This Amendment
No. 1 on Form 10-K/A (“Amendment”) to the Annual Report on Form 10-K of Petrolia Energy Corporation (the
“Company”) for the fiscal year ended December 31, 2017 (the “Form 10-K”), originally filed with the
Securities and Exchange Commission (the “SEC”) on April 17, 2018, is being filed for the sole purpose of amending
Item 1. Business; Item 8. Financial Statements and Supplementary Data; Item 9A. Controls and Procedures; Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Item 13. Certain Relationships and
Related Transactions, and Director Independence; and the footnotes to the financial statements included herein, to clarify
that (a) the Bow Acquisition is a related party transaction, because of the related party relationship we failed to disclose
as described in (c) below, (b) the President, Chief Executive Officer and 100% owner of Blue Sky International Holdings Inc.
(“Blue Sky”) is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer; that Mr.
Chaudhary owns and controls BSIH Ltd. (“BSIH”), which was the largest shareholder of the Company prior to the
cancellation of the shares held by BSIH in September 2018, pursuant to the terms of a Share Exchange Agreement between the
Company and Blue Sky Resources Ltd. dated August 31, 2018 of which entity Mr. Chaudhary also owns and controls; (c) prior to
the acquisition of Bow Energy Ltd (“Bow”) as described in (b) above, BSIH, and as a result of his ownership and
control of BSIH, Mr. Chaudhary controlled Bow; (d) on April 12, 2018 a $500,000 convertible promissory note was issued to
Blue Sky and such note was subsequently canceled by the Company; (e) BSIH and Blue Sky Resources Ltd. are both entirely owned
by Mr. Chaudhary; (f) Quinten Beasley, the Company’s Director, and not Mr. Khan, beneficially owns the shares of the
Company’s common stock held by Jovian Petroleum Corporation; and (g) the Company’s disclosure controls and
procedures, and internal control over financial reporting were ineffective as of December 31, 2017; specifically, we have
material weakness in internal controls over monitoring and disclosing related party transactions as indicated in the
amendment of the related party disclosures above.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
NOTE
1. ORGANIZATION
Petrolia
Energy Corporation (“we”, “us”, and the “Company”) is in the business of oil and gas exploration,
development, and production. The financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America and the rules of the U.S. Securities and Exchange Commission (“SEC”).
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 SEC. A summary
of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
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 asset retirement obligations (Note 10), income taxes (Note 11) and the estimate of proved oil and gas reserves
and related present value estimates of future net cash flows therefrom (Note 12).
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.
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.
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. There was no impairment during the year ended December 31, 2017 and 2016.
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.
Revenue
Recognition
— Revenues from the sale of crude oil, natural gas, and natural gas liquids are recognized when the
product is delivered at a fixed or determinable price, title has transferred; collectability is reasonably assured and evidenced
by a contract. The Company follows the sales method of accounting for its oil and natural gas revenue, so it recognizes revenue
on all crude oil, natural gas, and natural gas liquids sold to purchasers, regardless of whether the sales are proportionate to
its ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on
a specific property greater than the expected remaining proved reserves. The Company had no imbalance positions at December 31,
2017 or 2016. Charges for gathering and transportation are included in production expenses.
Receivables
and allowance for doubtful accounts
— Oil revenues receivable do not bear any interest. These receivables are primarily
comprised of joint interest billings. Early in 2017, $117,000 of these receivables were provided as consideration towards the
purchase of the 60% WI in TLSAU (see Note 9 for further explanation). We regularly review collectability and establish or adjust
an allowance for uncollectible amounts as necessary using the specific identification method. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management
has determined that a reserve for uncollectible amounts was not required in the periods presented.
Asset
Retirement Obligations
— The Company records a liability for asset retirement obligations (“ARO”) associated
with its oil and gas wells when those assets are placed in service. The corresponding cost is capitalized as an asset and included
in the carrying amount of oil and gas properties and is depleted over the useful life of the properties. Subsequently, the ARO
liability is accreted to its then-present value.
Inherent
in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation
factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded
as a gain or loss upon settlement.
Debt
Issuance Costs
— Costs incurred in connection with the issuance of long-term debt are presented as a direct deduction
from the carrying value of the related debt and amortized over the term of the related debt.
Stock-Based
Compensation
— The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718.
Stock-based compensation to employees is measured at the grant date, based on the fair value of the award, and is recognized as
expense over the requisite employee service period. The Company accounts for stock-based compensation to other than employees
in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment
date or upon completion of the services, based on the fair value of the equity instruments, and is recognized as expense over
the service period. The Company estimates the fair value of stock-based payments using the Black-Sholes option-pricing model for
common stock options and warrants and the closing price of the Company’s common stock for common share issuances. The Company
may grant stock to employees and contractors in exchange for services rendered.
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, 2017 and 2016.
The
Company is required to file federal income tax returns in the United States and in various state and local jurisdictions. The
Company’s tax returns filed since the 2015 tax year are subject to examination by taxing authorities in the jurisdictions
in which it operates in accordance with the normal statutes of limitations in the applicable jurisdiction.
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. We perform ongoing evaluations of the estimated useful lives of the property and equipment for depreciation purposes.
Maintenance and repairs are expensed as incurred. We periodically review our 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.
We recognize 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.
We recorded no impairment on our non-oil and gas long-lived assets during the years ended December 31, 2017 and 2016, respectively.
Earnings
(Loss) Per Share
— Basic earnings (loss) per share have been calculated based upon the weighted-average number
of common shares outstanding. The weighted-average number of common shares outstanding used in the computations of earnings (loss)
per share was 93,545,807 for 2017 and 54,541,922 for 2016. Diluted earnings per share (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 because losses 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 2017 and 2016. The
Company does not require collateral. While the Company believes its recorded receivable 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
– The carrying value of cash and cash equivalents, accounts receivable, and accounts payable,
as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments.
Intangible
Assets
– Our intangible assets are subject to amortization and are amortized using the straight-line method over
their estimated period of benefit. Intangible assets acquired as part of a business combination are capitalized at their acquisition
date fair value.
Equipment
Sales
– Revenues from the sale of oil and gas related equipment are recognized at the time of sale, when the significant
risks and rewards of ownership have been transferred to the buyer and the recovery of the consideration is probable.
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.
NOTE
3. AMENDMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has determined that it should amend its previously issued
financial statements in its Form 10-K for the fiscal year ended December 31, 2018 due to its failure to adequately disclose the
following matters associated with related party transactions involving the Company and its officers. Thus, the Company has filed the amendment to its previously issued financial statements to adequately disclose and clarify that:
(a) the Bow Acquisition is a related party transaction, because of the related party relationship we failed to disclose as
described in (c) below, (b) the President, Chief Executive Officer and 100% owner of Blue Sky International Holdings Inc.
(“Blue Sky”) is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer; that Mr.
Chaudhary owns and controls BSIH Ltd. (“BSIH”), which was the largest shareholder of the Company prior to the
cancellation of the shares held by BSIH in September 2018, pursuant to the terms of a Share Exchange Agreement between the
Company and Blue Sky Resources Ltd. dated August 31, 2018 of which entity Mr. Chaudhary also owns and controls; (c) prior to
the acquisition of Bow Energy Ltd (“Bow”) as described in (b), above, BSIH, and as a result of his ownership and
control of BSIH, Mr. Chaudhary controlled Bow; (d) on April 12, 2018 a $500,000 convertible promissory note was issued to
Blue Sky and such note was subsequently canceled by the Company; (e) BSIH and Blue Sky Resources Ltd. are both entirely owned
by Mr. Chaudhary; (f) Quinten Beasley, the Company’s Director, and not Mr. Khan, beneficially owns the shares of
the Company’s common stock held by Jovian Petroleum Corporation; (g) the Company’s disclosure controls
and procedures, and internal control over financial reporting were ineffective as of December 31, 2017; specifically, we
have material weakness in internal controls over monitoring and disclosing related party transactions as indicated in
the amendment of the related party disclosures above.
NOTE
4. 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. We plan to generate profits by drilling productive oil
or gas wells. However, we will need to raise the funds required to drill new wells through the sale of our securities, through
loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any
commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available
when needed, we may need to cease operations. We may not be successful in raising the capital needed to drill oil or gas wells.
Any wells that we may drill may not be productive of oil or gas. Management believes that actions presently being taken to obtain
additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements
have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been
made to account for this uncertainty.
NOTE
5. NOTE RECEIVABLE
The
Company purchased a Note Receivable from Blue Sky New Mexico, Inc. (“BSNM”) on November 4, 2015 with a face value
of $1,300,000. BSNM had previously purchased this note from the Bankruptcy Trustee, it was an asset of the Orbit Petroleum bankruptcy
liquidation. The Company issued six million (6,000,000) shares of common stock as consideration for the note. The dollar value
of the shares on this date was $316,800, specifically 6,000,000 shares at a market price of $0.528 per share. The note bears an
annual simple interest rate that accrues at the rate of 10%. The note is secured by mortgages on the Twin Lakes oil and gas leases.
On
November 4, 2015, the note was past due and is considered to be in default. In February 2017, the Company included the note as
consideration for the purchase of a 60% working interest in TLSAU, so it is no longer outstanding. See Note 12 for further explanation.
NOTE
6. RELATED PARTY TRANSACTIONS
Beginning
February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest offering (“ORRI”) on behalf of
the SUDS field to raise $300,000 to purchase and install pump jacks for twenty two (22) previously drilled wells at the field.
Under the terms of the offering, investors received 1% of the gross revenue from the field monthly, based on their investment
of $20,000 until such time they receive a cumulative revenue amount of $30,000. At its completion, the ORRI raised a total of
$300,000. Effective April 18, 2017, all owners of SUDS ORRI interests were authorized to convert their interests, at their sole
discretion, to Preferred Stock in the Company in conjunction with the Company’s current Series A Preferred Stock Offering.
Included in this conversion offering each investor converted ORRI interests equal to the cumulative revenue amount of $30,000,
less their revenue received since inception. During the second quarter of 2017, 14% of the 15% outstanding SUDS ORRI interests
were converted to Preferred Stock of the Company. This conversion resulted in 40,500 shares of Preferred Stock being issued to
those holders who chose to convert, with a value of $405,000. The transaction resulted in an increase to Oil and Gas Property
assets by $280,000 and an increase to interest expense of $128,229 and a cash true-up payment of $3,230. Related parties (James
Burns, Joel Oppenheim, Paul Deputy, Lee Lytton, Leo Womack and Jovian) converted 6% in ORRI interests and received a total of
17,400 shares of Preferred Stock (2,900 shares of Preferred Stock each), with the total valued at $174,000.
The
Company through its wholly-owned subsidiary Askarii sold pump jacks to the other owners of the SUDS properties (before the Company’s
September 2016 acquisition of the 90% working interest), totaling $198,000 for the year ended December 31, 2016. Askarii booked
a profit of $164,670 on the sale of pump jacks to the other owners of the SUDs properties.
On
February 10, 2016, a shareholder provided an advance of $20,000 in order to temporarily fund the Company’s working capital
needs. On April 1, 2016, in order to compensate the shareholder, the Company issued 285,714 shares in consideration for forgiveness
of the debt in full. The valuation of the issuance was $20,000, based on 285,714 shares valued at $0.07 per share on April 1,
2016.
On
March 11, 2016, the Board of Directors granted Leo B. Womack, the Chairman of the Board of Directors of the Company an option
to purchase 1 million shares of the Company’s common stock at an exercise price of $0.06 per share, which vested on January
1, 2017, and is exercisable for 36 months thereafter. The Board also granted Lee Lytton and Joel Oppenheim, members of the Board
of Directors each an option to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.06 per share,
which vests on January 1, 2017, and is excisable for 36 months thereafter. The fair value of the options granted on March 11,
2016 is $115,045.
