Petrolia Energy Corporation - 10-K
Exhibit 10.28
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-52690
| PETROLIA ENERGY CORPORATION |
(Exact name of registrant as specified in its charter)
| TEXAS | 86-1061005 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
710 N Post Oak, Suite 512 Houston, TX |
77024 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (832-941-0011)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
None
Securities registered pursuant to Section 12(g) of the Act:
| Common Stock, $0.001 Par Value Per Share |
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filing). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “ large accelerated filer, ” “ accelerated filer ” and “ smaller reporting company ” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company ☒ |
| Emerging growth ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2017 was approximately $8,175,105.
As of April 16, 2018, the registrant had 222,437,810 outstanding shares of common stock.
Documents Incorporated by Reference: None
Table of Contents
FORWARD-LOOKING STATEMENTS
This Report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words “may,” “will,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.
The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this report include:
| ● | The sale prices of crude oil: |
| ● | The amount of production from oil wells in which we have an interest; |
| ● | Lease operating expenses; |
| ● | International conflict or acts of terrorism; |
| ● | General economic conditions; and |
| ● | Other factors disclosed in this Report. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read the matters described in “Risk Factors” and the other cautionary statements made in this Report as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Please see the “Glossary of Oil and Gas Terms” on page 9, for a list of abbreviations and definitions used throughout this report.
Except where context otherwise requires and for purposes of the Annual Report on Form 10-K only:
| ● | “we”, “us”, “our company”, “our”, “the company” refer to Petrolia Energy Corporation, and its subsidiaries |
| ● | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
| ● | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and “Securities Act” refers to the Securities Act of 1933, as amended. |
Available Information
We are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements and other information may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at http://www.sec.gov . Copies of all or a portion of such materials can be obtained from the Public Reference Room of the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.
Financial and other information about the Company is available on our website ( http://www.petroliaenergy.com/ ). Information on our website is not incorporated by reference into this Report. We make available on our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
| 1 |
Background
We were incorporated in Colorado on January 16, 2002.
We planned to sell custom framed artwork, art accessories, and interior design consulting. However, we generated only limited revenue and were inactive between 2008 and February of 2012.
In February 2012, we decided it would be in the best interests of our shareholders to no longer pursue our original business plan and, in April 2012 we became active in the exploration and development of oil and gas properties.
Effective September 2, 2016, we formally changed our name to Petrolia Energy Corporation, pursuant to the filing of a Statement of Conversion with the Secretary of State of Colorado and a Certificate of Conversion with the Secretary of State of Texas, authorized by the Plan of Conversion which was approved by our stockholders at our April 14, 2016, annual meeting of stockholders, each of which are described in greater detail in the Definitive Proxy Statement on Schedule 14A, which was filed with the Securities and Exchange Commission on March 23, 2016. In addition to the Certificate of Conversion filing, we filed a Certificate of Correction filing with the Secretary of State of Texas (correcting certain errors in our originally filed Certificate of Formation) on August 24, 2016.
As previously reported, although the stockholders approved the Plan of Conversion at the annual meeting, pursuant to which our corporate jurisdiction was to be changed from the State of Colorado to the State of Texas by means of a process called a “Conversion” and our name was to be changed to “Petrolia Energy Corporation”, those filings were not immediately made and the Conversion did not become legally effective until September 2, 2016. Specifically, on June 15, 2016, the Company filed a Certificate of Conversion with the Texas Secretary of State, affecting the Conversion and the name change, and including a Certificate of Formation as a converted Texas corporation; however, the Statement of Conversion was not filed with the State of Colorado until a later date. As a result, and because FINRA and the Depository Trust Company (DTC) had advised us that they would not recognize the Conversion or name change, or update such related information in the marketplace, until we became current in our periodic filings with the Securities and Exchange Commission and they had a chance to review and approve such transactions, we took the position that the Conversion and name change were not legally effective until September 2, 2016.
As a result of the filings described above, and FINRA and the Depository Trust Company (DTC) formally recognizing and reflecting the events described above in the marketplace, the Company has formally converted from a Colorado corporation to a Texas corporation, and has formally changed its name to “Petrolia Energy Corporation”.
Two significant acquisitions were made in 2015 and additional working interests in the same properties were acquired in 2016 and 2017, as described in greater detail in the “Plan of Operation” section below. Additionally, in February 2018, we acquired Bow Energy Ltd and its assets, as discussed below.
Plan of Operation
Since 2015, we have established a clearly defined strategy to acquire, enhance and redevelop high-quality, resource in place assets. The Company has been focusing on acquisitions in the Southwest United States while actively pursuing our strategy to offer low-cost operational solutions in established Oil and Gas regions. We believe our mix of assets-oil-in-place conventional plays, low-risk resource plays and the redevelopment of our late-stage plays is a solid foundation for continued growth and future revenue growth.
Our strategy is to acquire low risk, conventionally producing oil fields. This strategy allows us to incorporate new technology to minimize risk and maximize the recoverability of existing reservoirs. This approach allows us to minimize the environmental impact caused by exploratory development.
Our activities will primarily be dependent upon available financing.
Oil and gas leases are considered real property. Title to properties which we may acquire will be subject to landowner’s royalties, overriding royalties, carried working and other similar interests and contractual arrangements customary in the oil and gas industry, to liens for current taxes not yet due, liens for amounts owing to persons operating wells, and other encumbrances. As is customary in the industry, in the case of undeveloped properties little investigation of record title will be made at the time of acquisition (other than a preliminary review of local records). However, drilling title opinions may be obtained before commencement of drilling operations.
Minerva-Rockdale Field
The Minerva-Rockdale Field, which is located approximately 30 miles Northeast of Austin, Texas, was first discovered in 1921 and is approximately 50 square miles in size. The main producing formation for this field is the Upper Cretaceous Navarro Group of sands and shales. The Navarro is typically subdivided into several producing zones from the uppermost “A” and “B” sands to the lower “C” and “D” sands. The “B” sand is the primary producing zone. These sands are commonly fine grained and poorly sorted and were deposited close to a shoreline during a cycle of marine regression.
| 2 |
In April 2013, the Company entered into a lease pertaining to a 423 acre tract in Milam County, Texas, which is adjacent to the Company’s original 200 acre lease. The Company issued 500,000 shares of its common stock as consideration for a 100% working interest (83.33% net revenue interest) in such lease.
During the period from our inception to December 31, 2011, we did not drill any oil or gas wells. During the year-ended December 31, 2012 we drilled and completed six (6) oil wells; and during 2013 the Company drilled and completed three (3) wells of which one (1) was converted to an injection well. During 2014 the Company drilled seven (7) new wells. In 2015, six (6) of the wells were completed, five (5) wells produced, one (1) did not produce and one (1) well was not completed. In 2016, the Company had thirteen (13) wells producing with one (1) injection well and one (1) did not produce/one (1) well not completed. During 2017, out of a total of sixteen (16) wellbores, thirteen (13) wells are producers, one (1) is an injection well, one (1) well requires completing and one (1) well is completed but not perforated. Out of the thirteen (13) producers, eight (8) were producing during 2017
Slick Unit Dutcher Sands (“SUDS”) Field
The SUDS oilfield consists of 2,600 acres located in Creek County, Oklahoma and carries a 76.5% net revenue interest (NRI). The first oil producer was completed in 1918 by Standard Oil of Ohio (“Sohio”), which at that time was owned by John D. Rockefeller. By 1959, approximately 14,000,000 barrels of oil had been recovered at an average well depth of 3,100 feet and over 100 wells in production. Through a series of events, the infrastructure had deteriorated and the field suffered a lot of neglect. From 2011 to the 2016, when the Company took over operations and 100% of the Working Interest of SUDS, Jovian Petroleum Corporation and its subsidiaries, Jovian Resources, LLC and SUDS Properties, LLC (together known as “Jovian”), the previous operator and owner of SUDS, had invested an estimated $1.6 million into the restoration of the field; including environmental clean-up, rebuilding the infrastructure, and repairing certain injection wells and producers. Note that Jovian and its management are considered a related party. This designation is because two (2) individuals hold key management and ownership positions in both companies which effectively results in joint control. To date, 22 wells have been worked over and 9 are fully operational with considerable reserves remaining. As a result of the transactions below, as of December 31, 2017 and 2016, Petrolia was the operator and has a 100% working interest in this field. Mr. Zel C. Khan, our Chief Executive Officer and President, is the former manager of Jovian and Mr. Quinten Beasley, our Director, currently serves as President of Jovian.
SUDS 10% Acquisition
The Company acquired a 10% working interest in the SUDS field located in Creek County Oklahoma on September 23, 2015, in exchange for 10,586,805 shares of restricted common stock. Based on the then current market value of our common stock, $0.068 per share, the price paid was $719,903 or $4.77 dollars per barrel of oil (Bbl). Through this transaction, the Company increased its reserve base by approximately 151,000 Bbls of (1P) proven reserves. Concurrently with the purchase, Jovian agreed to assign to the Company the right to be the operator of record of the SUDS field, governed by an American Association of Professional Landmen (AAPL) standard Joint Operating Agreement (JOA).
SUDS 90% Acquisition
On the effective date of September 28, 2016, the Company acquired a 90% net working interest in the SUDS field as a result of two separate agreements, Purchase and Sale Agreement and the Share Exchange Agreement, both between the Company and Jovian.
The Company issued two notes for a combined value of $4,000,000 in exchange for a cumulative 50% working interest in SUDS. A Promissory Note to Jovian for $1,000,000 was executed bearing interest at 5% and due on December 31, 2016 related to the acquisition of a 50% working interest in the SUDS field. The Promissory Note was secured by a 12.5% undivided working interest in the SUDS field. In addition, a Production Payment Note was executed for the same 50% working interest in the SUDS field. This note was for $3,000,000, paid out of twenty percent (20%) of the 50% undivided interest of net revenues received by the Purchaser that is attributable to the SUDS field assets. The Production Payment Note was secured by a 12.5% undivided working interest in the SUDS field.
The Company issued 24,308,985 shares of its restricted common stock to Jovian to acquire an additional 40% working interest ownership of SUDS. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799/share market price of our common stock on September 28, 2016 (the effective date of the transaction).
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 12,749,286 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.
| 3 |
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. |
| • | 12,749,286 shares of common stock which were valued using the market price on the date of issuance of $0.104 per share ($1,325,926). |
| • | 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.
Twin Lakes San Andres Unit (“TLSAU”) Field
TLSAU is located 45 miles from Roswell, Chavez County, New Mexico and consists of 4,864 acres with 80 wells. The last independent reserve report prepared by MKM Engineering on December 31, 2017, reflects approximately 1.6 million barrels of proven oil reserves remaining for the 100% working interest. During 2017, the Company took control of thirty-eight (38) wells of which twenty-one (21) were re-worked of this eight (8) wells remained producing, five (5) wells were dedicated for injection purpose and the remaining await additional workover and a secondary review. As of December 31, 2017, Petrolia was the operator of the TLSAU field (through an agreement with Blue Sky NM, Inc. (“BSNM”) described below). As of the date of this report, Petrolia owns a 100% working interest in the field. In 2017 the Company worked over 21 wells capable of producing oil. Eight (8) of those wells produced and thirteen (13) experienced a repairable mechanical failure after a month of production.
TLSAU 15% Acquisition
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. Through this transaction, the Company increased its reserve base by approximately 384,800 Bbls of (1P) proven reserves. The Company was also assigned all rights to be the operator of the TLSAU unit under a standard operating agreement.
The total purchase price for the acquisition of the Net Working Interest and equipment rights was $196,875 or $0.52 dollars per barrel of oil (Bbl) and was paid to BSNM. The Company paid $50,000 in cash and gave a promissory note in the amount of $146,875. The $50,000 was paid by the CEO of the Company for the benefit of the Company and recorded as a shareholder advance. Subsequently, the $50,000 advance was converted into 800,000 shares of common stock at $0.06 per share and warrants to purchase 800,000 shares of common stock. In addition, a $1.3 million face value note payable to BSNM was purchased for $316,800 (6,000,000 shares of common stock at $0.0528 per share). With the inclusion of the note receivable, the price per barrel would be $1.33 dollars per barrel oil (Bbl). (See Note 5 and Note 6 of the audited consolidated financial statements beginning on page F-1 hereof for further details)
TLSAU 25% Acquisition
On September 1, 2016, the Company acquired an additional 25% working interest ownership in the TLSAU field through the issuance of 3,500,000 shares of its restricted common stock to an unrelated party. The purchase price of the shares equates to a $350,000 value, based on the $0.10 per share market price of Petrolia’s shares on September 1, 2016. After the purchase, the Company owns a total working interest ownership of 40%. The final purchase price allocation of the transaction is as follows: oil and gas properties acquired $392,252, and asset retirement obligations assumed of $42,252.
TLSAU 60% Acquisition
Effective February 12, 2017, the Company acquired an additional 60% working interest ownership in the TLSAU field (the “Net Working Interest”) resulting from the execution of a Settlement Agreement on February 12, 2017. The agreement assigned Dead Aim Investments’ (“Dead Aim”) 60% ownership interests to the Company. As a result of this transaction, Petrolia 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 we acquired in November 2015 and the write-off of $148,988 of Dead Aim’s outstanding accounts receivable to Petrolia. Dead Aim assumed liability (prior to the acquisition) for the OPBE note that the Company purchased.
| 4 |
Non Oil & Gas Properties Businesses
Askarii Resources, LLC
Effective February 1, 2016, the Company acquired 100% of the issued and outstanding shares in Askarii Resources LLC (“Askarii”), a private Texas based oil & gas service company. The Company acquired Askarii by issuing one (1) million restricted common shares. Based on the then market value of the Company stock at $0.05 per share, the aggregate value of the transaction is $50,000.
Askarii, while dormant for the last few years, has a significant history with major oil companies providing services both onshore and offshore- Gulf of Mexico. Using Askarii, the Company will engage in the oil field service business as well as the leasing of field related heavy equipment. Askarii will also research various enhanced oil recovery (EOR) technologies and methods which it can use for the benefit of the Company’s oil fields.
There were no wells drilled during the years ended December 31, 2017 and December 31, 2016.
The following table shows, as of March 31, 2018, our producing wells, developed acreage, and undeveloped acreage:
| State | Productive Wells | Developed Acreage | Undeveloped Acreage (1) | ||||||||||||||||||||
| Gross | Net | Gross | Net | Gross | Net | ||||||||||||||||||
| Texas | 16 | 16 | 260 | 260 | 363 | 363 | |||||||||||||||||
| Oklahoma | 26 | (2) | 26 | 1,040 | 1,040 | 1,564 | 1,564 | ||||||||||||||||
| New Mexico | 38 | (3) | 32 | 500 | 500 | 4,364 | 4,364 | ||||||||||||||||
| (1) | Undeveloped acreage includes leasehold interests on which wells have not been drilled or completed to the point that would permit the production of commercial quantities of natural gas and oil regardless of whether the leasehold interest is classified as containing proved undeveloped reserves. |
| (2) | Represents twenty-six (26) wells that were worked-over and capable of producing oil. Seventeen (17) of those wells experienced a repairable mechanical failure after a week of production. Those eighteen (18) wells are excluded from our producing well totals in the overview description above. Note that there were other wells that were worked over that never produce oil and are excluded from all of these reported amounts. |
| (3) | Represents 21 wells that were worked-over and capable of producing oil. Eight (8) of those wells produced and thirteen (13) experienced a repairable mechanical failure after a month of production. Note that there were other wells that were worked over that never produce oil and are excluded from all of these reported amounts. |
The following table shows, as of February 22, 2018, the status of our gross acreage:
| State |
Held by
Production |
Not Held by
Production |
||||||
| Texas | 623 | — | ||||||
| Oklahoma | 2,604 | — | ||||||
| New Mexico | 4,864 | — | ||||||
Leases on acres that are Held by Production remain in force so long as oil or gas is produced from one or more wells on the particular lease. Leased acres that are not held by Production require annual rental payments to maintain the lease until the first to occur of the following: the expiration of the lease or the time oil or gas is produced from one or more wells drilled on the leased acreage. At the time oil or gas is produced from wells drilled on the leased acreage, the lease is considered to be Held by Production.
