UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(Issuer’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate
by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☐
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller
Reporting Company | |
Emerging
growth company |
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 Exchange Act). Yes ☐
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: shares of common stock as of July 29, 2022.
TABLE OF CONTENTS
Page | ||
Part I Financial Information | ||
Item 1. | Consolidated Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 24 |
Item 4. | Controls and Procedures | 24 |
Part II Other Information | ||
Item 1. | Legal Proceedings | 25 |
Item 1A. | Risk Factors | 26 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
Item 3. | Defaults Upon Senior Securities | 26 |
Item 4. | Mine Safety Disclosures | 26 |
Item 5. | Other Information | 26 |
Item 6. | Exhibit Index | 26 |
SIGNATURES | 27 | |
EXHIBITS | 28 |
2 |
PART I: Financial Information
Item 1. Consolidated Financial Statements
PETROLIA ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2021 | December 31, 2020 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | $ | ||||||
Accounts receivable | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property & equipment | ||||||||
Oil and gas, on the basis of full cost accounting | ||||||||
Evaluated properties | ||||||||
Furniture, equipment & software | ||||||||
Less accumulated depreciation and depletion | ( | ) | ( | ) | ||||
Net property and equipment | ||||||||
Other assets | ||||||||
Operating lease right-of-use asset | ||||||||
Other assets | ||||||||
Total Assets | $ | $ | ||||||
LIABILITIES & STOCKHOLDERS DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | $ | ||||||
Accounts payable – related parties | ||||||||
Operating lease liability – current | ||||||||
Accrued liabilities | ||||||||
Accrued liabilities – related parties | ||||||||
Notes payable, current portion | ||||||||
Notes payable – related parties, current portion | ||||||||
Total current liabilities | ||||||||
Asset retirement obligations | ||||||||
Notes payable, net of current portion | ||||||||
Operating lease liability | ||||||||
Derivative liability | ||||||||
Total Liabilities | $ | $ | ||||||
Stockholders’ Deficit | ||||||||
Preferred stock, $ shares issued and outstanding | par value, shares authorized; $ | $ | ||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding||||||||
Additional paid in capital | ||||||||
Accumulated other comprehensive income | ( | ) | ( | ) | ||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | $ |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3 |
PETROLIA ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||
Oil and gas sales | ||||||||||||||||
Oil and gas sales | $ | $ | $ | $ | ||||||||||||
Total Revenue | ||||||||||||||||
Operating expenses | ||||||||||||||||
Lease operating expense | ||||||||||||||||
Production tax | ||||||||||||||||
General and administrative expenses | ||||||||||||||||
Depreciation, depletion, and amortization | ||||||||||||||||
Asset retirement obligation accretion | ||||||||||||||||
Loss on TLSAU abandonment | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expenses) | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expense) | ( | ) | ( | ) | ||||||||||||
Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
Total other income (expenses) | ( | ) | ( | ) | ( | ) | ||||||||||
Net loss before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Series A Preferred Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net Loss Attributable to Common Stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Loss per share | ||||||||||||||||
(Basic and fully diluted) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted average number of common shares outstanding, basic & diluted | ||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ||||||||||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
4 |
PETROLIA ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
Preferred stock | Common stock | Additional paid-in | Shares to be | Accumulated other comprehensive | Accumulated | Shareholders’ equity | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | issued | income | deficit | (deficit) | ||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
Common shares issued | — | ( | ) | |||||||||||||||||||||||||||||||||
Series A preferred dividends | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Warrants issued as financing fees | — | — | ||||||||||||||||||||||||||||||||||
Shares for conversion of related party debt | — | |||||||||||||||||||||||||||||||||||
Warrants issued with loans | — | — | ||||||||||||||||||||||||||||||||||
Stock to be issued | — | |||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
Series A preferred dividends | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Warrants issued as financing fee | — | — | ||||||||||||||||||||||||||||||||||
Common shares issued for conversion of debt | — | |||||||||||||||||||||||||||||||||||
Common shares issued for settlement of related party fee | — | |||||||||||||||||||||||||||||||||||
Warrants issued for settlement of loans | — | — | ||||||||||||||||||||||||||||||||||
Gain on modification of related party debt | — | — | ||||||||||||||||||||||||||||||||||
Gain on issuance of shares for settlement of accrued related party fees | — | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | ||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
5 |
PETROLIA ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustment to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depletion, depreciation and amortization | ||||||||
Asset retirement obligation accretion | ||||||||
Operating lease | ( | ) | ||||||
Amortization of debt discount | ||||||||
Change in fair value of derivative liabilities | ( | ) | ||||||
Stock-based compensation expense | ||||||||
Warrants issued as financing fees | ||||||||
Forgiveness of PPP loan | ( | ) | ||||||
Loss on TLSAU abandonment | ||||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | ( | ) | ||||||
