in the United States have contributed to increased economic uncertainty and diminished
expectations for the global economy. These factors, combined with volatile prices of oil and natural gas, declining business and consumer
confidence and increased unemployment and inflation, have precipitated economic uncertainty. Concerns about global economic growth and
inflation have had a significant adverse impact on global financial markets and commodity prices.
Our
exploration and development activities are capital intensive. We make and expect to continue to make substantial capital expenditures
in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. Our cash on hand, our
operating cash flows and future potential borrowings may not be adequate to fund our future acquisitions or future capital expenditure
requirements. The rate of our future growth may be dependent, at least in part, on our ability to access capital at rates and on terms
we determine to be acceptable.
Cash
Management
Our
cash flows from operations and access to capital are subject to a number of variables, including: our estimated proved oil and natural
gas reserves; the amount of oil and natural gas we produce from existing wells; the prices at which we sell our production; the costs
of developing and producing our oil and natural gas reserves; our ability to acquire, locate and produce new reserves; the ability and
willingness of banks to lend to us; and our ability to access the equity and debt capital markets. In addition, future events, such as
terrorist attacks, wars or combat peace-keeping missions, financial market disruptions, general economic recessions, inflation, oil and
natural gas industry recessions, large company bankruptcies, accounting scandals, overstated reserves estimates by major public oil companies
and disruptions in the financial and capital markets have caused financial institutions, credit rating agencies and the public to more
closely review the financial statements, capital structures and earnings of public companies, including energy companies. Such events
have constrained the capital available to the energy industry in the past, and such events or similar events could adversely affect our
access to funding for our operations in the future.
If
our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other
reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels, further develop and
exploit our current properties or invest in additional exploration opportunities.
Alternatively,
a significant improvement in oil and natural gas prices or other factors could result in an increase in our capital expenditures and
we may be required to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale
of production payments, the sale or farm out of interests in our assets, the borrowing of funds or otherwise to meet any increase in
capital needs. If we are unable to raise additional capital from available sources at acceptable terms, our business, financial condition
and results of operations could be adversely affected. Further, future debt financings may require that a portion of our cash flows provided
by operating activities be used for the payment of principal and interest on our debt, thereby reducing our ability to use cash flows
to fund working capital, capital expenditures and acquisitions.
Debt
financing may involve covenants that restrict our business activities. If we succeed in selling additional equity securities to raise
funds, at such time the ownership percentage of our existing shareholders would be diluted, and new investors may demand rights, preferences
or privileges senior to those of existing shareholders. If we choose to farm-out interests in our prospects, we may lose operating control
over such prospects.
Terrorist
Attack
We
cannot assess the extent of either the threat or the potential impact of future terrorist attacks on the energy industry in general,
and on us in particular, either in the short-term or in the long-term. Uncertainty surrounding such hostilities may affect our operations
in unpredictable ways, including the possibility that infrastructure facilities, including pipelines and gathering systems, production
facilities, processing plants and refineries, could be targets of, or indirect casualties of, an act of terror, a cyber-attack or electronic
security breach, or an act of war.
Production
Growth
In
addition, there is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations,
some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground
injection or other disposal of our wastes, the use of hydraulic fracturing fluids and historical industry operations and waste disposal
practices.
The
rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas
reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and
exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional
oil and natural gas producing properties. In the future, we may have difficulty acquiring new properties. During periods of low oil and/or
natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to
replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely
affected.
Our
ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural
gas and securing trained personnel. Also, there is substantial competition for capital available for investment in the oil and natural
gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours,
and many of our competitors have more established presences in the United States and in foreign locations than we have. Those companies
may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase
a greater number of properties and prospects than our financial or personnel resources permit. In addition, other companies may be able
to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain
qualified personnel has increased in recent years due to competition and may increase substantially in the future. We may not be able
to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and
retaining quality personnel and raising additional capital, which could have a material adverse effect on our business, financial condition
and results of operations.
Technology
and Innovation
Our
industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using
new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and
competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors will have
greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them
to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or
at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become
obsolete, and we may be adversely affected.
Consumer
Confidence
Our
results of operations are materially affected by the conditions of the global economies and the credit, commodities and stock markets.
Among other things, we may be adversely impacted if consumers of oil and gas are not able to access sufficient capital to continue to
operate their businesses or to operate them at prior levels. A decline in consumer confidence or changing patterns in the availability
and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result our results of operations.
Alternative
Energy
Because
our operations depend on the demand for oil, any improvement in or new discoveries of alternative energy technologies (such as wind,
solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil, gas and
oil and gas related products could have a material adverse impact on our business, financial condition and results of operations.
Reserve
Valuation
The
process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including
assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect
the estimated quantities and the calculation of the present value of our reserves. In order to prepare our year-end reserve estimates,
our independent petroleum consultant projected our production rates and timing of development expenditures. Our independent petroleum
consultant also analyzed available geological, geophysical, production and engineering data. The extent, quality and reliability of this
data can vary and may not be under our control. The process also requires economic assumptions about matters such as oil and natural
gas prices, operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves
are inherently imprecise.
You
should not assume that the present value of future net revenues from our proved oil and natural gas reserves is the current market value
of our estimated oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash
flows from our proved reserves on the 12-month un-weighted first-day-of-the-month average price for each product and costs in effect
on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate.
Future
Regulations
Our
operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration, development,
production and transportation of oil and natural gas and operational safety. Future laws or regulations, any adverse change in the interpretation
of existing laws and regulations or our failure to comply with such legal requirements may harm our business, results of operations and
financial condition.
Employee
Retention
To
a large extent, we depend on the services of our senior management. The loss of the services of any of our senior management, could have
a negative impact on our operations. We do not maintain or plan to obtain for the benefit of the Company any insurance against the loss
of any of these individuals.
Equity
Dilution
Our
board of directors may attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash
consideration will consist of shares of our common stock, preferred stock or warrants to purchase shares of our common stock. Our board
of directors has authority, without action or vote of the shareholders to issue all or part of the authorized but unissued shares of
common stock, preferred stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling
shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests
of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve
to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed
to supporting existing management.
Illiquid
and Volatile Equity Environment
We
currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic,
illiquid and volatile in the future. Our stock is currently not actively traded because of SEC Rule 15c2-11. Factors that could affect
our stock price or result in fluctuations in the market price or trading volume of our common stock include:
|
● |
our
actual or anticipated operating and financial performance and drilling locations, including reserves estimates; |
|
● |
quarterly
variations in the rate of growth of our financial indicators, such as net income per share, net income and cash flows, or those of
companies that are perceived to be similar to us; |
|
● |
changes
in revenue, cash flows or earnings estimates or publication of reports by equity research analysts; |
|
● |
speculation
in the press or investment community; |
|
● |
public
reaction to our press releases, announcements and filings with the SEC; |
|
● |
sales
of our common stock by us or other shareholders, or the perception that such sales may occur; |
|
● |
the
limited amount of our freely tradable common stock available in the public marketplace; |
|
● |
general
financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices; |
|
● |
the
realization of any of the risk factors presented in this Annual Report; |
|
● |
the
recruitment or departure of key personnel; |
|
● |
commencement
of, or involvement in, litigation; |
|
● |
the
prices of oil and natural gas; |
|
● |
the
success of our exploration and development operations, and the marketing of any oil and natural gas we produce; |
|
● |
changes
in market valuations of companies similar to ours; and |
|
● |
domestic
and international economic, legal and regulatory factors unrelated to our performance. |
Our
stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general
have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political and market conditions,
such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related
to our actual value, and not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should
exercise extreme caution before making an investment in us.
Additionally,
as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability
to acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect on the market price
of our common stock. In addition, a shareholder may not be able to borrow funds using our common stock as collateral because lenders
may be unwilling to accept the pledge of securities having such a limited market. We cannot assure you that an active trading market
for our common stock will develop or, if one develops, be sustained. Extreme caution should be taken when considering purchasing Petrolia’s
common stock.
Our
common stock will be subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our common
stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a
stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted
on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any
transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely
limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market. In addition,
various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in the common
stock may have their ability to sell their shares of the common stock impaired.
Administrative Proceedings
File No. 3-20724 was filed by the SEC seeking
to revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act. The Company has filed a
response to the SEC's motion, but there is no assurance that the Company will be successful, and that the registration of the Company's
securities will not be revoked.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to the Company as a “smaller
reporting”/“non-accelerated filer”.
ITEM
2. PROPERTIES.
Our
principal office is located at 710 N. Post Oak Rd., Suite 400, Houston, Texas 77024.
At
December 31, 2020 we terminated our sublease of office space and entered into an executive office sharing agreement which allows the
Company to use approximately 800 square feet of work space, on an as needed basis. The space costs $100 per month, and is contracted
on a month-to-month basis.
The
Company’s oil and gas properties are described under “Item 1. Business”, above, and below under “Note 4. “Evaluated
Properties” in the consolidated audited financial statements attached hereto.
ITEM
3. LEGAL PROCEEDINGS.
On
March 11, 2022, Petrolia Energy Corporation (“Petrolia” or the “Company”) and Petrolia Canada Corporation (“Petrolia
Canada”), an affiliate of Petrolia’s, filed a lawsuit in District Court, Harris County Texas against Jovian Petroleum Corporation,
Zel Khan and Quinten Beasley (herein collectively after referred to as the “Defendants”). The case is assigned to Judge Jaclanel
McFarland, of the 133rd Judicial District Court of Harris County, Texas under Cause No. 2022-15278.
In
their filed petition against the Defendants, Petrolia and Petrolia Canada claim fraud and breach of contract against all the named Defendants
and, in addition to those two (2) claims, they also assert breach of fiduciary duty claims against Defendants Zel Khan and Quinten Beasley.
Defendant Zel Khan was a former CEO and Director of Petrolia and Defendant Quinten Beasley was a former Senior Vice President and Director
of Petrolia Canada.
Petrolia
and Petrolia Canada are demanding a jury trial and are seeking monetary relief of more than ONE MILLION US DOLLARS ($1,000,000.00) in
their lawsuit filed against the Defendants. In the lawsuit filed by the two (2) companies against the Defendants, referenced above, they
seek judgment against the Defendants for (i) actual damages in the amount of lost revenue and economic losses, (ii) punitive damages,
(iii) pre-and post-judgment interest, (iv) court costs, (v) attorneys’ fees, and (vi) any other relief to which Petrolia and Petrolia
Canada are entitled.
On March 16, 2022, Petrolia Canada Corporation
received a Notice of Intention to Retain Collateral Pursuant to Section 62 of the Personal Property Security Act (Alberta) from the counsel
of Blue Sky Resources Ltd. related to a Loan Agreement and General Security Agreement between Petrolia Canada Corporation and Emmett
Lescroart. Petrolia Canada Corporation was notified that Blue Sky Resources Ltd., as assignee of the Emmet Lescroart loan, intends to
retain the Utikuma loan collateral pursuant to the General Security Agreement with Petrolia Canada Corporation. On March 30, 2022, Petrolia
Canada Corporation’s counsel responded to Blue Sky Resources, Ltd. with a Notice of Objection.
On January 28, 2022, the Securities and Exchange
Commission filed an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange
Act of 1934 to suspend for a period not exceeding twelve months or revoke the registration of each class of securities registered pursuant
to Section 12 of the Exchange Act of the Company. The Division of Enforcement at the Securities and Exchange Commission (the “Division”)
filed a Motion for Summary Disposition in this matter and the Company filed a Response to the Motion for Summary Disposition in April
2022. On May 5, 2022, the Division filed its Response in Support of its Motion for Summary Disposition.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following information sets forth the names, ages, and positions of our directors and executive officers as of December 31, 2020.
Name |
|
Age |
|
Position |
|
Director/Officer
Since |
Zel
C. Khan |
|
48 |
|
Chief
Executive Officer |
|
April
2016 through September 2021 |
Mark
Allen |
|
54 |
|
President |
|
September
1, 2020 |
Leo
Womack |
|
78 |
|
Director |
|
August
2014 |
James
Edward Burns |
|
52 |
|
Chairman |
|
April
2017 |
Ivar
Siem |
|
75 |
|
Director |
|
April
2019 |
Set
forth below is a brief description of the background and business experience of each of our current executive officers and directors:
Zel
C. Khan is an oilfield operator with over 25 years of experience in the Oil & Gas industry. He has successfully operated, both
on and offshore, in Texas, Oklahoma, New Mexico and California. Mr. Khan has served as the CEO of the Company from February 2015
through September 2021. Prior to joining the Company, from March 2010 to February 2015, Mr. Khan was the CEO of Jovian Petroleum
Corporation, an oil and gas operator in California, Oklahoma, New Mexico, and Texas. From August 2006 to March 2010, Mr. Khan served
as Operating Manager of Pyramid GOM Inc., an offshore deep-water operator. He has established a reputation for reducing operating costs
on various projects, including a former ConocoPhillips offshore facility located in deep water Gulf of Mexico where he was the Operating
Manager. Mr. Khan has also operated in Kern County, California and Alberta, Canada, both are heavy oil fields requiring special operational
procedures to maintain low lift costs and strict environmental policies as set by the respective governmental agencies. Mr. Khan holds
a Bachelor of Science degree and a Master’s degree from Chapman University, California.
Mark Allen is an executive in the oil and
gas industry with over 25 years of experience, previously 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. Mr. Allen has also held leadership roles at Shell Oil Company. For the past 10 years Mr. Allen
has been the President of Contango Energy, a family held energy company. Mr. Allen holds a BS in Accounting from Brigham Young University
and an MBA from the University of St. Thomas. In September 2021, Mr. Allen was appointed as the Chief Executive Officer of the Company.
Leo
Womack has over 40 years of experience in advising and serving as Director of small micro-capitalization public and private companies.
Mr. Womack has been the President of Gulf Equities Realty Advisors, Inc., a diversified real estate portfolio management company, since
1986. For more than five (5) years, from March 1986 to the present, Mr. Womack has been and continues to be employed as the President
of Gulf Equities Realty Advisors Inc. He has been the Chairman of Fairway Medical Technologies, Inc., a medical device company and a
portfolio company of the Baylor College of Medicine Venture Fund since 1996. From 1969 to 1978, he was the managing partner of a local
and later national CPA firm. He has served on the Board and as Chairman of the Houston Angel Network and on National Committees of the
Angel Capital Association. Prior to its acquisition by ITT Corporation in 2010, he served as a board member and the audit committee chair
for OI Corporation (NASDAQ:OICO). Mr. Womack continues to serve on the Boards of Directors of five early-stage companies that he or his
Family Trust have invested in. Mr. Womack earned a Bachelor of Business Administration in Accounting from Texas A&M University-Kingsville
in 1965 and holds a Series 7 Securities License. Mr. Womack is also a licensed Certified Public Accountant (CPA).