Proved Reserves
Below is a table that provides historical average sales price per barrel and average production cost per barrel by geographical location and by year, for the last three (3) fiscal years.
|
Average Sales
(per Bbls)
($) |
Average
(per Bbls) ($)
|
Oil Production (Bbls)
|
|||||||||||
| Texas | |||||||||||||
| 2015 | 42.38 | 49.97 | 4,024 | ||||||||||
| 2016 | 34.49 | 35.52 | 3,401 | ||||||||||
| 2017 | 37.90 | 57.94 | 2,322 | ||||||||||
| Oklahoma | |||||||||||||
| 2015 | 45.84 | 68.48 | 155 | ||||||||||
| 2016 | 38.14 | 81.47 | 2,400 | ||||||||||
| 2017 | 32.51 | 133.25 | 885 | ||||||||||
| New Mexico | |||||||||||||
| 2015 | 43.04 | 117.44 | 134 | ||||||||||
| 2016 | 29.10 | 186.25 | 842 | ||||||||||
| 2017 | 39.08 | 251.23 | 464 | ||||||||||
| 5 |
Below are estimates of our net proved reserves as of December 31, 2017, net to our interest. Our proved reserves are located in Texas, Oklahoma and New Mexico.
Estimates of volumes of proved reserves at December 31, 2017 are presented in barrels (Bbls) for oil and, for natural gas, in millions of cubic feet (Mcf) at the official temperature and pressure bases of the areas in which the gas reserves are located.
| Oil(Bbls) | Gas(Mcf) | |||||||
| Proved: | ||||||||
| Developed | 1,598,010 | — | ||||||
| Undeveloped | 40,190 | — | ||||||
| Total | 1,638,200 | — | ||||||
There was a significant increase of approximately 1.6 million barrels of proved reserves primarily due to the acquisition of 60% working interests in the TLSAU field during 2017 (see explanations above).
| ● | Bbl - refers to one stock tank barrel, or 42 U.S. gallons liquid volume, in reference to crude oil or other liquid hydrocarbons. |
| ● | Mcf - refers to one thousand cubic feet. |
| ● | A BOE (i.e., barrel of oil equivalent) combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl of oil. |
Below are estimates of our present value of estimated future net revenues from our proved reserves based upon the standardized measure of discounted future net cash flows relating to proved oil and gas reserves in accordance with the provisions of Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. The standardized measure of discounted future net cash flows is determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on period-end economic conditions. The estimated future production is based upon benchmark prices that reflect the unweighted arithmetic average of the first-day-of-the-month price for oil and gas during the twelve month period ended December 31, 2017. The resulting estimated future cash inflows are then reduced by estimated future costs to develop and produce reserves based on period-end cost levels. No deduction has been made for depletion, depreciation or for indirect costs, such as general corporate overhead. Present values were computed by discounting future net revenues by 10% per year.
| Future cash inflows | $ | 62,964,150 | ||
| Deductions (including estimated taxes) | $ | (28,828,130 | ) | |
| Future net cash flow | $ | 34,136,020 | ||
| Discounted future net cash flow | $ | 16,605,980 |
MKM Engineering prepared the estimates of our proved reserves, future production and income attributable to our leasehold interests as of December 31, 2017. Michele Mudrone was the technical person primarily responsible for overseeing the preparation of the 2017 reserve report. Ms. Mudrone has more than 25 years of practical experience in the estimation and evaluation of petroleum reserves. MKM Engineering is an independent petroleum engineering firm that provides petroleum consulting services to the oil and gas industry. The estimates of drilled reserves, future production and income attributable to certain leasehold and royalty interests are based on technical analysis conducted by engineers employed at MKM Engineering.
Zel C. Khan, our CEO, oversaw preparation of the reserve estimates by MKM Engineering. We do not have a reserve committee and we do not have any specific internal controls regarding the estimates of our reserves.
Our proved reserves include only those amounts which we reasonably expect to recover in the future from known oil and gas reservoirs under existing economic and operating conditions, at current prices and costs, under existing regulatory practices and with existing technology. Accordingly, any changes in prices, operating and development costs, regulations, technology or other factors could significantly increase or decrease estimates of proved reserves.
| 6 |
Proved reserves were estimated by performance methods, the volumetric method, analogy, or a combination of methods utilizing present economic conditions and limited to those proved reserves economically recoverable. The performance methods include decline curve analysis that utilize extrapolations of historical production and pressure data available through December 31, 2017 in those cases where such data was considered to be definitive.
Proved undeveloped reserves decreased from 2016 to 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. At this time the Company does not have the funding to support the first five years of development so the proved undeveloped reserves were not taken into account for the Twin Lakes San Andres Unit.
Forecasts for future production rates are based on historical performance from wells currently on production in the region with an economic cut-off for production based upon the projected net revenue being equal to the projected operating expenses. No further reserves or valuation were given to any wells beyond their economic cut-off. Where no production decline trends have been established due to the limited historical production records from wells on the properties, surrounding wells historical production records were used and extrapolated to wells of the property. Where applicable, the actual calculated present decline rate of any well was used to determine future production volumes to be economically recovered. The calculated present rate of decline was then used to determine the present economic life of the production from the reservoir.
For wells currently on production, forecasts of future production rates were based on historical performance data. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to economic depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future production rates.
Proved developed non-producing and undeveloped reserves were estimated primarily by the performance and historical extrapolation methods. Test data and other related information were used to estimate the anticipated initial production rates from those wells or locations that are not currently producing. For reserves not yet on production, sales were estimated to commence at a date we determined to be reasonable.
In general, the volume of production from our oil and gas properties declines as reserves are depleted. Except to the extent we acquire additional properties containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves will decline as reserves are produced. Accordingly, volumes generated from our future activities are highly dependent upon the level of success in acquiring or finding additional reserves and the costs incurred in doing so.
Recent Events:
Acquisition of Bow Energy Ltd
On November 30, 2017, we signed an Agreement and the Arrangement (the “Arrangement”) to acquire Bow Energy Ltd (“Bow”). Bow is a Canadian company with corporate offices in Alberta, Calgary.
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, and Mahato PSC – 20% working interest.
On February 27, 2018, the Acquisition closed and we acquired all of the issued and outstanding shares of capital stock of Bow (each a “Bow Share”). The Agreement and the Arrangement was approved by an overwhelming majority of more than 99% of the votes cast by Bow’s shareholders at a special meeting of shareholders of Bow held on February 21, 2018. Final approval of the Arrangement was granted by the Court of Queen’s Bench of Alberta (the “Court”) on February 23, 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 the rounding described below. The Arrangement provided that no fractional shares would be issued in connection with the Arrangement, and instead, each Bow shareholder otherwise entitled to a fractional interest would receive the nearest whole number of Company shares. For example, where such fractional interest is greater than or equal to 0.5, the number of shares to be issued would be rounded up to the nearest whole number and where such fractional interest is less than 0.5, the number of shares to be issued would be rounded down to the nearest whole number. In calculating such fractional interests, all shares issuable in the name of or beneficially held by each Bow shareholder or their nominee as a result of the Arrangement shall be aggregated.
The Arrangement provides that any certificate formerly representing Bow common stock not duly surrendered on or before the last business day prior to the third anniversary of the closing date will cease to represent a claim by, or interest of, any former shareholder of any kind of nature against Bow or the Company and on such date all consideration or other property to which such former holder was entitled shall be deemed to have been surrendered to the Company.
| 7 |
The Company also assumed all of the outstanding warrants to purchase shares of common stock of Bow (the “Bow Warrants”) and certain options to purchase shares of common stock of Bow (the “Bow Options”) in connection with the Arrangement (i.e., each warrant/option to purchase one (1) share of Bow represents the right to purchase one (1) share of the Company following the closing).
The Bow Shares were delisted from the facilities of the TSX Venture Exchange after the close of business on March 5, 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. The assets are surrounded by major discoveries by Repsol, ConocoPhillips and Chevron and existing transportation infrastructure.
The preliminary engineering resource estimate was conducted by McDaniel & Associates Consultants LT and further tests are being conducted to complete this report for a full reservoir analysis. Estimates will be released by end of 3 rd Quarter of 2018.
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; (c) approved the issuance of 100,000 shares of the Company’s restricted common stock to the Company’s legal counsel; and (d) approved the issuance of 616,210 shares of restricted common stock to Mr. James E. Burns 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. 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; 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.
Government Regulation
Various state and federal agencies regulate the production and sale of oil and natural gas. All states in which we plan to operate impose restrictions on the drilling, production, transportation and sale of oil and natural gas.
The Federal Energy Regulatory Commission (the “FERC”) regulates the interstate transportation and the sale in interstate commerce for resale of natural gas. The FERC’s jurisdiction over interstate natural gas sales has been substantially modified by the Natural Gas Policy Act under which the FERC continued to regulate the maximum selling prices of certain categories of gas sold in “first sales” in interstate and intrastate commerce.
FERC has pursued policy initiatives that have affected natural gas marketing. Most notable are (1) the large-scale divestiture of interstate pipeline-owned gas gathering facilities to affiliated or non-affiliated companies; (2) further development of rules governing the relationship of the pipelines with their marketing affiliates; (3) the publication of standards relating to the use of electronic bulletin boards and electronic data exchange by the pipelines to make available transaction information on a timely basis and to enable transactions to occur on a purely electronic basis; (4) further review of the role of the secondary market for released pipeline capacity and its relationship to open access service in the primary market; and (5) development of policy and promulgation of orders pertaining to its authorization of market-based rates (rather than traditional cost-of-service based rates) for transportation or transportation-related services upon the pipeline’s demonstration of lack of market control in the relevant service market. We do not know what effect the FERC’s other activities will have on the access to markets, the fostering of competition and the cost of doing business.
Our sale of oil and natural gas liquids will not be regulated and will be at market prices. The price received from the sale of these products will be affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier pipelines.
Federal, state, and local agencies have promulgated extensive rules and regulations applicable to our oil and natural gas exploration, production and related operations. Most states require permits for drilling operations, drilling bonds and the filing of reports concerning operations, and impose other requirements relating to the exploration of oil and natural gas. Many states also have statutes or regulations addressing conservation matters including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of some states limit the rate at which oil and natural gas is produced from our properties. The federal and state regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Because these rules and regulations are amended or reinterpreted frequently, we are unable to predict the future cost or impact of complying with those laws.
Competition and Marketing
We will be faced with strong competition from many other companies and individuals engaged in the oil and gas business, many are very large, well established energy companies with substantial capabilities and established earnings records. We will be at a competitive disadvantage in acquiring oil and gas prospects since we must compete with these individuals and companies, many of which have greater financial resources and larger technical staffs. It is nearly impossible to estimate the number of competitors; however, it is known that there are a large number of companies and individuals in the oil and gas business.
| 8 |
Exploration for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil field equipment including drilling rigs and tools. We will depend upon independent drilling contractors to furnish rigs, equipment and tools to drill our wells. Higher prices for oil and gas may result in competition among operators for drilling equipment, tubular goods and drilling crews which may affect our ability to expeditiously drill, complete, recomplete and work-over wells.
The market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted. These factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental regulation. In addition, there is always the possibility that new legislation may be enacted that would impose price controls or additional excise taxes upon crude oil or natural gas, or both. Oversupplies of natural gas can be expected to recur from time to time and may result in the gas producing wells being shut-in. Imports of natural gas may adversely affect the market for domestic natural gas.
The market price for crude oil is significantly affected by policies adopted by the member nations of Organization of Petroleum Exporting Countries (“OPEC”). Members of OPEC establish prices and production quotas among themselves for petroleum products from time to time with the intent of controlling the current global supply and consequently price levels. We are unable to predict the effect, if any, that OPEC or other countries will have on the amount of, or the prices received for, crude oil and natural gas.
Glossary of Oil and Gas Terms
DEVELOPED ACREAGE. The number of acres that are allocated or assignable to productive wells or wells capable of production.
DISPOSAL WELL. A well employed for the reinjection of salt water produced with oil into an underground formation.
HELD BY PRODUCTION. A provision in an oil, gas and mineral lease that perpetuates an entity’s right to operate a property or concession as long as the property or concession produces a minimum paying quantity of oil or gas.
INJECTION WELL. A well employed for the injection into an underground formation of water, gas or other fluid to maintain underground pressures which would otherwise be reduced by the production of oil or gas.
LANDOWNER’S ROYALTY. A percentage share of production, or the value derived from production, which is granted to the lessor or landowner in the oil and gas lease, and which is free of the costs of drilling, completing, and operating an oil or gas well.
LEASE. Full or partial interests in an oil and gas lease, authorizing the owner thereof to drill for, reduce to possession and produce oil and gas upon payment of rentals, bonuses and/or royalties. Oil and gas leases are generally acquired from private landowners and federal and state governments. The term of an oil and gas lease typically ranges from three to ten years and requires annual lease rental payments of $1.00 to $2.00 per acre. If a producing oil or gas well is drilled on the lease prior to the expiration of the lease, the lease will generally remain in effect until the oil or gas production from the well ends. The owner of the lease is required to pay the owner of the leased property a royalty which is usually between 12.5% and 25% of the gross amount received from the sale of the oil or gas produced from the well.
LEASE OPERATING EXPENSES. The expenses of producing oil or gas from a formation, consisting of the costs incurred to operate and maintain wells and related equipment and facilities, including labor costs, repair and maintenance, supplies, insurance, production, severance and other production excise taxes.
NET ACRES OR WELLS. A net well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres expressed as whole numbers and fractions.
NET REVENUE INTEREST. A percentage share of production, or the value derived from production, from an oil or gas well and which is free of the costs of drilling, completing and operating the well.
OVERRIDING ROYALTY. A percentage share of production, or the value derived from production, which is free of all costs of drilling, completing and operating an oil or gas well, and is created by the lessee or working interest owner and paid by the lessee or working interest owner to the owner of the overriding royalty.
PRODUCING PROPERTY. A property (or interest therein) producing oil or gas in commercial quantities or that is shut-in but capable of producing oil or gas in commercial quantities. Interests in a property may include working interests, production payments, royalty interests and other non-working interests.
| 9 |
PROSPECT. An area in which a party owns or intends to acquire one or more oil and gas interests, which is geographically defined on the basis of geological data and which is reasonably anticipated to contain at least one reservoir of oil, gas or other hydrocarbons.
PROVED RESERVES. Those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for the estimation.
SHUT-IN WELL. A well which is capable of producing oil or gas but which is temporarily not producing due to mechanical problems or a lack of market for the well’s oil or gas.
UNDEVELOPED ACREAGE. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not such acreage contains proved reserves. Undeveloped acreage should not be confused with undrilled acreage which is “Held by Production” under the terms of a lease.
WORKING INTEREST. A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing and operating a well. After royalties are paid, the working interest also entitles its owner to share in production revenues with other working interest owners, based on the percentage of the working interest owned.
Employees
As of April 10, 2018 we have six (6) full time employees and no part time employees.
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to us and our industry could materially impact our future performance and results of operations. We have provided below a list of known material risk factors that should be reviewed when considering buying or selling our securities. These are not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.
We will need to raise funds from additional financing in the future to complete our business plan and may need to raise additional funding in the future to support our operations. We have no commitments for any financing and any financing commitments may result in dilution to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our stockholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, we may raise funding by issuing convertible notes, which if converted into shares of our common stock would dilute our then stockholders’ interests. Lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.
The price we receive for our oil directly affects our revenues, profitability, access to capital and future rate of growth. Oil is a commodity that is subject to wide price fluctuations in response to relatively minor changes in supply and demand. Lower prices for our oil may not only decrease our revenues but may also reduce the amount of oil that we can produce economically. Historically, the markets for oil have been volatile and will likely continue to be volatile in the future. The prices we receive for our production and the volume of our production depend on numerous factors beyond our control. These factors include the following: changes in global supply and demand for oil, the actions of OPEC, the price and quantity of imports of foreign oil, acts of war, terrorism or political instability in oil producing countries and economic conditions.
The price of West Texas Intermediate (“WTI”) crude oil has decreased from $107 per barrel in the middle of June 2014 to as low as $28 per barrel in February 2016. This decrease in prices has impacted all oil and gas producers to varying degrees depending on hedging strategies and debt obligations. The 2017 WTI price increased to an average of $50.88 per barrel and ended the year at $60 per barrel.
Accounting rules applicable to us require that we periodically review the carrying value of our oil properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development plans, production data, economics and other factors, we will likely be required to write down the carrying value of our oil and natural gas properties. Such write-downs constitute a non-cash charge to earnings. Impairment of proved properties under our full cost oil accounting method is largely driven by the present values of future net revenues of proved reserves estimated using SEC mandated 12-month un-weighted first-day-of-the-month commodity prices. No assurance can be given that we will not experience ceiling test impairments in future periods, which could have a material adverse effect on our results of operations in the periods taken. As a result of lower oil prices, we may also reduce our estimates of the reserve volumes that may be economically recovered, which would reduce the total value of our proved reserves.
| 10 |
Our undeveloped proved reserves and developed non-producing proved reserves require additional expenditures and/or activities to convert these into producing reserves. We cannot provide assurance these expenditures will be made and that activities will be entirely successful in converting these reserves. Furthermore, there can be no assurance that all of our undeveloped and developed non-producing reserves will ultimately be produced during the time periods we have planned, at the costs we have budgeted, or at all, which could result in the write-off of previously recognized reserves.
Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful exploration, development or acquisition activities, our proved reserves and production will decline over time. Our exploration, development and acquisition activities require substantial capital expenditures. The capital markets we have historically accessed are currently constrained, but we believe we could access other capital markets if the need arises. These limitations in the capital markets may affect our ability to grow and changes in our capitalization structure may significantly affect our financial risk profile. Furthermore, we cannot be certain that financing for future capital expenditures will be available if needed, and to the extent required, on acceptable terms.
Future cash flows are subject to a number of variables, such as the level of production from existing wells, the prices of oil and our success in developing and producing new reserves. Any reductions in our capital expenditures to stay within internally generated cash flow (which could be adversely affected by declining commodity prices) and cash on hand will make replacing produced reserves more difficult. If our cash flow from operations and cash on hand are not sufficient to fund our capital expenditure budget, we may be limited in our ability to access additional debt, equity or other methods of financing on an economic or timely basis to replace our proved reserves.
The Environmental Protection Agency (EPA) has adopted new regulations under the Clean Air Act (CAA) that, among other things, require additional emissions controls for the production of oil, including New Source Performance Standards to address emissions of sulfur dioxide and Volatile Organic Compounds (VOCs) and a separate set of emission standards to address hazardous air pollutants frequently associated with such production activities. For well completion operations occurring at such well sites before January 1, 2015, the final regulations allow operators to capture and direct flowback emissions to completion combustion devices, such as flares, in lieu of performing green completions. These regulations also establish specific new requirements regarding emissions from dehydrators, storage tanks and other production equipment. Compliance with these requirements could significantly increase our costs of development and production.
We are required to record a liability for the present value of our asset retirement obligation (ARO) to plug and abandon inactive non-producing wells, facilities and equipment, and to restore the land at the end of oil production operations. As a result, we may make significant increases or decreases to our estimated ARO in future periods. Accordingly, our estimate of future ARO could differ dramatically from what we may ultimately incur.
Our development activities may be unsuccessful for many reasons, including adverse weather conditions, cost overruns, equipment shortages, geological issues and mechanical difficulties. Moreover, the successful drilling of an oil well does not assure us that we will realize a profit on our investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their costs, unsuccessful wells hinder our efforts to replace reserves.
Our oil exploration and production activities, including well stimulation and completion activities which include, among other things, hydraulic fracturing, involve a variety of operating risks, including fires, explosions, blow-outs and surface craters, uncontrollable flows of oil and formation water, natural disasters. If we experience any of these problems, well bores, platforms, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of injury or loss of life, damage to and destruction of property, natural resources and equipment, pollution and other environmental damage.
Our business strategy includes growing by making acquisitions (for example our acquisition of Bow), which may include acquisitions of exploration and production companies, producing properties and undeveloped leasehold interests. Our acquisition of oil and natural gas properties requires assessments of many factors that are inherently inexact and may be inaccurate, including the acceptable prices for available properties, amounts of recoverable reserves, estimates of future oil prices, estimates of future exploratory, development and operating costs, estimates of the costs and timing of plugging, and abandonment and estimates of potential environmental and other liabilities.
If we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following: the difficulty of integrating acquired products, services or operations; the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; difficulties in maintaining uniform standards, controls, procedures and policies; the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; the potential inability or failure to achieve additional sales; the effect of any government regulations which relate to the business acquired; potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition; and potential expenses under the labor, environmental and other laws of various jurisdictions. Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
| 11 |
Exploring for and developing hydrocarbon reserves involves a high degree of operational and financial risk, which precludes us from definitively predicting the costs involved and time required to reach certain objectives. The budgeted costs of planning, drilling, completing and operating wells are often exceeded and such costs can increase significantly due to various complications that may arise during the drilling and operating processes. Before a well is spud, we may incur significant geological and geophysical (seismic) costs, which are incurred whether a well eventually produces commercial quantities of hydrocarbons or is drilled at all. Exploration wells bear a much greater risk of loss than development wells. The analogies we draw from available data from other wells, more fully explored locations or producing fields may not be applicable to our drilling locations. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our operations as proposed and could be forced to modify our drilling plans accordingly.
If we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found or produced. We may drill or participate in new wells that are not productive. We may drill wells that are productive, but that do not produce sufficient net revenues to return a profit after drilling, operating and other costs. There is no way to predict in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient quantities to recover exploration, drilling or completion costs or to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive hydrocarbon-bearing formation or experience mechanical difficulties while drilling or completing the well, resulting in a reduction in production and reserves from the well or abandonment of the well. Whether a well is ultimately productive and profitable depends on a number of additional factors, including the following: general economic and industry conditions, including the prices received for oil and natural gas; shortages of, or delays in, obtaining equipment, including hydraulic fracturing equipment, and qualified personnel; potential drainage by operators on adjacent properties; loss of or damage to oilfield development and service tools; problems with title to the underlying properties; increases in severance taxes; adverse weather conditions that delay drilling activities or cause producing wells to be shut down; domestic and foreign governmental regulations; and proximity to and capacity of transportation facilities. If we do not drill productive and profitable wells in the future, our business, financial condition and results of operations could be materially and adversely affected.
We review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment at least annually on December 31 of each year, or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value. If conditions in any of the businesses in which we compete were to deteriorate, we could determine that certain of our assets were impaired and we would then be required to write-off all or a portion of our costs for such assets. Any such significant write-offs would adversely affect our balance sheet and results of operations.
Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit, the United States mortgage market and a declining real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of oil and natural gas, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a recession. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could diminish, which could impact the price at which we can sell our oil, natural gas and natural gas liquids, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition.
Our exploration and development activities are capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. Our cash on hand, our operating cash flows and future potential borrowings may not be adequate to fund our future acquisitions or future capital expenditure requirements. The rate of our future growth may be dependent, at least in part, on our ability to access capital at rates and on terms we determine to be acceptable.
Our cash flows from operations and access to capital are subject to a number of variables, including: our estimated proved oil and natural gas reserves; the amount of oil and natural gas we produce from existing wells; the prices at which we sell our production; the costs of developing and producing our oil and natural gas reserves; our ability to acquire, locate and produce new reserves; the ability and willingness of banks to lend to us; and our ability to access the equity and debt capital markets. In addition, future events, such as terrorist attacks, wars or combat peace-keeping missions, financial market disruptions, general economic recessions, oil and natural gas industry recessions, large company bankruptcies, accounting scandals, overstated reserves estimates by major public oil companies and disruptions in the financial and capital markets have caused financial institutions, credit rating agencies and the public to more closely review the financial statements, capital structures and earnings of public companies, including energy companies. Such events have constrained the capital available to the energy industry in the past, and such events or similar events could adversely affect our access to funding for our operations in the future.
| 12 |
If our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels, further develop and exploit our current properties or invest in additional exploration opportunities. Alternatively, a significant improvement in oil and natural gas prices or other factors could result in an increase in our capital expenditures and we may be required to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production payments, the sale or farm out of interests in our assets, the borrowing of funds or otherwise to meet any increase in capital needs. If we are unable to raise additional capital from available sources at acceptable terms, our business, financial condition and results of operations could be adversely affected. Further, future debt financings may require that a portion of our cash flows provided by operating activities be used for the payment of principal and interest on our debt, thereby reducing our ability to use cash flows to fund working capital, capital expenditures and acquisitions. Debt financing may involve covenants that restrict our business activities. If we succeed in selling additional equity securities to raise funds, at such time the ownership percentage of our existing shareholders would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing shareholders. If we choose to farm-out interests in our prospects, we may lose operating control over such prospects.
We cannot assess the extent of either the threat or the potential impact of future terrorist attacks on the energy industry in general, and on us in particular, either in the short-term or in the long-term. Uncertainty surrounding such hostilities may affect our operations in unpredictable ways, including the possibility that infrastructure facilities, including pipelines and gathering systems, production facilities, processing plants and refineries, could be targets of, or indirect casualties of, an act of terror, a cyber-attack or electronic security breach, or an act of war.
There are numerous operational hazards inherent in oil and natural gas exploration, development, production and gathering, including: unusual or unexpected geologic formations; natural disasters; adverse weather conditions; unanticipated pressures; loss of drilling fluid circulation; blowouts where oil or natural gas flows uncontrolled at a wellhead; cratering or collapse of the formation; pipe or cement leaks, failures or casing collapses; fires or explosions; releases of hazardous substances or other waste materials that cause environmental damage; pressures or irregularities in formations; and equipment failures or accidents.
In addition, there is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations, some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground injection or other disposal of our wastes, the use of hydraulic fracturing fluids and historical industry operations and waste disposal practices.
The rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional oil and natural gas producing properties. In the future, we may have difficulty acquiring new properties. During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely affected.
Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, and many of our competitors have more established presences in the United States and in foreign locations than we have. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased in recent years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which could have a material adverse effect on our business, financial condition and results of operations.
Our industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become obsolete, and we may be adversely affected.
Our results of operations are materially affected by the conditions of the global economies and the credit, commodities and stock markets. Among other things, we may be adversely impacted if consumers of oil and gas are not able to access sufficient capital to continue to operate their businesses or to operate them at prior levels. A decline in consumer confidence or changing patterns in the availability and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result our results of operations.
Because our operations depend on the demand for oil and used oil, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil, gas and oil and gas related products could have a material adverse impact on our business, financial condition and results of operations.
| 13 |
The process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and the calculation of the present value of our reserves. In order to prepare our year-end reserve estimates, our independent petroleum consultant projected our production rates and timing of development expenditures. Our independent petroleum consultant also analyzed available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary and may not be under our control. The process also requires economic assumptions about matters such as oil and natural gas prices, operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.
You should not assume that the present value of future net revenues from our proved oil and natural gas reserves is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on the 12-month un-weighted first-day-of-the-month average price for each product and costs in effect on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate.
Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration, development, production and transportation of oil and natural gas and operational safety. Future laws or regulations, any adverse change in the interpretation of existing laws and regulations or our failure to comply with such legal requirements may harm our business, results of operations and financial condition.
To a large extent, we depend on the services of our senior management. The loss of the services of any of our senior management, could have a negative impact on our operations. We do not maintain or plan to obtain for the benefit of the Company any insurance against the loss of any of these individuals.
Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock, preferred stock or warrants to purchase shares of our common stock. Our board of directors has authority, without action or vote of the shareholders to issue all or part of the authorized but unissued shares of common stock, preferred stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:
| ● | our actual or anticipated operating and financial performance and drilling locations, including reserves estimates; |
| ● | quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and cash flows, or those of companies that are perceived to be similar to us; |
| ● | changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts; |
| ● | speculation in the press or investment community; |
| ● | public reaction to our press releases, announcements and filings with the SEC; |
| ● | sales of our common stock by us or other shareholders, or the perception that such sales may occur; |
| ● | the limited amount of our freely tradable common stock available in the public marketplace; |
| ● | general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices; |
| ● | the realization of any of the risk factors presented in this Annual Report; |
| ● | the recruitment or departure of key personnel; |
| ● | commencement of, or involvement in, litigation; |
| ● | the prices of oil and natural gas; |
| ● | the success of our exploration and development operations, and the marketing of any oil and natural gas we produce; |
| ● | changes in market valuations of companies similar to ours; and |
| ● | domestic and international economic, legal and regulatory factors unrelated to our performance. |
Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in us.
Additionally, as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability to acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect on the market price of our common stock. In addition, a shareholder may not be able to borrow funds using our common stock as collateral because lenders may be unwilling to accept the pledge of securities having such a limited market. We cannot assure you that an active trading market for our common stock will develop or, if one develops, be sustained.
| 14 |
Our common stock will be subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market. In addition, various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.
Our principal office is located at 710 N. Post Oak Rd., Suite 512, Houston, Texas 77024.
We lease our principal office space, consisting of approximately 1,000 square feet, at a rate which is currently $2,012 per month. Our lease is an annual renewable lease and it expires on August 31, 2018.
The Company’s oil and gas properties are described under “Item 1. Business” and below under “Note 12. Supplemental Information Relating to Oil And Gas Producing Activities (Unaudited)” at the end of the consolidated audited financial statements attached hereto.
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We are not currently a party to any material legal proceeding. In addition, we are not aware of any material legal or governmental proceedings against us, or contemplated to be brought against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
| 15 |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted under the symbol “BBLS” on the OTCQB market operated by OTC Markets Group.
Only a limited market exists for our securities. There is no assurance that a regular trading market will develop, or if developed, that it will be sustained. Therefore, a shareholder may be unable to resell his securities in our company.
The following tables set forth the range of high and low sales prices for our common stock for the periods indicated as reported by the OTCQB market operated by the OTC Markets Group. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
| Quarter Ended | High | Low | ||||||
| March 31, 2016 | $ | 0.13 | $ | 0.04 | ||||
| June 30, 2016 | $ | 0.18 | $ | 0.04 | ||||
| September 30, 2016 | $ | 0.18 | $ | 0.02 | ||||
| December 31, 2016 | $ | 0.19 | $ | 0.09 | ||||
| Quarter Ended | High | Low | ||||||
| March 31, 2017 | $ | 0.17 | $ | 0.08 | ||||
| June 30, 2017 | $ | 0.14 | $ | 0.05 | ||||
| September 30, 2017 | $ | 0.13 | $ | 0.06 | ||||
| December 31, 2017 | $ | 0.47 | $ | 0.08 | ||||
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Holders of Our Common Stock
As of April 16, 2018 we had 222,437,810 outstanding shares of common stock and approximately 273 shareholders of record.
16
Dividends
Holders of our common stock are entitled to receive dividends as may be declared by our board of directors. Our directors are not restricted from paying any dividends but are not obligated to declare a dividend. We have never declared or paid any dividends on our common stock and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the board of directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Preferred Stock
Our Certificate of Formation authorizes our Board of Directors to issue up to 1,000,000 shares of preferred stock. The provisions in the Certificate of Formation, relating to the preferred stock, allow our directors to issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of our common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by our management.
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 stock (based on a $10 per share price) will convert into 7.1429 common shares (which results in a $0.14 per common share conversion rate). 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), conversion of debt (28,900 shares - 25,900 related to short term notes and 3,000 related to equipment purchase), conversion of shareholder advances (27,090 shares of which 840 was for accrued interest) and cash (24,100 shares). Of the 120,590 shares, 57,990 of the shares were issued to related parties while 62,600 of the shares were issued to third parties.
On July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred Stock. The outstanding debt included the following: a $350,000 Convertible Secured Note dated June 17, 2013, a $100,000 Convertible Secured Note dated September 30, 2013 and a $100,000 Convertible Secured Note dated December 31, 2013. Subsequent to this conversion, all of the Company’s debt with Mr. Wilber is deemed cancelled and it is no longer due and payable. 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. The CEO of Jovian is Quinten Beasley, our director, and the largest shareholder of Jovian is Zel C. Khan, our CEO and director.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information, as of December 31, 2017, with respect to our compensation plans under which common stock is authorized for issuance.
Equity Compensation Plan Information
| (A) | (B) | (C) | ||||||||||
| Plan Category | Number of securities to issue upon exercise of outstanding warrants | Weighted-average exercise price of outstanding warrants | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A) | |||||||||
| Equity compensation plans approved by shareholders (1) | 0 | N/A | 40,000,000 | |||||||||
| Equity compensation plans not approved by shareholders (2) | 7,000,001 | $ 0.19 per share | 0 | |||||||||
| Total | 7,000,001 | $ 0.19 per share | 40,000,000 | |||||||||
| (1) | The Company’s 2015 Stock Incentive Plan has included 4,000,000 shares in the Plan. On September 21, 2017, the majority stockholders of the Company, approved 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. At present, no shares have been issued from the Plan. | |
| (2) | During 2017, 7,000,001 warrants were issued to Management and Directors, consultants, and stockholders who subscribed to the PPM as performance incentives and compensation for funds provided from investment and operations. |
17
Recent Sales of Unregistered Securities
The Company sold the following unregistered equity securities during the year ended December 31, 2017, and through the date of the filing of this Report, which were not previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K:
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 to the financial statements attached hereto, for financial related details on all purchases. During the 1 st quarter 2018, three and a quarter (3.25) units had been subscribed for and $1,354,168 shares of common stock had been purchased by various accredited investors.