Other current assets | ||||||||
Accounts payable | ||||||||
Accounts payable – related parties | ( | ) | ||||||
Accrued liabilities | ( | ) | ||||||
Accrued liabilities – related parties | ||||||||
Net cash flows from operating activities | ( | ) | ( | ) | ||||
Cash Flows from Investing Activities | ||||||||
Escrow for property purchase | ||||||||
Cash flows from investing activities | ||||||||
Cash Flows from Financing Activities | ||||||||
Proceeds from notes payable | ||||||||
Repayments on notes payable | ( | ) | ( | ) | ||||
Proceeds from related party notes payable | ||||||||
Repayments on related party notes payable | ( | ) | ||||||
Shares to be issued | ||||||||
Cash flows from financing activities | ( | ) | ||||||
Changes in foreign exchange rate | ( | ) | ( | ) | ||||
Net change in cash | ( | ) | ( | ) | ||||
Cash at beginning of period | ||||||||
Cash at end of period | $ | $ |
SUPPLEMENTAL DISCLOSURES
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Interest paid | $ | $ | ||||||
Income taxes paid | ||||||||
NON-CASH INVESTING AND FINANCIAL DISCLOSURES | ||||||||
Series A preferred dividends accrued | ||||||||
Debt discount on warrant issue | ||||||||
Conversion of related party debt and payables | ||||||||
Modification of related party debt | ||||||||
Capitalized interest payable | ||||||||
Settlement of notes payable related party for common shares | ||||||||
Issuing of previous shares to be issued | ||||||||
Utikuma acquisition – purchase price | ||||||||
Utikuma acquisition – initial ARO | ||||||||
Utikuma acquisition – extra cost triggered by WTI | ||||||||
Third party loan for Utikuma purchase | ||||||||
Related party loan payments on Company’s behalf |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
6 |
PETROLIA ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION:
Petrolia Energy Corporation (the “Company”) is in the business of oil and gas exploration, development and production.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for such interim periods are not necessarily indicative of operations for a full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the year ended December 31, 2020, as reported in Form 10-K, have been omitted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases
Leases are classified as operating leases or financing leases based on the lease term and fair value associated with the lease. The assessment is done at lease commencement and reassessed only when a modification occurs that is not considered a separate contract.
Lessee arrangements
Where the Company is the lessee, leases classified as operating leases are recorded as lease liabilities based on the present value of minimum lease payments over the lease term, discounted using the lessor’s rate implicit in the lease or the Company’s incremental borrowing rate, if the lessor’s implicit rate is not readily determinable. The lease term includes all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise the termination options. Corresponding right-of-use assets are recognized consisting of the lease liabilities, initial direct costs and any lease incentive payments.
Lease liabilities are drawn down as lease payments are made and right-of-use assets are depreciated over the term of the lease. Operating lease expenses are recognized on a straight-line basis over the term of the lease, consisting of interest accrued on the lease liability and depreciation of the right-of-use asset, adjusted for changes in index-based variable lease payments in the period of change.
Lease payments on short-term operating leases with lease terms twelve months or less are expensed as incurred.
Fair Value of Financial Instruments
Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2021, the amounts reported for cash, accrued interest and other expenses, notes payable, convertible notes, and derivative liability approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
7 |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The hierarchy is broken down into three levels based on the observability of inputs as follows:
● | Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment; | |
● | Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly; and | |
● | Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows as of September 30, 2021, and December 31,2020.
September 30, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Derivative liabilities | ||||||||||||||||
ARO liabilities | ||||||||||||||||
December 31, 2020 | ||||||||||||||||
Derivative liabilities | ||||||||||||||||
ARO liabilities |
Loss per share:
The computation of basic loss per share of common stock is based on the weighted average number of shares outstanding during the period.
NOTE 3. GOING CONCERN
The Company has suffered recurring losses from operations and currently has a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company plans to generate profits by reworking its existing oil or gas wells, as needed, funding permitting. The Company will need to raise funds through either the sale of its securities, issuance of corporate bonds, joint venture agreements and/or bank financing to accomplish its goals. The Company does not have any commitments or arrangements from any person to provide the Company with any additional capital.
If additional financing is not available when needed, we may need to cease operations. The Company may not be successful in raising the capital needed to drill and/or rework existing oil wells. Any additional wells that the Company may drill may be non-productive. Management believes that actions presently being taken to secure additional funding for the reworking of its existing infrastructure will provide the opportunity for the Company to continue as a going concern. Since the Company has an oil producing asset, its goal is to increase the production rate by optimizing its current infrastructure. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
8 |
NOTE 4. EVALUATED PROPERTIES
The Company’s current properties can be summarized as follows.