Effective
April 18, 2016, Quinten Beasley was compensated for his Board service during 2016 through a grant of 500,000 warrants to purchase
500,000 shares of the Company’s common stock at an exercise price of $0.07 per share, which vested immediately, and is exercisable
for 36 months thereafter. The fair value of the warrants is $41,891 based on a $0.08 valuation, volatility of 235%, a discount
rate of 1.09% and a 3 year term. The total amount of the warrants was expensed in 2016. These warrants are subject to a claw-back
provision which would be ratably invoked if a director did not complete his 2016 service term.
On
May 2, 2016, the Company paid off its outstanding Promissory Note to Blue Sky NM (“BSNM”) for $146,875. This Note
was created when the 15% working interest in the Twin Lakes field was purchased in November of 2015. The payoff was made by issuing
1,468,750 shares of the Company’s restricted common stock. Based on the market value of the stock on May 2, 2016 of $0.10,
the value of the transaction was $146,875 and resulted in no gain or loss. In addition, a cash payment of $4,869 was made to pay
off the remaining outstanding interest.
On
May 31, 2016, in exchange for a cash payment of $48,000, the Company issued 8 units or 800,000 shares to the then CFO as part
of, and under the terms of, the September 1, 2015 private offering. The shares were issued at a price of $0.06 per share and included
warrants to purchase an additional 800,000 shares of common stock at a price of $0.10 cents per share at any time prior to August
5, 2018. This represented the final sale under this offering.
On
June 24, 2016, the Company purchased a 2007 Toyota Tundra vehicle for $10,625 from Jovian. It is being used for field operations.
During July 2016, payments of $7,000 were made against the outstanding balance. There was no promissory note created for the remaining
outstanding balance of $3,264, and both parties agreed for the balance to be paid when funds become available. The truck’s
estimated useful life is 5 years.
On
July 13, 2016, the Company issued warrants to purchase 60,000 shares of common stock. The warrants were related loans provided
by investors to the purchase a pulling rig. The fair value of all of the warrants was $3,744 at an exercise price of $0.06 per
share, expiring on July 13, 2019. The following affiliated investors each received 10,000 warrants related to their loans: Joel
Oppenheim – Director, Lee Lytton – then Director, Paul Deputy – then CFO, Leo Womack – Board Chairman
and Quinten Beasley – Director.
On
August 18, 2016, Paul M. Deputy was appointed Chief Financial Officer (“CFO”) of the Company and entered into an employment
agreement with the Company effective July 1, 2016 to serve as Chief Financial Officer for an initial term of twelve (12) months
(automatically renewable thereafter for additional one year terms). The agreement provides that the Company will pay Mr. Deputy
$140,000 per year. After 90 days the Board has chosen to issue Mr. Deputy’s one warrant for each dollar of gross salary
that is deferred. The exercise price of the warrants is the market price of the Company’s shares at each quarter end. The
Company granted Mr. Deputy options to purchase 550,000 shares of the Company’s restricted common stock at a value of $26,096
with an exercise price of $0.077 per share with a term of three (3) years beginning July 1, 2016, as a signing bonus. These warrants
were recognized as stock compensation expense.
In
association with the employment agreement of Paul Deputy, our Chief Financial Officer, dated July 1, 2016, the Company issued
one warrant to purchase one share of the Company’s restricted stock at the exercise price at quarter end for each dollar
of Mr. Deputy’s deferred gross salary for the quarter ended December 31, 2017. Mr. Deputy’s total accrued salary from
September 1, 2016 to December 31, 2017 was $186,687. The Company granted warrants to purchase 29,167 shares of common stock for
the quarter ended December 31 2017 valued at $4,890 (the Company also granted 35,000 shares of common stock for the quarter ended
September 30, 2017 valued at $4,146 the Company also granted warrants to purchase 35,000 shares of common stock for the quarter
ended June 30, 2017 valued at $3,106 and for the quarter ended March 31, 2017 valued at $4,851). The aggregate fair value of the
warrants for the twelve months ended December 31, 2017 was $16,993. The warrants were valued using the Black Sholes valuation
model. The warrants were recognized as stock compensation expense.
On
August 17, 2016, the Company issued warrants to purchase 10,000 shares of common stock. The warrants were related to Bridge loans
– working capital notes that were not paid timely. The agreement stated that lenders would be paid a 10% warrant coverage.
At August 17, 2016, Director Joel Oppenheim was due $100,000 and was issued 10,000 warrants. The fair value of these warrants
was $1,588 at an exercise price of $0.09 per share, expiring on August 17, 2019.
On
August 18, 2016, the Board of Directors issued the then CFO 500,000 shares of the Company’s restricted common stock for
a signing bonus. The shares were issued at current market price of $0.077 per share on August 17, 2016 at a value of $38,500 and
recorded as stock based compensation.
On
August 18, 2016, the Board of Directors granted Joel Oppenheim options to purchase 300,000 shares of the Company’s restricted
common stock at an exercise price of $0.077 per share and have a term of three (3) years beginning August 17, 2016 at a value
of $23,028 as compensation for arranging and guaranteeing certain bank relationships for the Company.
On
August 25, 2016, in consideration for the cancellation of $12,000 of accounts payable, the Company issued 150,000 shares at a
valuation of $12,000 priced at $0.08 per share, to Director Quinten Beasley.
On
August 25, 2016, in consideration for the cancellation of debts incurred, the Company issued 250,000 shares to Director Joel Oppenheim.
These shares had a valuation of $20,000 and were priced at $0.08 per share.
On
August 25, 2016, in consideration for the cancellation of $56,107 of accounts payable and $110,000 of debts incurred, the Company
issued 2,076,000 shares at a valuation of $166,107 priced at $0.08 per share, to the then CFO.
During
the 2nd and 3rd quarter of 2016, warrants to purchase 230,000 shares of common stock were issued for pre-bridge loans. The loans
were provided as follows: $110,000 by Director Joel Oppenheim, $100,000 by the CFO and $20,000 by Chairman Leo Womack. These warrants
had a valuation of $15,792 with an exercise price of $0.09 per share and expire in the 2nd and 3rd quarter of 2019.
On
September 28, 2016, the Company issued 24,308,985 shares of its restricted common stock to SUDS Properties LLC., a related party,
to acquire an additional 40% working interest ownership As a result of the exchange, SUDS became a wholly-owned subsidiary of
the Company. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799 per share market price of the
Company’s shares on September 28, 2016 (the effective date of the transaction).
On
September 28, 2016, the Company acquired an additional 50% working interest ownership from Jovian Resources LLC for $4,000,000
in debt. Specifically, a Promissory Note payable for $1,000,000 as outlined above in Note 4. In addition, a Production Payment
Note for $3,000,000 will be paid out net revenues received by the purchaser. See Note 6 for additional details of this transaction.
The final purchase price allocation of the combined transactions is as follows: oil and gas properties acquired $8,401,318, asset
retirement obligation assumed of $28,132.
During
the nine months ended September 30, 2016, two directors were granted warrants to purchase 31,250 shares of common stock in exchange
for providing collateral to a bank to collateralize the Company’s letters of credit. The value of the warrants was $2,629
with an exercise price of each warrant is $0.06 per share and they expire three (3) years from their grant date. The value of
these warrants was recorded as debt issuance costs on the date of the grant.
The
Board authorized the Company to allow all outstanding warrant-holders to exercise their outstanding warrants at a 20% discount.
In October 2016, four (4) warrant holders exercised a total of 825,000 warrants by remitting payments of $63,352 at an average
share price of $0.095 per share. Director Lee Lytton exercised 10,000 warrants (included in the total above) by remitting a payment
of $472 at a share price of $0.059 per share. Director Joel Oppenheim exercised 300,000 warrants by remitting payment of $18,480
at a share price of $0.06 per share.
On
December 31, 2016, the Company issued warrants to purchase 500,000 shares of Company common stock to extend the due date on Rick
Wilber’s Notes, based on the Amendment to the Agreement. These warrants were valued at $79,223 and have an exercise price
of $0.15 and expire on December 31, 2021.
On
April 18, 2017, James E. Burns was appointed President of the Company and entered into an employment agreement with the Company
to serve as President. The agreement provides that the Company will pay Mr. Burns $300,000 per year in base salary. For the first
year of employment, $100,000 of the salary will be paid in cash, the remaining amount will be paid by the issuance of 1,400,000
shares of common stock. On June 30, 2017, 350,000 shares, valued at $35,000, were issued in accordance with Mr. Burns common stock
related salary compensation. On September 30, 2017, 350,000 shares, valued at $42,000, were issued in accordance with Mr. Burns
common stock related salary compensation. The $100,000 cash salary will commence after $1,000,000 is raised from the Series A
Preferred Offering or a material event that brings cash into the Company. A one-time signing bonus of 1,000,000 shares of common
stock, valued at $120,000, was granted to Mr. Burns upon execution of the agreement. Mr. Burns will also receive an annual bonus
based on the percentage increase in stock price during the year. For every percentage point increase in stock price, Mr. Burns
will be paid that percentage times his base salary. For example, if the stock price increased by 20%, then a $60,000 bonus ($300,000
* 20% = $60,000) would be paid. On an annual basis, Mr. Burns will also receive service related warrants to purchase 1,000,000
shares of common stock with an exercise price of $0.14 per share. At September 30, 2017, warrants to purchase 250,000 shares of
common stock were granted, valued at $29,580, related to his 3rd quarter service bonus. These warrants are based on a $0.12 price
per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. In addition, warrants to purchase 166,667
shares of common stock were granted, valued at $14,758, related to his 2nd quarter service bonus. These warrants are based on
a $0.09 price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. On December 31, 2017, warrants
to purchase 250,000 shares of common stock were granted, at $0.17 price per share valuation, related to his 4
th
quarter
service, volatility of 284%, a discount rate of 1.09%, valued at $41,916.
On
June 8, 2017, the Company sold a 2007 Toyota Tundra truck to Jovian for $5,000. The payment was made through a $5,000 reduction
of Jovian’s shareholder advance balance. The transaction resulted in a loss of $3,677 based on an original cost of $10,625
and accumulated depreciation of $1,948.
During
the year ended December 31, 2017, shareholders advanced an additional $361,600 to the Company, the Company made payments back
to shareholders of $74,000 ($5,000 out of the $74,000 related to the truck purchase disclosed above) and $262,500 of outstanding
debt was converted to Series A Preferred Stock. This resulted in an increase to the shareholder advance liability from $192,000
at December 31, 2016 to $217,100 at December 31, 2017. The following related parties (Leo Womack – $55,000, Lee Lytton –
$25,000, Joel Oppenheim – $167,500 and Paul Deputy - $15,000) converted their shareholder advances into Preferred Stock.
For
their service as Directors on the Company’s Board of Directors, on May 23, 2017, the Board granted Leo B. Womack, the Chairman
of the Board of Directors of the Company an option to purchase 1,000,000 shares of the Company’s common stock at an exercise
price of $0.12 per share, which vested immediately, and is exercisable for 36 months thereafter. The Board also granted Lee Lytton,
Joel Oppenheim, Quinten Beasley and Saleem Nizami, members of the Board of Directors each an option to purchase 500,000 shares
of the Company’s common stock at an exercise price of $0.12 per share, which vested immediately, and is exercisable for
36 months thereafter. The fair value of the options granted on May 23, 2017 is $356,027, based on a $0.12 valuation, volatility
of 235%, a discount rate of 1.09% and a 3 year term. The total amount of the options was expensed during the year ended December
31, 2017. These warrants are subject to a clawback provision which would be ratably invoked if a director did not complete his
2017 service term.
On
April 18, 2017, Mr. James Burns and Mr. Saleem Nizami were elected Directors of the Company. In exchange for accepting their appointments,
each individual was granted 100,000 shares of common stock valued at $0.13 per share. Each Directors shares were valued at $13,000.