James
Edward Burns is an oil and gas executive who brings more than 25 years of energy experience to Petrolia Energy’s Board. Most
recently, he served as President of BLU LNG, a domestic LNG provider, from December 2014 to February 2016, where he created a coherent
commercial and operational strategy serving as catalyst for renewed efficiency and effectiveness. Prior to his role at BLU LNG, Mr. Burns
was President of Fortress Energy Partners a division of Fortress Investment Group and worked in various executive roles globally at Royal
Dutch Shell, and Texaco. Mr. Burns also serves as a member of the Houston Angel Network’s Energy Council and is the chairman of
the board of Triple E Real Estate Investments. He holds a BS in Business Administration from California State University and an Executive
MBA from the University of Houston.
Ivar
Siem is the Chairman of American Resources Inc. (“American”). Mr. Siem previously also served as the Chairman and CEO
of American and its predecessor from September 2000 to August 1, 2017. Mr. Siem has broad experience from both the upstream and the service
segments of the oil and gas industry. He has been the founder of several companies and involved in multiple roll-ups and restructuring
processes throughout his career. These include Fred Olsen, Inc., Dolphin International, Inc., Blue Dolphin Energy, Seateam Technology
ASA, DI Industries/Grey Wolf Drilling, American Resources Offshore, Inc., and Equimavenca SA. He has served on a number of public and
private company boards including Frupor SA, Avenir ASA, Wellcem AS, and Siem Industries, Inc. Since July 2018, Mr. Siem has served as
a member of the Board of Directors of PEDEVCO Corp. (NYSE American:PED), a company with securities registered under the Exchange Act.
On
September 1, 2020, Mark Allen was appointed President. Additionally, on February 1, 2021, Paul Deputy was appointed interim CFO.
On
July 13, 2020, the following Board members resigned: Joel Oppenheim, Richard Dole and Saleem Nizami. On September 16, 2020 Zel
Khan resigned as a board member but remained as Chief Executive Officer.
Term
of Office
Our
Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed
from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the
board.
CORPORATE
GOVERNANCE
The
Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable
disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company; and strives
to be compliant with applicable governmental laws, rules and regulations.
Board
Leadership Structure
The
roles of Chairman and Chief Executive Officer of the Company are currently held separately. Mr. Burns serves as Chairman and Mr. Allen
serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an independent
director, an affiliated director, or a member of management. Our Board believes that the Company’s current leadership structure
is appropriate because it effectively allocates authority, responsibility, and oversight between management and the members of our Board
(currently Mr. Burns as Chairman). It does this by giving primary responsibility for the operational leadership and strategic direction
of the Company to its Chief Executive Officer, while enabling our Chairman to facilitate our Board’s oversight of management, promote
communication between management and our Board, and support our Board’s consideration of key governance matters. The Board believes
that its programs for overseeing risk, as described below, would be effective under a variety of leadership frameworks and therefore
do not materially affect its choice of structure.
Risk Oversight
Effective risk oversight is an important priority
of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout
the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes
understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes,
allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities.
The directors exercise direct oversight of strategic risks to the Company.
Family Relationships
None of our directors are related by blood, marriage,
or adoption to any other director, executive officer, or other key employees.
Arrangements Between Officers and Directors
To our knowledge, there is no arrangement or understanding
between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Other Directorships
No directors of the Company are also directors of
issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports
under the Exchange Act), except as discussed in their bios above.
Director Qualifications
The Board believes that each of our directors is highly
qualified to serve as a member of the Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications
of the Board. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes
are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated
and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our executive
officers or directors has been involved in any of the following events during the past ten years:
(1) |
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
(2) |
any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and minor offenses); |
(3) |
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
(4) |
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law; |
(5) |
being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
(6) |
being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section (1a)(40) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member. |
Board of Directors Meetings
The Company had four (4) official meetings of the
Board of Directors during the fiscal year 2020 and ten (10) during the previous fiscal year ending December 31, 2019. All directors attended
at least 75% of the meetings of the Board of Directors and meetings of Committees of the Board of Directors, for committees on which they
served. The Company has not adopted a policy requiring its directors to attend its annual meeting.
Hedging, Clawbacks and Insider Trading Policies
The Company does not currently hedge any oil and gas
products.
Insider trading includes the trading of our stock
and options (put and call), based on material, non-public information about the Company. The Company prohibits any insider trading shares
based on insider information and could be exposed to potential civil and/or criminal penalties. It also prohibits the sharing of that
information with other non-insider individuals. This policy applies to the purchase/sale of common stock and preferred stock. The Company
prohibits the trading of options at any time, irrespective of stock trading restrictions. This policy applies to all directors, officers,
employees and consultants of the Company, as well as their family members. This policy imposes special additional temporary trading restrictions
applicable to directors and officers of the Company.
COMMITTEES OF THE BOARD
Board Committee Membership
|
|
Independent |
|
Audit
Committee |
|
Compensation
Committee |
|
Nominating
and Corporate Governance Committee |
James
E. Burns (1) |
|
|
|
|
|
C |
|
|
Leo
Womack |
|
X |
|
C |
|
|
|
M |
Ivar
Siem |
|
X |
|
M |
|
|
|
C |
(1) Chairman of Board of Directors.
C - Chairman of Committee.
M - Member.
The charter for each committee of the Board identified
below is available on our website at www.petroliaenergy.com. Copies of the committee charters are also available for free upon written
request to our Corporate Secretary. Additionally, the committee charters are filed as exhibits to our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on May 24, 2018 (the “Form 8-K”).
Audit Committee
The Audit Committee, which is comprised exclusively
of independent directors, has been established by the Board to oversee our accounting and financial reporting processes and the audits
of our financial statements.
The Board has selected the members of the Audit Committee
based on the Board’s determination that the members are financially literate (as required by NASDAQ rules) and qualified to monitor
the performance of management and the independent auditors and to monitor our disclosures so that our disclosures fairly present our business,
financial condition and results of operations.
The Board has also determined that Mr. Womack, is
an “audit committee financial expert” (as defined in the SEC rules) because he has the following attributes: (i) an understanding
of generally accepted accounting principles in the United States of America (“GAAP”) and financial statements; (ii) the ability
to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience
analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable
to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding
of internal control over financial reporting; and (v) an understanding of audit committee functions. Mr. Womack has acquired these attributes
by means of having held various positions that provided relevant experience, as described in his biographical above.
The Audit Committee has the sole authority, at its
discretion and at our expense, to retain, compensate, evaluate and terminate our independent auditors and to review, as it deems appropriate,
the scope of our annual audits, our accounting policies and reporting practices, our system of internal controls, our compliance with
policies regarding business conduct and other matters. In addition, the Audit Committee has the authority, at its discretion and at our
expense, to retain special legal, accounting, or other advisors to advise the Audit Committee.
The Audit Committee was formed on May 21, 2018.
The Audit Committee Charter is filed as Exhibit 99.3
to the Form 8-K filed on May 24, 2018.
Compensation Committee
The Compensation Committee, which is comprised exclusively
of independent directors, is responsible for the administration of our stock compensation plans, approval, review and evaluation of the
compensation arrangements for our executive officers and directors and oversees and advises the Board on the adoption of policies that
govern the Company’s compensation and benefit programs. In addition, the Compensation Committee has the authority, at its discretion
and at our expense, to retain special legal, accounting or other advisors to advise the Compensation Committee.
The Compensation Committee was formed on May 21, 2018.
The Compensation Committee Charter is filed as Exhibit
99.4 to the Form 8-K filed on May 24, 2018.
On July 13, 2020, when Joel Oppenheim resigned as
Chairman, James Burns replace him as Chairman of the Compensation Committee.
Nominating and Corporate Governance Committee
The Nominating and Governance Committee, which is
comprised exclusively of independent directors, is responsible for identifying prospective qualified candidates to fill vacancies on the
Board, recommending director nominees (including chairpersons) for each of our committees, developing and recommending appropriate corporate
governance guidelines and overseeing the self-evaluation of the Board.
In considering individual director nominees and Board
committee appointments, our Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on
the Board and Board committees and to identify individuals who can effectively assist the Company in achieving our short-term and long-term
goals, protecting our stockholders’ interests and creating and enhancing value for our stockholders. In so doing, the Nominating
and Governance Committee considers a person’s diversity attributes (e.g., professional experiences, skills, background, race and
gender) as a whole and does not necessarily attribute any greater weight to one attribute. Moreover, diversity in professional experience,
skills and background, and diversity in race and gender, are just a few of the attributes that the Nominating and Governance Committee
takes into account. In evaluating prospective candidates, the Nominating and Governance Committee also considers whether the individual
has personal and professional integrity, good business judgment and relevant experience and skills, and whether such individual is willing
and able to commit the time necessary for Board and Board committee service.
While there are no specific minimum requirements that
the Nominating and Governance Committee believes must be met by a prospective director nominee, the Nominating and Governance Committee
does believe that director nominees should possess personal and professional integrity, have good business judgment, have relevant experience
and skills, and be willing and able to commit the necessary time for Board and Board committee service. Furthermore, the Nominating and
Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending individuals
that can best perpetuate the success of our business and represent stockholder interests through the exercise of sound business judgment
using their diversity of experience in various areas. We believe our current directors possess diverse professional experiences, skills
and backgrounds, in addition to (among other characteristics) high standards of personal and professional ethics, proven records of success
in their respective fields and valuable knowledge of our business and our industry.
The Nominating and Governance Committee uses a variety
of methods for identifying and evaluating director nominees. The Nominating and Governance Committee also regularly assesses the appropriate
size of the Board and whether any vacancies on the Board are expected due to retirement or other circumstances. In addition, the Nominating
and Governance Committee considers, from time to time, various potential candidates for directorships. Candidates may come to the attention
of the Nominating and Governance Committee through current Board members, professional search firms, stockholders or other persons. These
candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee and may be considered at any point
during the year.
The Committee evaluates director nominees at regular
or special Committee meetings pursuant to the criteria described above and reviews qualified director nominees with the Board. The Committee
selects nominees that best suit the Board’s current needs and recommends one or more of such individuals for election to the Board.
The Nominating and Governance Committee was formed
on May 21, 2018.
The Nominating and Governance Committee Charter is
filed as Exhibit 99.5 to the Form 8-K filed on May 24, 2018.
Stockholder Communications with the Board
Our Company has defined policy and procedural requirements
for stockholders to submit recommendations or nominations for directors as set forth in the Company’s Bylaws and described below.
Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do
not have any specific process or procedure for evaluating such nominees. The Nominating and Governance Committee will assess all candidates,
whether submitted by management or stockholders, and make recommendations for election or appointment.
The Nominating and Governance Committee will consider
candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly
submitted in writing to the Secretary of the Company in accordance with the manner described below. The Secretary will send properly submitted
stockholder recommendations to the Nominating and Governance Committee. Individuals recommended by stockholders in accordance with these
procedures will receive the same consideration received by individuals identified to the Nominating and Governance Committee through other
means. The Nominating and Governance Committee also may, in its discretion, consider candidates otherwise recommended by stockholders
without accompanying biographical information, if submitted in writing to the Secretary.
Our stockholders and other interested parties may
communicate with members of the Board of Directors by submitting such communications in writing to our Corporate Secretary, 710 N. Post
Oak Rd., Suite 400, Houston, Texas 77024, who, upon receipt of any communication other than one that is clearly marked “Confidential,”
will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication
to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Corporate
Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication
to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication
will be forwarded to a Board member to bring to the attention of the Board.
Code of Conduct
We have adopted a Code of Ethical Business Conduct
(“Code of Conduct “) that applies to all of our directors, officers and employees.
Any stockholder who so requests may obtain a free
copy of our Code of Conduct by submitting a written request to our Corporate Secretary. Additionally, the Code of Conduct was filed as
an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed with the SEC on November
23, 2015, as Exhibit 14.1.
We intend to disclose any amendments to our Code of
Conduct and any waivers with respect to our Code of Conduct granted to our principal executive officer, our principal financial officer,
or any of our other employees performing similar functions on our website at www.petroliaenergy.com within four business days after the
amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least
12 months after the initial disclosure. There have been no waivers granted with respect to our Code of Conduct to any such officers or
employees.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of the Exchange
Act requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of the
Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Pursuant to SEC rules, we are not required to disclose
in this filing any failure to timely file a Section 16(a) report that has been disclosed by us in a prior annual report or proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning
the compensation of (i) all individuals serving as our principal executive officer (PEO) or acting in a similar capacity during the last
completed fiscal year, regardless of compensation level; (ii) our two most highly compensated executive officers other than the PEO who
were serving as executive officers at the end of the last completed fiscal year and who were paid more than $100,000 of total compensation;
and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to paragraph (ii) but for the fact that
the individual was not serving as an executive officer at the end of the last completed fiscal year (collectively, the “Named Executive
Officers”).
The following table summarizes all compensation paid
or accrued to our former or current executive officers during the years ended December 31, 2020 and December 31, 2019:
Name and Principal Position | |
Fiscal Year | | |
Salary (1) | | |
Bonus (2) | | |
Stock Awards (3) | | |
Option and Warrant Awards (4) | | |
All Other Compensation (5) | | |
Total | |
Zel Khan (Former Chief Executive Officer)(6) | |
| 2020 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 28,354 | | |
$ | — | | |
$ | 28,354 | |
| |
| 2019 | | |
$ | 125,000 | | |
$ | — | | |
$ | — | | |
$ | 67,622 | | |
$ | — | | |
$ | 192,622 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mark Allen
(President) (7) | |
| 2020 | | |
$ | 60,000 | | |
$ | — | | |
$ | 70,000 | | |
$ | — | | |
$ | — | | |
$ | 130,000 | |
| |
| 2019 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Horacio Alfredo Fernandez
(Interim Principal Financial and Accounting Officer) (8) | |
| 2020 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| 2019 | | |
$ | 68,000 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 68,000 | |
Does not include perquisites and other personal benefits,
or property, unless the aggregate amount of such compensation is more than $10,000. None of our executive officers received any change
in pension value and nonqualified deferred compensation earnings during the periods presented.
|
(1) |
The dollar value of base salary (cash and non-cash) earned. Executive
salaries in 2019 and 2020 were generally accrued by not paid. |
|
(2) |
The dollar value of bonus (cash and non-cash) earned. |
|
(3) |
The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant. |
|
(4) |
The fair value of options and warrants granted computed in accordance with ASC 718 on the date of grant. |
|
(5) |
All other compensation received that we could not properly report in any other column of the table. |
|
(6) |
Zel C. Khan was appointed as President and Chief Executive Officer
of the Company, on March 1, 2015. Mr. Khan resigned as Chief Executive Officer of the Company in September 2021. |
|
(7) |
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. |
|
(8) |
Horacio Alfredo Fernandez was appointed as interim Chief Financial Officer on October 31, 2018. He resigned on March 20, 2020 |
Mark Allen was appointed as the Chief Executive
Officer of the Company in September 2021. Paul Deputy was re-appointed Interim Chief Financial Officer as of February 1, 2021.
We do not provide our officers or employees with pension,
stock appreciation rights, long-term incentive, profit sharing, retirement or other plans, although we may adopt one or more of such plans
in the future.
We do not maintain any life or disability insurance
on any of our officers.