Cost | Canadian properties | United States properties | Total | |||||||||
As of December 31, 2019 | $ | $ | $ | |||||||||
Additions | ||||||||||||
Dispositions | ( | ) | ( | ) | ||||||||
Impairment of oil and gas properties | ( | ) | ( | ) | ||||||||
Asset retirement cost additions | ||||||||||||
Foreign currency translation | ||||||||||||
As of December 31, 2020 | $ | $ | $ | |||||||||
Additions | ||||||||||||
Foreign currency translations | ( | ) | ( | ) | ||||||||
As of September 30, 2021 | $ | $ | $ | |||||||||
Accumulated depletion | ||||||||||||
As of December 31, 2019 | ||||||||||||
Depletion | ||||||||||||
Foreign currency translation | ||||||||||||
As of December 31, 2020 | $ | $ | $ | |||||||||
Depletion | ||||||||||||
Foreign currency translation | ( | ) | ( | ) | ||||||||
As of September 30, 2021 | $ | $ | $ | |||||||||
Net book value as of December 31, 2020 | $ | $ | $ | |||||||||
Net book value as of September 30, 2021 | $ | $ | $ |
On
August 6, 2019, the Company entered into a Purchase and Sale Agreement (“PSA”) for the sale of the NOACK property with Flowtex
Energy LLC (“FT”). The purchaser agreed to pay $
On
May 1, 2020, Petrolia Energy Corporation acquired a
On
July 27, 2020, the Company entered into a settlement agreement pursuant to which nine leases totalling approximately
On April 8, 2021, the State of New Mexico Energy, Minerals and Natural Resources Oil Conservation Division (“OCD”) sent the Company a Notice of Violation alleging that the Company was not in compliance with certain New Mexico Oil and Gas Act regulations associated with required reporting, inactive wells, and financial assurance requirements. On December 30, 2021, the Company entered a Stipulated Final Order to resolve the matter. The company agreed to submit appropriate forms for the identified wells, open an escrow account and deposit funds into it, and provide the OCD with a report proposing deadlines for bringing all remaining wells into compliance. The first two wells were plugged in June of 2022. See Form 8-K reference in Exhibits section below.
9 |
NOTE 5. LEASES
Our adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leases on the balance sheet as an ROU asset and a corresponding lease liability. The new guidance also requires additional disclosures as detailed below. We adopted this standard on the effective date of January 1, 2019 and used this effective date as the date of initial application. Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for prior periods. We elected the ‘package of practical expedients,’ which permitted us to not reassess our prior conclusions related to lease identification, lease classification, and initial direct costs, and we did not elect the use of hindsight.
Lease ROU assets and liabilities are recognized at commencement date of the lease, based on the present value of lease payments over the lease term. The lease ROU asset also includes any lease payments made and excludes any lease incentives. When readily determinable, we use the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date, including the lease term.
Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of September 30, 2021, we did not have any short-term leases.
The tables below present financial information associated with our lease.
Balance Sheet Classification | September 30, 2021 | December 31, 2020 | ||||||||
Right-of-use assets | Other long-term assets | |||||||||
Current lease liabilities | Other current liabilities | |||||||||
Non-current lease liabilities | Other long-term liabilities |
As of September 30, 2021, the maturities of our lease liability are as follows:
2021 | $ | |||
2022 | ||||
Total | $ | |||
Less: Imputed interest | ( | ) | ||
Present value of lease liabilities | $ |
10 |
NOTE 6. NOTES PAYABLE
The following table summarizes the Company’s notes payable:
Interest rate | Date of maturity | September 30, 2021 | December 31, 2020 | ||||||||||||
Truck loan (i) | % | $ | $ | ||||||||||||
Credit note I (ii) | % | ||||||||||||||
Credit note II (iii) | % | ||||||||||||||
Credit note III (iv) | % | ||||||||||||||
Discount on credit note III | — | — | ( | ) | |||||||||||
Credit note IV(v) | % | ||||||||||||||
Discount on credit note IV | — | — | ( | ) | ( | ) | |||||||||
Credit note V(vi) | % | ||||||||||||||
Credit note VI (vii) | % | ||||||||||||||
Lee Lytton | — | ||||||||||||||
Joel Oppenheim (viii) | % | ||||||||||||||
Joel Oppenheim (viii) | % | ||||||||||||||
Joel Oppenheim(viii) | % | ||||||||||||||
Credit Note VII (viii) | % | ||||||||||||||
Origin Bank (PPP loan) (ix) | — | — | |||||||||||||
Quinten Beasley | % | ||||||||||||||
Jovian Petroleum Corporation (x) | % | ||||||||||||||
M. Horowitz | % | ||||||||||||||
$ | $ | ||||||||||||||