On
May 23, 2017, related party debt holders were offered the option to convert their outstanding loan balances of $362,500 and accrued
interest of $13,400 (totaling $375,900) into Preferred Stock. As a result, the following Preferred Stock shares were issued: Leo
Womack 5,500 shares, Joel Oppenheim 17,590 shares, Lee Lytton 2,500 shares, James Burns 10,500 shares and Paul Deputy (former
CFO) 1,500 shares. In addition, any holder of any non-interest bearing loan converted also received warrants to purchase four
shares of common stock for each dollar converted. Consequently, a total of warrants to purchase 400,000 shares of common stock
were granted (Leo Womack 70,000 shares, Joel Oppenheim 270,000 shares, Lee Lytton 30,000 shares and Paul Deputy (former CFO) 30,000
shares) as part of the conversion, which each had an exercise price of $0.20 per share and a term of 3 years. The warrants were
valued at $47,319. Any loan that had received warrants when initially issued did not receive additional warrants in this conversion
offering.
Jovian
converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second
tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated
together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the
second in July 2017 (See Note 6. Notes Payable for the details of these transactions).
The
combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment
of tranche 2 was recognized in the third quarter, with no impact on the consolidated statement of operations.
On
May 23, 2017, James E. Burns, the President of the Company, sold a Caterpillar D6 Dozer to the Company in exchange for 3,000 shares
of Preferred Stock. The equipment was valued at $30,000.
On
August 1, 2017 Mr. Joel Oppenheim provided a Letter of Credit (LOC), which was posted as collateral, in order for the Company
to issue operating bonds with the State of New Mexico for the operation of 25 Twin Lakes San Andres Unit wells. In exchange for
the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000 and warrants to purchase 2,000,000
shares of common stock valued at $236,586 with an exercise price of $0.14 per share. The warrants are based on a $0.12 price per
share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. For each quarter following the initial advance
until the LOC is revoked an additional two hundred fifty thousand (250,000) warrants will be granted. The exercise price of those
warrants will be the average common stock market price over the previous 90 days. In addition, Petrolia will provide security
interest in the form of 100% undivided working interest in the Noack field. On December 31, 2017, warrants to purchase 250,000
shares of common stock were granted, at $0.17 price per share valuation, related to the Letter of Credit (LOC) provided for the
4
th
quarter, volatility of 284%, a discount rate of 1.09%, and a 3 years term, valued at $41,916.
On
September 26, 2017, Mr. Oppenheim was issued 1,035,000 shares of common stock. These shares were the result of exercising warrants
to purchase 1,035,000 shares of common stock, at an exercise price of $0.06 per share, which included the remittance of $62,065
as the aggregate exercise price.
On
October 1, 2017, the Company commenced a private offering of its securities under Regulation D to accredited investors. Each unit
is comprised of 416,667 shares of common stock at a price of $0.12 per share and one warrant to purchase an additional 416,670
shares of common stock at a price of $0.20 per share at any time prior to October 1, 2020. As of December 31, 2017 six and a half
(6.5) units had been subscribed for and 2,708,336 shares of common stock had been purchased by various accredited investors. See
Note 6 for financial related details on all purchases. Out of the six and a half (6.5) units subscribed for, 4/5 (0.80) of one
unit was subscribed by and 333,333 shares of common stock had been purchased by our Director Leo Womack, and 1/5 (0.20) of one
unit was subscriber for and 83,334 shares of common stock had been purchased by our Director Joel Oppenheim.
On January 16, 2018, Paul Deputy tendered his resignation as the
Chief Financial Officer of the Company.
Also effective on January 16, 2018, the Company appointed Tariq
Chaudhary as the Company’s new Chief Financial Officer (CFO), in anticipation of the completion of the Company’s acquisition
of Bow Energy Ltd.
Mr. Chaudhary’s biographical information is presented in PART
III. ITEM 10.
On January 24, 2018, 350,000 shares, valued at $44,800, were issued
in accordance with Mr. James Burns’ common stock related salary compensation.
On February 1, 2018, a law firm was granted 100,000 shares of common
stock as a bonus for the Bow Energy acquisition.
On February 1, 2018, in consideration for the cancellation of $25,000
in debt, the Company issued 125,000 shares of common stock to a Director, a related party transaction.
On February 1, 2018, a Director exercised 1,110,000 warrants of
common stock by settling $102,590 of Accounts Payable to a company controlled by the director at an average share price of $0.092
per share, a related party transaction.
On February 23, 2018, a Director was issued 100,000 shares of common
stock for reissuance of lost certificate, related party transaction.
On February 27, 2018, the Company closed the Acquisition and Petrolia
acquired all of the issued and outstanding shares of capital stock of Bow Energy Ltd., (“BOW”), a Canadian company
with corporate offices in Alberta, Calgary. Bow’s common shares were listed for trading on the TSX Venture Exchange. The
Bow shares were delisted from the facilities of the TSX Venture Exchange on March 5, 2018.
Under the terms of the Arrangement, Bow shareholders are deemed
to have received 1.15 Petrolia common stock shares for each Bow share. A total of 106,156,712 shares of the Company’s common
stock were issued to the Bow shareholders as a result of the Arrangement, plus additional shares in connection with rounding.
Bow is an Oil & Gas Exploration and Development company operating
in the prolific Indonesian Sumatra basin. BOW’s key assets include South Block A PSC – 44.48% working interest, Bohorok
PSC – 50% working interest, Bohorok Deep JSA – 20.25% working interest, Palmerah Baru – 54% working interest,
MNK Palmerah – 69.36% working interest, Mahato PSC – 20% working interest. BOW will continue as a wholly owned subsidiary
of Petrolia and continue to operate all properties under BOW.
Ilyas Chaudhary, is the father of Zel C. Khan, the Company's Chief
Executive Officer. Mr. Chaudhary owned and controlled BSIH Ltd. (“BSIH”) prior to the acquisition of Bow and through
the ownership and control of BSIH, Mr. Chaudhary controlled Bow. Therefore, the BOW acquisition is considered to be a related party
transaction. Additionally, BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to
the terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018.
The acquired assets of Bow consist of over 948,000 net acres onshore
North Sumatra, Indonesia which consists of interests in five production-sharing contracts (PSCs) and one Joint Study Agreement
(JSA) with the Indonesian government.
On February 28, 2018, Director Joel Oppenheim exercised 630,000
warrants by remitting payment of $61,800 at an average share price of $0.098 per share.
Effective April 12, 2018, the Board of Directors (a) appointed Zel
C. Khan as Secretary of the Company; (b) appointed Ivar Siem as a member of the Board of Directors of the Company; and (c) approved
the issuance of 616,210 shares of restricted common stock to Mr. James E. Burns, a member of the Board of Directors, in consideration
for 2017 deferred salary of $61,621.
Also, on April 12, 2018, the Board of Directors approved (a) the
entry by the Company into a $500,000 Convertible Promissory Note with Blue Sky International Holdings Inc., a related party. The
note, effective April 1, 2018, is due on April 1, 2019, accrues interest at the rate of 11% per annum until paid in full, and is
convertible into shares of common stock of the Company at the rate of $0.12 per share. This note was never utilized and subsequently
cancelled; and (b) the entry into an Amended Revolving Line of Credit Agreement with Jovian Petroleum Corporation, a related party,
which establishes a revolving line of credit in the amount of $500,000 for a period of six months (through August 9, 2018) with
amounts borrowed thereunder due at the expiration of the line of credit and accruing interest at the rate of 3.5% per annum unless
there is a default thereunder at which time amounts outstanding accrue interest at the rate of 7.5% per annum until paid in full,
with such interest payable every 90 days. Both the Blue Sky International Holdings Inc. Promissory Note and the Jovian Line of
Credit are related party transactions. Blue Sky International Holdings Inc. is owned by Mr. Ilyas Chaudhary, father of Zel C. Khan,
former Director and Officer of Jovian and current CEO and President of the Company.
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 Resources Ltd. (“Blue Sky”), whose President is Ilyas Chaudhary, the
father of Zel C. Khan, the Company’s Chief Executive Officer. Mr. Chaudhary owns and controls BSIH Ltd.
(“BSIH”). BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to the
terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018. 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 General 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 $1,089,150 in U.S. dollars) of which CAD $1,022,400 (approximately $779,478 in U.S.
dollars) was paid in cash (the “Cash Payment”) and CAD $406,181 (approximately $314,912 in U.S. dollars) was
evidenced by a promissory note (the “Acquisition Note”).
The Cash Payment was made with funds
borrowed by the Company pursuant to the terms of that certain $1,530,000 May 9, 2018, Amended and Restated Loan Agreement
entered into with Bow and a third party (the “Loan Agreement” and the “Lender”). The amount owed
under the Loan Agreement accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default) and
is due and payable on May 11, 2021. The Working Interest will be held in the name of the Company’s newly formed
wholly-owned Alberta, Canada, subsidiary, Petrolia Canada Corporation. The Acquisition Note, which was dated June 8, 2018,
bears interest at the rate of 9% per annum, beginning on August 1, 2018 and is due and payable on November 30, 2018, provided
that we have the right to extend the maturity date for a period six months with 10 days’ notice to Blue Sky, in the
event we pay 25% of the principal amount of the Acquisition Note at the time of extension.
The acquisition has not formally closed as the assets can only be
transferred after the payment/settlement of the Acquisition Note.
On August 17, 2018, the Company sold
an aggregate of $90,000 in Convertible Promissory Notes (the “Director Convertible Notes”), to the Company’s
directors, Ivar Siem ($20,000) through an entity that he is affiliated with; Leo Womack ($60,000); and Joel Oppenheim ($10,000).
The Director Convertible Notes accrue interest at the rate of 12% per annum until paid in full and are due and payable on October
17, 2018. The amount owed may be prepaid at any time without penalty. The outstanding principal and interest owed under the Director
Convertible Notes are convertible into common stock of the Company, from time to time, at the option of the holders of the notes,
at a conversion price of $0.10 per share. As additional consideration for entering into the notes, the Company agreed to grant
one-year warrants to purchase one share of the Company’s common stock at an exercise price of $0.10 per share for each dollar
loaned pursuant to the Director Convertible Notes (the “Bridge Note Warrants”). As such, the Company granted (a) 20,000
Bridge Note Warrants to an entity affiliated with Ivar Siem; (b) 60,000 Bridge Note Warrants to Leo Womack; and (c) 10,000 Bridge
Note Warrants to Joel Oppenheim. The Director Convertible Notes contain standard and customary events of default. It is contemplated
that up to an additional $160,000 in Director Convertible Notes will be sold to affiliates of the Company in the next several months.
Effective on August 31, 2018, the Company
entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“Blue Sky”
and the “Exchange Agreement”). The President, Chief Executive Officer and 100% owner of Blue Sky is Ilyas Chaudhary,
the father of Zel C. Khan, the Company’s Chief Executive Officer. Chaudhary indirectly owns and controls BSIH Ltd. (“BSIH”),
which is a significant shareholder of the Company. Additionally, prior to the acquisition of Bow Energy Ltd. (“Bow”)
(which we acquired pursuant to an Arrangement Agreement dated November 30, 2017, which acquisition closed on February 27, 2018),
BSIH, and as a result of his ownership and control of BSIH, Mr. Chaudhary, controlled Bow.