Employment Agreements
Zel C. Khan (CEO)
On September 23, 2015, Zel C. Khan, entered into an
employment agreement with the Company effective October 1, 2015 to serve as our President and Chief Executive Officer for an initial term
of twenty-four (24) months (automatically renewable thereafter for additional one-year terms), which agreement automatically extended
from October 1, 2017 to September 30, 2018 and from October 1, 2018 to September 30, 2019. The agreement provides that the Company will
pay Mr. Khan an annual base salary of $160,000, with a provision for deferral of current payments until such time that the Company is
cash flow positive. The Company will issue one warrant to purchase one share of the Company’s restricted common stock at an exercise
price of $0.20 per share for each dollar of gross salary that is deferred. The Warrants will have a term of 36 months from date of grant,
which will vest quarterly.
In the event Mr. Khan’s employment is terminated
by the Company without cause, he is required to receive severance pay equal to two months of his base salary. “Cause”
means (i) the commission of a felony or other crime involving moral turpitude or the commission of any other act or omission involving
misappropriation, dishonesty, unethical business conduct, disloyalty, fraud or breach of fiduciary duty, (ii) reporting to work under
the influence of alcohol, (iii) the use of illegal drugs (whether or not at the workplace) or other conduct, which could reasonably be
expected to, or which does, cause the Company or any of its affiliates public disgrace or disrepute or economic harm, (iv) repeated failure
to perform duties as reasonably directed by the Board of Directors, (v) gross negligence or willful misconduct with respect to the Company
or its affiliates or in the performance of Mr. Khan’s duties under the agreement, (vi) obtaining any personal profit not thoroughly
disclosed to and approved by the board in connection with any transaction entered into by, or on behalf of, the Company or any of its
affiliates, or (vii) violating any of the terms of the Company’s or its affiliates’ rules or policies applicable to Mr. Khan
which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to
Mr. Khan, or any other material breach of the agreement or any other agreement between Mr. Khan and the Company or any of its affiliates
which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to
Mr. Khan.
The employment agreement includes a non-solicitation/non-interference
clause which applies for two years after the termination date of the employment agreement. The employment agreement also requires Mr.
Khan to submit to the board all business, commercial and investment opportunities or offers presented to Mr. Khan or of which Mr. Khan
becomes aware which relate to the business of the Company or its affiliates.
The Chairman of the Board of Directors accepted the
resignation of Chief Executive Officer, Zel C. Khan, effective September 1, 2021.
Mark Allen (President)
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 at signing and the remaining
at the end of the contract period). He also is to receive 1,000,000 warrants at $0.08 per share that expire in 36 months and vest over
a two-year period.
On September 1, 2021, the Board of Directors approved
a contractual Employment Agreement between the Company and Mark Allen to appoint him as the CEO of the Company.
Director Compensation
The table below summarizes all compensation of our
directors for the year ended December 31, 2020, other than Mr. Khan, whose compensation is included in the executive compensation table
above:
Name | |
Fees Earned or Paid in Cash (1) |
| | |
Stock Awards (2) | |
Option and Warrant Awards (3) | | |
Non-Equity Incentive Plan Compensation | | |
Non-Qualified Deferred Compensation Earnings | | |
All Other Compensation | | |
Total ($) | |
James E. Burns | |
$ | 71,000 |
(4,5 | ) | |
$ | — | |
$ | 32,801 | | |
$ | — | | |
$ | — | | |
$ | 20,130 | (5) | |
$ | 123,931 | |
Leo Womack | |
| — |
| | |
| — | |
$ | 32,801 | | |
| — | | |
| — | | |
| — | | |
$ | 32,801 | |
Ivar Siem | |
$ | — |
| | |
$ | — | |
$ | 32,801 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 32,801 | |
The notes below summarizes
all compensation of our directors for the year ended December 31, 2020.
|
(1) |
Fees earned due to retainers, meetings, committees and chairman services. These fees were not paid in cash to date but were accrued. |
|
(2) |
The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant. |
|
(3) |
The fair value of warrants granted computed in accordance with ASC 718 on the date of grant. |
|
(4) |
Includes $65,000 which was accrued and not paid for salary and $6,000 which was accrued and not paid for fees. |
|
(5) |
Payment for health insurance benefits was included in James Burns employment agreement. |
The fair value of stock issued
for services computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 on the date
of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information
regarding the beneficial ownership of our common stock and preferred stock by (i) each person who is known by the Company to own beneficially
more than five percent (5%) of our outstanding voting stock; (ii) each of our directors and director nominees; (iii) each of our executive
officers and significant employees; and (iv) all of our current executive officers, significant employees and directors as a group, as
of May 9, 2022 (the “Date of Determination”).
Beneficial ownership is determined in accordance with
the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares
of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable
or convertible within 60 days of the Date of Determination, are deemed to be outstanding and to be beneficially owned by the person or
group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person
or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
We believe that, except as otherwise noted and subject
to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the
shares of common stock shown as beneficially owned by such person. Unless otherwise indicated, the address for each of the officers or
directors listed in the table below is 710 N. Post Oak Rd., Suite 400, Houston, Texas 77024.
|
|
Number of Common
Stock Shares (1) |
|
|
Percent of
Common Stock (2) |
|
|
Number of Series A
Convertible Preferred
Stock Shares |
|
|
Percent of
Series A
Convertible
Preferred Stock (2) |
|
|
Total
Beneficial Ownership |
|
|
Percent of Total
Voting Shares (3) |
|
Named Executive Officers and Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo Womack |
|
|
5,862,500 |
(4) |
|
|
3.3 |
% |
|
|
8,400 |
|
|
|
4.2 |
% |
|
|
6,462,504 |
|
|
|
3.4 |
% |
James E. Burns |
|
|
7,904,566 |
(5) |
|
|
4.5 |
% |
|
|
16,400 |
|
|
|
8.2 |
% |
|
|
9,076,002 |
|
|
|
4.7 |
% |
Ivar Siem |
|
|
2,854,167 |
(6) |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
2,854,167 |
|
|
|
1.5 |
% |
Mark M. Allen |
|
|
11,635,778 |
(7) |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
11,635,778 |
|
|
|
6.1 |
% |
Paul Deputy |
|
|
4,512,048 |
(8) |
|
|
2.5 |
% |
|
|
4,400 |
|
|
|
2.2 |
% |
|
|
4,826,336 |
|
|
|
2.5 |
% |
All Named Executive Officers and Directors as a Group (5 persons) |
|
|
32,768,059 |
|
|
|
18.5 |
% |
|
|
29,200 |
|
|
|
14.7 |
% |
|
|
34,320,722 |
|
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quinten Beasley |
|
|
9,706,172 |
(9) |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
9.706,172 |
|
|
|
5.1 |
% |
Zel C. Khan |
|
|
46,865,575 |
(10) |
|
|
26.5 |
% |
|
|
24,410 |
|
|
|
12.3 |
% |
|
|
48,865,575 |
|
|
|
24.5 |
% |
Joel Oppenheim |
|
|
11,271,613 |
(11) |
|
|
6.4 |
% |
|
|
20,490 |
|
|
|
10.3 |
% |
|
|
11,271,613 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rick Wilber |
|
|
3,230,000 |
(12) |
|
|
1.8 |
% |
|
|
55,000 |
|
|
|
27.6 |
% |
|
|
7,158,595 |
|
|
|
3.7 |
% |
Under Rule 13d-3 of the Exchange Act, a beneficial
owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares, and/or (ii) investment
power, which includes the power to dispose or direct the disposition of shares. Also under this rule, certain shares may be deemed to
be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise
of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of
any person, the number of shares is deemed to include the number of shares beneficially owned by such person by reason of such acquisition
rights. As a result, the percentage of outstanding shares of any person as shown in the above table does not necessarily reflect the
person’s actual voting power at any particular date.
|
(1) |
Not including shares of common stock issuable upon conversion of outstanding
shares of Series A Preferred Stock held by each holder. |
|
(2) |
Except as otherwise indicated, all shares are owned directly, and the percentage shown is based on 176,988,322 shares of common stock and 199,100 shares of Series A Convertible Preferred Stock issued and outstanding as of the Date of Determination. The Series A Preferred Stock (and accrued and unpaid dividends thereon) are convertible into shares of common stock of the Company on a 71.429-for-one basis. The Series A Preferred Stock includes a blocker prohibiting the conversion of the Series A Preferred Stock into common stock of the Company, if upon such conversion/exercise the holder thereof would beneficially own more than 4.999% of the Company’s then outstanding common stock, provided such limitation shall not apply in the event of an automatic conversion of the Series A Preferred Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation also limits the voting rights of any holders of the Series A Preferred Stock, the effects of which have been reflected in the table above. The Beneficial Ownership Limitation may be waived by any holder with 61 days prior written notice to the Company. |
|
|
|
|
(3) |
Includes all shares of common stock beneficially owned by each named
person, all shares of common stock issuable upon exercise of warrants which have vested, or which will vest within 60 days
of the Date of Determination to the named person, and all shares of common stock issuable upon conversion of Series A Preferred Stock
held by the named person, subject to the Beneficial Ownership Limitation. |
|
|
|
|
(4) |
Includes all shares of common stock beneficially owned by Mr. Womack
and the Leo B. Womack Family Trust, which Mr. Womack is deemed to beneficially own (the “Trust”), all shares of common
stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr.
Womack and the Trust, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion
of outstanding shares of Series A Preferred Stock held by Mr. Womack and the Trust, subject to the Beneficial Ownership Limitation.
|
|
|
|
|
(5) |
Includes all shares of common stock beneficially owned by Mr. Burns,
all shares of common stock issuable upon exercise of warrants which have vested, or which will vest within 60 days of the Date
of Determination to Mr. Burns, and for the “Total Beneficial Ownership” column, shares of common stock
issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Burns, subject to the Beneficial Ownership
Limitation. |
|
|
|
|
(6) |
Includes all shares of common stock beneficially owned by Mr. Siem
and American Resources Offshore Inc. (“American Resources”) and all shares of common stock issuable upon exercise
of warrants which have vested, or which will vest within 60 days of the Date of Determination to Mr. Siem and American
Resources. Mr. Siem is deemed to beneficially own the securities held by American Resources due to his position as Director
and CEO of American Resources. |
|
|
|
|
(7) |
Includes all shares of common stock and warrants to purchase
shares of common stock held by Mr. Allen, which have vested, or which will vest within 60 days of the Date of Determination. |
|
|
|
|
(8) |
Includes all shares of common stock and warrants to purchase shares
of common stock held by Mr. Deputy, which have vested, or which will vest within 60 days of the Date of Determination.
|
|
|
|
|
(9) |
Address: 710 N. Post Oak Rd., Suite 500, Houston, Texas
77024. Includes all shares of common stock beneficially owned by Mr. Beasley, Critical Communication LLC (“Critical”),
all shares of common stock issuable upon exercise of warrants which have vested, or which will vest within 60 days of the Date of
Determination to Mr. Beasley, Critical. Mr. Beasley is deemed to beneficially own the securities held by Critical due to his position
as Managing Director of Critical. |
|
|
|
|
(10) |
Address: 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024. Includes
all shares of common stock beneficially owned by Mr. Khan, and Jovian Petroleum Corporation (“Jovian”), all shares
of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination
to Mr. Khan and Jovian, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon
conversion of outstanding shares of Series A Preferred Stock held by Mr. Khan and Jovian, subject to the Beneficial Ownership
Limitation. Mr. Khan is deemed to beneficially own the securities held by Jovian due to his position as CEO of Jovian. |
|
|
|
|
(11) |
Includes all shares of common stock beneficially owned by Mr. Oppenheim, all shares of common stock issuable upon exercise of warrants which have vested, or which will vest within 60 days of the Date of Determination to Mr. Oppenheim, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Oppenheim, subject to the Beneficial Ownership Limitation. |
|
|
|
|
(12) |
Address: 10360 Kestrel Street, Plantation, Florida, 33324. |
Changes in Control
The Company is not aware of any arrangements, which
may at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.
Except as discussed below or otherwise disclosed
above under “Item 11. Executive Compensation,”, Note 7 – Related Party Notes Payable,
Note 10 - Equity and Note 11 - Related Party Transactions, of the consolidated audited financial statements included herein,
all of which information is incorporated by reference into this Item 13, there have been no transactions since the beginning of the Company’s
last fiscal year, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the
amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end, for the
last two completed fiscal years, and in which any officer, director, or any stockholder owning greater than five percent (5%) of our
outstanding voting shares, nor any member of the above referenced individual’s immediate family, had or will have a direct or indirect
material interest.
On August 1, 2017, Mr. Joel Oppenheim provided a Letter of Credit (LOC),
which was posted as collateral in order for the Company to issue operating bonds with the State of New Mexico for the operation of Twin
Lakes San Andres Unit wells. In exchange for the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000
and warrants to purchase 2,000,000 shares of common stock with an exercise price of $0.14 per share.
On August 21, 2019, the Company closed private placements
with related parties for gross proceeds of $150,000, consisting of 1,875,000 shares of common stock and 3,750,000 warrants to purchase
shares of common stock, exercisable at a price of $0.10 per share at any time prior to November 1, 2020. American Resources Offshore Inc.
(of which Ivar Siem, our director) subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock.
Leo Womack, our director, subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock. Jovian
Petroleum Corporation, a greater than 5% shareholder of the Company, subscribed for 625,000 shares of common stock and warrants to purchase
1,250,000 shares of common stock. Joel Martin Oppenheim, our director, subscribed for 625,000 shares of common stock and warrants to purchase
1,250,000 shares of common stock.
On October 25, 2021, the
Board of Directors of the Company approved the filing of a Certificate of Designations of Petrolia Energy Corporation Establishing the
Designations, Preferences, Limitations, and Relative Rights of its Series B Preferred Stock with the Secretary of State of Texas, which
designation was filed with, and became effective with, the Secretary of State of Texas on October 25, 2021. The Series B Designation
designated three shares of Series B Preferred Stock. The Company issued one share of its newly designated shares of Series B Preferred
Stock to each of the three members of its then Board of Directors, (1) James E. Burns, (2) Leo Womack and (3) Ivar Siem, in consideration
for services rendered to the Company as members of the Board of Directors. Such shares of Series B Preferred Stock vote in aggregate
sixty percent (60%) of the total vote on all shareholder matters, voting separately as a class.
In October and November
of 2021, and January 2022, the Company entered into various subscription agreements with certain accredited investors, pursuant to which
the Subscribers agreed, subject to certain conditions in the Subscription Agreements, to purchase an aggregate amount of 11,000 shares
of the Company’s newly designated shares of Series C Convertible Preferred Stock, par value $0.10 per share at $10.00 per share.
Investors in the offering include the Company’s director, Leo Womack, who purchased $50,000 in shares of Series C Preferred Stock
(5,000 shares).
Review, Approval and Ratification of Related Party
Transactions
On August 22, 2018, the Company adopted a formal related
party transaction policy (the “Policy”) for the review, approval or ratification of transactions, such as those described
above, with our directors, nominees for director, executive officers and significant shareholders or certain entities or persons related
to them.