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, the Company’s law firm was granted 100,000 shares of common stock as a bonus for the Bow Energy acquisition.
On February 1, 2018, a contractor, 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 Director Joel Oppenheim.
On February 1, 2018, Director Quinten Beasley exercised 1,110,000 warrants of common stock by settling $102,590 of Accounts Payable to a company controlled by the director Quinten Beasley, Critical Communications Limited, at an average share price of $0.092 per share.
On February 5, 2018, one accredited investor subscribed and purchased 2,000 Series A preferred shares for $20,000.
On February 23, 2018, Director Saleem Nizami was issued 100,000 shares of common stock in exchange for his professional consulting services at the SUDS, Oklahoma lease.
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 warrants to purchase 360,000 shares of common stock by remitting payment of $36,875 at an average share price of $0.102 per shares.
On February 28, 2018, Director Joel Oppenheim exercised warrants to purchase 630,000 shares of common stock by remitting payment of $61,800 at an average share price of $0.098 per share.
We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, and the rules and regulations promulgated thereunder in connection with the sales, grants and issuances described above since the foregoing issuances did not involve a public offering, the recipients were (a) “accredited investors”, and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. With respect to the transactions described above, no general solicitation was made either by us or by any person acting on our behalf. The transactions were privately negotiated, and did not involve any kind of public solicitation. No underwriters or agents were involved in the foregoing issuances and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
On February 27, 2018, the Acquisition closed and the Company acquired all of the issued and outstanding shares of capital stock of Bow. 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. The Arrangement provided that no fractional shares would be issued in connection with the Arrangement, and instead, each Bow shareholder otherwise entitled to a fractional interest would receive the nearest whole number of Company shares. For example, where such fractional interest is greater than or equal to 0.5, the number of shares to be issued would be rounded up to the nearest whole number and where such fractional interest is less than 0.5, the number of shares to be issued would be rounded down to the nearest whole number. In calculating such fractional interests, all shares issuable in the name of or beneficially held by each Bow shareholder or their nominee as a result of the Arrangement shall be aggregated. The Company also assumed all of the outstanding warrants to purchase shares of common stock of Bow and certain options to purchase shares of common stock of Bow in connection with the Arrangement (i.e., each warrant/option to purchase one (1) share of Bow represents the right to purchase one (1) share of the Company following the closing).
The Company claims an exemption from registration for the issuance/grant of the Bow securities pursuant to Section 3(a)(10) of the Securities Act, which exempts from the registration requirements under the Securities Act the issuance and exchange of securities which have been approved, after a hearing upon the fairness of the terms and conditions on which all persons to whom it is proposed the securities will be issued shall have the right to appear, by any court expressly authorized by law to grant such approval. The SEC has provided that the term “any court” in Section 3(a)(10) of the Securities Act includes a foreign court. Under the Arrangement, Bow submitted the Plan of Arrangement to the court for an interim order permitting notice to all persons to which the Bow Securities, as applicable, would potentially be issuable. Following the requisite approval by the Bow shareholders and a hearing at which such persons had the right to appear, Bow sought a final order from the court as to the fairness of the Plan of Arrangement, which was provided on February 23, 2018.
18
ITEM 6. SELECTED FINANCIAL DATA
Not required under Regulation S-K for “smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution you that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Risk Factors” and “Forward Looking Statements.”
Results of Operations
Revenues
Our total revenue reported for the year ended December 31, 2017 was $148,835, a decrease of $172,411 from the prior year. However, our oil and gas sales increased $25,589 over the same period.
During 2017, Askarii did not have equipment sales, as compared with previous year when Askarii had $198,000 in sales of equipment made to Petrolia, a related party.
Operating Expenses
Operating expenses increased to $3,090,935 for the year ended December 31, 2017 from $1,883,774 for the year ended December 31, 2016, an increase of $1,207,161. Our major expenses for the year ended 2017 were for professional services of $164,366, stock compensation of $1,199,420, corporation legal expense $152,399 and deferred salary of $195,789. Professional services increased primarily due to financial and accounting contractors, Stock compensation increased due to Board and Advisory Board fees/compensation (See Note 7 to the consolidated financial statements included herein for further details). Deferred salary increased due to the hiring of the President which his deferral salary was $61,620 and the deferral salary of the CFO was $134,169 for the year 2017.
Our lease operating expenses increased due to adding additional field personnel to oversee the SUDS and TLSAU fields, increased repairs due to SUDS and TLSAU workovers and higher administrative charges due to taking over as operator at the fields. Our general and administrative expenses increased primarily due to increased stock compensation expense, increased professional services and deferred salary.
Other Income/Expenses
Other expenses were $319,184 for the year ended December 31, 2017 a small increase from other expenses of $313,251 for the same period ended 2016. The small increase was primarily due to a $79,841 increase on loss on conveyance of ORRI warrants and a decrease in interest expense of $93,426.
Net Loss
The net loss for the year ended December 31, 2017 was $3,261,284 compared to net loss of $1,875,779 for the year ended December 31, 2016, an increase of $1,385,505 from the prior period for the reasons described above.
Liquidity and Capital Resources
As of December 31, 2017, we had total current assets of $142,612 and total assets in the amount of $13,577,572. Our total current liabilities as of December 31, 2017, were $1,560,014 and our total liabilities as of December 31, 2017 were $2,058,086. We had negative working capital of $1,417,402 as of December 31, 2017.
Our material asset balances are made up of oil and gas properties and related equipment. Our most significant liabilities include deferred salary to the Company’s officers Paul Deputy $186,686, James Burns $61,620 and Zel Khan $200,000, and asset retirement obligation in the amount of $473,868.
19
Operating activities used $937,157 in cash for the year ended December 31, 2017. Our net loss of $3,261,284 was the main component of our negative operating cash flow, offset mainly by, stock-based compensation for employees of $325,747, stock based compensation for directors $394,154 and guarantor fees $524,502.
Net cash used by investing activities for the year ended December 31, 2017 was $9,256 primarily the result of the purchase of equipment for the field of $9,256.
Cash provided by financing activities during the year ended December 31, 2017 amounted to $960,359 and consisted of $112,065 in private placement offerings, $323,000 in private placement offering for related party, $292,600 in net advances from shareholders (funds provided primarily by Management and Board members for working capital) See Note 6 to the consolidated financial statements included herein for further details, and $241,000 in proceeds from issuance of preferred stocks.
During the year ended December 31, 2016, we raised $48,000 through a private placement offering with warrants authorized by the Board on March 23, 2015. And we raised $63,352 through the exercise of outstanding warrants. (See Note 7 to the consolidated financial statements included herein for further details).
During the year ended December 31, 2017, we raised $325,000 through a private placement offering common shares with warrants authorized by the Board on October 1, 2017. Also we raised $241,000 through a private placement offering of Series A Preferred Stock shares authorized by the Board on April 18, 2017. And we raised $110,065 through the exercise of outstanding warrants for 1,635,000 common shares. Also, in October 2017 and December 2017, the Company satisfied $78,000 through the issuance of 750,000 common shares for the outstanding balance owed to two consultants totaling $78,000. (See Note 7 to the consolidated financial statements included herein for further details).
Our sources and (uses) of funds for the year ended December 31, 2017 were:
| Cash used in operations | $ | (937,157 | ) | |
| Net Proceeds from investing activities | (9,256 | ) | ||
| Net Proceeds from shareholder advances | 292,600 | |||
| Proceeds from issuance of common stock | 112,065 | |||
| Proceeds from issuance of common stock for related party | 323,000 | |||
| Proceeds from issuance of preferred stock | 241,000 | |||
| Proceeds from other financing activities | (8,306 | ) |
The Company continues to operate at a negative cash flow of approximately $90,000 per month and our auditors have raised a going concern in their latest audit report as contained herein. Management is pursuing several initiatives to secure funding to increase production at both the SUDS and TLSAUs fields which together with anticipated increases in the price of crude oil may reduce the Company’s monthly cash shortfall. The total amount required by the Company to accomplish this objective is approximately $1,000,000, which funding may not be available on favorable terms, if at all.
The Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We plan to generate profits by working over existing wells and drilling productive oil or gas wells. However, we will need to raise additional funds to workover or drill new wells through the sale of our securities, through loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available when needed, we may need to cease operations. There can be no assurance that we will be successful in raising the capital needed to drill oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all. Any wells which we may drill may not be productive of oil or gas. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, and results of operations, liquidity or capital resources.
20
Trends Affecting Future Operations
The factors that will most significantly affect our results of operations will be (i) the sale prices of crude oil and natural gas, (ii) the amount of production from oil or gas wells in which we have an interest, and (iii) lease operating expenses. Our revenues will also be significantly impacted by our ability to maintain or increase oil or gas production through exploration and development activities.
It is expected that our principal source of cash flow will be from the production and sale of crude oil and natural gas reserves which are depleting assets. Cash flow from the sale of oil and gas production depends upon the quantity of production and the price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining financing. However, price increases heighten the competition for oil and gas prospects, increase the costs of exploration and development, and, because of potential price declines, increase the risks associated with the purchase of producing properties during times that prices are at higher levels.
A decline in oil and gas prices (i) will reduce the cash flow internally generated by the Company which in turn will reduce the funds available for exploring for and replacing oil and gas reserves, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be obtained, (iii) will reduce the number of oil and gas prospects which have reasonable economic terms, (iv) may cause us to permit leases to expire based upon the value of potential oil and gas reserves in relation to the costs of exploration, (v) may result in marginally productive oil and gas wells being abandoned as non-commercial, and (vi) may increase the difficulty of obtaining financing. However, price declines reduce the competition for oil and gas properties and correspondingly reduce the prices paid for leases and prospects. During the last 5 months oil prices have trended upward to approximately $60.00 per barrel.
Other than the foregoing, we do not know of any trends, events or uncertainties that will have, or are reasonably expected to have, a material impact on our sales, revenues or expenses.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Going concern – The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses of $11,323,383 since its inception and requires capital for its contemplated operational and marketing activities to take place. The Company’s ability to raise additional capital through the future sales of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Recently Issued Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated audited financial statements and supplementary data required by this Item are presented beginning on page F-1 of this Annual Report on Form 10-K, which follows “Signatures” below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
21
An evaluation was carried out under the supervision and with the participation of our management, including our Principal Executive and Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, our management concluded that, as of December 31, 2017, our disclosure controls and procedures were effective. Subsequent audit adjustments were necessary but were the result of further review of complex accounting issues and were not considered the result of material control deficiencies with regard to financial reporting by our internal staff.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of our Principal Executive and Financial Officer and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework of 2013. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
22
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following information sets forth the names, ages, and positions of our current directors and executive officers as of the date of this Report.
| Name | Age | Position | Director Since | ||
| Zel C. Khan | 44 | Chief Executive Officer and Director | April 2016 | ||
| Tariq Chaudhary | 48 | Chief Financial Officer | January 2018 | ||
| Leo Womack | 74 | Chairman | August 2014 | ||
| Joel Oppenheim | 74 | Director | June 2015 | ||
| Quinten Beasley | 43 | Director | April 2016 | ||
| James Edward Burns | 48 | President and Director | April 2017 | ||
| Saleem Nizami | 66 | Director | April 2017 | ||
| Ivar Siem | 70 | Director | April 2018 |
Set forth below is a brief description of the background and business experience of each of our current executive officers and directors:
Zel C. Khan is an oilfield operator with over 20 years of experience in the Oil & Gas industry. He has successfully operated, both on and offshore, in Texas, Oklahoma, New Mexico and California. He has established a reputation for reducing operating costs on various projects, including a former ConocoPhillips offshore facility located in deep water Gulf of Mexico where he was the Operating Manager. Mr. Khan has also operated in Kern County, California and Alberta, Canada, both are heavy oil fields requiring special operational procedures to maintain low lift costs and strict environmental policies as set by the respective governmental agencies. Mr. Khan holds a Bachelor of Science degree and a Master’s degree from Chapman University, California.
Tariq Chaudhary , most recently served as Vice President Finance at Blue Sky International, a major shareholder of Bow Energy Ltd., from March 2016 to January 2018. Mr. Chaudhary served as Controller at Auto House Ltd., based in Calgary, Canada, from July 2016 until November 2017. From October 2012 to June 2016, Mr. Chaudhary served as Senior Cost Specialist with Canadian Natural Resources Ltd. From July 2008 to September 2012, Mr. Chaudhary served as Business/Administrative Manager at Syncrude Canada Ltd. Mr. Chaudhary has 25 years’ experience in the treasury and financial sector, and has served as a senior financial executive for several companies over those years. Mr. Chaudhary holds a Bachelors of Arts degree in Commerce and a Master of Business Administration in Accounting & Finance from California Coast University.
Leo Womack has over 40 years of experience in advising and serving as Director of small micro-capitalization public and private companies. Mr. Womack has been the President of Gulf Equities Realty Advisors, Inc., a diversified real estate portfolio management company, since 1986. For the last five (5) years Mr. Womack has been and continues to be employed as the President of Gulf Equities Realty Advisors Inc. He has been the Chairman of Fairway Medical Technologies, Inc., a medical device company and a portfolio company of the Baylor College of Medicine Venture Fund since 1996. From 1969 to 1978, he was the managing partner of a local and later national CPA firm. He has served on the Board and as Chairman of the Houston Angel Network and on National Committees of the Angel Capital Association. Prior to its acquisition by ITT Corporation in 2010, he served as a board member and the audit committee chair for OI Corporation (NASDAQ:OICO). Mr. Womack continues to serve on the Boards of Directors of five early stage companies that he or his Family Trust have invested in. Mr. Womack earned a Bachelor of Business Administration in Accounting from Texas A&M University-Kingsville in 1965 and holds a Series 7 Securities License. Mr. Womack is also a licensed Certified Public Accountant (CPA).
Joel Oppenheim currently owns and has operated the Oppenheim Group since 1991. The Oppenheim Group is a real estate consulting firm that has represented multiple Fortune 10 and Fortune 100 Companies on their commercial real estate needs throughout the United States. In 2014, Mr. Oppenheim began concentrating on the Oppenheim Group’s investment portfolio including several successful oil and gas investments both in Texas and California. Mr. Oppenheim is a licensed Commercial Real Estate Broker in Texas and graduated from City College of New York - Bernard Baruch School of Business, with a degree in accounting. Mr. Oppenheim has been an active member of the Houston Angel Network since 2009. He has successfully started and sold numerous businesses throughout his career, including some of the most successful restaurants and clubs in Houston.
Quinten Beasley is a design engineer and an independent businessman with over 25 years of diverse international energy and development experience. Mr. Beasley is co-founder, and current President and Chief Executive Officer, of Jovian Petroleum Corporation, a private Oil & Gas exploration and production company with assets in the United States and has held key positions in a number of successful oilfield construction companies in Canada. Mr. Beasley continues to manage a private equity firm, Critical Update Limited, focused on early stage land development while overseeing the operations of FAQ Investment Inc., an international product development firm for the last several years. Since receiving a Diploma in Interior Design from Mount Royal University in 1995, Mr. Beasley has established a significant reputation for his commitment to excellence in product development and project completion; playing a prominent role in the development of many residential and industrial applications in Canada and the United Kingdom. He currently serves on several for-profit and not-for-profit boards as part of his commitment to serving the community.
23
James Edward Burns is an oil and gas executive who brings more than 25 years of energy experience to the Petrolia Energy’s Board. Most recently, he served as President of BLU LNG, a domestic LNG provider, where he created a coherent commercial and operational strategy serving as catalyst for renewed efficiency and effectiveness. Prior to his role at BLU LNG, Mr. Burns was President of Fortress Energy Partners a division of Fortress Investment Group and worked in various executive roles globally at Royal Dutch Shell, and Texaco. Mr. Burns also serves as a member of the Houston Angel Network’s Energy Council and is the chairman of the board of Triple E Real Estate Investments. He holds a BS in Business Administration from California State University and an Executive MBA from the University of Houston.
Saleem Nizami is a Petroleum Geologist for over 40 years of Oil & Gas experience. Prior to founding APEC, Inc., an Oklahoma-based Petroleum and Environmental Consulting firm in 1989. Mr. Nizami served as a Senior Geologist and Manager in the Division of Oil & Gas at the Oklahoma Corporate Commission. Mr. Nizami has worked with numerous small to mid-sized Oil & Gas companies along with Major’s such as Chevron, ExxonMobil and Chesapeake Energy Corp. Mr. Nizami holds an MSc. in Petroleum Geology from Osmania University.