Pursuant to the Exchange Agreement, we
exchanged 100% of the ownership of Bow, in consideration for:
(a)
70,807,417
shares of the Company’s common stock owned and controlled by Mr. Chaudhary and BSIH (the “Blue Sky Shares”);
(b)
$100,000
in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
(c)
the
assumption of certain payables owed by Bow totaling $1,696,332 (which includes $730,000 owed under the terms of a Loan Agreement,
as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow pursuant to the amendment to the Loan
Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement));
(d)
20%
of Bow Energy International Holdings, Inc, which is wholly-owned by Bow (“Bow EIH”)(which entity’s subsidiaries
own certain Production Sharing Contracts (the “PSC”) and certain other participating assets), pursuant to an Assignment
Agreement;
(e)
certain
carry rights described in greater detail in the Exchange Agreement, providing for Blue Sky to carry the Company for up to the next
$10 million of aggregate costs in BOW EIH and the PSC assets, with any profits from BOW EIH being distributed 80% to Bow and 20%
to the Company, pursuant to a Petrolia Carry Agreement (the “Carry Agreement”); and
(f)
a
3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which is wholly-owned by BOW EIH in the Bohorok,
Indonesia PSC (the “Bohorok PSC”) since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s share of
the prior sunk cost of the Bohorok PSC), which royalty is evidenced by an Assignment of Petrolia Royalty (the “Royalty Assignment”).
The Exchange Agreement closed on August
31, 2018 and has an effective date of July 1, 2018. The Exchange Agreement contains customary and standard representations and
warranties of the parties, indemnification obligations (which survive for six months following the closing) and closing conditions.
The Company is in the process of cancelling the Blue Sky Shares and returning such shares to the status of authorized but unissued
shares of common stock.
NOTE
7. NOTES PAYABLE
Convertible
Debt – Related Party
On
June 17, 2013, the Company entered into a Convertible Secured Note and Warrant Purchase Agreement (the “Purchase Agreement”)
with Rick Wilber. Pursuant to the Purchase Agreement, the Company agreed to sell, and Mr. Wilber agreed to buy, for aggregate
consideration of $350,000, a convertible secured promissory note in the principal amount of $350,000 (the “Note”)
convertible at $0.30 per share, and a warrant to purchase 1,000,000 shares of the Company’s common stock (the “Warrant”)
at an exercise price of $0.80 per share. The Warrant vests immediately and has a term of 10 years. The relative fair value of
the Warrant was determined to be $148,925, which was recorded as a debt discount. The intrinsic value of the beneficial conversion
feature of the note was determined to be $102,259 and was recorded as a debt discount. The debt discounts were amortized over
the life of the Note using the effective interest method. The effective interest rate was 53.7%. The $350,000 balance is due June
17, 2016. The Note’s due date was extended until June 30, 2017.
On
September 30, 2013, the Company entered into a Convertible Secured Note and Warrant Purchase Agreement (the “September Purchase
Agreement”) with Rick Wilber. Pursuant to the September Purchase Agreement, the Company agreed to sell, and Mr. Wilber agreed
to buy, for aggregate consideration of $100,000, a convertible secured promissory note in the principal amount of $100,000 (the
“September Note”) convertible at $0.30 per share, and a warrant to purchase 285,000 shares of the Company’s
common stock (the “September Warrant”) at an exercise price of $0.80 per share. The September Warrant vests immediately
and has a term of 10 years. The relative fair value of the September Warrant was determined to be $46,022 which was recorded as
a debt discount. The intrinsic value of the beneficial conversion feature of the September Note was determined to be $46,022 and
was recorded as a debt discount. The debt discounts were amortized over the life of the September Note using the effective interest
method. The effective interest rate was 119.7%. The $100,000 balance is due September 30, 2016. The September Note’s due
date was extended to June 30, 2017. In order to extend the September Note’s due date and based on the Amendment to the Agreement,
warrants to purchase 500,000 shares of Company common stock were issued by the Company. These warrants were valued at $79,223
and have an exercise price of $0.15 and expire on December 31, 2021.
On
December 31, 2013, the Company entered into a Convertible Secured Note and Warrant Purchase Agreement (the “December Purchase
Agreement”) with Rick Wilber. The September Note was consolidated into the December Purchase Agreement. Pursuant to the
December Purchase Agreement, in addition to the proceeds of the September Note, the Company agreed to sell, and Mr. Wilber agreed
to buy, for aggregate consideration of $100,000, a convertible secured promissory note in the principal amount of $100,000 (the
“December Note”) convertible at $0.30 per share, and a warrant to purchase 285,000 shares of the Company’s common
stock (the “December Warrant”) at an exercise price of $0.80 per share. The December Warrant vests immediately and
has a term of 10 years. The relative fair value of the December Warrant was determined to be $49,873 which was recorded as a debt
discount. The intrinsic value of the beneficial conversion feature of the December Note was determined to be $50,127 and was recorded
as a debt discount. The debt discounts were amortized over the life of the December Note using the effective interest method.
The effective interest rate was 132.2%. The $100,000 balance is due September 30, 2016. The December Note’s due date was
extended to June 30, 2017.
During
the years ended December 31, 2016 and 2015, the Company amortized $171,573 and 152,980 of the total discounts on the three transactions
above to interest expense. At December 31, 2016 the discount was fully amortized, and the ending note payable-related party balance
was $550,000; resulting in net convertible debt-related party of $550,000.
During
January to June 2017, the Company issued 80,000 warrants, at the exercise price of $0.15 per share for a 36 month term, for each
month to keep the December Purchase Agreement compliant while negotiating conversion terms, totaling 480,000 warrants of common
shares. On July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred
Stock.
Convertible
Debt – (non-related parties)
Convertible
Bridge Notes
On
July 25, 2016, the Company entered into Promissory Notes for $75,000 with accredited investors. The notes bear interest at 10%
per annum and mature on July 31, 2017. If the Company completes a qualified offering prior to July 31, 2017, the notes and accrued
interest will automatically convert into the common shares at an 80% conversion rate. If not converted earlier, the principal
and interest on the Note will convert into shares at the rate of $0.10 per share at maturity.
Promissory
Notes – non convertible (related parties)
On
May 1, 2015, twenty two (22) units were subscribed for by accredited investors in a private offering of securities under Regulation
D, which resulted in 2,200,000 shares being purchased. Eight (8) units of the twenty two (22) units or 800,000 shares were issued
for conversion of debt. These eight units were issued as follows. Mr. Leo Womack, Chairman of the Company, purchased 300,000 shares
(including 300,000 warrants) through the Leo B. Womack Family Trust. Mr. Lee Lytton, a Director of the Company, purchased 300,000
shares (including 300,000 warrants). Mr. Joel Oppenheim, a Director of the Company, purchased 200,000 shares (including 200,000
warrants). These 800,000 shares (and 800,000 warrants) offset a total of $80,000 in advances from affiliates that was disclosed
as a liability in the consolidated financial statements as of March 31, 2015 and were converted to equity in this offering. The
conversion resulted in a $90,800 loss on the conversion (including the value of the warrants). In addition, Jovian purchased 100,000
of the shares and Joel Oppenheim purchased an additional 100,000 shares, exclusive of his shares related to his conversion of
debt.
On
November 4, 2015, the Company executed a Promissory Note for $146,875 related to the TLSAU acquisition. The note was due on December
31, 2015 and accrues at a rate of 10% per annum and the repayment of the note is secured by 1,000,000 shares of restricted stock
of the Company. The Company exercised its one time right for a 6 month extension of the maturity date of the note by issuing BSNM
500,000 additional shares of restricted Company stock. The 500,000 shares were issued at a price of $0.75 per share at a value
of $37,500.
On
May 2, 2016, the Company paid off its outstanding Promissory Note to BSNM for $146,875. The payoff was made through the issuance
of 1,468,750 shares of Company common stock. Based on the market value of the stock on May 2, 2016 of $0.10, the value of the
transaction was $146,875 and resulted in no gain or loss. In addition, a cash payment of $4,869 was made to pay off the remaining
outstanding interest.
A
Promissory Note to Jovian for $1,000,000 was executed bearing interest at 5% and due on December 31, 2016 related to the acquisition
of a 50% working interest in the SUDS field. Full payment was due on December 31, 2016, provided the buyer extended the Note to
June 30, 2017 by making a $10,000 payment in cash. The Promissory Note is secured by a 12.5% undivided working interest in the
SUDS field. In the event the Company closes any financing related to the SUDS field, 50% of the net proceeds received from the
financing will be applied to pay the Note.
Production
Payment Note
In
addition to the Promissory Note described above, a Production Payment Note was executed for the same 50% working interest in the
SUDS field. This note was for $3,000,000, paid out of twenty percent (20%) of the 50% undivided interest of net revenues received
by the Purchaser that is attributable to the SUDS field assets. The Purchaser shall make the production payments to seller no
later than the end of each calendar month. The Production Payment Note is secured by a 12.5% undivided working interest in the
SUDS field. Based on forecasts of future SUDS related revenues, $2,904,020 of the note balance is classified as long term and
$95,980 is classified as current as of December 31, 2016.
Conversion
of $1,000,000 Promissory Note and $3,000,000 Production Payment Note to common stock and preferred stock.
Jovian
Petroleum Corporation converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017
and a $2,000,000 second tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two
transactions were contemplated together, and they were accounted for as one extinguishment that was accomplished in two tranches,
the first in May 2017 and the second in July 2017.
Tranche
1
- On May 30, 2017, Jovian Petroleum Corporation converted $2 million of its $4 million debt into 10 million shares
of the Company’s common stock. The $2 million debt included a $1 million Promissory Note and $1 million of the $3 million
Production Payment Note as well as interest payable of $33,151.
Tranche
2
- On July 19, 2017, Jovian Petroleum Corporation converted $2 million of its remaining debt (outstanding under
a Production Payment Note) into 12,749,285 shares of the Company’s common stock and 21,510 shares of the Company’s
Preferred Stock.
The
consideration for the debt extinguished consisted of the following:
●
|
10 million shares
of common stock which were valued using the market price on the date of issuance of $0.14 per share ($1,400,000)
|
●
|
Warrants to purchase
6 million shares of common stock with an exercise price of $0.20 per share based on a $0.12 valuation, volatility of 293%,
a discount rate of 1.09% and warrants to purchase 4 million shares of common stock with an exercise price of $0.35 per share
based on a $0.12 valuation, volatility of 293%, and a discount rate of 1.09%. All warrants expire in 3 years. The 6 million
warrants were valued at $709,776 while the 4 million warrants were valued at $471,104, totaling $1,180,880.
|
●
|
12,749,285 shares
of common stock which were valued using the market price on the date of issuance of $0.104 per share ($1,325,926).
|
●
|
The Preferred Stock
was valued at $10.00 per share, the cash price paid by third party investors for the same stock with an aggregate value of
$215,100.
|
The
combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment
of tranche 2 was recognized in the third quarter, with no impact on the consolidated statement of operations.
Bridge
Loan – Working Capital
On
June 17, 2016, the Company entered into Temporary Unsecured Loans (Bridge Loan – Working Capital) for $230,000. The notes
bear interest at 10% per annum payable and mature in sixty (60) days. The lenders receive 100% warrant coverage at an exercise
price of $0.09 per share. If the loans are not paid in 60 days, a 10% warrant coverage default penalty is paid. Initially, Director
Leo Womack loaned $20,000, Director Joel Oppenheim loaned $110,000 and the CFO loaned $100,000. At December 31, 2016, the outstanding
balance of Bridge Loan – Working Capital was $120,000. The decrease during 2016 was due to Mr. Oppenheim converting $20,000
and the CFO converting $110,000 of their respective debt into shares.
Rig
Loan
On
July 13, 2016, the Company entered into Temporary Unsecured Loans (Rig Loan) for $60,000. The notes bear interest at 10% per annum
payable and mature on September 13, 2016. Should the Company default in timely repayment, the Company shall pay a penalty to each
of the named parties by issuing warrants at a 100% coverage ratio. Each warrant has an exercise price of $0.059 per share and
will expire September 13, 2019. The following related parties loaned funds to the Company as follows: $10,000 from Mr. Leo Womack
– Chairman, $10,000 from the CFO, $10,000 from Mr. Lee Lytton – Director, $10,000 from Mr. Joel Oppenheim –
Director, $10,000 from Mr. Quinten Beasley – Director. At December 31, 2016 the outstanding balance of Rig Loan was $60,000.