Under the terms of the Policy, the Audit Committee
shall review the material facts of all related party transactions and may approve or disapprove of the entry into the related party transaction.
Where advance Audit Committee review of a related party transaction is not feasible or has otherwise not been obtained, then the related
party transaction shall be reviewed subsequently by the Audit Committee (and such transaction may be ratified subsequently by the Audit
Committee). The Audit Committee may also disapprove of a previously entered into related party transaction and may require that management
of the Company take all reasonable efforts to terminate, unwind, cancel or annul the related party transaction. The Audit Committee shall
be authorized to review in advance and provide standing pre-approval in advance of certain related party transactions or categories of
related party transactions which include employment of executive officers, director compensation and others. The Audit Committee or the
Board of Directors may recommend the creation of a special Audit Committee to review any related party transaction.
Each officer and/or director who is a related party
with respect to a particular related party transaction shall disclose all material information to the Audit Committee concerning such
related party transaction and his or her interest in such transaction. Any member of the Audit Committee who has a potential interest
in any related party transaction shall recuse himself or herself and abstain from voting on the approval or ratification of the related
party transaction, but may participate in all or a portion of the Audit Committee’s discussions of the related party transaction,
if requested by the Audit Committee.
In connection with its review of a related party transaction,
the Audit Committee shall take into account, among other factors it deems appropriate, including the following factors, among others,
to the extent relevant to the related party transaction:
● Whether the terms of the related party transaction
are fair to the Company and would apply on the same basis if the transaction did not involve a related party, i.e., whether the terms
of the transaction would be the same if the transaction was undertaken on an arms-length basis;
● Whether there are any compelling business
reasons for the Company to enter into the related party transaction and the nature of alternative transactions, if any;
● Whether the related party transaction would
impair the independence of an otherwise independent director or nominee for director;
● Whether the Company was notified about the
related party transaction before its commencement and if not, why pre-approval was not sought and whether subsequent ratification would
be detrimental to the Company; and
● Whether the related party transaction would
present an improper conflict of interest for any related party, taking into account the size of the transaction, the overall financial
position of the related party, the direct or indirect nature of the related party’s interest in the transaction and the ongoing
nature of any proposed relationship and any other factors the Audit Committee deems relevant.
If a related party transaction will be ongoing, the
Audit Committee may establish guidelines for the Company’s management to follow in its ongoing dealings with the related party.
Thereafter, the Audit Committee shall periodically review and assess ongoing relationships with the related party. Any material amendment,
renewal or extension of a transaction, arrangement or relationship previously reviewed under the Policy shall also be subject to subsequent
review under the Policy.
In addition to guidelines for ongoing related party
transactions, the Audit Committee may, as it deems appropriate and reasonable, establish from time to time guidelines regarding the review
of other related party transactions including those that (i) involve de minimus amounts, (ii) do not require public disclosure, or (iii)
involve transactions that have primarily a charitable purpose.
Director Independence
Our common stock is quoted for trading on the OTC
Pink Sheet market operated by OTC Markets Group and we are not required to have independent members of our Board of Directors pursuant
to OTC Pink Sheet market rules. Notwithstanding that we currently consider Leo Womack and Ivar Siem as independent directors.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
Our independent public accounting firm is M&K
CPAS, PLLC, Houston, Texas, PCAOB Auditor ID #2738.
M&K
CPAS, PLLC (“M&K”) served as our independent registered public accounting firm for the year ended December 31, 2018.
MaloneBailey, LLP (“MaloneBailey”) served as our independent registered public accounting firm for the year ended December
31, 2017 and resigned effective January 29, 2019. The following table shows the aggregate fees billed to us for these years by M&K
and MaloneBailey.
| |
Year
Ended December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Audit
Fees | |
$ | 27,000 | | |
$ | 70,100 | |
Audit-Related
Fees | |
| — | | |
| — | |
Tax
Fees | |
| — | | |
| — | |
All
Other Fees | |
| — | | |
| — | |
Total | |
$ | 27,000 | | |
$ | 70,100 | |
Audit fees represent amounts billed for professional
services rendered for the audit of our annual consolidated financial statements and the reviews of the financial statements included in
our Form 10-Q reports. Prior to contracting with M&K to render audit or non-audit services, each engagement was approved by our directors.
It is the policy of our Board of Directors that all
services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and
non-audit services, must be pre-approved by our Board of Directors. Our Board of Directors pre-approved all services, audit and non-audit
related, provided to us by M&K for 2019 and 2020.
In order to assure continuing auditor independence,
the Board of Directors periodically considers the independent auditor’s qualifications, performance and independence and whether
there should be a regular rotation of our independent external audit firm.
The accompanying notes are an integral part
of these audited consolidated financial statements.
The accompanying notes are an integral part
of these audited consolidated financial statements.
The accompanying notes are an integral part
of these audited consolidated financial statements
The accompanying notes are an integral part of these
audited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Petrolia Energy Corporation
(the “Company”) is in the business of oil and gas exploration, development and production.
Basis of presentation
The accompanying financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and pursuant to the accounting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”).
A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Askarii Resources and Petrolia Canada Corporation. All significant intercompany
balances and transactions have been eliminated upon consolidation.
The Company accounts for its investment in companies
in which it has significant influence by the equity method. The Company’s proportionate share of earnings is included in earnings
and added to or deducted from the cost of the investment.
Foreign currency translation
The functional and reporting currency of the Company
is the United States dollar. The functional currencies of the Company’s wholly-owned subsidiaries, Askarii Resources and Petrolia
Canada Corporation, are the United States dollar and the Canadian dollar, respectively. Transactions involving foreign currencies are
converted into the Company’s functional currency using the exchange rates in effect at the time of the transactions. At the balance
sheet date, monetary assets and liabilities that are denominated in currencies other than the Company’s functional currency are
translated using exchange rates at that date. Exchange gains and losses are included in net earnings. On consolidation, Petrolia Canada
Corporation’s income statement amounts are translated at average exchange rates for the year, while the assets and liabilities are
translated at year-end exchange rates. Translation adjustments are accumulated as a separate component of stockholders’ equity in
other comprehensive income.
Management estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in
preparing these financial statements include depreciation of furniture, equipment and software, asset retirement obligations (“AROs”)
(Note 9), income taxes (Note 13) and the estimate of proved oil and gas reserves and related present value estimates of
future net cash flows therefrom (Note 15).
Cash and cash equivalents
The Company considers all highly liquid instruments
purchased with an original maturity date of three months or less to be cash equivalents. At December 31, 2020, the Company did not hold
any cash equivalents.
Receivables and allowance for doubtful accounts
Oil revenues receivable do not bear any interest.
These receivables are primarily comprised of joint interest billings. Management regularly reviews collectability and establishes or adjusts
an allowance for uncollectible amounts as necessary using the specific identification method. Account balances are charged off against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management has determined
that a reserve for uncollectible amounts was not required in the periods presented.
Oil and gas properties
The Company follows the full cost accounting method
to account for oil and natural gas properties, whereby costs incurred in the acquisition, exploration and development of oil and gas reserves
are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on nonproducing leases, drilling,
completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement
costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless
such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the
gain or loss is recognized to operations.
The capitalized costs of oil and gas properties, excluding
unevaluated and unproved properties, are amortized as depreciation, depletion and amortization expense using the units-of-production method
based on estimated proved recoverable oil and gas reserves.
The costs associated with unevaluated and unproved
properties, initially excluded from the amortization base, relate to unproved leasehold acreage, wells and production facilities in progress
and wells pending determination of the existence of proved reserves, together with capitalized interest costs for these projects. Unproved
leasehold costs are transferred to the amortization base with the costs of drilling the related well once a determination of the existence
of proved reserves has been made or upon impairment of a lease. Costs associated with wells in progress and completed wells that have
yet to be evaluated are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned
to the property. Costs of dry wells are transferred to the amortization base immediately upon determination that the well is unsuccessful.
All items classified as unproved property are assessed
on a quarterly basis for possible impairment or reduction in value. Properties are assessed on an individual basis or as a group if properties
are individually insignificant. The assessment includes consideration of various factors, including, but not limited to, the following:
intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves;
and economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment,
the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred
to the full cost pool and become subject to amortization.
Under full cost accounting rules for each cost center,
capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred
income taxes, may not exceed an amount (the “cost ceiling”) equal to the sum of (a) the present value of future net cash flows
from estimated production of proved oil and gas reserves, based on current prices and operating conditions, discounted at ten percent
(10%), plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated fair value of any unproved properties
included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties
involved. If capitalized costs exceed this limit, the excess is charged to operations. For purposes of the ceiling test calculation, current
prices are defined as the un-weighted arithmetic average of the first day of the month price for each month within the 12 month period
prior to the end of the reporting period. Prices are adjusted for basis or location differentials. Unless sales contracts specify otherwise,
prices are held constant for the productive life of each well. Similarly, current costs are assumed to remain constant over the entire
calculation period.
Given the volatility of oil and gas prices, it is
reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term.
If oil and gas prices decline in the future, even if only for a short period of time, it is possible that impairments of oil and gas properties
could occur. In addition, it is reasonably possible that impairments could occur if costs are incurred in excess of any increases in the
present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted
present value of the related proved oil and gas reserves.
Furniture, equipment and software
Furniture, equipment, and software are stated at cost,
less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related
asset, generally three to five years. Fully depreciated assets are retained in property and accumulated depreciation accounts until they
are removed from service. Management performs ongoing evaluations of the estimated useful lives of the property and equipment for depreciation
purposes. Maintenance and repairs are expensed as incurred. Management periodically reviews long-lived assets, other than oil and gas
property, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully
recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying
amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value.
Derivative financial instruments
The Company’s derivative financial instruments
consist of warrants with an exercise price denominated in a currency other than the Company’s functional currency. These derivative
financial instruments are measured at their fair value at the end of each reporting period. Changes in fair value are recorded in net
income.
Asset retirement obligations
The Company records a liability for Asset Retirement
Obligations (“AROs”) associated with its oil and gas wells when those assets are placed in service. The corresponding cost
is capitalized as an asset and included in the carrying amount of oil and gas properties and is depleted over the useful life of the properties.
Subsequently, the ARO liability is accreted to its then-present value.
Inherent in the fair value calculation of an ARO are
numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing
of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these
assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance.
Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Debt issuance costs
Costs incurred in connection
with the issuance of long-term debt are presented as a direct deduction from the carrying value of the related debt and amortized over
the term of the related debt.
Revenue recognition
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This
update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which includes
(i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining
the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue as each
performance obligation is satisfied. The Company adopted this standard on a modified retroactive basis on January 1, 2018. No financial
statement impact occurred upon adoption.
Revenue from contracts with customers
The Company recognizes revenue when it satisfies a
performance obligation by transferring control over a product to a customer. Revenue is measured based on the consideration the Company
expects to receive in exchange for those products.
Performance
obligations and significant judgments
The
Company sells oil and natural gas products in the United States through a single reportable segment. The Company enters into contracts
that generally include one type of distinct product in variable quantities and priced based on a specific index related to the type of
product.
The
oil and natural gas is typically sold in an unprocessed state to processors and other third parties for processing and sale to customers.
The Company recognizes revenue at a point in time when control of the oil or natural gas passes to the customer or processor, as applicable,
discussed below. For oil sales, control is typically transferred to the customer upon receipt at the wellhead or a contractually agreed
upon delivery point. Under our natural gas contracts with processors, control transfers upon delivery at the wellhead or the inlet of
the processing entity’s system. For our other natural gas contracts, control transfers upon delivery to the inlet or to a contractually
agreed upon delivery point. In the cases where the Company sells to a processor, management has determined that the Company is the principal
in the arrangement and the processors are customers. The Company recognizes the revenue in these contracts based on the net proceeds
received from the processor.
Transfer
of control drives the presentation of transportation and gathering costs within the accompanying consolidated statements of operations.
Transportation and gathering costs incurred prior to control transfer are recorded within the transportation and gathering expense line
item on the accompanying consolidated statements of operations, while transportation and gathering costs incurred subsequent to control
transfer are recorded as a reduction to the related revenue.
A
portion of our product sales are short-term in nature. For those contracts, the Company uses the practical expedient in Accounting Standards
Codification (“ASC”) 606-10-50-14 exempting us from disclosure of the transaction price allocated to remaining performance
obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For
our product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC 606-10-50-14(a)
which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable
consideration is allocated entirely to an unsatisfied performance obligation. Under these sales contracts, each unit of product represents
a separate performance obligation; therefore, future volumes are unsatisfied, and disclosure of the transaction price allocated to remaining
performance obligations is not required. The Company has no unsatisfied performance obligations at the end of each reporting period.
Management
does not believe that significant judgments are required with respect to the determination of the transaction price, including any variable
consideration identified. There is a low level of uncertainty due to the precision of measurement and use of index-based pricing with
predictable differentials. Additionally, any variable consideration identified is not constrained.
Stock-based
compensation
The
Company accounts for stock-based compensation to employees in accordance with FASB ASC 718. Stock-based compensation to employees
is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service
period. The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments
issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value
of the equity instruments, and is recognized as expense over the service period. The Company estimates the fair value of stock-based
payments using the Black-Sholes Option Pricing Model for common stock options and warrants and the closing price of the Company’s
common stock for common share issuances. The Company may grant stock to employees and non-employees in exchange for goods, services or
for settlement of liabilities. Shares granted to employees in exchange for goods, services or settlement of liabilities are measured
based on the fair value of the shares issued. Shares granted to non-employees in exchange for goods or services are measured based on
the fair value of the consideration received or the fair value of the shares issued, whichever is more reliably measurable.
Income
taxes
Income
taxes are accounted for pursuant to ASC 740, Income Taxes, which requires recognition of deferred income tax liabilities and assets
for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
The Company provides for deferred taxes on temporary differences between the financial statements and tax basis of assets using the enacted
tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Uncertain
tax positions are recognized in the financial statements only if that position is more likely than not of being sustained upon examination
by taxing authorities, based on the technical merits of the position. The Company recognizes interest and penalties related to uncertain
tax positions in the income tax provision. There are currently no unrecognized tax benefits that if recognized would affect the tax rate.
There was no interest or penalties recognized for the twelve months ended December 31, 2020 and 2019.
The
Company is required to file federal income tax returns in the United States and Canada, and in various state and local jurisdictions.
The Company’s tax returns are subject to examination by taxing authorities in the jurisdictions in which it operates in accordance
with the normal statutes of limitations in the applicable jurisdiction.
Earnings
(loss) per share
Basic
earnings (loss) per share has been calculated based on the weighted-average number of common shares outstanding. The treasury stock method
is used to compute the dilutive effect of the Company’s share-based compensation awards. Under this method, the incremental number
of shares used in computing diluted earnings per share (“EPS”) is the difference between the number of shares assumed issued
and purchased using assumed proceeds. Diluted EPS amounts would include the effect of outstanding stock options, warrants, and other
convertible securities if including such potential shares of common stock is dilutive. Basic and diluted earnings per share are the same
in all periods presented as all outstanding instruments are anti-dilutive.