Ivar Siem is the Chairman of American Resources Inc. (“American”). Mr. Siem previously also served as the Chairman and CEO of American and its predecessor from September 2000 to August 1, 2017. Mr. Siem has broad experience from both the upstream and the service segments of the oil and gas industry. He has been the founder of several companies and involved in multiple roll-ups and restructuring processes throughout his career. These include Fred Olsen, Inc., Dolphin International, Inc., Blue Dolphin Energy, Seateam Technology ASA, DI Industries/Grey Wolf Drilling, American Resources Offshore, Inc., and Equimavenca SA. He has served on a number of public and private company boards including Frupor SA, Avenir ASA, Wellcem AS, and Siem Industries, Inc.
Term of Office
Our Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
CORPORATE GOVERNANCE
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.
Board Leadership Structure
The roles of Chairman and Chief Executive Officer of the Company are currently held separately. Mr. Womack serves as Chairman and Mr. Khan serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an independent director, an affiliated director, or a member of management. Our Board believes that the Company’s current leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management (the Company’s Chief Executive Officer, Mr. Khan and the Company’s Chief Financial Officer, Mr. Chaudhary) and the members of our Board (currently Mr. Womack as Chairman). It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to its Chief Executive Officer, while enabling our Chairman to facilitate our Board’s oversight of management, promote communication between management and our Board, and support our Board’s consideration of key governance matters. The Board believes that its programs for overseeing risk, as described below, would be effective under a variety of leadership frameworks and therefore do not materially affect its choice of structure.
Risk Oversight
Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The directors exercise direct oversight of strategic risks to the Company.
Family Relationships
None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
24
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Other Directorships
No directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
Director Qualifications
The Board believes that each of our directors is highly qualified to serve as a member of the Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our executive officers or directors has been involved in any of the following events during the past ten years:
| (1) | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| (2) | any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and minor offenses); |
| (3) | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| (4) | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law; |
| (5) | being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| (6) | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section (1a)(40) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member. |
Board of Directors Meetings
The Company had nine (9) official meetings of the Board of Directors during the fiscal year 2017 and thirteen (13) during the previous fiscal year ending December 31, 2016. In 2017, three of the directors (Leo Womack, Zel C Khan and Joel Oppenheim) attended each meeting, while Lee Lytton (a former member of the Board) attended five (5) meetings and was present at four (4) meetings by telephone. Quinten Beasley attended two (2) meetings (note that Mr. Beasley lives in Canada) and attended four (4) meeting by telephone, James Burns attended seven (7) meetings from the date he was appointed as a Director on April 18, 2017, and Saleem Nizami attended seven (7) meetings via telephone, since the date he was appointed as Director on April 18, 2017. The Company has not adopted a policy requiring its directors to attend its annual meeting of stockholders.
COMMITTEES OF THE BOARD
Our Company currently does not have nominating, compensation or audit committees or committees performing similar functions, nor does our Company have a written nominating, compensation or audit committee charter. Our directors believe that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by our Board of Directors.
Our Company has defined policy and procedural requirements for stockholders to submit recommendations or nominations for directors as set forth in the Company’s Bylaws and described below. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The directors will assess all candidates, whether submitted by management or stockholders, and make recommendations for election or appointment.
25
The Board of Directors will consider candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described below. The Secretary will send properly submitted stockholder recommendations to the Board of Directors. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Board of Directors through other means. The Board of Directors also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical information, if submitted in writing to the Secretary.
Although we do not have a formal audit committee, the Board of Directors approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board of Directors reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
Additionally, Mr. Leo Womack Chairman of our Board of Directors has been licensed as a Certified Public Accountant (CPA) in Texas since 1967 and qualifies as an “ audit committee financial expert ” (as defined in the SEC rules) because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States of America (“ GAAP ”) and financial statements; (ii) the ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions.
Stockholder Communications with the Board
Our stockholders and other interested parties may communicate with members of the Board of Directors by submitting such communications in writing to our Corporate Secretary, 710 N. Post Oak Rd., Suite 512, Houston, Texas 77024, who, upon receipt of any communication other than one that is clearly marked “ Confidential , ” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “ Confidential , ” our Corporate Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication will be forwarded to a Board member to bring to the attention of the Board.
Director Independence
Our common stock is quoted for trading on the OTCQB market operated by OTC Markets Group and we are not required to have independent members of our Board of Directors pursuant to OTCQB market rules. Notwithstanding that we currently consider Leo Womack, Joel Oppenheim, Ivar Siem, and Saleem Nizami as independent directors.
As described above, we do not currently have a separately designated audit, nominating or compensation committee.
Code of Conduct
We have adopted a Code of Ethical Business Conduct (“ Code of Conduct ”) that applies to all of our directors, officers and employees.
Any stockholder who so requests may obtain a free copy of our Code of Conduct by submitting a written request to our Corporate Secretary. Additionally, the Code of Conduct was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed with the SEC on November 23, 2015, as Exhibit 14.1.
We intend to disclose any amendments to our Code of Conduct and any waivers with respect to our Code of Conduct granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.petroliaenergy.com within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Code of Conduct to any such officers or employees.
Employment Agreements
Zel C. Khan (CEO)
On September 23, 2015, Zel C. Khan, entered into an employment agreement with the Company effective October 1, 2015 to serve as our President and Chief Executive Officer for an initial term of twenty-four (24) months (automatically renewable thereafter for additional one year terms), which agreement automatically extended from October 1, 2017 to September 30, 2018. The agreement provides that the Company will pay Mr. Khan an annual base salary of $160,000, with a provision for deferral of current payments until such time that the Company is cash flow positive. The Company will issue one warrant to purchase one share of the Company’s restricted common stock at an exercise price of $0.20 per share for each dollar of gross salary that is deferred. The Warrants will have a term of 36 months from date of grant, which will vest quarterly.
26
Mr. Khan also received a one-time grant of one million (1,000,000) restricted shares of the Company’s common stock (the “ Shares ”), effective October 1, 2015.
In the event Mr. Khan’s employment is terminated by the Company without cause, he is required to receive severance pay equal to two months of his base salary. “ Cause ” means (i) the commission of a felony or other crime involving moral turpitude or the commission of any other act or omission involving misappropriation, dishonesty, unethical business conduct, disloyalty, fraud or breach of fiduciary duty, (ii) reporting to work under the influence of alcohol, (iii) the use of illegal drugs (whether or not at the workplace) or other conduct, which could reasonably be expected to, or which does, cause the Company or any of its affiliates public disgrace or disrepute or economic harm, (iv) repeated failure to perform duties as reasonably directed by the Board of Directors, (v) gross negligence or willful misconduct with respect to the Company or its affiliates or in the performance of Mr. Khan’s duties under the agreement, (vi) obtaining any personal profit not thoroughly disclosed to and approved by the board in connection with any transaction entered into by, or on behalf of, the Company or any of its affiliates, or (vii) violating any of the terms of the Company’s or its affiliates’ rules or policies applicable to Mr. Khan which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to Mr. Khan, or any other material breach of the agreement or any other agreement between Mr. Khan and the Company or any of its affiliates which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to Mr. Khan.
The employment agreement includes a non-solicitation/non-interference clause which applies for two years after the termination date of the employment agreement. The employment agreement also requires Mr. Khan to submit to the board all business, commercial and investment opportunities or offers presented to Mr. Khan or of which Mr. Khan becomes aware which relate to the business of the Company or its affiliates.
On April 18, 2017, Mr. Khan agreed to amend his agreement so that his salary was reduced to $10 per annum.
There are no family relationships between Mr. Khan and any of our other directors or executive officers.
The following shows the amount of time Mr. Khan expects to devote to our business:
| Name | Percent | |||
| Zel C. Khan | 90 | % | ||
Paul Deputy (Former CFO)
On July 1, 2016, Paul Deputy, entered into an employment agreement with the Company effective July 1, 2016 to serve as our Chief Financial Officer for an initial term of twelve (12) months (automatically renewable thereafter for additional one-year terms), which agreement automatically renewed on July 1, 2017. The agreement provides that the Company will pay Mr. Deputy an annual base salary of $140,000, with a provision for deferral of 90 days. After the 90 days Mr. Deputy is issued one warrant for each dollar of gross salary that is deferred. The exercise price of the warrants is the market price of the Company’s shares at each quarter end.
Mr. Deputy also received a one-time grant of warrants to purchase five hundred fifty thousand (550,000) shares of the Company’s common stock (the “ Shares ”), effective July 1, 2016. These warrants will be exercisable for a three-year period beginning July 1, 2016 at a strike price of $0.07 cents.
Effective January 16, 2018, Paul Deputy tendered his resignation as the Chief Financial Officer of the Company.
James E. Burns
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.
27
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review by us of Forms 3 and 4 relating to fiscal year 2017 as furnished to us under Rule 16a-3(d) under the Securities Act, and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2017, we believe that during fiscal 2017, that no director, executive officer, or beneficial owner of more than 10% of our common stock failed to file a report on a timely basis during 2017, except for: (i) James E. Burns, who inadvertently failed to timely report ten transactions on Form 4; (ii) Paul Deputy, who inadvertently failed to timely report eight transactions on Form 4; (iii) Leo Womack, who inadvertently failed to timely report six transactions on Form 4; (iv) Lee Lytton, who inadvertently failed to timely report four transactions on Form 4; and (v) Joel Oppenheim, who inadvertently failed to timely report thirteen transactions on Form 4.
Pursuant to SEC rules, we are not required to disclose in this filing any failure to timely file a Section 16(a) report that has been disclosed by us in a prior annual report or proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of (i) all individuals serving as our principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level; (ii) our two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year and who were paid more than $100,000 of total compensation; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to paragraph (ii) but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year (collectively, the “Named Executive Officers”).
The following table summarizes all compensation paid or accrued to our former or current executive officers during the years ended December 31, 2017 and December 31, 2016
| Name and Principal Position |
Fiscal
Year |
Salary (1) | Bonus (2) |
Stock
Awards (3) |
Option
Awards (4) |
All Other Compensation (5) | Total | |||||||||||||||||||||
| Zel Khan (Current Principal Executive Officer) (6) | 2017 | $ | 10 | $ | — | $ | 25,500 | $ | — | $ | — | $ | 25,510 | |||||||||||||||
| 2016 | $ | 194,000 | $ | — | $ | — | $ | 18,757 | $ | — | $ | 212,757 | ||||||||||||||||
| Paul Deputy (Former Principal Financial and Accounting Officer) (7) | 2017 | $ | 140,000 | $ | — | $ | — | $ | 16,993 | $ | — | $ | 156,993 | |||||||||||||||
| 2016 | $ | 78,616 | $ | — | $ | — | $ | 7,090 | $ | 77,126 | $ | 162,832 | ||||||||||||||||
| James E. Burns (President) (8) | 2017 | $ | 61,621 | $ | 197,000 | $ | — | $ | 86,254 | $ | — | $ | 344,875 | |||||||||||||||
| 2016 | $ | — | $ | — | $ | — | — | $ | — | $ | — | |||||||||||||||||
Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. None of our executive officers received any change in pension value and nonqualified deferred compensation earnings during the periods presented.
| (1) | The dollar value of base salary (cash and non-cash) earned. Executive salaries in 2017 were accrued but not paid, except $5,833 paid to Mr. Deputy, included in the $140,000 total salary. | |
| (2) | The dollar value of bonus (cash and non-cash) earned. | |
| (3) | The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant. | |
| (4) | The fair value of options granted computed in accordance with ASC 718 on the date of grant. |
28
| (5) | All other compensation received that we could not properly report in any other column of the table. | |
| (6) | Mr. Zel C. Khan was appointed as President and Chief Executive Officer of the Company, on March 1, 2015. | |
| (7) | Appointed as Chief Financial Officer July 1, 2016 and resigned as Chief Financial Officer on January 16, 2018. Mr. Deputy converted a significant portion of his salary to shares during 2017, except $5,833 of his salary paid in cash. | |
| (8) | Appointed as President on April 18, 2017. Mr. Burns will receive a deferred salary and stock compensation totaling $300,000 for the first year in connection with his service on the Board and service as President pursuant to his employment agreement with Mr. Burns is for a one (1) year term, with an option to extend discussed above. Mr. Burns converted a significant portion of his salary to shares during 2017, thereby reducing his salary balance. Also on April 18, 2017, the Board of Directors granted James E. Burns 1,000,000 shares of our restricted common stock in consideration for agreeing to serve as President of the Company. |
We do not provide our officers or employees with pension, stock appreciation rights, long-term incentive, profit sharing, retirement or other plans, although we may adopt one or more of such plans in the future.
We do not maintain any life or disability insurance on any of our officers.
Director Compensation
The table below summarizes all compensation of our directors for the year ended December 31, 2017, other than Mr. Khan, whose salary is included in the executive compensation table above:
DIRECTOR COMPENSATION
| Name | Fees Earned or Paid in Cash (1) | Stock Awards (2) | Option Awards (3) | Non-Equity Incentive Plan Compensation | Non-Qualified Deferred Compensation Earnings | All Other Compensation | Total ($) | |||||||||||||||||||||
| Leo Womack | $ | 48,000 | $ | — | $ | 118,675 | $ | — | $ | — | $ | — | $ | 166,675 | ||||||||||||||
| Lee H. Lytton (4) | 24,000 | — | 59,338 | — | — | — | 83,338 | |||||||||||||||||||||
| Joel Oppenheim | 24,000 | — | 59,338 | — | — | — | 83,338 | |||||||||||||||||||||
| Quinten Beasley | 24,000 | — | 59,338 | — | — | — | 83,338 | |||||||||||||||||||||
| James E. Burns | — | 13,000 | 15,836 | — | — | — | 28,836 | |||||||||||||||||||||
| Saleem Nizami | 18,000 | 13,000 | 59,338 | — | — | — | 90,338 | |||||||||||||||||||||
The notes below summarizes all compensation of our directors for the year ended December 31, 2017.
| (1) | Fees earned due to retainers, meetings, committees and chairman services. These fees were not paid in cash but were accrued. | |
| (2) | The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant. | |
| (3) | The fair value of options granted computed in accordance with ASC 718 on the date of grant. | |
| (4) | On March 31, 2018, Mr. Lytton passed away unexpectedly. |
The fair value of stock issued for services computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 on the date of grant. See also “Narrative Disclosure to the Director Compensation Table” below.
Narrative Disclosure to the Director Compensation Table
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, Quinten Beasley and Joel Oppenheim, then 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 vested on January 1, 2017, and is exercisable for 36 months thereafter. The fair value of the options granted on March 11, 2016 is $156,936.
On April 18, 2017, the Board of Directors agreed to issue James E. Burns 100,000 shares of our restricted common stock in consideration for agreeing to serve on our board of directors. Also on April 18, 2017, the Board of Directors agreed to issue Saleem Nizami 100,000 shares of our restricted common stock in consideration for agreeing to serve on our board of directors.
On May 23, 2017, 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 $0.12 per share, which vested on January 1, 2018, and is exercisable for 36 months thereafter. The Board also granted Lee Lytton, Quinten Beasley, Joel Oppenheim and Saleem Nizami, then 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 on January 1, 2018, and is exercisable for 36 months thereafter. The fair value of the options granted on May 23, 2017 is $356,027.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table shows, as of April 13, 2018, information with respect to those persons owning beneficially 5% or more of our common stock and the number and percentage of outstanding shares owned by each of our officers and directors and by all officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment powers over his shares of common and preferred stock.
| Title of class | Name and address of beneficial owner | Amount of beneficial ownership (1) |
Percent of
class (2) |
||||||||
| Executive Officers & Directors: | |||||||||||
| Common | Quinten Beasley | 7,706,172 shares | (3 | ) | 3.5 | % | |||||
| Common | Joel Oppenheim | 8,635,024 shares | (4 | ) | 3.9 | % | |||||
| Common | Leo Womack | 6,460,000 shares | (5 | ) | 2.9 | % | |||||
| Common | Paul Deputy | 6,349,131 shares | (6 | ) | 2.9 | % | |||||
| Common | James E. Burns | 4,191,233 shares | (7 | ) | 1.9 | % | |||||
| Common | Zel Khan | 54,077,053 shares | (8 | ) | 24.3 | % | |||||
| Common | Tariq Chaudhary | 675,417 shares | (9 | ) | * | % | |||||
| Common | Saleem Nizami | 750,000 shares | (10 | ) | * | % | |||||
| Common | Ivar Siem | 0 shares | * | % | |||||||
| Total of All Directors and Executive Officers as a Group (seven persons): |
88,844,030
shares |
||||||||||
| More Than 5% Beneficial Owners: | |||||||||||
| Jovian Petroleum Corporation | (11) | 51,277,053 shares | (12 | ) | 23.5 | % | |||||
| BSIH Ltd. | (13) | 70,807,417 shares | (14 | ) | 31.9 | % | |||||
* Less than one percent (1%).