Cancelation
of Bridge Loan-Working Capital and Rig Loan
As
of May 23, 2017, the following related parties had the following outstanding balances corresponding to the Bridge Loan-Working
Capital, Rig Loan and Shareholder Advance: Leo Womack $55,000, Lee Lytton $$25,000, Joel Oppenheim $167,500, Paul Deputy (former
CFO) $15,000 and James Burns $100,000.
On
May 23, 2017, related party debt holders were offered the option to convert their outstanding loan balances of $362,500 and accrued
interest of $13,400 (totaling $375,900) into Preferred Stock. As a result, the following Preferred Stock shares were issued: Leo
Womack 5,500 shares, Joel Oppenheim 17,590 shares, Lee Lytton 2,500 shares, James Burns 10,500 shares and Paul Deputy (former
CFO) 1,500 shares. In addition, any holder of any non-interest bearing loan converted also received warrants to purchase for shares
of common stock for each dollar converted. Consequently, a total of warrants to purchase 400,000 shares of common stock were granted
(Leo Womack 70,000 shares, Joel Oppenheim 270,000 shares, Lee Lytton 30,000 shares and Paul Deputy (former CFO) 30,000 shares)
as part of the conversion, which each had an exercise price of $0.20 per share and a term of 3 years. The warrants were valued
at $47,319. Any loan that had received warrants when initially issued did not receive additional warrants in this conversion offering.
Promissory
Notes – (non-related parties)
Short
Term Debt
On
November 15, 2016 the Company entered into Promissory Notes for $200,000 with two accredited investors. The notes bear interest
at 12% per annum payable monthly at the rate of 1% and will mature on May 31, 2017. The Company will have the option of extending
the notes for up to an additional six (6) months at an annual rate of 18% by paying interest monthly at a rate of 1.5%. Investors
received warrants to purchase 100,000 shares of common stock (a 50% coverage ratio) at an exercise price of $0.12 per share. The
warrants expire on December 31, 2019. On May 11, 2017, one accredited investor converted his outstanding balance of the loan of
$100,000 into 10,000 Series A preferred shares. On May 26, 2017 one accredited investor converted his outstanding balance of the
loan of $100,000 plus interest accrued of $5,000 into 10,500 Series A preferred shares.
Installment
Notes
On
January 6, 2017, the Company purchased a 2014 Toyota Tundra for a total price of $35,677 and entered into an installment note
with JPMorgan Chase Bank in the amount of $35,677 for a term of 5 years at 5.49% APR. Principal payments of $5,076 were made during
2017, leaving a remaining balance of $30,600 at year end.
Shareholder
Advances (Related Party Only)
Shareholder
Advances (Related Party Only)
|
|
|
|
|
|
Amount
|
|
Balance at December 31, 2016
|
|
$
|
192,000
|
|
|
|
|
|
|
Additions
|
|
|
|
|
Advance (1)
|
|
|
361,600
|
|
Total Additions
|
|
|
361,600
|
|
|
|
|
|
|
Payments
|
|
|
|
|
Debt Conversion to Shares (2)
|
|
|
262,500
|
|
Reduction of shareholder balance through the sale of truck (3)
|
|
|
5,000
|
|
Cash (4)
|
|
|
69,000
|
|
Total Payments
|
|
|
336,500
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
217,100
|
|
|
(1)
|
Funds
that were provided by related parties as shareholder advances.
|
|
(2)
|
Shares were issued
to extinguish outstanding liabilities of the Company. These liabilities could be outstanding shareholder advances, pre-bridge
working capital loans or service related accounts payable.
|
|
(3)
|
Reduction of Jovian
Petroleum balance through the sale of 2007 pickup truck Toyota.
|
|
(4)
|
Funds that were
paid in cash by the Company to various related parties to reimburse for funds that were previously loaned as a shareholder
advances.
|
Five
Year Maturity
As
of December 31, 2017, future maturities on our notes payable, which include the $217,100 related party notes, and the $32,582
current maturities and $24,204 long term installment note payable, were as follows:
Fiscal year ending:
|
|
|
|
|
2018
|
|
|
$
|
249,682
|
|
2019
|
|
|
|
7,102
|
|
2020
|
|
|
|
7,502
|
|
2021
|
|
|
|
7,925
|
|
2022
|
|
|
|
1,675
|
|
Total
|
|
|
$
|
273,886
|
|
NOTE
8. EQUITY
Preferred
Stock
– 1,000,000 shares authorized.
Effective
April 11, 2017, the Company initiated a $2,000,000 Series A Convertible Preferred Stock (“Preferred Stock”) offering
at a price of $10.00 per share. The holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate
of 9%. 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 share will convert to
7.1429 common shares (which results in a $0.14 per common share conversion rate). During the second quarter of 2017, 120,590 shares
or $1,205,900 of the offering had been issued. The 120,590 shares were issued as follows: conversion of TORRI (40,500 shares)
– See Note 7 for additional details, conversion of debt (28,900 shares - 25,900 related to short term notes [as described
in Note 6] and 3,000 related to equipment purchase), conversion of shareholder advances (27,090 shares of which 840 was for accrued
interest, see Note 7 for further explanation) and cash (24,100 shares). Of the 120,590 shares, 57,990 of the shares were issued
to related parties while 62,600 of the shares were issued to third parties.
On
July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred Stock.
The outstanding debt included the following: a $350,000 Convertible Secured Note dated June 17, 2013, a $100,000 Convertible Secured
Note dated September 30, 2013 and a $100,000 Convertible Secured Note dated December 31, 2013. Subsequent to this conversion,
all of the Company’s debt with Mr. Wilber is deemed cancelled and it is no longer due and payable. Mr. Wilber retains both
the warrants and shares that were previously issued by the Company related to the original sale of these notes (and their respective
amendments).
On
July 19, 2017, Jovian Petroleum Corporation (“Jovian”) converted $2 million of its remaining debt into 12,749,285
shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock. The Preferred Stock was priced
at $10.00 per share with a value of $215,100. Refer to Note 6 for further explanation. The CEO of Jovian is Quinten Beasley, our
director, and the largest shareholder of Jovian is Zel C. Khan, our CEO and director.
On
the 1
st
quarter 2017, James Burns received warrants to purchase 120,000 common shares, at an exercise price of
$0.14 per share at a 3 year term, valued at $15,800, for his consulting services.
Common
Stock
–
On
May 1, 2015, the Company commenced a private offering of its securities under Regulation D to accredited investors. Each unit
with a price of $10,000 per unit, is comprised of 100,000 shares of common stock and one warrant to purchase an additional 100,000
shares of common stock at a price of $0.12 per share at any time prior to August 5, 2018. As of December 31, 2015, fourteen (14)
units had been subscribed for and 1,400,000 shares of common stock had been purchased by various accredited investors. See Note
6 for financial related details on all purchases.
On
September 1, 2015, the Company commenced a private offering of its securities under Regulation D to accredited investors. Each
unit which has a price of $6,000, is comprised of 100,000 shares of common stock and one warrant to purchase an additional 100,000
shares of common stock at a price of $0.10 per share at any time prior to August 31, 2018. As of December 31, 2015 twenty seven
(27) units had been subscribed for and 2,700,000 shares of common stock had been purchased. Seven (7) of those units were purchased
by accredited investors. This offering was closed on May 31, 2016.
On
September 23, 2015, the Company acquired a 10% working interest from Jovian in the SUDS field, in exchange for 10,586,805 shares
of restricted common stock. For further details see Note 9.
On
September 24, 2015, the Board of Directors of the Company approved the adoption of the 2015 Stock Incentive Plan (the “Plan”).
The Plan provides an opportunity, subject to approval of our Board of Directors of individual grants and awards, for any employee,
officer, director or consultant of the Company. The maximum aggregate number of shares of common stock which may be issued pursuant
to awards under the Plan was 4,000,000 shares (which has since been increased to 40,000,000 as discussed below). The plan was
ratified by the stockholders at the Company’s annual meeting which was held on April 14, 2016.
At
the 2015 Annual Meeting of our Stockholders, held on April 14, 2016, the shareholders voted to increase the total number of authorized
shares of common stock to 150,000,000.
On
November 4, 2015, the Company acquired a 15% net working interest in the TLSAU field and all operating equipment on the field,
pursuant to the terms of a Memorandum of Agreement between the Company and BSNM, which was dated November 4, 2015 (the “Purchase
Agreement”).
On
February 1, 2016, the Company acquired 100% of the issued and outstanding shares in Askarii Resources, LLC, a private Texas based
oil & gas service company for 1,000,000 shares of Company common stock. See Note 9 for further details on this transaction.
On
March 11, 2016, the Board of Directors granted three (3) contract employees 700,000 shares of the Company’s restricted common
stock for settlement of outstanding payables. The shares were issued at the current market price of $0.06 per share on March 11,
2016, at an aggregate value of $42,000.
On
August 17, 2016 the Board of Directors issued two employees 200,000 shares of the Company’s restricted common stock.
The shares were issued at current market price of $0.077 per share on August 17, 2016 at a value of $15,400 and recorded as stock
based compensation.
On
September 1, 2016, the Company acquired an additional 25% working interest ownership of TLSAU field through the issuance of 3,500,000
shares of its restricted common stock with an unrelated party. See Note 9 for additional details on this transaction.
On
September 28, 2016, the Company issued 24,308,985 shares of its restricted common stock to Jovian to acquire an additional 40%
working interest ownership of SUDS. See Note 9 for further details of this transaction.
On
September 30, 2016, per a consulting agreement, a contractor was issued 11,607 shares of common stock in exchange for services.
These shares were valued at $1,625 at a market price of $0.14 per share.
Effective
September 30, 2016, the seven (7) Advisory Board members were compensated for their service from April 1, 2016 through September
30, 2016 (for two quarters) though the granting of 12,500 warrants each (87,500 total warrants per quarter), per quarter per Board
member, to purchase 12,500 shares of the Company’s common stock at an average exercise price of $0.095 per share, which
vested immediately, and are exercisable for 36 months thereafter. In 2016, a total of 262,000 warrants were issued with a fair
value of $29,161 based on an average $0.095 valuation, volatility of 235%, a discount rate of 1.09% and a 3 year term. The total
amount of the warrants was expensed in 2016. These warrants are subject to a clawback provision which would be ratably invoked
if an advisory board member did not complete his 2016 service term.
On
December 7, 2016, the Board of Directors issued an employee 100,000 shares of the Company’s restricted common stock.
The shares were issued at current market price of $0.12 per share on the effective date of November 17, 2016 at a value of $12,000
and recorded as stock based compensation.
During
December 2016, warrants to purchase 100,000 shares of common stock were issued for short term debt. The loans were provided by
accredited investors. These warrants had a valuation of $14,870 with an exercise price of $0.12 per share and expire in December
2019.
On
December 31, 2016, a contractor was granted warrants to purchase 40,000 shares of common stock with an exercise price of $0.14
per share. These warrants were valued at $5,545 at a market price of $0.16 per share.
On
December 31, 2016, per the consulting agreement, a contractor was issued 18,157 shares of common stock in exchange for services.
These shares were valued at $2,869 at a market price of $0.16 per share.
Effective
March 31, 2017, the seven (7) Advisory Board members were compensated for their service from January 1, 2017 through March 31,
2017 by the granting of warrants to purchase 12,500 shares of common stock each per quarter per Board member (in aggregate 87,500
total warrants per quarter), at an average exercise price of $0.14 per share, which vested immediately, and are exercisable for
36 months thereafter. The warrants were issued with a fair value of $12,127 based on an average $0.14 valuation, volatility of
296%, a discount rate of 1.09% and a 3 year term. The warrants were valued using the Black Sholes valuation model. These warrants
are subject to a clawback provision which would be ratably invoked if an advisory board member did not complete his 2017 service
term. Effective March 31, 2017, the Advisory Board was dissolved and no other warrants were issued subsequent to the first quarter
of 2017.