Concentration
of credit risk
The
Company is subject to credit risk resulting from the concentration of its oil receivables with significant purchasers. Two purchasers
accounted for all of the Company’s oil sales revenues for 2019 and 2020. The Company does not require collateral. While the Company
believes its recorded receivables will be collected, in the event of default the Company would follow normal collection procedures. The
Company does not believe the loss of a purchaser would materially impact its operating results as oil is a fungible product with a well-established
market and numerous purchasers.
At
times, the Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management monitors
the credit ratings and concentration of risk with these financial institutions on a continuing basis to safeguard cash deposits.
Fair
value measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. The hierarchy is broken down into three levels based on
the observability of inputs as follows:
|
● |
Level
1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree
of judgment; |
|
● |
Level
2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly; and |
|
● |
Level
3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
Our
derivative liabilities are measured at fair value on a recurring basis and estimated as follows:
SCHEDULE OF DERIVATIVE LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
December 31, 2020 | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Derivative liabilities | |
| — | | |
| | | |
| 183,798 | | |
| 183,798 | |
ARO liabilities | |
| — | | |
| — | | |
| 3,624,133 | | |
| 3,624,133 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2019 | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
| — | | |
| | | |
| 24,509 | | |
| 24,509 | |
ARO liabilities | |
| — | | |
| — | | |
| 1,723,364 | | |
| 1,723,364 | |
The
carrying value of cash, accounts receivable, other current assets, accounts payable, accounts payable – related parties, accrued
liabilities and accrued liabilities – related parties, as reflected in the consolidated balance sheets, approximate fair value,
due to the short-term maturity of these instruments. The carrying value of notes payable approximates their fair value due to immaterial
changes in market interest rates and the Company’s credit risk since issuance of the instruments or due to their short-term nature.
Derivative liabilities are remeasured at fair value every reporting period. Our derivative liabilities
are considered level 3 financial instruments.
Related
parties
The
Audit Committee approves all material related party transactions. The Audit Committee is provided with the details of each new, existing
or proposed related party transaction, including the terms of the transaction, the business purpose of the transaction, and the benefits
to the Company and the relevant related party. In determining whether to approve a related party transaction, the following factors are
considered: (1) if the terms are fair to the Company, (2) if there are business reasons to enter into the transaction, (3) if the transaction
would impair independence of an outside Director, or (4) if the transaction would present an improper conflict of interest for any Director
or executive officer. Any member of the Audit Committee who has an interest in the transaction will abstain from voting on the approval
of the related party transaction.
Business
combinations
In
January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The
ASU provides an updated model for determining if acquired assets and liabilities constitute a business. In a business combination, the
acquired assets and liabilities are recognized at fair value and goodwill could be recognized. In an asset acquisition, the assets are
allocated value based on relative fair value and no goodwill is recognized. The ASU narrows the definition of a business. The Company
adopted this standard on January 1, 2018. ASU 2017-01 did not have a material impact on our financial statements on adoption.
Reclassifications
Certain
amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had
no effect on net loss, working capital or equity previously reported.
Recent
accounting pronouncements
The
Company has evaluated all the recent accounting pronouncements through the filing date and believes that none of them will have a material
effect on the Company other than those discussed below.
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize all rights and obligations
created by those leases, including operating leases, with a term greater than 12 months on the balance sheet. The accounting for lessors
will remain largely unchanged from the existing accounting standards. The standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years.
Under
ASU 2016-02, each lease agreement will be evaluated to identify the lease components and non-lease components at lease inception. The
total consideration in the lease agreement will be allocated to the lease and non-lease components based on their relative standalone
selling prices.
In
July 2018, the FASB issued ASU 2018-11, “Leases – Targeted Improvements” that allows lessors to elect, as a
practical expedient, to not separate lease and non-lease components and allows these components to be accounted for as a single lease
component if both (1) the timing and pattern of transfer to the lessee of the lease component and the related non-lease component are
the same and (2) the lease component, if accounted for separately, would be classified as an operating lease. In addition, a company
is permitted to use its effective date as the date of initial application. Therefore, a company electing this option will not restate
comparative period financial information, will not make the new required lease disclosures in comparative periods beginning before the
effective date and will recognize its cumulative effect transition adjustment as of the effective date. Under the practical expedient
mentioned above, it is expected that revenue will be presented under a single lease component presentation. The Company will elect this
expedient upon adoption.
The
Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective method, whereby a cumulative effect adjustment will be
made as of that day with no retrospective effect. The Company applied the package of practical expedients such that for any expired or
existing leases it will not reassess lease classification, initial direct costs or whether any expired or existing contracts are or contain
leases. Note that the Company had no outstanding leases as of December 31, 2019. In 2020, we entered a lease with a related party, that
is accounted for and disclosed using the framework of ASC 842.
NOTE
3. GOING CONCERN
The
Company has suffered recurring losses from operations and currently has a working capital deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The Company plans to generate profits by reworking its existing
oil or gas wells, as needed, funding permitting. The Company will need to raise funds through either the sale of its securities, issuance
of corporate bonds, joint venture agreements and/or bank financing to accomplish its goals. The Company does not have any commitments
or arrangements from any person to provide the Company with any additional capital.
If
additional financing is not available when needed, we may need to cease operations. The Company may not be successful in raising the
capital needed to drill and/or rework existing oil wells. Any additional wells that the Company may drill may be non-productive. Management
believes that actions presently being taken to secure additional funding for the reworking of its existing infrastructure will provide
the opportunity for the Company to continue as a going concern. Since the Company has an oil producing asset, its goal is to increase
the production rate by optimizing its current infrastructure. The accompanying financial statements have been prepared assuming the Company
will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
NOTE
4. EVALUATED PROPERTIES
The
acquired properties and current properties can be summarized as follows:
SCHEDULE
OF ACQUIRED AND CURRENT PROPERTIES
Cost | |
Canadian properties | | |
US properties | | |
Total | |
As of December 31, 2018 | |
| 2,443,747 | | |
| 10,350,538 | | |
| 12,794,285 | |
Additions | |
| — | | |
| — | | |
| — | |
Dispositions | |
| — | | |
| — | | |
| — | |
Asset retirement cost additions | |
| — | | |
| — | | |
| — | |
Foreign currency translations | |
| 119,687 | | |
| — | | |
| 119,687 | |
As of December 31, 2019 | |
$ | 2,563,434 | | |
$ | 10,350,538 | | |
$ | 12,913,972 | |
Additions | |
| 678,765 | | |
| — | | |
| 678,765 | |
Dispositions | |
| — | | |
| 5,648,904 | ) | |
| (6,255,103 | ) |
Impairment of oil and gas properties | |
| | | |
| (396,922 | ) | |
| (396,922 | ) |
Asset retirement cost additions | |
| 906,146 | | |
| — | | |
| 1,512,256 | |
Foreign currency translation | |
| 166,459 | | |
| — | | |
| 166,459 | |
As of December 31, 2020 | |
| 4,314,804 | | |
| 4,304,622 | | |
| 8,619,427 | |
| |
| | | |
| | | |
| | |
Accumulated depletion | |
| | | |
| | | |
| | |
As of December 31, 2018 | |
| 413,657 | | |
| 61,551 | | |
| 475,208 | |
Dispositions | |
| — | | |
| — | | |
| — | |
Impairment of oil and gas properties | |
| — | | |
| — | | |
| — | |
Depletion | |
| 1,004,832 | | |
| — | | |
| 1,004,832 | |
Foreign currency translations | |
| 40,487 | | |
| — | | |
| 40,487 | |
As of December 31, 2019 | |
| 1,458,976 | | |
| 61,551 | | |
| 1,520,527 | |
Dispositions | |
| — | | |
| — | | |
| — | |
Depletion | |
| 1,115,595 | | |
| — | | |
| 1,115,595 | |
Foreign currency translation | |
| 57,178 | | |
| — | | |
| 57,178 | |
As of December 31, 2020 | |
$ | 2,631,749 | | |
$ | 61,551 | | |
$ | 2,693,300 | |
| |
| | | |
| | | |
| | |
Net book value as at December 31, 2020 | |
$ | 1,683,055 | | |
$ | 4,243,071 | | |
$ | 5,926,126 | |
Net book value as at December 31, 2019 | |
$ | 1,104,458 | | |
$ | 10,288,987 | | |
$ | 11,393,445 | |
U.S.
Properties – Minerva-Rockdale Field (“NOACK”) Field
On
November 1, 2018, the Company sold 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”) to Crossroads Petroleum LLC (“CP”) for $375,000. The terms of this agreement included $260,000 to be paid
as a deposit with the balance of $115,000 to be paid by December 31, 2018. On April 15, 2019, the Company foreclosed on the property
since CP did not satisfy all of the contractual payment requirements. On April 15, 2019, the remaining unpaid receivable balance was
$120,000 which was written off as a loss on sale of property. Note that previous payments of $255,000 were forfeited to the Company and
no reimbursement to CP was made.
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, 2020, FT had
made cumulative payments of $375,000, resulting in a $25,000 account receivable to the Company at December 31, 2020 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.
U.S.
Properties – Slick Unit Dutcher Sands (“SUDS”) Field
On
July 24, 2018, the Company announced the signing of the Slick Unit Exploration and Development Agreement (the “Development Agreement”)
with Boone Operating Inc. (“Boone”), a private Exploration & Production company, to explore and develop the Misener and
Simpson Formations at the SUDS Field. The Development Agreement expired and was not renewed. The Company’s primary focus remains
to develop the Dutcher Sands formation.
The
SUDS Field is a 2604-acre lease located in Creek County, 36 miles Southwest of Tulsa, Oklahoma. The field was first discovered in 1918
by SOHIO Oil Company utilizing over 100 wells with the primary objective to produce from the Dutcher Sands at an average well depth of
3,100 ft.
U.S.
properties – Twin Lakes San Andres Unit (“TLSAU”) Field
TLSAU
is located 45 miles from Roswell, Chaves County, New Mexico. The last independent reserve report prepared by MKM Engineering on December
31, 2020, reflects approximately 98,250 barrels of proven oil reserves remaining for the 100% working interest.
On
July 27, 2020 the Company entered into a settlement agreement with their Trustee pursuant to which nine leases totaling approximately
3,800 acres of the 4,880 acre Twin Lakes San Andres Unit were forfeited as a part of the settlement agreement. Consequently, the Company
no longer has the right to produce oil, gas, or other hydrocarbons and any other minerals from the mineral estate encumbered by the leases
and owned by the Trustee. The company accounted for the forfeiture of the TLSAU properties, in accordance with Reg S-W.T.Rule 4-10(c)(6).
Accordingly, an analysis of multi-period reserve reports was performed to determine the percentage of the cumulative US full cost pool’s
reserves that were forfeited (56% or 943,820). Then that percentage was multiplied by the period end net property balance of $10,175,456.
This resulted in a write down of $5,648,994 ($10,175,456 * 56%) of the US cost pool. Note that both TLSAU and SUDS make up the US full
cost pool.
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). Blue Sky had previously acquired
an 80%
working interest in the Canadian Properties from Georox Resources Inc., who had acquired the Canadian Properties from Cona Resources
Ltd. and Cona Resources Partnership prior to the acquisition by the Company.
The
effective date of the acquisition was June 1, 2018. The acquisition of the Canadian Properties was evidenced and documented by a Memorandum
of Understanding between the Company and Blue Sky dated June 29, 2018 and a Conveyance between the parties dated as of the same date,
pursuant to which the Company agreed to acquire the Working Interest in consideration for $1,428,581 in Canadian dollars (“CAD”)
(approximately $1,096,216 in U.S. dollars) of which CAD $1,022,400 (approximately $782,441 in U.S. dollars) was paid in cash (the “Cash
Payment”) and CAD $406,181 (approximately $313,775 in U.S. dollars) was evidenced by a promissory note (the “Acquisition
Note”). The Cash Payment was made with funds borrowed by the Company pursuant to the terms of that certain $1,530,000 May 9, 2018,
Amended and Restated Loan Agreement entered into with Bow and a third party (the “Loan Agreement” and the “Lender”).
The amount owed under the Loan Agreement accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default)
and is due and payable on May 11, 2021.
The
Working Interest will be held in the name of the Company’s wholly-owned Alberta, Canada, subsidiary, Petrolia Canada Corporation.
The Acquisition Note which was dated June 8, 2018, bears interest at the rate of 9% per annum, beginning on August 1, 2018
and is due and payable on November 30, 2018, provided that the Company has the right to extend the maturity date for a period six months
with 10 days’ notice to Blue Sky, in the event the Company pays 25% of the principal amount of the Acquisition Note at the time
of extension.
On
September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky. Pursuant to the MOU, the
Company obtained the rights to acquire an additional 3% working interest in the Canadian Properties, increasing our Working Interest
to 28%. Total consideration paid from the Company to Blue Sky for the additional 3% Working Interest was $150,000.
On
February 16, 2022, Petrolia Canada Corporation (PCC), a wholly owned subsidiary of Petrolia Energy Corporation (PEC), entered into a
Purchase and Sale Agreement (PSA) and Debt Settlement Agreement (DSA) with Prospera Energy, Inc. whereby PCC sold its 28% working interest
in the Luseland, Hearts Hill and Cuthbert fields.
Utikuma
field
On
May 1, 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 bpd of light oil. The working interest was acquired from
Blue Sky Resources Ltd. in an affiliated party transaction as Zel C. Khan, the Company’s former 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. The
total purchase price of the property was $2,000,000 (CAD), with $1,000,000 of that total due initially. The additional $1,000,000 was
contingent on the future price of WTI crude. At the time WTI price exceeded $50/bbl, the Company would pay an additional $750,000. In
addition, at the time WTI price exceeded $57/bbl the Company would pay an additional $250,000 (for a cumulative contingent total of $1,000,000).
Note that WTI crude prices did not exceed those price thresholds until 2021, so the contingent $1,000,000 will not be recorded until
2021. Included in the terms of the agreement, the Company also funded their portion of the Alberta Energy Regulator (“AER”)
bond fund requirement ($599,851 USD), necessary for the wells to continue in production after the acquisition. Additional funds
($385,336 USD) remain in the other current asset balance for future payments to BSR, related to the acquisition.
On December 2, 2020 Petrolia Canada Corporation received
$602,404.84 CAD from the proceeds of a secured royalty interest loan between Blue Sky Resources and PrairieSky Royalty related to the
Utikuma asset.