Unless otherwise stated, the address of each shareholder is c/o Petrolia Energy Corporation, 710 N Post Oak, Suite 512, Houston, Texas 77024.
| (1) | Under Rule 13d-3 of the Exchange Act, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares, and/or (ii) investment power, which includes the power to dispose or direct the disposition of shares. Also under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date. |
| (2) | Except as otherwise indicated, all shares are owned directly and the percentage shown is based on 222,437,810 shares of common stock. |
| (3) | Includes 7,706,172 shares held by Mr. Beasley directly. |
| (4) | Includes 4,676,690 shares held by Joel Oppenheim. Includes warrants to purchase 100,000 shares of Company common stock at an exercise price of $0.75 per share, which expire on August 5, 2019. Includes warrants to purchase 300,000 shares of Company common stock at an exercise price of $0.12 per share, which expire on August 5, 2018. Includes warrants to purchase 200,000 shares of Company common stock at an exercise price of $0.10 per share, which expire on September 1, 2018. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.10 per share, which expire on September 1, 2018. Includes warrants to purchase 50,000 shares of Company common stock at an exercise price of $0.09 per share, which expire on June 20, 2019. Includes warrants to purchase 55,000 shares of Company common stock at an exercise price of $0.09 per share, which expire on August 23, 2019. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.06 per share, which expire on September 14, 2019. Includes warrants to purchase 500,000 shares of Company common stock at an exercise price of $0.12 per share, which expire on August 23, 2020. Includes warrants to purchase 270,000 shares of Company common stock at an exercise price of $0.20 per share, which expire on May 23, 2020. Includes warrants to purchase 2,000,000 shares of Company common stock at an exercise price of $0.14 per share, which expire on August 1, 2020. Includes warrants to purchase 250,000 shares of Company common stock at an exercise price of $0.14 per share, which expire on December 1, 2020. Includes warrants to purchase 83,334 shares of Company common stock at an exercise price of $0.20 per share, which expire on October 1, 2020. |
30
| (5) | Includes 2,550,000 shares held by the Leo B. Womack Family Trust, which Mr. Womack is deemed to beneficially own (the “Trust”). Includes 166,667 shares issuable upon the exercise of warrants, which have an exercise price of $0.75 per share and an expiration date of August 5, 2019, held by the Trust. Includes 300,000 shares issuable upon the exercise of warrants, which have an exercise price of $0.12 per share and an expiration date of August 5, 2018, held by the Trust. Includes 1,000,000 shares issuable upon the exercise of options, which have an exercise price of $0.06 per share, and have a term of three years from their vesting date. Includes 1,000,000 shares issuable upon the exercise of options, which have an exercise price of $0.06 per share, and have a term of three years from their vesting date. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.10 per share, which expire on February 1, 2019. Includes warrants to purchase 20,000 shares of Company common stock at an exercise price of $0.09 per share, which expire on August 10, 2019. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.06 per share, which expire on September 13, 2019. Includes warrants to purchase 1,000,000 shares of Company common stock at an exercise price of $0.12 per share, which expire on May 23, 2020. Includes warrants to purchase 70,000 shares of Company common stock at an exercise price of $0.20 per share, which expire on May 23, 2020. |
| (6) | Includes 4,262,048 shares held by Mr. Deputy. Includes 100,000 shares issuable upon exercise of warrants, which have an exercise price of $0.12 per share and expire on August 31, 2018. Includes 1,100,000 shares issuable upon exercise of warrants, which have an exercise price of $0.10 per share and expire on August 31, 2018. Includes 10,000 shares issuable upon exercise of warrants, which have an exercise price of $0.10 per share and expire on February 1, 2019. Includes 100,000 shares issuable upon exercise of warrants, which have an exercise price of $0.09 per share and expire on June 17, 2019. Includes 10,000 shares issuable upon exercise of warrants, which have an exercise price of $0.059 and expire on September 13, 2019. Includes 550,000 shares issuable upon exercise of warrants, which have an exercise price of $0.077 and expire on July 1, 2019. Includes 6,250 shares issuable upon exercise of warrants, which have an exercise price of $0.12 and expire on September 26, 2019. Includes 11,666 shares issuable upon exercise of warrants, which have an exercise price of $0.14 and expire on September 30, 2019. Includes 35,000 shares issuable upon exercise of warrants, which have an exercise price of $0.16 and expire on December 31, 2019. Includes 35,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 and expire on March 31, 2020. Includes 35,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 and expire on June 30, 2020. Includes 30,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 and expire on May 23, 2020. Includes 35,000 shares issuable upon exercise of warrants, which have an exercise price of $0.12 and expire on September 30, 2020. Includes 29,167 shares issuable upon exercise of warrants, which have an exercise price of $0.12 and expire on December 31, 2020. |
| (7) | Includes 3,054,566 shares held by Mr. Burns. Includes 10,000 shares issuable upon exercise of warrants, which have an exercise price of $0.10 per share and expire on February 1, 2019. Includes 50,000 shares issuable upon exercise of warrants, which have an exercise price of $0.12 per share and expire on December 17, 2019. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on December 31, 2019. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on January 31, 2020. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on February 28, 2020. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on March 31, 2020. Includes 166,667 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on September 30, 2020. Includes 250,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on September 30, 2020. Includes 250,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on December 31, 2020. Includes 250,000 shares issuable upon exercise of warrants, which have an exercise price of $0.14 per share and expire on March 31, 2021. |
| (8) | Includes 1,800,000 shares held by Mr. Khan. Includes 800,000 shares issuable upon exercise of warrants, which have an exercise price of $0.10 per share and expire on August 31, 2018. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 per share and expire on December 31, 2018. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 per share and expire on March 31, 2019. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 per share and expire on June 30, 2019. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 per share and expire on September 30, 2019. Includes 40,000 shares issuable upon exercise of warrants, which have an exercise price of $0.20 per share and expire on December 31, 2019. Includes ownership of the securities held by Jovian Petroleum Corporation, which securities Mr. Khan is deemed to beneficially own due to his ownership position in Jovian (see footnotes 12). Includes warrants to purchase 100,000 shares of Company common stock at an exercise price of $0.12 per share, which expire on August 5, 2018. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.10 per share, which expire on February 1, 2019. Includes warrants to purchase 6,000,000 shares of Company common stock at an exercise price of $0.20 per share, which expire on May 23, 2020. Includes warrants to purchase 4,000,000 shares of Company common stock at an exercise price of $0.35 per share, which expire on May 23, 2020. |
31
| (9) | Includes 675,417 shares held by Mr. Chaudhary. |
| (10) | Includes 200,000 shares held by Mr. Nizami. Includes warrants to purchase 12,500 shares of Company common stock at an exercise price of $0.05 per share, which expire on June 30, 2019. Includes warrants to purchase 12,500 shares of Company common stock at an exercise price of $0.14 per share, which expire on September 30, 2019. Includes warrants to purchase 12,500 shares of Company common stock at an exercise price of $0.14 per share, which expire on December 31, 2019. Includes warrants to purchase 12,500 shares of Company common stock at an exercise price of $0.14 per share, which expire on March 31, 2020. Includes warrants to purchase 500,000 shares of Company common stock at an exercise price of $0.12 per share, which expire on May 23, 2020. |
| (11) | Address: 710 N. Post Oak Rd., Suite 550, Houston, Texas 77024. Shares held by Jovian Petroleum Corporation are beneficially owned by Quinten Beasley, President and CEO, a member of the Board of Directors of the Company. |
| (12) | Includes 41,167,053 shares held by Jovian Petroleum Corporation. Includes 100,000 shares issuable upon the exercise of warrants, which have an exercise price of $0.12 per share and an expiration date of August 5, 2018. Includes warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.10 per share, which expire on February 1, 2019. Includes warrants to purchase 6,000,000 shares of Company common stock at an exercise price of $0.20 per share, which expire on May 23, 2020. Includes warrants to purchase 4,000,000 shares of Company common stock at an exercise price of $0.35 per share, which expire on May 23, 2020. |
| (13) | Address: 234-5149 Country Hills Blvd NW Calgary, AB T3A 5K8. Canada. |
| (14) | Includes 70,807,417 shares held by BSIH Ltd. which was the largest shareholder of Bow Energy Ltd. |
Changes in Control
The Company is not aware of any arrangements, which may at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Except as discussed below or otherwise disclosed above under “ Executive Compensation ,” or in Note 5 Related Party, of the consolidated audited financial statements included herein, all of which information is incorporated by reference into this Item 13, there have been no transactions since the beginning of the Company’s last fiscal year, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end, for the last two completed fiscal years, and in which any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, nor any member of the above referenced individual’s immediate family, had or will have a direct or indirect material interest.
Beginning February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest (“ORRI”) offering on behalf of the SUDS field to raise $300,000. Under the terms of the Company offering, investors will receive 1% of the gross revenue from the field monthly, based on their investment of $20,000 until such time as they receive a cumulative revenue amount of $30,000. With each unit purchased, a warrant to purchase 10,000 shares of Company’s common stock was granted with an exercise price of $0.10 per share, and an expiration date of February 28, 2019. At the end of the second quarter of 2016, the $300,000 offering had been received which resulted in the granting of warrants to purchase 150,000 shares of common stock. The following affiliated investors each purchased one (1) unit in the offering: Joel Oppenheim, Jovian, Lee Lytton (former Secretary and Director), Paul Deputy (former CFO) and Leo Womack. The fair value of all 150,000 SUDS related warrants was $14,336, over a 3 year term. This fair value was accounted for as a loss on the conveyance.
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, Joel Oppenheim, a Director and related party, 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 (since deceased) 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 vested 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.
32
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 are exercisable for 36 months thereafter. The fair value of the warrants is $41,891 with a 3 year term. These warrants are subject to a claw-back provision which would be ratably invoked if Mr. Beasley 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 former CFO, Paul Deputy, 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 17, 2016, the Company entered into Temporary Unsecured Loans (Bridge Loan – Working Capital) for $230,000. The notes bear interest at 10% per annum and were payable and matured in sixty (60) days. The lenders received 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 was to be paid. Initially, Director Leo Womack loaned $20,000, Director Joel Oppenheim loaned $110,000 and our former CFO loaned $100,000. At December 31, 2017, the outstanding balance of Bridge Loan – Working Capital is $0. The decrease during 2017 was due to all lenders converting their respective debt into shares.
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 – Director (now deceased), Paul Deputy – former CFO, Leo Womack – Board Chairman and Quinten Beasley – Director.
In association with Mr. Deputy’s employment agreement 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 year ended 2016. Mr. Deputy’s total accrued salary at December 31, 2016 was $52,520. The Company granted warrants to purchase 46,666 shares of common shares for the year ended 2016. The warrants have a term of 36 months from their issuance date. The fair value of all four quarter’s warrants was $7,090 and a 3 year term.
On August 18, 2016, the Board of Directors issued Mr. Deputy, 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 debts incurred, the Company issued 285,710 shares to Mr. Deputy, the then CFO. These shares had a valuation of $20,000 and were priced at $0.07 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 Mr. Deputy, the then CFO.
During the 2 nd and 3 rd 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 Mr. Deputy, the then 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 2 nd and 3 rd quarter of 2019.
33
During the 3 rd quarter of 2016, warrants to purchase 31,250 shares of common stock were issued for guaranteeing bank collateral. This collateral was provided by Director Joel Oppenheim and Mr. Deputy, the then CFO. These warrants had a valuation of $2,629 with an exercise price of $0.06 per share and expire in the 3 rd quarter of 2019.
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 shares. Director Lee Lytton (since deceased) 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 the effective date of September 28, 2016, we acquired a 90% net working interest in the SUDS field located in Creek County, Oklahoma (the “Working Interest”) based on two separate agreements, the Purchase and Sale Agreement and the Share Exchange Agreement, both between the Company and Jovian.
The Company issued two notes for a combined value of $4,000,000 in exchange for a cumulative 50% working interest in SUDS.
One note is a Promissory Note for $1,000,000 bearing interest at 5% and due on December 31, 2016. If full payment is not made by December 31, 2016, the buyer will be entitled to extend the Note to June 30, 2017 by making a $10,000 payment in cash prior to maturity. The Promissory Note is secured by a 12.5% undivided working interest in the SUDS field. Although the note is due on December 31, 2016, 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.
The second note is a Production Payment Note for $3,000,000 paid out of twenty percent (20%) of the 50% undivided interest of net revenues received by the Purchaser that are 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.
As of 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.
Also, 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 was to 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 was also to receive an annual bonus based on the percentage increase in stock price during the year. For every percentage point increase in stock price, Mr. Burns 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 is a loss of $3,677 based on an original cost of $10,625 and accumulated depreciation of $1,948.
During 2017, shareholders advanced an additional $361,600 to the Company, the Company made payments back to shareholders of $74,000 ($5,000 out of the $74,000 related to the truck purchase disclosed above) and $262,500 of outstanding debt was converted to Series A Preferred Stock. This resulted in an increase to the shareholder advance liability from $192,000 at December 31, 2016 to $217,100 at December 31, 2017. The following related parties (Leo Womack - $55,000, Lee Lytton - $25,000, Joel Oppenheim - $167,500 and Paul Deputy - $15,000) converted their shareholder advances into Preferred Stock.
For their service as Directors on the Company’s Board of Directors, on May 23, 2017, the Board granted Leo B. Womack, the 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 are 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 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.
34
Beginning February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest offering (“ORRI”) on behalf of the SUDS field to raise $300,000 to purchase and install pump jacks for twenty two (22) previously drilled wells at the field. Under the terms of the offering, investors received 1% of the gross revenue from the field monthly, based on their investment of $20,000 until such time they receive a cumulative revenue amount of $30,000. At its completion, the ORRI raised a total of $300,000. Effective April 18, 2017, all owners of SUDS ORRI interests were authorized to convert their interests, at their sole discretion, to Preferred Stock in the Company in conjunction with the Company’s current Series A Preferred Stock Offering. Included in this conversion offering each investor converted ORRI interests equal to the cumulative revenue amount of $30,000, less their revenue received since inception. During the second quarter of 2017, 14% of the 15% outstanding SUDS ORRI interests were converted to Preferred Stock of the Company. This conversion resulted in 40,500 shares of Preferred Stock being issued to those holders who chose to convert, with a value of $405,000. The transaction resulted in an increase to Oil and Gas Property assets by $280,000 and an increase to interest expense of $128,229 and a cash true-up payment of $3,230. Related parties (James Burns, Joel Oppenheim, Paul Deputy (former CFO), Lee Lytton (former Secretary and Director), Leo Womack and Jovian) converted 6% in ORRI interests and received a total of 17,400 shares of Preferred Stock (2,900 shares of Preferred Stock each), with the total valued at $174,000.
On May 23, 2017, related party debt holders were offered the option to convert their outstanding loan balances of $362,500 and accrued interest of $13,400 (totaling $375,900) into Preferred Stock. As a result, the following Preferred Stock shares were issued: Leo Womack 5,500 shares, Joel Oppenheim 17,590 shares, Lee Lytton 2,500 shares, James Burns 10,500 shares and Paul Deputy 1,500 shares. In addition, any holder of any non-interest bearing loan converted also received warrants to purchase four shares of common stock for each dollar converted. Consequently, a total of warrants to purchase 400,000 shares of common stock were granted (Leo Womack 70,000 shares, Joel Oppenheim 270,000 shares, Lee Lytton 30,000 shares and Paul Deputy (former CFO) 30,000 shares) as part of the conversion, which each had an exercise price of $0.20 per share and a term of 3 years. The warrants were valued at $47,319. Any loan that had received warrants when initially issued did not receive additional warrants in this conversion offering.
Jovian converted its outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the second in July 2017.
Tranche 1 - On May 30, 2017, Jovian converted $2 million of its $4 million debt into 10 million shares of the Company’s common stock. The $2 million debt included a $1 million Promissory Note and $1 million of the $3 million Production Payment Note as well as interest payable of $33,151.
Tranche 2 - On July 19, 2017, Jovian converted $2 million of its remaining debt (outstanding under a Production Payment Note) into 12,749,285 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.