Effective
February 1, 2017, the Company entered into a consulting agreement in exchange for geology related services. Specifically these
services include providing reports detailing analysis of present and potential oil and gas assets. The term of the agreement is
one (1) year, subject to a one (1) year extension. The consultant is to be granted warrants to purchase 25,000 shares of common
stock for services provided each quarter. The exercise price of the warrants will be the market price of the Company’s stock
at quarter end, the warrant term expires 3 years from the date of grant. During the first quarter of 2017, 25,000 warrants were
issued with a fair value of $3,465, based on an average $0.14 valuation, volatility of 296%, a discount rate of 1.09% and a 3
year term. During the second quarter of 2017, 25,000 warrants were issued with a fair value of $2,217 based on an average $0.09
valuation, volatility of 296%, a discount rate of 1.09% and a 3 year term. The warrants vested immediately. As of December 31,
2017, the consultant has been granted warrants to purchase 50,000 shares of common stock, with a fair value of $5,682.
From
January to March 2017, James Burns received 120,000 warrants of common shares, at the exercise price of $0.14 for a 3 year term,
valued at $15,800, for his consulting services.
On
May 12, 2017, one (1) warrant holder exercised a total of 600,000 warrants by remitting payment of $48,000 at a share price of
$0.08 per shares.
On
July 6, 2017, the Company contracted with an attorney to facilitate the conversion of the Rick Wilber debt (described above).
To compensate the attorney for his service, he was granted 150,000 shares of common stock valued at $15,000.
On
July 31, 2017, based on the terms of the agreement, the Company’s final outstanding $25,000 Convertible Bridge Note was
mandatorily converted to 271,096 shares of common stock. Based on the agreement, the debt was converted at $0.10 per share. This
included the principal balance of $25,000 and accrued interest of $2,110. However, the market price of the shares on the conversion
date was $0.12 per share resulting in a loss on conversion of $5,422.
On
August 15, 2017, in exchange for services related to negotiations concerning our New Mexico operating bond requirements, the Company
paid a law firm 500,000 shares of common stock was valued at $65,000. Such shares were provided as a bonus for the successful
closing of the Twin Lakes San Andres Unit, New Mexico acquisition.
From
October to December 2017, the Company issued a total of 750,000 shares of common stock for consulting services valued at $78,000.
Out of the 750,000 shares: 294,000 shares were issued to Sandstone Group Corp; 243,000 shares were issued to Newbridge Securities
Corp; 63,000 shares were issued to Robert Santos Nesperiera; and 150,000 shares were issued to Interlink Group Inc.
On
October 1, 2017, the Company commenced a private offering of its securities under Regulation D to accredited investors. Each
unit which has a price of $50,000, is comprised of 416,667 shares of common stock and one warrant to purchase an additional 416,667
shares of common stock at a price of $0.20 per share at any time prior to October 1, 2020. As of December 31, 2017 six
and a half (6.5) units had been subscribed for and 2,708,336 shares of common stock had been purchased by various accredited investors
for $325,000. The proceeds from this private offering include units sold to related parties, as described in Note 5.
On
November 07, 2017, the majority stockholders of the Company, via written consent to action without meeting, approved (1) the adoption
of an amendment to the Petrolia Energy Corporation 2015 Stock Incentive Plan to increase by 36,000,000 (to 40,000,000) the number
of shares of common stock reserved for issuance under the plan; (2) the filing of a Certificate of Amendment to the Company’s
Certificate of Formation with the Secretary of State of Texas to (a) increase the number of authorized shares of common stock,
par value $0.001 per share of the Company, to 400,000,000 shares of common stock; and (b) amend the par value of the Company’s
preferred stock, from $0.10 per share to $0.001 per share.
Summary
information regarding common stock warrants issued and outstanding as of December 31, 2017, is as follows:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
intrinsic
value
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
Outstanding at year ended
December 31, 2015
|
|
|
|
11,910,111
|
|
|
$
|
0.33
|
|
|
$
|
—
|
|
|
|
3.5
|
|
Granted
|
|
|
|
5,740,416
|
|
|
|
0.09
|
|
|
|
—
|
|
|
|
2.6
|
|
Exercised
|
|
|
|
(825,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at year ended December 31, 2016
|
|
|
|
16,825,527
|
|
|
|
0.26
|
|
|
|
—
|
|
|
|
3.20
|
|
Granted
|
|
|
|
19,896,670
|
|
|
|
0.19
|
|
|
|
—
|
|
|
|
3.01
|
|
Exercised
|
|
|
|
(1,635,000
|
)
|
|
|
0.07
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at quarter ended December 31, 2017
|
|
|
|
35,087,197
|
|
|
$
|
0.24
|
|
|
$
|
1,106,583
|
|
|
|
2.15
|
|
The
table below summarizes warrant issuances during the years ended December 31, 2017 and 2016:
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants Granted
|
|
|
|
|
|
|
|
|
Board of Director Service
|
|
|
3,120,000
|
|
|
|
2,500,000
|
|
PORRI
|
|
|
—
|
|
|
|
150,000
|
|
Deferred Salary – CEO, CFO
|
|
|
134,167
|
|
|
|
206,666
|
|
Performance bonus – President
|
|
|
666,667
|
|
|
|
—
|
|
Providing Bond Related Collateral
|
|
|
2,250,000
|
|
|
|
31,250
|
|
Conversion of Debt
|
|
|
10,400,000
|
|
|
|
|
|
Pre-bridge Loans
|
|
|
—
|
|
|
|
290,000
|
|
Short-term Debt
|
|
|
—
|
|
|
|
100,000
|
|
Advisory Board
|
|
|
87,500
|
|
|
|
262,500
|
|
Deferred loan penalty
|
|
|
—
|
|
|
|
10,000
|
|
Consulting Agreements
|
|
|
50,000
|
|
|
|
340,000
|
|
Rick Wilber Loan
|
|
|
480,000
|
|
|
|
500,000
|
|
Signing Bonus – CEO, CFO
|
|
|
—
|
|
|
|
550,000
|
|
Private Placement Memo (Sept 2015)
|
|
|
—
|
|
|
|
800,000
|
|
Private Placement Memo (Oct 2017)
|
|
|
2,708,336
|
|
|
|
—
|
|
Total
|
|
|
19,896,670
|
|
|
|
7,740,000
|
|
NOTE
9. COMMITMENTS AND CONTINGENCIES
Environmental
Matters –
The Company, as a lessee of oil and gas properties, is subject to various federal, state and local laws
and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among
other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations
and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease
operations in the affected area. The Company is not aware of any environmental claims existing as of December 31, 2017, which
have not been provided for, covered by insurance or otherwise have a material impact on its financial position or results of operations.
There can be no assurance, however, that current regulatory requirements will not change, or past noncompliance with environmental
laws will not be discovered on the Company’s properties.
Office
Lease
– As of December 31, 2017, the Company has one annually renewable office lease in Houston at a cost of $2,012
per month.
During
2017, one Director provided personal guarantees to the bank. The bank, relying on those guarantees, issued letters of credit to
bonding authorities to meet regulatory bonding requirements.
NOTE
10. OIL AND GAS ACQUISITIONS
As
of December 31, 2015, the Company had completed the drilling of sixteen wells on the leased properties. Four of these wells have
been pledged as collateral for the convertible notes payable.
On
September 23, 2015, the Company entered into a Purchase and Sale Agreement with SUDS Properties, LLC (“SUDS” and the
“Purchase Agreement”). SUDS is 100% owned by Jovian Resources LLC (“Jovian”). Mr. Zel C. Khan, our present
CEO, is the former manager of Jovian. Pursuant to the Purchase Agreement, the Company acquired a 10% working interest (carrying
a 7.8% NRI) in the SUDS field located in Creek County Oklahoma, in exchange for 10,586,805 shares of restricted common stock.
Based on that current market value of Company common stock at $0.068 per share, the price paid was $719,903. Concurrently with
the purchase, Jovian agreed to assign us all rights to be the operator of the SUDS unit under a standard operating agreement.
The Company did not prepare an unaudited pro-forma income statement table for 2015, related to this SUDS purchase, because the
net income effect of those transactions was consider to be immaterial.
On
November 4, 2015, the Company acquired a 15% net working interest in the TLSAU field located in Chavez County, New Mexico (the
“Net Working Interest”) and all operating equipment on the field, pursuant to the terms of a Memorandum of Agreement
between the Company and BSNM, which was dated November 4, 2015 (the “Purchase Agreement”).
On
February 1, 2016, the Company acquired 100% of the issued and outstanding shares in Askarii Resources, a private Texas based oil
& gas service company. The Company acquired Askarii by issuing one million restricted common shares. Based on the then current
market value of the Company’s stock of $0.05 per share, the aggregate value of the transaction is $50,000. There were minimal
tangible assets purchased from Askarii. The final purchase price allocation is as follows: trademarks $10,000, internet/website
$5,000, customer lists $10,000 and customer relationships $25,000.
On
September 1, 2016, the Company acquired an additional 25% working interest ownership of the TLSAU field located 45 miles from
Roswell, Chavez County, New Mexico, through the issuance of 3,500,000 shares of its restricted common stock with an unrelated
party. The purchase price of the shares equates to a $350,000 value, based on the $0.10/share market price of Petrolia’s
shares on September 1, 2016. After the purchase, the Company holds a total working interest ownership of 40%. The final purchase
price allocation of the transaction is as follows: oil and gas properties acquired $392,252, asset retirement obligation assumed
of $42,252.
On
September 28, 2016 the Company issued 24,308,985 shares of its restricted common stock to Jovian, a related party, to acquire
100% (an additional 40% working interest ownership) As a result of the exchange, SUDS became a wholly-owned subsidiary of the
Company. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799 per share market price of Petrolia’s
shares on September 28, 2016 (the effective date of the transaction).
On
September 28, 2016, the Company acquired a 100% working interest ownership of SUDs (an additional 50% working interest ownership)
through the issuance of a note payable for $4,000,000 as outlined above in Note 4 and the issuance of 24,308,985 shares of its
restricted common stock, from a related party. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799/share
market price of the Company’s common stock on September 28, 2016. After the acquisition, the Company holds a total working
interest ownership of 100%. The final purchase price allocation of the combined transactions is as follows: oil and gas properties
acquired $8,401,318, asset retirement obligation assumed of $28,132.
Effective
February 12, 2017, the Company acquired an additional 60% working interest ownership in the TLSAU field (the “Net Working
Interest”) resulting from the execution of a Settlement Agreement on February 12, 2017. The agreement assigned Dead Aim
Investments’ (“Dead Aim”) 60% ownership interests to the Company. As a result of this transaction, the Company
now owns 100% working interest in TLSAU. Consideration of $465,788 was given in exchange for Dead Aim’s working interest.
The consideration includes the forgiveness of the Orbit Petroleum Inc Bankruptcy Estate (“OPBE”) note of $316,800
(with a $1.3 million face value) which the Company acquired in November 2015 and the write-off of $148,988 of Dead Aim’s
outstanding accounts receivable to the Company. Dead Aim assumed liability (prior to the acquisition) for the OPBE note that the
Company purchased.