NOTE
5. NOTES PAYABLE
SCHEDULE OF NOTES PAYABLE
| |
Interest rate | | |
Date of maturity | |
December 31, 2020 | | |
December 31, 2019 | |
Truck loan (ii) | |
| 5.49 | % | |
January 20, 2022 | |
| 9,916 | | |
| 16,141 | |
Credit note I (iii) | |
| 12 | % | |
May 11, 2021 | |
| 800,000 | | |
| 800,000 | |
Credit note II (iv) | |
| 12 | % | |
October 17, 2019 | |
| 346,038 | | |
| 346,038 | |
Credit note III (v) | |
| 15 | % | |
April 25, 2021 | |
| 750,000 | | |
| 750,000 | |
Discount on credit note III | |
| — | | |
— | |
| (5,976 | ) | |
| (25,101 | ) |
Credit note VI(vi) | |
| 10 | % | |
January 01, 2020 | |
| 937,019 | | |
| — | |
Discount on credit note VI | |
| | | |
| |
| (285,768 | ) | |
| — | |
Lee Lytton(i) | |
| | | |
On demand | |
| 3,500 | | |
| — | |
Joel Oppenheim (vii) | |
| 10 | % | |
On demand | |
| 161,900 | | |
| — | |
Joel Oppenheim (vii) | |
| 10 | % | |
On demand | |
| 15,000 | | |
| — | |
Joel Oppenheim(vii) | |
| 10 | % | |
October 17, 2018 | |
| 240,000 | | |
| — | |
Origin Bank (PPP loan) | |
| | | |
| |
| 56,680 | | |
| — | |
Mark Allen(viii) | |
| 12 | % | |
June 30, 2021 | |
| — | | |
| 200,000 | |
M. Hortwitz | |
| 10 | % | |
October 14, 2016 | |
| 10,000 | | |
| 10,000 | |
| |
| | | |
| |
| 3,038,309 | | |
| 2,097,078 | |
Current portion: | |
| | | |
| |
| | | |
| | |
Truck loan | |
| | | |
| |
| 9,343 | | |
| 7,502 | |
Credit note I | |
| | | |
| |
| 800,000 | | |
| 90,000 | |
Credit note II | |
| | | |
| |
| 346,038 | | |
| 346,038 | |
Credit note III | |
| | | |
| |
| 744,023 | | |
| — | |
Credit note VI | |
| | | |
| |
| 651,251 | | |
| — | |
M. Hortwitz | |
| | | |
| |
| 10,000 | | |
| 10,000 | |
Lee Lytton | |
| | | |
| |
| 3,500 | | |
| — | |
Joel Oppenheim | |
| | | |
| |
| 176,900 | | |
| — | |
Joes Oppenheim | |
| | | |
| |
| 240,000 | | |
| — | |
Mark Allen | |
| | | |
| |
| — | | |
| 200,000 | |
Origin Bank (PPP Loan) | |
| | | |
| |
| 56,680 | | |
| — | |
Current portion of notes payable | |
| | | |
| |
$ | 3,037,737 | | |
$ | 653,540 | |
|
(i) |
Note
needs to be settled with the estate of Lee Lytton. |
|
|
|
|
(ii) |
On
January 6, 2017, the Company purchased a truck and entered into an installment note in the amount of $35,677 for a term of five years
and interest at 5.49% per annum. Payments of principal and interest in the amount of $683 are due monthly. |
|
|
|
|
(iii) |
On
May 9, 2018, Bow entered into an Amended and Restated Loan Agreement with a third party. The Loan Agreement increased by $800,000
the amount of a previous loan agreement entered into between Bow and the Lender, to $1,530,000. The amount owed under the Loan Agreement
accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default) and is due and payable on May 11,
2021, provided that the amount owed can be prepaid prior to maturity, beginning 60 days after the date of the Loan Agreement, provided
that the Company gives the Lender 10 days’ notice of our intent to repay and pays the Lender the interest which would have
been due through the maturity date at the time of repayment. The Loan Agreement contains standard and customary events of default,
including cross defaults under other indebtedness obligations of us and Bow, and the occurrence of any event which would have a material
adverse effect on us or Bow. The Company is required to make principal payments of $10,000 per month from January through September
2019 with the remaining balance of $710,000 due at maturity on May 11, 2021. |
|
|
|
|
|
The
additional $800,000 borrowed in connection with the entry into the Loan Agreement was used by the Company to acquire the Working
Interest in the Canadian Properties. |
|
|
|
|
|
In
order to induce the Lender to enter into the Loan Agreement, the Company agreed to issue the Lender 500,000 shares of restricted
common stock (the “Loan Shares”), which were issued on May 18, 2018, and warrants to purchase 2,320,000 shares of common
stock (the “Loan Warrants”), of which warrants to purchase (a) 320,000 shares of common stock have an exercise price
of $0.10 per share in Canadian dollars and expire in May 15, 2021, (b) 500,000 shares of common stock have an exercise price of $0.12
per share in U.S. dollars, and expire on May 15, 2021; and (c) 1,500,000 shares of common stock have an exercise price of $0.10 per
share in U.S. dollars and expire on May 15, 2020. |
|
|
|
|
|
The
fair value of the 500,000 common shares issued were assessed at the market price of the stock on the date of issuance and valued
at $47,500. The fair value of the Canadian dollar denominated warrants issued were assessed at $30,012 using the Black Scholes Option
Pricing Model. The fair value of the U.S. dollar denominated warrants issued were assessed at $182,650 using the Black Scholes Option
Pricing Model. The Company determined the debt modification to be an extinguishment of debt and recorded a total loss on extinguishment
of debt of $260,162. |
|
|
|
|
|
Upon
the disposition of Bow pursuant to the Exchange Agreement, a total of $730,000 of the obligations owed under
the Loan Agreement were transferred to Blue Sky. |
|
|
|
|
(iv) |
On
September 17, 2018, the Company entered into a loan agreement (LOC) with a third party for $200,000 (which was later increased to
$500,000) to acquire an additional 3% working interest in the Canadian Properties. The loan bears interest at 3.5% 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.
During
2019, the LOC balance increased by $150,000 resulting in a $346,038 ending balance. During 2020, the LOC balance decreased by $157,753
resulting in a $188,285 ending balance. |
|
|
|
|
(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 at 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 $0.012
per share expiring on
May 1, 2021 were issued associated with the note and were recorded as a debt discount of $5,976 on the balance sheet. The
notes hold a security guarantee of a 50%
Working Interest in the Utikima oil field and a 100%
Working Interest in the Twin Lakes Properties. |
|
(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”), at an exercise price of $0.10
per share in Canadian
dollars 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. |
|
|
|
|
(vii) |
Various
Shareholder Advances provided by Mr. Oppenheim during 2018 and 2019. There were no formal
documents drawn. Interest rates were applied based on other similar loan agreements entered
into by the Company during that period. On February 22, 2021, Mr. Oppenheimer combined
the loans, which now bear an interest rate of 10% and are due on December 31, 2021.
|
|
|
During
2019, the Company entered into a loan agreement in the amount of $200,000 with a third party. The note bears interest at an interest
rate of 12% per annum and matures on June 30, 2021. At the maturity date, the note holder has the right to collect the principal
plus interest or convert into 2,500,000 shares of common stock at $0.08 per share. In addition, upon conversion, the note holder
will also receive 10,000,000 warrants at an exercise price of $0.10 per share, vesting immediately with a 36 month expiration period.
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 was transferred into the Jovian LOC and is now included in the $362,583
at December 31, 2020 (see Note 7:
Related Party Notes Payable)
On
April 23, 2020, the Company was granted a $56,680 business loan through the Paycheck Payment Protection (PPP) program administered
through the CARES act. The loan amount was based 2.5 times the Company’s average monthly payroll costs. The Company is in the
process of applying for loan forgiveness and expects to be granted the forgiveness. If forgiveness is granted, the loan principal
will not have to be repaid. If not, the loan will earn 1% annual interest and will mature in 2 years. |
|
|
|
|
(viii) |
Mark Allen became a related party in 2020, therefore his note has been moved
to that schedule. |
The
following is a schedule of future minimum repayments of notes payable as of December 31:
SCHEDULE OF FUTURE MINIMUM REPAYMENTS OF NOTES PAYABLE
|
|
|
|
|
2021 |
|
|
3,037,737 |
|
2022 |
|
|
573 |
|
Thereafter |
|
|
— |
|
Total |
|
$ |
3,038,310 |
|
NOTE
6. LEASES
Our
adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leases
on the balance sheet as an ROU asset and a corresponding lease liability. The new guidance also requires additional disclosures as detailed
below. We adopted this standard on the effective date of January 1, 2019 and used this effective date as the date of initial application.
Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for
prior periods. We elected the ‘package of practical expedients,’ which permitted us to not reassess our prior conclusions
related to lease identification, lease classification, and initial direct costs, and we did not elect the use of hindsight.
Lease
ROU assets and liabilities are recognized at commencement date of the lease, based on the present value of lease payments over the lease
term. The lease ROU asset also includes any lease payments made and excludes any lease incentives. When readily determinable, we use
the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at the lease commencement date, including the lease term.
Short-term
leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for short-term leases is recognized
on a straight-line basis over the lease term. As of December 31, 2020 and 2019, we did not have any short-term leases.
The
tables below present financial information associated with our lease.
SCHEDULE
OF FINANCIAL INFORMATION LEASE
| |
| |
December 31, | | |
December 31, | |
| |
Balance Sheet Classification | |
2020 | | |
2019 | |
| |
| |
| | |
| |
Right-of-use assets | |
Other long-term assets | |
| 23,145 | | |
| - | |
Current lease liabilities | |
Other current liabilities | |
| 13,107 | | |
|
- | |
Non-current lease liabilities | |
Other long-term liabilities | |
| 13,909 | | |
| - | |
As of December 31, 2020, our maturities
of our lease liability are as follows:
SCHEDULE OF MATURITIES LEASE LIABILITY
| |
| | |
2021 | |
$ | 14,997 | |
Total | |
$ | 14,997 | |
Less: Imputed interest | |
| (1,088 | ) |
Present value of lease liabilities | |
$ | 13,909 | |
NOTE
7. RELATED PARTY NOTES PAYABLE
The
chart below summarizes the related party Notes Payable as of December 31, 2020 and 2019.
SCHEDULE OF RELATED PARTY NOTES PAYABLE
| |
Interest rate | | |
Date of maturity | |
December 31, 2020 | | |
December 31, 2019 | |
Lee Lytton (i) | |
| — | | |
On demand | |
| — | | |
| 3,500 | |
Quinten Beasley | |
| 10 | % | |
October 14, 2016 | |
| 5,000 | | |
| 10,000 | |
Joel Oppenheim | |
| — | | |
On demand | |
| — | | |
| 217,208 | |
Joel Oppenheim | |
| 12 | % | |
On demand | |
| — | | |
| 15,000 | |
Jovian Petroleum Corporation (ii) | |
| 3.5 | % | |
December 31, 2021 | |
| 188,285 | | |
| 362,583 | |
Ivar Siem (vi) | |
| 12 | % | |
On demand | |
| 200,000 | | |
| 100,000 | |
Ivar Siem (vi) | |
| No interest | | |
On demand | |
| 50,000 | | |
| 50,000 | |
Joel Oppenheim (iii) | |
| 12 | % | |
December 31, 2019 | |
| — | | |
| 200,000 | |
Mark Allen–SUDS Development (ix) | |
| 9 | % | |
September 2, 2021 | |
| 55,000 | | |
| — | |
Mark Allen-SUDS Development (vii) | |
| 10 | % | |
June 30, 2021 | |
| 135,000 | | |
| — | |
Mark Allen | |
| 12 | % | |
June 30, 2020 | |
| 200,000 | | |
| — | |
Mark Allen (iv) | |
| 10 | % | |
June 30, 2020 | |
| 100,000 | | |
| — | |
Discount on note | |
| | | |
| |
| (11,536 | ) | |
| — | |
Mark Allen (v) | |
| 10 | % | |
June 30, 2020 | |
| 125,000 | | |
| — | |
Discount on note | |
| | | |
| |
| (11,420 | ) | |
| — | |
| |
| | | |
| |
$ | 1,035,329 | | |
$ | 983,291 | |
Note:
Mark Allen’s notes were not included in related party notes payable at December 31, 2019 because he was not appointed as an officer
of the Company until September 1, 2020. In 2020 his notes are reported in related party notes payable.
|
(ii) |
On February 9, 2018, the
Company entered into a Revolving Line of Credit Agreement (“LOC”) for $200,000 (subsequently increased to $500,000 on
April 12, 2018) with Jovian Petroleum Corporation. The CEO of Jovian is Quinten Beasley, our former director (resigned October 31,
2018), and 25% of Jovian is owned by Zel C. Khan, our CEO and director. The initial agreement is for a period of 6 months and can
be extended for up to 5 additional terms of 6 months each. All amounts advanced pursuant to the LOC will bear interest from the date
of advance until paid in full at 3.5% simple interest per annum. Interest will be calculated on a basis of a 360-day year and charged
for the actual number of days elapsed. Subsequent to year-end this LOC has been extended until December 31, 2021. |
|
|
|
|
|
On January 20, 2020, Jovian Petroleum, purchased 1 unit
of 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. Jovian converted the debt into shares during 2020. |
|
|
|
|
(iii) |
Joel
Oppenheim was no longer a related party on December 31, 2020. This note is now reflected in Note 5 (Notes Payable). |
|
|
|
|
(iv) |
On
January 3, 2020, the Company entered into a loan agreement in the amount of $100,000
with
Mark M Allen. 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 in Canadian dollars and expire on January 3, 2023. The fair value of issued
warrants were recorded as a debt discount of $31,946
and
monthly amortization of $1,775.
|
|
(v) |
On February 14, 2020, the
Company entered into a loan agreement in the amount of $125,000 with Mark M Allen. 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 in Canadian dollars and expire on February 14, 2022. The fair value of issued warrants were
recorded as a debt discount of $38,249 and monthly amortization of $1,903. |
|
|
|
|
(vi) |
On
August 15, 2019, the Company entered into a loan agreement in the amount of $75,000 with Ivar Siem. The note bears interest at an
interest rate of 12% per annum with a four (4) month maturity.
On
December 4, 2019, the Company entered into a loan agreement in the amount of $100,000 with Ivar Siem. The note bears interest at
an interest rate of 12% per annum with a six (6) month maturity. At the maturity date, the note holder has the right to collect the
principal plus interest or convert into 1,250,000 shares of common stock at $0.08 per share. In addition, if converted, the note
holder will also receive 5,000,000 warrants at an exercise price of $0.10 per share, vesting immediately with a 36 month expiration
period.
On
February 28, 2020, the Company entered into a $50,000 loan agreement with a related party. The note does not bear any interest (0%
interest rate) is due on demand. The note includes warrants to purchase 200,000 shares of common stock (the “Loan Warrants”),
at an exercise price of $0.10 per share in Canadian dollars and expire on March 1, 2022. The warrants vest and will be issued on
January 1, 2021. |
|
|
|
|
(vii) |
On January 6, 2020, the
Company entered into a consulting agreement, with Mark M Allen, that included a funding clause where the Company borrowed $135,000
($62,000 on January 6, 2020, $45,000 on May 18, 2020 and $28,000 on June 26, 2020) 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. |
|
|
|
|
(viii) |
During
2019, the Company entered into a loan agreement in the amount of $200,000 with Mark M Allen. The note bears interest at an interest
rate of 12% per annum and matures on June 30, 2021. At the maturity date, the note holder has the right to collect the principal
plus interest or convert into 2,500,000 shares of common stock at $0.08 per share. In addition, upon conversion, the note holder
will also receive 10,000,000 warrants at an exercise price of $0.10 per share, vesting immediately with a 36 month expiration period.
|
|
(ix) |
On
April 15, 2020, the Company entered into a consulting agreement, with Mark M Allen, that included a funding clause where the Company
borrowed $55,000 from Mr. Allen. The note bore interest at an interest rate of 9% per annum and matures on August 15, 2021. |
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.