The consideration for the debt extinguished consisted of the following:
| ● | 10 million shares of common stock which were valued using the market price on the date of issuance of $0.14 per share ($1,400,000). |
| ● | Warrants to purchase 6 million shares of common stock with an exercise price of $0.20 per share based on a $0.12 valuation, volatility of 293%, a discount rate of 1.09% and warrants to purchase 4 million shares of common stock with an exercise price of $0.35 per share based on a $0.12 valuation, volatility of 293%, and a discount rate of 1.09%. All warrants expire in 3 years. The 6 million warrants were valued at $709,776 while the 4 million warrants were valued at $471,104, totaling $1,180,880. |
| ● | 12,749,285 shares of common stock which were valued using the market price on the date of issuance of $0.104 per share ($1,325,926). |
| ● | The Preferred Stock was valued at $10.00 per share, the cash price paid by third party investors for the same stock with an aggregate value of $215,100. |
The combination of the two transactions resulted in an $88,755 loss which was recognized in the second quarter of 2017. The extinguishment of tranche 2 was recognized in the third quarter, with no impact on the consolidated statement of operations.
On May 23, 2017, James E. Burns, the President of the Company, sold a Caterpillar D6 Dozer to the Company in exchange for 3,000 shares of Preferred Stock. The equipment was valued at $30,000.
35
On August 1, 2017, Mr. Joel Oppenheim provided a Letter of Credit (LOC), which was posted as collateral, in order for the Company to issue operating bonds with the State of New Mexico for the operation of 25 Twin Lakes San Andres Unit wells. In exchange for the LOC, the Company issued Mr. Oppenheim 2,000,000 shares of common stock valued at $246,000 and warrants to purchase 2,000,000 shares of common stock valued at $236,586 with an exercise price of $0.14 per share. The warrants are based on a $0.12 price per share valuation, volatility of 286%, a discount rate of 1.09% and a 3 year term. For each quarter following the initial advance until the LOC is revoked an additional two hundred fifty thousand (250,000) warrants will be granted. The exercise price of those warrants will be the average common stock market price over the previous 90 days. In addition, the Company will provide 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 initiated a new $500,000 private placement offering consisting of 10 units to “accredited investors”, with each unit consisting of (1) 416,667 shares of restricted common stock and (2) warrants to purchase 416,667 additional shares of common stock at an exercise price of $0.20 per share at any time prior to October 1, 2020. Each unit is being sold for $50,000.
In 2017 the Company sold 6.5 (six and a half) Units (2,708,336 restricted shares of common stock and warrants to purchase 2,708,336 shares of common stock) for aggregate consideration of $325,000. Included as purchases in the offering were Leo Womack, our Chairman and Director, who purchased 0.8 (8/10 part) of Unit for an aggregate of $40,000; and Joel Oppenheim, our Director, which acquired one fifth of one (1/5 part) Unit for an aggregate of $10,000.
Effective April 12, 2018, the Board of Directors approved the issuance of 616,210 shares of restricted common stock to Mr. James E. Burns in consideration for 2017 deferred salary of $61,621.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders. However, all of the transactions described above were approved and ratified by the Board of Directors and one or more officers of the Company. In connection with the approval of the transactions described above, the Board of Directors took into account several factors, including its fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
MaloneBailey, LLP (“MaloneBailey”) served as our independent registered public accounting firm for the years ended December 31, 2017 and 2016. The following table shows the aggregate fees billed to us for these years by MaloneBailey.
|
Year Ended December 31, |
||||||||
| 2017 | 2016 | |||||||
| Audit Fees | $ | 64,000 | $ | 66,500 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | 2,500 | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 64,000 | $ | 69,000 | ||||
Audit fees represent amounts billed for professional services rendered for the audit of our annual consolidated financial statements and the reviews of the financial statements included in our Form 10-Q reports. Prior to contracting with MaloneBailey to render audit or non-audit services, each engagement was approved by our directors.
It is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and non-audit services, must be pre-approved by our Board of Directors. Our Board of Directors pre-approved all services, audit and non-audit related, provided to us by MaloneBailey for 2017 and 2016.
In order to assure continuing auditor independence, the Board of Directors periodically considers the independent auditor’s qualifications, performance and independence and whether there should be a regular rotation of our independent external audit firm.
36
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
INDEX TO FINANCIAL STATEMENTS
| (2) | Financial Statement Schedules |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
| (3) | Exhibits required by Item 601 of Regulation S-K |
EXHIBIT INDEX
| 37 |
| 38 |
| 39 |
| 40 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PETROLIA ENERGY CORPORATION | ||
| By: | /s/ Zel Khan | |
| Zel Khan | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: April 17, 2018 | ||
| By: | /s/ Tariq Chaudhary | |
| Tariq Chaudhary | ||
| Chief Financial Officer | ||
| (Principal Financial/Accounting Officer) | ||
| Date: April 17, 2018 |
Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Zel C Khan | Chief Executive Officer | |||
| Zel C. Khan | (Principal Executive Officer), and Director | April 17, 2018 | ||
| /s/ Tariq Chaudhary | Chief Financial Officer | April 17, 2018 | ||
| Tariq Chaudhary | (Principal Financial/Accounting Officer) | |||
| /s/ Leo Womack | ||||
| Leo Womack | Chairman | April 17, 2018 | ||
| /s/ Joel Oppenheim | ||||
| Joel Oppenheim | Director | April 17, 2018 |
| /s/ Quinten Beasley | ||||
| Quinten Beasley | Director | April 17, 2018 | ||
| /s/ James E. Burns | ||||
| James E. Burns | President and Director | April 17, 2018 |
| /s/ Saleem Nizami | ||||
| Saleem Nizami | Director | April 17, 2018 |
| 41 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Petrolia Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Petrolia Energy Corporation and its subsidiary (collectively, the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2011.
Houston, Texas
April 17, 2018
| F- 1 |
PETROLIA ENERGY CORPORATION
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 82,593 | $ | 68,648 | ||||
| Accounts receivable | 51,026 | 199,003 | ||||||
| Other current assets | 8,993 | 31,192 | ||||||
| Total current assets | 142,612 | 298,843 | ||||||
| Property & equipment | ||||||||
| Oil and gas, on the basis of full cost accounting | ||||||||
| Evaluated properties | 14,312,580 | 13,465,387 | ||||||
| Furniture, equipment & software | 264,723 | 200,416 | ||||||
| Less accumulated depreciation | (1,192,229 | ) | (1,119,708 | ) | ||||
| Net property and equipment | 13,385,074 | 12,546,095 | ||||||
| Other Assets | ||||||||
| Intangible assets | 49,886 | 49,886 | ||||||
| Note receivable | — | 316,800 | ||||||
| Total Assets | $ | 13,577,572 | $ | 13,211,624 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 413,435 | $ | 352,241 | ||||
| Accrued liabilities |
896,897 |
494,983 | ||||||
| Debt short term | — | 275,000 | ||||||
| Convertible debt - related party | — | 550,000 | ||||||
| Current maturities of installment notes payable | 32,582 | 26,186 | ||||||
| Note payable – related parties | 217,100 | 1,287,980 | ||||||
| Total current liabilities | 1,560,014 | 2,986,390 | ||||||
| Asset retirement obligations | 473,868 | 322,710 | ||||||
| Installment note payable | 24,204 | — | ||||||
| Note payable to related party – long term | — | 2,904,020 | ||||||
| Total Liabilities | 2,058,086 | 6,213,120 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.001 par value; 1,000,000 shares authorized; 197,100 and 0 shares issued and outstanding | 197 | — | ||||||
| Common stock, $.001 par value; 400,000,000 shares authorized; 111,698,222 and 79,034,505 shares issued and outstanding | 111,698 | 79,034 | ||||||
| Additional paid in capital | 22,730,974 | 14,887,090 | ||||||
| Accumulated deficit |
(11,323,383 |
) | (7,967,620 | ) | ||||
| Total Stockholders’ Equity | 11,519,486 | 6,998,504 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,577,572 | $ | 13,211,624 | ||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F- 2
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year ended | Year ended | |||||||
|
December 31,
2017 |
December 31,
2016 |
|||||||
| Oil and gas sales | $ | 148,835 | $ | 123,246 | ||||
| Equipment sales to related party | — | 198,000 | ||||||
| Total Revenue | 148,835 | 321,246 | ||||||
| Operating expenses | ||||||||
| Cost of equipment sold | — | 33,330 | ||||||
| Lease operating expense | 416,232 | 304,199 | ||||||
| General and administrative expenses | 2,550,481 | 1,433,182 | ||||||
| Depreciation, depletion and amortization | 74,469 | 74,065 | ||||||
| Asset retirement obligation accretion | 49,753 | 38,998 | ||||||
| Total Operating Expense | 3,090,935 | 1,883,774 | ||||||
| Loss from Operations | (2,942,100 | ) | (1,562,528 | ) | ||||
| Interest (expense) | (265,813 | ) | (359,239 | ) | ||||
| Other income | 40,806 | 60,324 | ||||||
| Loss on warrants issued for PORRI | — | (14,336 | ) | |||||
| Loss on conversion of debt | (94,177 | ) | — | |||||
| Total other income (expense) | (319,184 | ) | (313,251 | ) | ||||
| Net loss from continuing operations before taxes | (3,261,284 | ) | (1,875,779 | ) | ||||
| Income tax provision (benefit) | — | — | ||||||
| Net Loss | $ | (3,261,284 | ) | $ | (1,875,779 | ) | ||
| Series A Preferred Dividends | (94,479 | ) | — | |||||
| Net Loss Attributable to Common Stockholders | (3,355,763 | ) | (1,875,779 | ) | ||||
| Loss per share | ||||||||
| (Basic and fully diluted) | $ | (0.04 | ) | $ | (0.03 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 93,545,807 | 54,541,922 | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F- 3
PETROLIA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year
Ended
|
Year
Ended
|
|||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (3,261,284 | ) | $ | (1,875,779 | ) | ||
| Adjustment to reconcile net loss to net cash Used in operating activities: | ||||||||
| Depreciation and amortization | 74,469 | 74,065 | ||||||
| Accretion of debt discount | — | 171,573 | ||||||
| Finance fee for extension on note payable | 60,101 | 79,223 | ||||||
| Loss on conveyance of ORRI warrants | — | 14,336 | ||||||
| Interest on ORRI conversion | 128,229 | — | ||||||
| Guarantor fees | 524,502 | — | ||||||
| Loss on disposal of assets | 3,677 | — | ||||||
| Debt Issuance costs | 47,319 | 38,622 | ||||||
| Loss on conversion of Jovian debt | 88,755 | — | ||||||
| Loss on conversion of short term debt | 5,422 | — | ||||||
| Asset retirement obligation accretion | 49,753 | 38,998 | ||||||
| Stock-based compensation expense-employees | 325,747 | 150,790 | ||||||
| Stock-based compensation expense- directors | 394,154 | 209,125 | ||||||
| Stock-based compensation expense-consultants | 179,519 | — | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | (1,010 | ) | (150,370 | ) | ||||
| Inventory | — | 33,330 | ||||||
| Other assets | 22,199 | (143 | ) | |||||
| Accounts payable | 61,195 | 302,821 | ||||||
| Accrued liabilities | 164,307 | 161,586 | ||||||
| Deferred salaries | 195,789 | 200,000 | ||||||
| Net cash used in operating activities | (937,157 | ) | (551,823 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Cash acquired from investment in Askarii | — | 114 | ||||||
| Proceeds from sale of property and equipment | — | 30,000 | ||||||
| Purchase of fixed assets | (9,256 | ) | (93,476 | ) | ||||
| Cash used in investing activities | (9,256 | ) | (63,362 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from shareholder advances | 361,600 | 388,000 | ||||||
| Proceed from issuance of common stocks | 323,000 | — | ||||||
| Proceeds from issuance of common stock. Related party. | 112,065 | 111,352 | ||||||
| Proceeds from issuance of preferred stock | 241,000 | — | ||||||
| Payments of shareholder advances | (69,000 | ) | (92,000 | ) | ||||
| Payments on notes payable | (5,076 | ) | (1,610 | ) | ||||
| Cash paid for PORRI conversion | (3,230 | ) | — | |||||
| Proceeds from short term loans | — | 275,000 | ||||||
| Cash provided by financing activities | 960,359 | 680,742 | ||||||
| Net change in cash and cash equivalents | 13,945 | 65,557 | ||||||
| Cash and cash equivalents | ||||||||
| Beginning of period | 68,648 | 3,091 | ||||||
| End of period | $ | 82,593 | $ | 68,648 | ||||
The accompanying notes are an integral part of these audited consolidated financial statements
F- 4
|
Year
Ended
|
Year
Ended
|
|||||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Interest paid | $ | 23,210 | $ | 33,088 | ||||
| Income taxes paid | — | — | ||||||
| NON-CASH INVESTING AND FINANCIAL DISCLOSURES | ||||||||
| Sale of vehicle to related party | 8,677 | — | ||||||
| Note payable for purchase of vehicle | 35,677 | — | ||||||
| Initial recognition of asset retirement obligation | 101,405 | 70,384 | ||||||
| Preferred shares issued for purchase of related party’s equipment | 30,000 | — | ||||||
| Settlement of accounts receivable and other assets for oil and gas properties | 465,788 | — | ||||||
| Settlement of debt with preferred shares | 154,000 | — | ||||||
| Settlement of debt and advances with preferred shares – related parties | 925,900 | — | ||||||
| Settlement of debt with common shares | 32,532 | — | ||||||
| Settlement of ORRI investments with preferred shares | 231,000 | — | ||||||
| Settlement of ORRI investments with preferred shares. Related party | 174,000 | — | ||||||
| Settlement of related party debt with shares of common stock, preferred stock and warrants | 4,033,151 | — | ||||||
| Series A Preferred Dividends | 94,479 | — | ||||||
| Settlement of accrued accounts payable through share issuance | — | 120,146 | ||||||
| Fair value of stock issued for oil properties | — | 4,773,186 | ||||||
| Fair value of stock issued for extinguishment of debt | — | 146,875 | ||||||
| Shares issued in payment of shareholder advance | — | 150,000 | ||||||
| Note payable for oil & gas properties | $ | — | $ | 4,000,000 | ||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F- 5
PETROLIA ENERGY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Additional | Stockholders’ | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance at December 31, 2015 | — | — | 42,839,958 | $ | 42,840 | $ | 9,129,629 | $ | (6,091,841 | ) | $ | 3,080,628 | ||||||||||||||||
| Shares issued for settlement of payables | 1,581,098 | 1,581 | 118,565 | — | 120,146 | |||||||||||||||||||||||
| Stock based compensation – directors | — | — | 209,125 | — | 209,125 | |||||||||||||||||||||||
| Stock based compensation – employees | 800,000 | 800 | 149,990 | — | 150,790 | |||||||||||||||||||||||
| Shares issued for issuance of common stock for cash | 1,625,000 | 1,625 | 109,727 | — | 111,352 | |||||||||||||||||||||||
| Shares issued related to acquisitions | 28,808,985 | 28,809 | 4,744,377 | — | 4,773,186 | |||||||||||||||||||||||
| Warrants issued for note extension | — | — | 79,223 | — | 79,223 | |||||||||||||||||||||||
| Warrants issued for loans | — | — | 38,622 | — | 38,622 | |||||||||||||||||||||||
| Shares issued for conversion of shareholder advances | 1,910,714 | 1,910 | 148,090 | 150,000 | ||||||||||||||||||||||||
| Warrants issued for PORRI equity offering | — | — | 14,336 | 14,336 | ||||||||||||||||||||||||
| Shares issued for extinguishment of debt | 1,468,750 | 1,469 | 145,406 | — | 146,875 | |||||||||||||||||||||||
| Net Loss | (1,875,779 | ) | (1,875,779 | ) | ||||||||||||||||||||||||
| Balance at December 31, 2016 | — | — | 79,034,505 | $ | 79,034 | $ | 14,887,090 | $ | (7,967,620 | ) | $ | 6,998,504 | ||||||||||||||||
| Shares issued for settlement of payables | 1,400,000 | 1,400 | 178,119 | — | 179,519 | |||||||||||||||||||||||
| Shares issued for conversion of debt | 271,096 | 271 | 32,260 | — | 32,531 | |||||||||||||||||||||||
| Stock based compensation – directors | 200,000 | 200 | 393,954 | — | 394,154 | |||||||||||||||||||||||
| Stock based compensation – employees | 1,700,000 | 1,700 | 324,047 | — | 325,747 | |||||||||||||||||||||||
| Shares issued for issuance of common stock for cash. | 2,891,669 | 2,892 | 320,108 | — | 323,000 | |||||||||||||||||||||||
| Shares issued for issuance of common stock for cash. Related Party | 1,451,667 | 1,452 | 110,613 | — | 112,065 | |||||||||||||||||||||||
| Warrants issued for loans | — | — | 385,922 | — | 385,922 | |||||||||||||||||||||||
| Shares and warrants issued for conversion of Notes payable to related party | 22,749,285 | 22,749 | 3,884,057 | — | 3,906,806 | |||||||||||||||||||||||
| Shares issued to related party for guarantor fee | 2,000,000 | 2,000 | 244,000 | — | 246,000 | |||||||||||||||||||||||
| Shares issued for cash | 24,100 | 24 | 240,976 | — | 241,000 | |||||||||||||||||||||||
| Shares issued for conversion of shareholder advances | 27,090 | 27 | 270,873 | — | 270,900 | |||||||||||||||||||||||
| Shares issued for conversion of debt | 42,010 | 42 | 420,058 | — | 420,100 | |||||||||||||||||||||||
| Shares issued for conversion of debt. Related party | 60,400 | 61 | 603,940 | — | 604,001 | |||||||||||||||||||||||
| Shares issued for purchase of equipment | 3,000 | 3 | 29,997 | — | 30,000 | |||||||||||||||||||||||
| Shares issued for conversion of TORRI | 23,100 | 23 | 230,977 | — | 231,000 | |||||||||||||||||||||||
| Shares issued for conversion of TORRI. Related party | 17,400 | 17 | 173,983 | — | 174,000 | |||||||||||||||||||||||
| Series A Preferred Dividends | (94,479 | ) | (94,479 | ) | ||||||||||||||||||||||||
| Net Loss | (3,261,284 | ) | (3,261,284 | ) | ||||||||||||||||||||||||
| Balance at December 31, 2017 | 197,100 | $ | 197 | 111,698,222 | $ | 111,698 | $ | 22,730,974 | $ | (11,323,383 | ) | $ | 11,519,486 | |||||||||||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F- 6
PETROLIA ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
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.