The
table below represents the unaudited pro-forma financial statement to show the effects of the combined entity for the periods
presented above:
|
|
December 31,
2017
Petrolia Combined
(Unaudited)
|
|
|
December 31,
2016
Petrolia Combined
(Unaudited)
|
|
Oil and Gas Sales
|
|
|
150,970
|
|
|
|
333,741
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(3,274,539
|
)
|
|
|
(1,957,181
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
NOTE
11. ASSET RETIREMENT OBLIGATIONS
During
the calendar years presented, the Company brought a number of oil and gas wells into productive status and will have asset retirement
obligations 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. For the purpose of determining the fair value of ARO incurred
during the calendar years presented, the Company used the following assumptions:
|
|
December
31,
2017
|
|
Inflation rate (avg.)
|
|
|
2.1
|
%
|
Estimated asset life
|
|
|
21 years
|
|
The
following table shows the change in the Company’s ARO for 2017 and 2016:
Asset retirement obligations
at December 31, 2015
|
|
$
|
213,328
|
|
|
|
|
|
|
Obligations assumed in acquisitions
|
|
|
70,384
|
|
Additional retirement obligations incurred
|
|
|
—
|
|
Change in estimate
|
|
|
—
|
|
Accretion expense
|
|
|
38,998
|
|
Settlements
|
|
|
—
|
|
|
|
|
|
|
Asset retirement obligations at December 31,
2016
|
|
$
|
322,710
|
|
|
|
|
|
|
Obligations assumed in acquisition
|
|
|
101,405
|
|
Additional retirement obligations incurred
|
|
|
—
|
|
Change in estimate
|
|
|
—
|
|
Accretion expense
|
|
|
49,753
|
|
Settlements
|
|
|
—
|
|
|
|
|
|
|
Asset retirement obligations at December 31,
2017
|
|
$
|
473,868
|
|
NOTE
12. INCOME TAXES
There
was no provision for income taxes for 2017 and 2016 due to a 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 2015 forward are open to IRS examination.
The
provision for income taxes differs from the amount computed by applying the federal statutory income tax rate (35%) on operations
due primarily to permanent differences attributable to organizational expenses.
|
|
Fiscal
Year
Ended
December 31,
2017
|
|
|
Fiscal
Year
Ended
December 31,
2016
|
|
|
|
|
|
|
|
|
Income tax expense computed at statutory rates
|
|
$
|
(1,141,449
|
)
|
|
$
|
(656,523
|
)
|
Non-deductible items
|
|
|
536,470
|
|
|
|
219,438
|
|
Change in valuation allowance
|
|
|
604,979
|
|
|
|
437,085
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
The
components of the net deferred tax asset were as follows:
|
|
December
31,
2016
|
|
|
|
Gross
Values
|
|
|
Tax
Effect
|
|
Deferred
tax assets
|
|
|
|
|
|
$
|
|
|
Book Impairment
|
|
$
|
668,073
|
|
|
$
|
233,825
|
|
Net operating loss
carryforwards
|
|
|
7,120,879
|
|
|
|
2,492,308
|
|
Asset retirement
obligation
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax
assets
|
|
|
7,788,952
|
|
|
|
2,726,133
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
O&G Properties
|
|
|
(6,496,717
|
)
|
|
|
(2,273,851
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax
liabilities
|
|
|
(6,496,717
|
)
|
|
|
(2,273,851
|
)
|
Less: Valuation
allowance
|
|
|
(1,292,235
|
)
|
|
|
(452,282
|
)
|
Net deferred tax
assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December
31,
2017
|
|
|
|
Gross
Values
|
|
|
Tax
Effect
|
|
Deferred tax assets
|
|
|
|
|
|
$
|
|
|
Book Impairment
|
|
$
|
668,073
|
|
|
$
|
140,295
|
|
Net operating loss carryforwards
|
|
|
8,924,934
|
|
|
|
1,874,236
|
|
Asset retirement obligation
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
9,593,007
|
|
|
|
2,014,531
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
O&G Properties
|
|
|
(1,556,593
|
)
|
|
|
(326,884
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
(1,556,593
|
)
|
|
|
(326,884
|
)
|
Less: Valuation allowance
|
|
|
(8,036,415
|
)
|
|
|
(1,687,647
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
A
valuation allowance has been established to offset deferred tax assets. The Company’s accumulated net operating losses were
approximately $9.6 million at December 31, 2017 and begin to expire if not utilized beginning in the year 2033. 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
13. 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 asset retirement obligations established in the current year, as well as increases
or decreases to the asset retirement obligations 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
2016, the Company purchased 90% working interest in the SUDS field in the amount of $8,373,186 and also purchased the 25% working
interest in the TLSAU field in the amount of $350,000. In 2017, the Company purchased a 60% working interest in the TLSAU field
in the amount of $745,788. With these purchases the Company obtained 100% working interest in the TLSAU field.
|
|
Fiscal
Year
Ended
December 31,
2017
|
|
|
Fiscal
Year
Ended
December 31,
2016
|
|
Property
acquisitions
|
|
$
|
745,788
|
|
|
$
|
8,723,186
|
|
Unevaluated
|
|
|
—
|
|
|
|
—
|
|
Evaluated
|
|
|
—
|
|
|
|
—
|
|
Exploration
|
|
|
—
|
|
|
|
—
|
|
Development
|
|
|
—
|
|
|
|
—
|
|
Total Costs Incurred
|
|
$
|
745,788
|
|
|
$
|
8,723,186
|
|
Capitalized
costs.
Capitalized costs include the cost of properties, equipment and facilities for oil and natural-gas producing
activities. Capitalized costs for proved properties include costs for oil and natural-gas leaseholds where proved reserves have
been identified, development wells, and related equipment and facilities, including development wells in progress. Capitalized
costs for unproved properties include costs for acquiring oil and gas leaseholds and geological and geophysical expenses where
no proved reserves have been identified.
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Capitalized
costs
|
|
|
|
|
|
|
|
|
Unevaluated properties
|
|
$
|
—
|
|
|
$
|
—
|
|
Evaluated properties
|
|
|
13,837,800
|
|
|
|
13,092,012
|
|
|
|
|
13,837,800
|
|
|
|
13,092,012
|
|
Less: Accumulated
DD&A
|
|
|
(1,068,795
|
)
|
|
|
(1,042,545
|
)
|
Net capitalized
costs
|
|
$
|
12,769,005
|
|
|
$
|
12,049,467
|
|
Oil
and Gas Reserve Information.
MKM
Engineering, an independent engineering firm, prepared the estimates of the proved reserves, future production, and income attributable
to the leasehold interests as of December 31, 2017 and 2016. 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.
Discounted
future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider unproved reserves, anticipated future oil and gas prices, interest rates, changes
in development and production costs and risks associated with future production. Because of these and other considerations, any
estimate of fair value is subjective and imprecise.
The
following table sets forth estimates of the proved oil and gas reserves (net of royalty interests) for the Company and changes
therein, for the periods indicated.
|
|
Oil
(Bbls)
|
|
|
|
|
|
December
31, 2015
|
|
|
734,520
|
|
Revisions of prior
estimates
|
|
|
(58,297
|
)
|
Purchases of reserves
in place
|
|
|
1,557,660
|
|
Production
|
|
|
(6,643
|
)
|
December 31,
2016
|
|
|
2,227,240
|
|
Revisions of prior
estimates
|
|
|
(2,186,554
|
)
|
Purchases of reserves
in place
|
|
|
1,600,935
|
|
Production
|
|
|
(3,421
|
)
|
December 31,
2017
|
|
|
1,638,200
|
|
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
|
|
Estimated
Quantities of Proved Developed Reserves – Oil (Bbls)
|
|
|
1,598,010
|
|
|
|
1,206,010
|
|
Estimated Quantities
of Proved Undeveloped Reserves – Oil (Bbls)
|
|
|
40,190
|
|
|
|
1,021,230
|
|
Proved
undeveloped reserves decreased from December 31, 2016 to December 31, 2017, primarily due to a specific “5-year rule”,
a new disclosure requirement in SEC Regulations S-X 210.4-10, which states that undeveloped projects should be developed within
5 years of the initial proved reserves booking. The Noack field has been under one ownership for 5 plus years. The Company believes
that once the drilling plan commences this will no longer be an issue. As per this regulation, once the Company provides evidence
that it adopted a development plan for a PUD location and that this development plan contains a “final investment decision”
showing that it would be developed within the next 5 years, then the PUDS removed from the 2017 report should be re-qualified
at that point.
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, 2016
|
|
|
1,206,010
|
|
Acquired Reserves
|
|
|
377,670
|
|
Revision of prior
estimates
|
|
|
17,751
|
|
Production
|
|
|
(3,421
|
)
|
December 31,
2017
|
|
|
1,598,010
|
|
Proved undeveloped
reserves
|
|
Oil
(bbls)
|
|
December
31, 2016
|
|
|
1,021,230
|
|
Acquired Reserves
|
|
|
1,223,265
|
|
Revisions to prior
estimates
|
|
|
(2,204,305
|
)
|
December 31,
2017
|
|
|
40,190
|
|
The
increases in Proved developed reserves and the increase in Proved Undeveloped (PUD) reserves were all due to the acquisition of
the 60% working interest in TLSAU.
Standardized
Measure of Discounted Future Net Cash Flows.
The Standardized Measure related to proved oil and gas reserves is summarized
below. Future cash inflows were computed by applying a twelve month average of the first day of the month prices to estimated
future production, less estimated future expenditures (based on year end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expense. Future income tax expenses are calculated by applying appropriate year-end
tax rates to future pretax net cash flows, less the tax basis of properties involved. Future net cash flows are discounted at
a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does
not necessarily result in an estimate of the fair market value or the present value of the Company.
Standardized
Measure of Oil and Gas
The
following table sets forth the changes in standardized measure of discounted future net cash flows relating to proved oil and
gas reserves for the periods indicated.
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$
|
62,964,150
|
|
|
$
|
90,265,000
|
|
Future production
costs
|
|
|
(27,336,630
|
)
|
|
|
(47,050,770
|
)
|
Future development
costs
|
|
|
(1,491,500
|
)
|
|
|
(10,396,000
|
)
|
Future income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Future net cash
flows
|
|
|
34,136,020
|
|
|
|
32,818,230
|
|
Discount of future
net cash flows at 10% per annum
|
|
|
(17,530,040
|
)
|
|
|
(19,253,750
|
)
|
|
|
|
|
|
|
|
|
|
Standardized measure
of discounted future net cash flows
|
|
$
|
16,605,980
|
|
|
$
|
13,564,480
|
|
Changes
in standardized measure of discounted future cash flows
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$
|
13,564,480
|
|
|
$
|
6,220,500
|
|
Sales and transfers
of oil & gas produced, net of production costs
|
|
|
267,997
|
|
|
|
175,048
|
|
Net changes in prices
and production costs
|
|
|
1,967,068
|
|
|
|
(1,917,506
|
)
|
Changes in estimated
future development costs
|
|
|
1,806,404
|
|
|
|
(673,960
|
)
|
Acquisitions of
minerals in place, net of production costs
|
|
|
7,645,722
|
|
|
|
9,941,241
|
|
Revision of previous
estimates
|
|
|
(19,654,723
|
)
|
|
|
(544,877
|
)
|
Change in discount
|
|
|
732,656
|
|
|
|
817,235
|
|
Change in production
rate or other
|
|
|
(10,276,980
|
)
|
|
|
(453,201
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
16,605,980
|
|
|
$
|
13,564,480
|
|
NOTE
14. BUSINESS SEGMENTS
We
are a diversified oil and gas company with operations in two segments:
Oil
and Gas Exploration and Production
– which includes exploration, development, and production of current and potential
oil and gas properties.
Oil
field services
– which includes selling oil field related equipment and providing various oil field related services
to the oil and gas industry.