The
following is a schedule of future minimum repayments of related party notes payable as of December 31, 2020:
SCHEDULE
OF FUTURE MINIMUM REPAYMENTS OF RELATED PARTY NOTES PAYABLE
|
|
|
|
|
2021 |
|
$ |
1,035,329 |
|
Thereafter |
|
|
— |
|
Total |
|
$ |
1,035,329 |
|
NOTE
8. 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. 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.
On
January 06, 2020, as an inducement to enter into a Loan Agreement, the Company issued, among other instruments, warrants to acquire 5,000,000
shares of common stock with an exercise price of $0.10 per share. 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 $144,259.
On
October 30, 2020, as an inducement to extend the principal payment deadline from the previously issued Loan Agreement, the Company issued
additional warrants to acquire 5,000,000 shares of common stock with an exercise price of $0.10 per share. 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 $95,352.
A
summary of the activity of the derivative liabilities is shown below:
SCHEDULE OF DERIVATIVE LIABILITIES
Balance,
December 31, 2019 |
|
$ |
24,509 |
|
Additions |
|
|
236,611 |
|
Fair
value adjustments |
|
|
(77,322 |
) |
As
of December 31, 2020 |
|
$ |
183,798 |
|
Derivative
liability classified warrants in the years ended December 31, 2020 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.
SCHEDULE OF DERIVATIVE LIABILITY OF FAIR VALUE ASSUMPTION
|
|
December
31, 2020 |
|
Risk-free
interest rate |
|
|
1.58%
- 2.27 |
% |
Expected
life |
|
|
1.4
- 2.1 years |
|
Expected
dividend rate |
|
|
0 |
% |
Expected
volatility |
|
|
208%
- 240 |
% |
NOTE
9. ASSET RETIREMENT OBLIGATIONS
The
Company has a number of oil and gas wells in production and will have AROs once the wells are permanently removed from service. The primary
obligations involve the removal and disposal of surface equipment, plugging and abandoning the wells and site restoration.
Petrolia Energy Corporation
(“Petrolia” or the “Company”) is the operator of certain wells located in New Mexico, at the Twin Lakes San Andres
Unit (“TLSAU”) Field. TLSAU is located 45 miles from Roswell, Chaves County, New Mexico.
On March 4, 2021, the Company
received a letter from the Commissioner of Public Lands of the State of New Mexico, which was sent to us and certain other parties notifying
such parties of certain non-compliance with the laws and regulations that it administers. The deficiencies are currently in the process
of being settled by a third party agreeing to plug six wells, including at least two Company operated wells (TLSAU wells #316 and #037).
The scope of the matter above included only 240 acres of the 640 acres of The New Mexico State Land Office (SLO) lease. The Commissioner
of Public Lands of the State of New Mexico could still file suit and require the plugging and surface remediation of all wells in section
36.
On April 8, 2021, the State of New Mexico Energy,
Minerals and Natural Resources Department Oil Conservation Division (“OCD”) sent the Company a Notice of Violation alleging
that the Company was not in compliance with certain New Mexico Oil and Gas Act regulations (the “NMAC”), associated with
required reporting, inactive wells and financial assurance requirements, plugging certain abandoned wells, providing required financial
assurance in connection with plugging expenses, and proposing to assess certain civil penalties in the amount of an aggregate of approximately
$35,100.
As previously reported and in Petrolia’s
Form 8-K dated October 25, 2021 (reference to which is hereby made), on April 8, 2021, the State of New Mexico Energy, Minerals and Natural
Resources Department, Oil Conservation Division (the “OCD”) issued a Notice of Violation (the “NOV”) to Petrolia
alleging that the Company violated four regulations under Title 19, Chapter 15 of the New Mexico Administrative Code (the “NMAC”)
by: (i) failing to file production reports for certain wells, (ii) exceeding the number of inactive wells allowed, (iii) failing to provide
financial assurance in the amount required, and (iv) failing to provide additional financial assurance in the amount required.
The Company acknowledged the violations
alleged in the NOV and requested an informal resolution. On December 30, 2021, to resolve this matter, Petrolia entered into a Stipulated
Final Order ( the “SFO”) in Case No. 21982 with the OCD whereby Petrolia among other things agreed to: (i) submit appropriate
forms for wells identified on the SFO Inactive Well List, (ii) plug the specific TLSAU wells listed in section 8 (c) and (d) of the SFO,
as well as submit all required information and forms specified in the SFO, (iii) open an escrow account meeting the terms listed in the
SFO, (iv) deposit funds into an escrow account within the timeframe described in the SFO, and (v) provide the OCD with a report proposing
deadlines for bringing all remaining wells into compliance. The company recognized an additional liability of $660,000 to plug these
wells.
The Company entered into a settlement agreement
on July 27, 2020 with Moon Company, Trustee of the O’Brien Mineral Trust pursuant to which nine leases totaling approximately 3,800
acres of the 4,880 acre Twin Lakes San Andres Unit were terminated as a part of the settlement agreement. Pursuant to this settlement
agreement, the Company no longer has the right to produce oil, gas, or other hydrocarbons and any other minerals from the mineral estate
encumbered by the leases and owned by the trustee of the O’Brien Mineral Trust.
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.
SCHEDULE
OF FAIR VALUE OF ASSET RETIREMENT OBLIGATIONS
|
|
|
December
31, 2020 |
|
Inflation
rate |
|
|
1.92
- 2.15 |
% |
Estimated
asset life |
|
|
12
- 22 years |
|
The
following table shows the change in the Company’s ARO liability for the years ended December 31, 2020 and 2019:
SCHEDULE
OF ASSET RETIREMENT OBLIGATIONS
| |
Canadian properties | | |
United States properties | | |
Total | |
Asset retirement obligations, December 31, 2018 | |
$ | 1,258,399 | | |
$ | 251,223 | | |
$ | 1,509,622 | |
Additions | |
| — | | |
| — | | |
| — | |
Accretion expense | |
| 123,474 | | |
| 26,150 | | |
| 149,624 | |
Disposition | |
| — | | |
| — | | |
| — | |
Foreign currency translation | |
| 64,118 | | |
| — | | |
| 64,118 | |
Asset retirement obligations, December 31, 2019 | |
| 1,445,991 | | |
| 277,373 | | |
| 1,723,364 | |
Acquisition of Canadian property - Utikuma | |
| 906,146 | | |
| — | | |
| 906,146 | |
Plugging liability at Twin Lakes | |
| | | |
| 606,109 | | |
| 606,109 | |
Accretion expense | |
| 259,016 | | |
| 28,742 | | |
| 287,758 | |
Disposition | |
| — | | |
| — | | |
| — | |
Foreign currency translation | |
| 100,756 | | |
| — | | |
| 100,756 | |
Asset retirement obligations, December 31, 2020 | |
$ | 2,711,909 | | |
$ | 912,225 | | |
$ | 3,624,133 | |
NOTE
10. EQUITY
Preferred
stock
The
holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 9% per annum. The Preferred Stock will
automatically convert into common stock when the Company’s common stock market price equals or exceeds $0.28 per share for 30 consecutive
days. At conversion, the value of each dollar of preferred stock (based on a $10 per share price) will convert into 7.1429 common shares
(which results in a $0.14 per common share conversion rate).
In
accordance with the terms of the Preferred Stock, cumulative dividends of $178,699 and $178,208 were declared for the year ended December
31, 2020 and December 31, 2019, respectively.
Common
stock
During
the 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 7: Related Party Transactions,
below.
On
July 23, 2019, director Joel Martin Oppenheim purchased additional 2019 private placements for $0.08 per unit for a total of 156,250
units with gross proceeds of $12,500. 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. Consideration for the purchase was provided through a cash payment of $2,500 as well as the forgiving of an outstanding bridge
loan of $10,000. These shares were not issued until January 2020.
On
August 8, 2019, director Joel Martin 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. These shares were not issued until January 2020.
On
August 14, 2019, director Joel Martin Oppenheim exercised warrants to purchase 10,000 shares of common stock for the exercise price of
$1,000 or $0.10 per share. These shares were not issued until January 2020.
During
2019, a Mark Allen 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 not issued until
January 2020.
On
January 20, 2020, 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. Jovian converted the debt into
shares during 2020.
On
February 29, 2020, the Company signed a consulting agreement with Mark Allen 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
and earned until December 15, 2020.
On September 1, 2020, the Company
entered into an employment agreement with Mark Allen, to serve as President for a period of six months (with monthly extensions). The
President was to be paid a salary of $15,000 a month. Also, the President was issued a signing bonus of 2,000,000 shares of common stock.
One million (1,000,000) shares were to be issued upon signing and the remaining 1,000,000 shares are to be issued at the completion of
a 6 month probationary period. In addition, the President was granted warrants to purchase 1,000,000 shares of common stock exercisable
at $0.08 per share equally vesting over 24 months. The warrants expire in 36 months.
On December 15, 2020, President Mark
Allen exercised warrants to purchase 1,650,000 shares of common stock for cash proceeds of $69,375 at an average exercise price of $0.04
per share.
On December 22, 2020, prior CFO Tariq
Chaudhary was issued 500,000 shares of common stock. These shares were issued in exchange for Mr. Chaudhary releasing the Company of
his remaining deferred outstanding salary balance of $77,500. The shares were issued at an average conversion price of $0.15 per share.
The
common stock is currently not actively traded because of SEC Rule 15c2-11.
Warrants
Continuity
of the Company’s common stock purchase warrants issued and outstanding is as follows:
SCHEDULE
OF COMMON STOCK PURCHASE WARRANTS ISSUED AND OUTSTANDING
| |
Warrants | | |
Weighted average exercise price | |
Outstanding at year ended December 31, 2018 | |
| 51,066,864 | | |
| 0.20 | |
Granted | |
| 12,250,000 | | |
| 0.15 | |
Exercised | |
| (125,000 | ) | |
| 0.09 | |
Expired | |
| (6,148,028 | ) | |
| 0.25 | |
Outstanding at year ended December 31, 2019 | |
| 57,043,836 | | |
$ | 0.14 | |
Granted | |
| 18,650,000 | | |
| 0.15 | |
Exercised | |
| (1,650,000 | ) | |
| 0.08 | |
Expired | |
| (33,279,170 | ) | |
| 0.19 | |
Outstanding at year ended December 31, 2020 | |
| 40,764,666 | | |
| 0.13 | |
As
of December 31, 2020, the weighted-average remaining contractual life of warrants outstanding was 1.39 years (2019 – 1.04 years).
As
of December 31, 2020, the intrinsic value of warrants outstanding is $0 (2019 - $8,256).
The
table below summarizes warrant issuances during the years ended December 31, 2020 and 2019:
SCHEDULE
OF WARRANTS ISSUANCE DURING PERIOD
| |
Year ended December 31, | |
| |
2020 | | |
2019 | |
Warrants granted: | |
| | | |
| | |
Board of directors and advisory board service | |
| 5,250,000 | | |
| 7,000,000 | |
Private placements | |
| | | |
| 3,750,000 | |
Pursuant to employment agreements | |
| 1,000,000 | | |
| — | |
Pursuant to financing arrangements | |
| 1,000,000 | | |
| 1,500,000 | |
Pursuant to consulting agreements | |
| 250,000 | | |
| — | |
Pursuant to loan agreements | |
| 11,150,000 | | |
| — | |
Total | |
| 18,650,000 | | |
| 12,250,000 | |
Warrants
granted in the years ended December 31, 2020 and 2019 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.
SCHEDULE
OF FAIR VALUE OF ASSUMPTION
|
|
December
31, 2020 |
|
|
December
31, 2019 |
|
Risk-free
interest rate |
|
|
1.65%
to 2.38 |
% |
|
|
1.94%
to 2.39 |
% |
Expected
life |
|
|
1.0
- 3.0 years |
|
|
|
1.0
- 3.0 years |
|
Expected
dividend rate |
|
|
0 |
% |
|
|
0 |
% |
Expected
volatility |
|
|
240%
- 274 |
% |
|
|
240%
- 283 |
% |
On
October 30, 2020, a third party debtor was issued warrants to purchase 5,000,000
shares of common stock at an exercise price of
$0.05
per share. The warrants have a 3
year expiration date. The warrants were issued
in exchange of an agreement to extend a debt principal payment deadline. The fair value of the warrants is calculated using the Black
Sholes Option Pricing Model and recorded as a debt discount. See Note 7 for more details.
NOTE
11. 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 in 2019, 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 January 20, 2020, 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. Jovian converted the debt into shares during 2020.
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 bpd
of light oil. The working interest was acquired from Blue Sky Resources Ltd. in an affiliated party transaction as Zel C. Khan, the
Company’s former 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. The total purchase price of the property was $2,000,000 (CAD),
with $1,000,000 of
that total due initially. The additional $1,000,000 was
contingent on the future price of WTI crude. At
the time WTI price exceeded $50/bbl, the Company would pay an additional $750,000. In addition, at the time WTI price exceeded
$57/bbl the Company would pay an additional $250,000 (for a cumulative contingent total of $1,000,000).
Note that WTI crude prices did not exceed those price thresholds until 2021, so the contingent $1,000,000 will
not be recorded until 2021. Included in the terms of the agreement, the Company also funded their portion of the Alberta Energy
Regulator (“AER”) bond fund requirement ($599,851 USD),
necessary for the wells to continue in production after the acquisition. Additional funds ($385,336 USD)
remain in the other current asset balance for future payments to BSR, related to the acquisition.
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.
On
September 1, 2020, the Company entered into an employment agreement with Mark Allen, to serve as President for a period of six months
(with monthly extensions). The President was to be paid a salary of $15,000 a month. Also, the President was issued a signing bonus of
2,000,000 shares of common stock. One million (1,000,000) shares were to be issued upon signing and the remaining 1,000,000 shares are
to be issued at the completion of a 6 month probationary period. In addition, the President was granted warrants to purchase 1,000,000
shares of common stock exercisable at $0.08 per share equally vesting over 24 months. The warrants expire in 36 months.
On
December 15, 2020, President Mark Allen exercised warrants to purchase 1,650,000
shares of common stock for cash proceeds of $69,375
at an average exercise price of $0.04
per share.
On
December 15, 2020, in accordance with the Mark Allen’s Consulting agreement that was signed prior to the Employment agreement,
the Company issued Mr. Allen 250,000 shares of common stock as part of the compensation terms of that agreement.
On
December 22, 2020, prior CFO Tariq Chaudhary was issued 500,000 shares of common stock. These shares were issued in exchange for Mr.
Chaudhary releasing the Company of his remaining deferred outstanding salary balance of $77,500. The shares were issued at an average
conversion price of $0.15 per share.