F- 7
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.
F- 8
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.
F- 9
Related Party – The Board approves all material related party transactions. The Board is provided with the details of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the transaction, and the benefits to the Company and the relevant related party. In determining whether to approve a related party transaction, the following factors are considered: (1) if the terms are fair to the Company, (2) if there are business reasons to enter into the transaction, (3) if the transaction would impair independence of an outside Director, (4) if the transaction would present an improper conflict of interest for any Director or executive officer. Any member of the Board who has an interest in the transaction will abstain from voting on the approval of the related party transaction.
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. 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 4. 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 5. RELATED PARTY TRANSACTIONS
Beginning on February 1, 2016, the Company sponsored the SUDS 1% Term Overriding Royalty Interest (“PORRI”) offering on behalf of the SUDS field to raise $300,000. Under the terms of the Company offering, investors will receive 1% of the gross revenue from the field monthly, based on their investment of $20,000 until such time as they receive a cumulative revenue amount of $30,000. With each unit purchased, a warrant to purchase 10,000 shares of Company’s common stock was granted with an exercise price of $0.10 per share, and an expiration date of February 28, 2019. At the end of the second quarter of 2016, the $300,000 offering had been received which resulted in the granting of warrants to purchase 150,000 shares of common stock. The following affiliated investors each purchased one (1) unit in the offering: Joel Oppenheim, Jovian, Lee Lytton, Paul Deputy (former CFO) and Leo Womack, cumulatively receiving 50,000 warrants. The fair value of all 150,000 SUDS related warrants was $14,336 based on a $0.06 per share valuation, volatility of 235%, a discount rate of 1.09%, over a 3 year term. This fair value was accounted for as a loss on the conveyance. In addition, to properly account for the Company’s 10% working interest ownership in the SUDS field, $30,000 was offset against the full cost pool of Oil & Gas Properties.
F- 10
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.
F- 11
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.
F- 12
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.
F- 13
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.
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.
F- 14
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.
NOTE 6. 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.
F- 15
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 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.
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.
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.
F- 16
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.
F- 17
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. |
F- 18
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 7. 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.
F- 19
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.
F- 20
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.
F- 21
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 8. 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.
F- 22
NOTE 9. 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.
F- 23
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
|
December 31, 2016
Petrolia
Combined
|
|||||||
| Oil and Gas Sales | 150,970 | 333,741 | ||||||
| Net Loss | (3,274,539 | ) | (1,957,181 | ) | ||||
| Loss per share | (0.04 | ) | (0.04 | ) | ||||
NOTE 10. 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 |
F- 24
NOTE 11. 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) | $ | — | $ | — | ||||
F- 25
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 12. 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 | ||||
F- 26
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 | |||
F- 27
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 | ||||
F- 28
NOTE 13. 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 14. 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.
F- 29
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.
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 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. 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; 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.
F- 30
Petrolia Energy Corporation - 10-K
Exhibit 10.28
Petrolia Energy Corporation - 10-K
Exhibit 10.29
Petrolia Energy Corporation - 10-K
EXHIBIT 21.1
SUBSIDIARIES
Askarii Resources, LLC, wholly-owned
Bow Energy Ltd, wholly-owned and its wholly-owned subsidiary Bow Energy International Holdings Inc.
Petrolia Energy Corporation - 10-K
EXHIBIT 23.1
CONSENT OF PETROLEUM ENGINEER
We consent to the references to our firm in the form and context in which they appear in the Annual Report on Form 10-K of Petrolia Energy Corporation (the “Company”) for the year ended December 31, 2017 (including, but not limited to, the notes to the financial statements included therein) (the “Annual Report”).
We further consent to the inclusion and use in the Annual Report of our report dated April 17, 2018, relating to an estimate of certain hydrocarbon reserves owned by Petrolia Energy Corporation (the “Report”), and the information from our Report contained in the Annual Report and the filing of the Report as Exhibit 99.1 to the Annual Report.
|
MKM ENGINEERING State of Texas Registration No. F-009733 |
|||
| By: | /s/ Michele Mudrone | ||
| Name: | Michele Mudrone, P.E. | ||
| Title: | Petroleum Engineer | ||
| Date: | April 17, 2018 | ||
Petrolia Energy Corporation - 10-K
EXHIBIT 31.1
CERTIFICATION
I, Zel C. Khan, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Petrolia Energy Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on my most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have significant role in the registrant’s internal control over financial reporting. |
| April 17, 2018 | |
| /s/ Zel C. Khan | |
|
Zel C. Khan, Chief Executive Officer (Principal Executive Officer) |
|
Petrolia Energy Corporation - 10-K
EXHIBIT 31.2
CERTIFICATION
I, Tariq Chaudhary, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Petrolia Energy Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have significant role in the registrant’s internal control over financial reporting. |
| April 17, 2018 | |
| /s/ Tariq Chaudhary | |
|
Tariq Chaudhary, Chief Financial Officer (Principal Financial/Accounting Officer) |
|
Petrolia Energy Corporation - 10-K
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SS. 1350 AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Petrolia Energy Corporation (the “Company”) on Form 10-K for the period ending December 31, 2017 as filed with the Securities and Exchange Commission (the “Report”), Tariq Chaudhary, the Company’s Principal Officer, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the Company.
| April 17, 2018 | |
| /s/ Zel C. Khan | |
| Zel C. Khan, Chief Executive Officer (Principal Executive Officer) | |
Petrolia Energy Corporation - 10-K
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SS.
1350 AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Petrolia Energy Corporation (the “Company”) on Form 10-K for the period ending December 31, 2017 as filed with the Securities and Exchange Commission (the “Report”), Tariq Chaudhary, the Company’s Chief Financial Officer, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the Company.
| April 17, 2018 | |
| /s/ Tariq Chaudhary | |
| Tariq Chaudhary, Chief Financial Officer (Principal Financial/Accounting Officer) |
Petrolia Energy Corporation - 10-K
Exhibit 99.1
MKM ENGINEERING
Oil and Gas Consulting Services
3905 Sagamore Hill Court
Plano, Texas 75025
April 17, 2018
Mr. Zel C. Khan
Petrolia Energy Corporation
710 N. Post Oak Road, Suite 512
Houston, TX 77024
Dear Mr. Khan:
As requested, an estimate has been made of certain hydrocarbon reserves owned by Petrolia Energy Corporation (hereinafter referred to as “Petrolia”). The appraised properties are located in Chaves County, New Mexico, Creek County, Oklahoma, and Milam County, Texas. Production data was generally available through December 2017. This appraisal evaluates Petrolia’s Proved Developed Producing (PDP), Proved Developed Non-Producing (PNP), Proved Developed Shut-In (PDSI), Proved Developed Behind Pipe (PBP), Proved Undeveloped (PUD), Probable Behind Pipe (PrBP), and Probable Undeveloped (PrUD) reserves. The effective date of this report is January 1, 2018.
The table below summarizes Petrolia’s net oil and gas reserves and cash flows generated using the requested price deck. Results shown below are presented for your information and should not be construed as our estimate of fair market value. As of January 1, 2018, Petrolia’s net total proved and probable reserves have been estimated to be as follows:
| Net Reserves | Present Worth | |||||||||||||||
| as of January 1, 2018 | of Future | |||||||||||||||
| Hydrocarbon | Natural | Net Income | ||||||||||||||
| Liquids | Gas | Future Net | Discounted @ | |||||||||||||
| Reserve Category | (Bbl) | (Mcf) | Income, $ | 10%/Annum, $ | ||||||||||||
| Proved Developed Producing | 571,390 | 0 | 14,310,730 | 5,879,410 | ||||||||||||
| Proved Developed Non Producing | 655,000 | 0 | 12,391,100 | 5,446,130 | ||||||||||||
| Proved Developed Shut-In | 40,780 | 0 | (702,040 | ) | (209,060 | ) | ||||||||||
| Proved Developed Behind Pipe | 330,840 | 0 | 7,417,020 | 5,017,190 | ||||||||||||
| Proved Undeveloped | 40,190 | 0 | 719,220 | 472,300 | ||||||||||||
| Total Proved | 1,638,200 | 0 | 34,136,030 | 16,605,970 | ||||||||||||
| Probable Behind Pipe | 127,480 | 0 | 1,658,840 | 458,370 | ||||||||||||
| Probable Undeveloped | 183,860 | 0 | 3,247,750 | 1,752,950 | ||||||||||||
| Total Probable | 311,340 | 0 | 4,906,590 | 2,211,320 | ||||||||||||
| Total Proved + Probable | 1,949,540 | 0 | 39,042,620 | 18,817,290 | ||||||||||||
Petrolia Energy Corporation
April 17, 2018
Page 2
FNI is after deducting estimated operating and future development costs, severance and ad valorem taxes, but before Federal income taxes. Total net Proved and Probable Reserves are defined as those natural gas and hydrocarbon liquid Reserves to Petrolia’s interests after deducting all shrinkage, royalties, overriding royalties, and reversionary interests owned by outside parties that become effective upon payout of specified monetary balances. All Reserves estimates have been prepared using standard engineering practices generally accepted by the petroleum industry and conform to guidelines developed and adopted by the Society of Petroleum Engineers (“SPE”), American Association of Petroleum Geologists (“AAPG”), World Petroleum Council (“WPC”), and the Society of Petroleum Evaluation Engineers (“SPEE”). All hydrocarbon liquid Reserves are expressed in United States barrels (“bbl”) of 42 gallons. Natural gas Reserves are expressed in thousand standard cubic feet (“Mcf”) at the contractual pressure and temperature bases.
RESERVE ESTIMATE METHODOLOGY
The Reserves estimates contained in this report have been prepared using standard engineering practices generally accepted by the petroleum industry. Decline curve analysis was used to estimate the remaining Reserves of pressure depletion reservoirs with enough historical production data to establish decline trends. Reservoirs under non-pressure depletion drive mechanisms and non-producing Reserves were estimated by volumetric analysis, research of analogous reservoirs, or a combination of both. The maximum remaining Reserves life assigned to wells included in this report is 40 years. This report does not include any gas sales imbalances.
FUTURE PRODUCTION RATES
Initial production rates are based on current producing rates for those wells now on production. If a decline trend has been established, this trend was used as the basis for estimating future production rates. If no production decline trend has been established, future production rates were held constant, or adjusted for market conditions where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to depletion of the reserves. For reserves not yet on production, test data and other related information were used to estimate anticipated initial production rates and sales were estimated to commence at a date deemed reasonable based on our experience and judgment.
RESERVE CLASSIFICATION
The Reserves estimates included in this report conform to the guidelines specified by the SPE, AAPG, WPC, and SPEE. For more information regarding Reserves classification definitions see Appendix A. A complete discussion of the Reserves classification definitions can be found on the SPE website (www.spe.org) .
COMMODITY PRICES
Future hydrocarbon revenues were estimated using the New York Mercantile Exchange (“NYMEX”) prices outlined below:
| Dates |
NYMEX PRICES
Base Price $/Bbl |
Base Price
$/MMBtu |
|||||||
| 2018 | 51.34 | 2.98 | |||||||
| 2019 | 51.34 | 2.98 | |||||||
| 2020 | 51.34 | 2.98 | |||||||
| 2021 | 51.34 | 2.98 | |||||||
| 2022 | 51.34 | 2.98 | |||||||
| 2023 | 51.34 | 2.98 | |||||||
| 2024 | 51.34 | 2.98 | |||||||
| 2025 | 51.34 | 2.98 | |||||||
| 2026 | 51.34 | 2.98 | |||||||
| 2027 | 51.34 | 2.98 | |||||||
| Thereafter | 51.34 | 2.98 | |||||||
Petrolia Energy Corporation
April 17, 2018
Page 3
Historical hydrocarbon liquid prices were indexed to the monthly average of the daily closing prices received at the Cushing, Oklahoma delivery point. The average difference between the wellhead oil price and the NYMEX price represents adjustments for crude quality, marketing fees, BS&W, transportation costs and purchaser bonuses. These adjustments were applied to the NYMEX prices listed in table above.
Historical natural gas prices were indexed to the monthly Henry Hub prices posted in the Inside FERC publication. The average difference between the wellhead price and the NYMEX price represents adjustments for BTU content, marketing, and transportation costs. These adjustments were applied to the NYMEX prices listed in table above.
Revenue accounting data for the period of January 2017 through December 2017 was used in this evaluation.
OPERATING EXPENSES & CAPITAL COSTS
In most cases, the lease operating costs used in this evaluation represent the average of recent historical monthly operating costs. In cases where historical costs were not available or deemed to be unreliable, operating costs were estimated based on knowledge of analogous wells producing under similar conditions. The lease operating expenses in this report represent field level operating costs and include COPAS charges.
Where available, capital costs were estimated using recent historical information reported for analogous expenditures. Where recent historical information was not available Authority for Expenditure (“AFE”) documents were used to estimate capital costs. AFE documents provided by the operator have been checked for reasonableness. Abandonment costs were not included for the properties.
Revenue accounting data for the period of January 2017 through December 2017 was used in this evaluation. Operating expenses and capital costs were held constant in this evaluation.
DISCLAIMERS
All information pertaining to the operating expenses, prices, and the interests of Petrolia in the properties appraised has been accepted as represented. It was not considered necessary to make a field examination of the appraised properties. Data used in performing this appraisal were obtained from Petrolia, public sources, and our own files. Supporting work papers pertinent to the appraisal are retained in our files and are available to you or designated parties at your convenience.
It was beyond the scope of this MKM Engineering report to evaluate the potential environmental liability costs from the operation and abandonment of these properties. In addition, no evaluation was made to determine the degree of operator compliance with current environmental rules, regulations, and reporting requirements. Therefore, no estimate of the potential economic liability, if any, from environmental concerns is included in the forecasts presented herein.
Petrolia Energy Corporation
April 17, 2018
Page 4
The Proved and Probable Reserves presented in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered; and, if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the product prices and the costs incurred in recovering these Reserves may vary from the price and cost assumptions in this report. In any case, quantities of Proved and Probable Reserves may increase or decrease as a result of future operations.
Reserves estimates for individual properties included in this report are only valid when considered within the context of the overall report and should not be considered independently. The future net income and net present value estimates contained in this report do not represent an estimate of fair market values.
MKM Engineering is independent with respect to Petrolia Energy Corporation as provided in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
CONCLUSIONS
Attached are summary tables of economic analysis of predicted future performance. Other tables identify the properties appraised with summary Reserves and the economic factors applicable to each. A list of tables is included. Reserves identified for this report are not risked.
We appreciate this opportunity to have been of service and hope that this report will fulfill your requirements.
| Respectfully submitted, | ||
| MKM ENGINEERING | ||
| F-009733 | ||
| /s/ Michele K. Mudrone | ||
| Michele K. Mudrone, P.E. | ||
Attachments