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
Oil & Gas
|
|
$
|
148,835
|
|
|
$
|
123,246
|
|
Oil field services
|
|
|
—
|
|
|
|
198,000
|
|
Total Revenues
|
|
|
148,835
|
|
|
|
321,246
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
Oil & Gas
|
|
|
(3,245,008
|
)
|
|
|
(2,052,004
|
)
|
Oil field services
|
|
|
(16,276
|
)
|
|
|
176,225
|
|
Total Net Income
|
|
|
(3,261,284
|
)
|
|
|
(1,875,779
|
)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Oil & Gas
|
|
|
13,408,306
|
|
|
|
13,026,082
|
|
Oil field services
|
|
|
169,266
|
|
|
|
185,542
|
|
Total Assets
|
|
|
13,577,572
|
|
|
|
13,211,624
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
Oil & Gas
|
|
|
51,026
|
|
|
|
199,003
|
|
Oil field services
|
|
|
—
|
|
|
|
—
|
|
Total Accounts Receivable
|
|
$
|
51,026
|
|
|
$
|
199,003
|
|
During
2017, all segment expenses incurred by the oil and gas segment. During the year ended December 31, 2016, all segment expenses
incurred by the oil and gas segment except the cost of equipment sold of $33,330, which was incurred by the oil field services
segment.
NOTE
15. SUBSEQUENT EVENTS
On
January 16, 2018, Paul Deputy tendered his resignation as the Chief Financial Officer of the Company.
Also
effective on January 16, 2018, the Company appointed Tariq Chaudhary as the Company’s new Chief Financial Officer (CFO),
in anticipation of the completion of the Company’s acquisition of Bow Energy Ltd.
Mr.
Chaudhary’s biographical information is presented on PART III. ITEM 10.
On
January 24, 2018, 350,000 shares, valued at $44,800, were issued in accordance with Mr. James Burns’ common stock related
salary compensation.
On
February 1, 2018, a law firm was granted 100,000 shares of common stock as a bonus for the Bow Energy acquisition.
On
February 1, 2018, a geologist consultant in Oklahoma, was issued 150,000 shares of common stock in exchange for his professional
consulting services.
On
February 1, 2018, in consideration for the cancellation of $25,000 in debt, the Company issued 125,000 shares of common stock
to a Director.
On
February 1, 2018, a Director exercised 1,110,000 warrants of common stock by settling $102,590 of Accounts Payable to a company
controlled by the director at an average share price of $0.092 per share.
On
February 5, 2018, one accredited investors subscribed and purchased 2,000 Series A preferred shares by remitting payment of $20,000.
On
February 23, 2018, a Director was issued 100,000 shares of common stock for reissuance of lost certificate.
On
February 27, 2018, the Company closed the Acquisition and Petrolia acquired all of the issued and outstanding shares of capital
stock of Bow Energy Ltd (“BOW”), a Canadian company with corporate offices in Alberta, Calgary. Bow’s common
shares are currently listed and posted for trading on the TSX Venture Exchange. Bow Shares delisted from the facilities of the
TSX Venture Exchange on March 5, 2018. The current capital structure of Bow is as follows: 92,310,184 common shares issued and
outstanding, 9,046,478 vested stock options, no warrants, no convertible preferred shares, with a fully diluted total of 101,356,662
shares.
Under
the terms of the Arrangement, Bow shareholders are deemed to have received 1.15 Petrolia common stock shares for each Bow Share.
A total of 106,156,712 shares of the Company’s common stock will be issued to the Bow shareholders as a result of the Arrangement,
plus additional shares in connection with the rounding described below.
Bow
is an Oil & Gas Exploration and Development company operating in the prolific Indonesian Sumatra basin. BOW’s
key assets include South Block A PSC – 44.48% working interest, Bohorok PSC – 50% working interest, Bohorok Deep JSA
– 20.25% working interest, Palmerah Baru – 54% working interest, MNK Palmerah – 69.36% working interest, Mahato
PSC – 20% working interest. BOW will continue as a wholly owned subsidiary of Petrolia and continue to operate all
properties under BOW.
Ilyas Chaudhary, is the father of Zel C. Khan, the Company's Chief
Executive Officer. Mr. Chaudhary owned and controlled BSIH Ltd. (“BSIH”) prior to the acquisition of Bow and through
the the ownership and control of BSIH, Mr. Chaudhary controlled Bow. Therefore, the BOW acquisition is considered to be a related
party transaction. Additionally, BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant
to the terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018.
The
acquired assets of Bow consist of over 948,000 net acres onshore North Sumatra, Indonesia which consists of interests in five
production-sharing contracts (PSCs) and one Joint Study Agreement (JSA) with the Indonesian government.
On
February 27, 2018, three (3) accredited investors subscribed and purchased two and a half (2.5) units of shares of common stock
in our private offering of securities. Each unit which has a price of $50,000, is comprised of 416,667 shares of common stock
and one warrant to purchase an additional 416,667 shares of common stock at a price of $0.20 per share at any time prior to October
1, 2020. In consideration of the two and a half (2.5) units subscribed, the Company issued 1,041,667 common shares for a total
price of $125,000 and 1,041,667 warrants of common stock at a price of $0.20 per share expiring on October 1, 2020.
On
February 28, 2018, one (1) warrant holder exercised a total of 360,000 warrants by remitting payment of $36,875 at an average
share price of $0.102 per share.
On
February 28, 2018, Director Joel Oppenheim exercised 630,000 warrants by remitting payment of $61,800 at an average share price
of $0.098 per share.
Effective
April 12, 2018, the Board of Directors (a) appointed Zel C. Khan as Secretary of the Company; (b) appointed Ivar Siem as a member
of the Board of Directors of the Company; and (c) approved the issuance of 616,210 shares of restricted common stock to Mr. James
E. Burns, a member of the Board of Directors, in consideration for 2017 deferred salary of $61,621.
Also,
on April 12, 2018, the Board of Directors approved (a) the entry by the Company into a $500,000 Convertible Promissory Note with
Blue Sky International Holdings Inc., a related party. The note, effective April 1, 2018, is due on April 1, 2019, accrues interest
at the rate of 11% per annum until paid in full, and is convertible into shares of common stock of the Company at the rate of
$0.12 per share. This note was never utilized and subsequently cancelled; and (b) the entry into an Amended Revolving Line of
Credit Agreement with Jovian Petroleum Corporation, a related party, which establishes a revolving line of credit in the amount
of $500,000 for a period of six months (through August 9, 2018) with amounts borrowed thereunder due at the expiration of the
line of credit and accruing interest at the rate of 3.5% per annum unless there is a default thereunder at which time amounts
outstanding accrue interest at the rate of 7.5% per annum until paid in full, with such interest payable every 90 days. Both the
Blue Sky International Holdings Inc. Promissory Note and the Jovian Line of Credit are related party transactions. Blue Sky International
Holdings Inc. is owned by Mr. Ilyas Chaudhary, father of Zel C. Khan, former Director and Officer of Jovian and current CEO and
President of the Company.
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 Resources Ltd. (“Blue Sky”), whose President is Ilyas Chaudhary, the
father of Zel C. Khan, the Company’s Chief Executive Officer. Mr. Chaudhary owns and controls BSIH Ltd.
(“BSIH”). BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to the
terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018. 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 General 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 $1,089,150 in U.S. dollars) of which CAD $1,022,400 (approximately $779,478 in U.S.
dollars) was paid in cash (the “Cash Payment”) and CAD $406,181 (approximately $309,672 in U.S. dollars) was
evidenced by a promissory note (the “Acquisition Note”).
The Cash Payment was made with funds
borrowed by the Company pursuant to the terms of that certain $1,530,000 May 9, 2018, Amended and Restated Loan Agreement
entered into with Bow and a third party (the “Loan Agreement” and the “Lender”). The amount owed
under the Loan Agreement accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default) and
is due and payable on May 11, 2021. The Working Interest will be held in the name of the Company’s newly formed
wholly-owned Alberta, Canada, subsidiary, Petrolia Canada Corporation. The Acquisition Note, which was dated June 8, 2018,
bears interest at the rate of 9% per annum, beginning on August 1, 2018 and is due and payable on November 30, 2018, provided
that we have the right to extend the maturity date for a period six months with 10 days’ notice to Blue Sky, in the
event we pay 25% of the principal amount of the Acquisition Note at the time of extension.
The acquisition has not formally closed as the assets can only be
transferred after the payment/settlement of the Acquisition Note.
On August 17, 2018, the Company sold
an aggregate of $90,000 in Convertible Promissory Notes (the “Director Convertible Notes”), to the Company’s
directors, Ivar Siem ($20,000) through an entity that he is affiliated with; Leo Womack ($60,000); and Joel Oppenheim ($10,000).
The Director Convertible Notes accrue interest at the rate of 12% per annum until paid in full and are due and payable on October
17, 2018. The amount owed may be prepaid at any time without penalty. The outstanding principal and interest owed under the Director
Convertible Notes are convertible into common stock of the Company, from time to time, at the option of the holders of the notes,
at a conversion price of $0.10 per share. As additional consideration for entering into the notes, the Company agreed to grant
one-year warrants to purchase one share of the Company’s common stock at an exercise price of $0.10 per share for each dollar
loaned pursuant to the Director Convertible Notes (the “Bridge Note Warrants”). As such, the Company granted (a) 20,000
Bridge Note Warrants to an entity affiliated with Ivar Siem; (b) 60,000 Bridge Note Warrants to Leo Womack; and (c) 10,000 Bridge
Note Warrants to Joel Oppenheim. The Director Convertible Notes contain standard and customary events of default. It is contemplated
that up to an additional $160,000 in Director Convertible Notes will be sold to affiliates of the Company in the next several
months.
Effective on August 31, 2018, the Company
entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“Blue Sky”
and the “Exchange Agreement”). The President, Chief Executive Officer and 100% owner of Blue Sky is Ilyas Chaudhary,
the father of Zel C. Khan, the Company’s Chief Executive Officer. Chaudhary indirectly owns and controls BSIH Ltd. (“BSIH”),
which is a significant shareholder of the Company. Additionally, prior to the acquisition of Bow Energy Ltd. (“Bow”)
(which we acquired pursuant to an Arrangement Agreement dated November 30, 2017, which acquisition closed on February 27, 2018),
BSIH, and as a result of his ownership and control of BSIH, Mr. Chaudhary, controlled Bow.
Pursuant to the Exchange Agreement, we
exchanged 100% of the ownership of Bow, in consideration for:
(a)
70,807,417
shares of the Company’s common stock owned and controlled by Mr. Chaudhary and BSIH (the “Blue Sky Shares”);
(b)
$100,000
in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
(c)
the
assumption of certain payables owed by Bow totaling $1,696,332 (which includes $730,000 owed under the terms of a Loan Agreement,
as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow pursuant to the amendment to the Loan
Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement));
(d)
20%
of Bow Energy International Holdings, Inc, which is wholly-owned by Bow (“Bow EIH”)(which entity’s subsidiaries
own certain Production Sharing Contracts (the “PSC”) and certain other participating assets), pursuant to an Assignment
Agreement;
(e)
certain
carry rights described in greater detail in the Exchange Agreement, providing for Blue Sky to carry the Company for up to the next
$10 million of aggregate costs in BOW EIH and the PSC assets, with any profits from BOW EIH being distributed 80% to Bow and 20%
to the Company, pursuant to a Petrolia Carry Agreement (the “Carry Agreement”); and
(f)
a
3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which is wholly-owned by BOW EIH in the Bohorok,
Indonesia PSC (the “Bohorok PSC”) since July 1, 2018, plus (ii) $3,546,450 (i.e., ½ of Bow’s share of
the prior sunk cost of the Bohorok PSC), which royalty is evidenced by an Assignment of Petrolia Royalty (the “Royalty Assignment”).
The Exchange Agreement closed on August
31, 2018 and has an effective date of July 1, 2018. The Exchange Agreement contains customary and standard representations and
warranties of the parties, indemnification obligations (which survive for six months following the closing) and closing conditions.
The Company is in the process of cancelling the Blue Sky Shares and returning such shares to the status of authorized but unissued
shares of common stock.