NOTE
12. COMMITMENTS AND CONTINGENCIES
Environmental
Matters – The Company, as a lessee of oil and gas properties, is subject to various federal, provincial, state and local laws
and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other
things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject
the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected
area. There can be no assurance, however, that current regulatory requirements will not change, or past noncompliance with environmental
laws will not be discovered on the Company’s properties.
Office
Lease – On December 31, 2020, the Company terminated its one annually renewable office lease in Houston with minimum contractual
lease payments of $1,500 per month.
As mentioned in Note 6, the Company holds a lease
for acreage at SUDS Field from Joel Opeenheim.
On August 1, 2017, Mr. Joel Oppenheim provided a Letter of Credit (LOC),
which was posted as collateral in order for the Company to issue operating bonds with the State of New Mexico for the operation of Twin
Lakes San Andres Unit wells. In exchange for the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000
and warrants to purchase 2,000,000 shares of common stock with an exercise price of $0.14 per share.
NOTE
13. INCOME TAXES
There
was no provision for income taxes for 2020 and 2019 due to net operating losses and doubt as to the entity’s ability to continue
as a going concern resulting in a 100% valuation allowance. Years from 2016 forward are open to examination by tax authorities in the
United States. Years from 2019 forward are open to examination by Canadian tax authorities.
The
provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 21% (2019 – 21%)
on operations due primarily to permanent differences attributable to organizational expenses.
SCHEDULE
OF INCOME TAX EXPENSES
| |
|
1 | | |
|
1 | |
| |
Fiscal Year Ended December 31,
2020 | | |
Fiscal Year Ended December 31, 2019 | |
| |
| | |
| |
Income tax (benefit) expense computed at statutory rates | |
$ | (2,078,000 | ) | |
$ | (629,000 | ) |
Non-deductible items | |
| 85,000 | | |
| 69,000 | |
Change in statutory, foreign tax, foreign exchange rates and other | |
| (2,427,000 | ) | |
| 172,000 | |
Change in valuation allowance | |
| 4,420,000 | | |
| 388,000 | |
Total | |
$ | — | | |
$ | — | |
The
significant components of the net deferred tax asset were as follows:
SCHEDULE
OF DEFERRED TAX ASSETS
|
|
|
2020 |
|
|
|
2019 |
|
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
Deferred
tax assets |
|
|
|
|
|
$ |
|
|
Net
operating loss carryforwards |
|
$ |
5,772,000 |
|
|
$ |
2,174,000 |
|
Asset
retirement obligation |
|
|
679,000 |
|
|
|
331,000 |
|
Oil
and gas properties |
|
|
(644,000 |
) |
|
|
(430,000 |
) |
Property
and equipment |
|
|
6,000 |
|
|
|
— |
|
Other |
|
|
— |
|
|
|
— |
|
Total
deferred tax assets (liabilities) |
|
|
5,813,000 |
|
|
|
2,075,000 |
|
Less:
Valuation allowance |
|
|
(5,813,000 |
) |
|
|
(2,075,000 |
) |
Net
deferred tax assets (liabilities) |
|
$ |
— |
|
|
$ |
— |
|
A
valuation allowance has been established to offset deferred tax assets. The Company’s accumulated net operating losses in the United
States were approximately $2.2 million at December 31, 2020 and begin to expire if not utilized beginning in the year 2033. The Company’s
accumulated non-capital tax losses in Canada were approximately $27.5 million at December 31, 2020 and will expire in 2039. The Tax Cuts
and Jobs Act was signed into law on December 22, 2017 and reduced the corporate income tax rate from 34% to 21%. The Company’s
deferred tax assets, liabilities, and valuation allowance have been adjusted to reflect the impact of the new tax law.
NOTE
14. SEGMENT REPORTING
The
Company has a single reportable operating segment, Oil and Gas Exploration and Production, which includes exploration, development, and
production of current and potential oil and gas properties. Results of operations from producing activities were as follows for the years
ended December 31, 2020 and 2019:
SCHEDULE
OF LONG-LIVED ASSETS
| |
| | | |
| | | |
| | |
| |
Canada | | |
United States | | |
Total | |
Year ended December 31, 2020 | |
| | | |
| | | |
| | |
Revenue | |
$ | 2,860,324 | | |
$ | 31,917 | | |
$ | 2,892,241 | |
Production costs | |
| (3,377,055 | ) | |
| (253,552 | ) | |
| (3,630,607 | ) |
Depreciation, depletion, amortization and accretion | |
| (1,374,611 | ) | |
| (60,429 | ) | |
| (1,435,039 | ) |
Results of operations from producing activities | |
$ | (1,891,341 | ) | |
$ | (282,064 | ) | |
$ | (2,173,405 | ) |
| |
| | | |
| | | |
| | |
Total long-lived assets | |
$ | 1,683,055 | | |
$ | 4,767,628 | | |
$ | 5,952,084 | |
| |
| | | |
| | | |
| | |
Year ended December 31, 2019 | |
| | | |
| | | |
| | |
Revenue | |
$ | 2,827,877 | | |
$ | 88,857 | | |
$ | 2,916,734 | |
Production costs | |
| (3,021,805 | ) | |
| (365,294 | ) | |
| (3,387,099 | ) |
Depreciation, depletion, amortization and accretion | |
| (1,004,832 | ) | |
| (32,187 | ) | |
| (1,037,019 | ) |
Results of operations from producing activities | |
$ | (1,198,760 | ) | |
$ | (308,624 | ) | |
$ | (1,507,384 | ) |
| |
| | | |
| | | |
| | |
Total long-lived assets | |
$ | 1,104,458 | | |
$ | 10,346,630 | | |
$ | 11,451,088 | |
The
Company’s revenues are derived from the following major customers:
SCHEDULE
OF REVENUES
| |
December 31,
2020 | | |
December 31,
2019 | |
Customer A | |
$ | 2,860,324 | | |
$ | 2,827,877 | |
Customer B | |
| 31,917 | | |
| 88,857 | |
Other customers | |
| — | | |
| — | |
Total revenues | |
$ | 2,892,241 | | |
$ | 2,916,734 | |
NOTE
15. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Costs
Incurred in Oil and Gas Property Acquisition, Exploration and Development
Amounts
reported as costs incurred include both capitalized costs and costs charged to expense during the year for oil and gas property acquisition,
exploration and development activities. Costs incurred also include new ARO established in the current year, as well as increases or
decreases to the ARO resulting from changes to cost estimates during the year. Exploration costs presented below include the costs of
drilling and equipping successful exploration wells, as well as dry hole costs, leasehold impairments, geological and geophysical expenses,
and the costs of retaining undeveloped leaseholds. Development costs include the costs of drilling and equipping development wells, and
construction of related production facilities.
In
2019, the Company did not make any acquisitions or purchase any working interests.
In
2020, the Company purchased 50%
working interest in the Utikuma field in Alberta,
Canada for an aggregate purchase price of $678,765. In connection with the acquisition, Company recognized an asset retirement obligation
of $906,146.
SCHEDULE OF COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
| |
|
1 | | |
|
1 | |
| |
Fiscal Year Ended December 31,
2020 | | |
Fiscal Year Ended December 31,
2019 | |
Property acquisitions | |
$ | 678,765 | | |
$ | — | |
Unevaluated | |
| — | | |
| — | |
Evaluated | |
| — | | |
| — | |
Exploration | |
| — | | |
| — | |
Development | |
| — | | |
| — | |
Total costs incurred | |
$ | 678,765 | | |
$ | — | |
Capitalized
costs
Capitalized
costs include the cost of properties, equipment and facilities for oil and natural-gas producing activities, excluding any asset retirement
obligations. Capitalized costs for proved properties include costs for oil and natural-gas leaseholds where proved reserves have been
identified, development wells, and related equipment and facilities, including development wells in progress. Capitalized costs for unproved
properties include costs for acquiring oil and gas leaseholds and geological and geophysical expenses where no proved reserves have been
identified.
SCHEDULE OF CAPITALIZED COSTS IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT
| |
| 1 | | |
| 1 | |
| |
December 31,
2020 | | |
December 31,
2019 | |
Capitalized costs: | |
| | | |
| | |
Unevaluated properties | |
$ | — | | |
$ | — | |
Evaluated properties | |
| 6,456,367 | | |
| 11,400,285 | |
Gross capitalized costs | |
| 6,456,367 | | |
| 11,400,284 | |
Less: Accumulated DD&A | |
| (2,693,300 | ) | |
| (1,520,527 | ) |
Net capitalized costs | |
$ | 3,763,067 | | |
$ | 9,879,758 | |
Oil
and Gas Reserve Information
MKM
Engineering (“MKM”), an independent engineering firm, prepared the estimates of the proved reserves, future production, and
income attributable to the Chaves County, New Mexico and Creek County, Oklahoma and Canadian property leasehold interests as of December
31, 2020 and the estimates of the proved reserves, future production, and income attributable to the Milam County, Texas, Chaves County,
New Mexico and Creek County, Oklahoma leasehold interests as of December 31, 2017. The estimated proved net recoverable reserves presented
below include only those quantities that were expected to be commercially recoverable at prices and costs in effect at the balance sheet
dates under the then existing regulatory practices and with conventional equipment and operating methods. Proved Developed Reserves represent
only those reserves estimated to be recovered through existing wells. Proved Undeveloped Reserves include those reserves that may be
recovered from new wells on undrilled acreage or from existing wells on which a relatively major expenditure for recompletion or secondary
recovery operations is required. All of the Company’s Proved Reserves are located onshore in the continental United States of America
and Canada.
Discounted
future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider unproved reserves, anticipated future oil and gas prices, interest rates, changes in development
and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value
is subjective and imprecise.
The
following table sets forth estimates of the proved oil and gas reserves (net of royalty interests) for the Company and changes therein,
for the periods indicated.
SCHEDULE OF PROVED OIL AND GAS RESERVES
| |
Oil (Bbls) | |
| |
| |
December 31, 2018 | |
| 1,894,180 | |
Revisions of prior estimates | |
| (11,217 | ) |
Purchases of reserves in place | |
| — | |
Disposition of mineral in place | |
| — | |
Production | |
| (82,506 | ) |
December 31, 2019 | |
| 1,800,457 | |
Revisions of prior estimates | |
| (860,450 | ) |
Purchases of reserves in place | |
| 466,800 | |
Disposition of mineral in place | |
| — | |
Production | |
| (95,135 | ) |
December 31, 2020 | |
| 1,311,672 | |
SCHEDULE OF PROVED DEVELOPED AND UNDEVELOPED RESERVES
| |
December 31,
2020 | | |
December 31,
2019 | |
| |
| | |
| |
Estimated quantities of proved developed reserves – Oil (Bbls) | |
| 1,245,512 | | |
| 1,668,437 | |
Estimated quantities of proved undeveloped reserves – Oil (Bbls) | |
| 66,160 | | |
| 112,020 | |
Proved
developed and proved undeveloped reserves decreased from December 31, 2019 to December 31, 2020, primarily due the forfeiture of wells
in New Mexico, production and revision of prior estimates, partially offset by the acquisition of the Canadian Properties.
The
following table sets forth estimates of the proved developed and proved undeveloped oil and gas reserves (net of royalty interests) for
the Company and changes therein, for the period indicates.
Proved developed producing and non-producing reserve | |
Oil (bbls) | |
December 31, 2019 | |
| 1,688,439 | |
Acquired reserves | |
| 466,800 | |
Disposition of reserves | |
| — | |
Revision of prior estimates | |
| (827,234 | ) |
Production | |
| (95,135 | ) |
December 31, 2020 | |
| 1,245,512 | |
Proved undeveloped reserves | |
Oil (bbls) | |
December 31, 2019 | |
| 112,020 | |
Acquired reserves | |
| | |
Revisions to prior estimates | |
| (45,860 | ) |
December 31, 2020 | |
| 66,160 | |
Standardized
Measure of Discounted Future Net Cash Flows
The
Standardized Measure related to proved oil and gas reserves is summarized below. Future cash inflows were computed by applying a twelve-month
average of the first day of the month prices to estimated future production, less estimated future expenditures (based on year end costs)
to be incurred in developing and producing the proved reserves, less estimated future income tax expense. Future income tax expenses
are calculated by applying appropriate year-end tax rates to future pretax net cash flows, less the tax basis of properties involved.
Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows.
This calculation procedure does not necessarily result in an estimate of the fair market value or the present value of the Company.
Standardized
Measure of Oil and Gas
The
following table sets forth the changes in standardized measure of discounted future net cash flows relating to proved oil and gas reserves
for the periods indicated.
SCHEDULE OF STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
| |
| 1 | | |
| 2 | |
| |
December 31, 2020 | | |
December 31, 2019 | |
| |
| | |
| |
Future cash inflows | |
$ | 47,647,500 | | |
$ | 95,308,120 | |
Future production costs | |
| (25,203,830 | ) | |
| (30,349,800 | ) |
Future development costs | |
| (2,148,510 | ) | |
| (2,051,730 | ) |
Future income taxes | |
| — | | |
| — | |
| |
| | | |
| | |
Future net cash flows | |
| 20,295,160 | | |
| 62,906,590 | |
Discount of future net cash flows at 10% per annum | |
| (12,339,240 | ) | |
| (37,081,860 | ) |
| |
| | | |
| | |
Standardized measure of discounted future net cash flows | |
$ | 7,956,920 | | |
$ | 25,824,730 | |
Changes
in standardized measure of discounted future cash flows
SCHEDULE OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE CASH FLOWS
| |
|
1 | | |
|
2 | |
| |
December 31,
2020 | | |
December 31,
2019 | |
| |
| | |
| |
Beginning of year | |
$ | 25,824,730 | | |
$ | 23,638,725 | |
Sales and transfers of oil & gas produced, net of production costs | |
| (735,300 | ) | |
| (1,514,335 | ) |
Net changes in prices and production costs | |
| (249,508 | ) | |
| 5,780,704 | |
Changes in estimated future development costs | |
| 96,780 | | |
| (676,141 | ) |
Acquisitions/dispositions of minerals in place, net of production costs | |
| — | | |
| — | |
Revision of previous estimates | |
| (14,938,598 | ) | |
| (878,772 | ) |
Change in discount | |
| 436,490 | | |
| 1,386,793 | |
Change in production rate or other | |
| (2,477,674 | ) | |
| (1,912,244 | ) |
| |
| | | |
| | |
End of year | |
$ | 7,956,920 | | |
$ | 25,824,730 | |
NOTE
16. SUBSEQUENT EVENTS
On
January 25, 2021, 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.
Paul
Deputy was reinstated Interim Chief Financial Officer, 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, was issued 250,000 shares of Petrolia common stock.
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.
On
March 30, 2021, 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.
On
March 30, 2021, 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.
Effective
September 1, 2021, the Board accepted Zel Khan’s resignation as Chief Executive Officer (“CEO”). See Form 8-K filing
reference in Exhibits section below
Effective
September 1, 2021, Mark M Allen was promoted from President to CEO. See Form 8-K reference in Exhibits section below.