Current portion: | |||||||||||||||
Truck loan | $ | $ | |||||||||||||
Credit note I | |||||||||||||||
Credit note II | |||||||||||||||
Credit note III | |||||||||||||||
Credit note IV | |||||||||||||||
Credit note V | |||||||||||||||
Credit note VI | |||||||||||||||
Lee Lytton | |||||||||||||||
Joel Oppenheim | |||||||||||||||
Joel Oppenheim | |||||||||||||||
Joel Oppenheim | |||||||||||||||
Credit note VII | |||||||||||||||
Origin Bank (PPP loan) | |||||||||||||||
Quinten Beasley | |||||||||||||||
Jovian Petroleum Corporation | |||||||||||||||
M. Horowitz | |||||||||||||||
Current portion of notes payable | $ | $ |
(i) |
11 |
(ii) | ||
In
order to induce the Lender to enter into the Loan Agreement, the Company agreed to issue the Lender | ||
On January 1, 2021, the Lender signed an amended loan agreement, which moved the balance of this note to credit note VI. More details can be found in footnote (vii). | ||
(iii) | ||
(iv) | ||
(v) | ||
(vi) | ||
(vii) | ||
(viii) | ||
(ix) | ||
(x) |
12 |
The following is a schedule of future minimum repayments of notes payable as of September 30, 2021:
2021 | $ | |||
Thereafter | ||||
$ |
NOTE 7. RELATED PARTY NOTES PAYABLE
The following table summarizes the Company’s related party notes payable:
Balance at: | |||||||||||||
Interest rate | Date of maturity | September 30, 2021 | December 31, 2020 | ||||||||||
Quinten Beasley | % | $ | $ | ||||||||||
Jovian Petroleum Corporation (i) | % | ||||||||||||
Ivar Siem (ii) | % | ||||||||||||
Ivar Siem (ii) | Non-interest | ||||||||||||
Ivar Siem (ii) | % | ||||||||||||
Mark M Allen (iii) | % | ||||||||||||
Mark M Allen (iv) | % | ||||||||||||
Mark M Allen (v) | % | ||||||||||||
Mark M Allen (vi) | % | ||||||||||||
Discount on Mark M Allen ($ | ( | ) | |||||||||||
Mark M Allen (vi) | % | ||||||||||||
Discount on Mark M Allen ($ | ( | ) | |||||||||||
Mark Allen (vi) | % | ||||||||||||
$ | $ |
(i) | ||
(ii) |
13 |
(iii) | ||
(iv) | ||
(v) | ||
(vi) |
The following is a schedule of future minimum repayments of related party notes payable as of September 30, 2021:
2021 | $ | |||
Thereafter | ||||
$ |
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
On
May 18, 2018, as an inducement to enter into an Amended and Restated Loan Agreement, the Company issued, among other instruments, warrants
to acquire
On
January 06, 2020, as an inducement to enter into a Loan Agreement, the Company issued, among other instruments, warrants to acquire
On
October 30, 2020, as an inducement to extend the principal payment deadline from the previously issued Loan Agreement, the Company issued
additional warrants to acquire
14 |
A summary of the activity of the derivative liabilities is shown below:
As of December 31, 2020 | ||||
Additions | ||||
Fair value adjustment | ( | ) | ||
As of September 30, 2021 | $ |
Derivative liability classified warrants were valued using the Black Scholes Option Pricing Model with the range of assumptions outlined below. Expected life was determined based on historical exercise data of the Company.
September
30, 2021 | ||||
Risk-free interest rate | % | |||
Expected life | ||||
Expected dividend rate | % | |||
Expected volatility | % |
NOTE 9. ASSET RETIREMENT OBLIGATIONS
The Company has a number of oil and gas wells in production and will have Asset Retirement Obligations (“AROs”) once the wells are permanently removed from service. The primary obligations involve the removal and disposal of surface equipment, plugging and abandoning the wells and site restoration.
AROs associated with the retirement of tangible long-lived assets are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets in the period incurred. The fair value of AROs is recognized as of the acquisition date of the working interest. The cost of the tangible asset, including the asset retirement cost, is depleted over the life of the asset. AROs are recorded at estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the long-lived asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated discount rates and changes in the estimated timing of abandonment.
The Company’s ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs. For the Canadian properties, abandonment and reclamation liabilities are prescribed by the province in which the Company operates in. For the purpose of determining the fair value of AROs incurred during the years presented, the Company used the following assumptions:
September 30, 2021 | ||||
Inflation rate | % | |||
Estimated asset life |
The following table shows the change in the Company’s ARO liability:
Canadian properties | United States properties | Total | ||||||||||
Asset retirement obligations, December 31, 2019 | $ | $ | $ | |||||||||
Acquisition of Canadian property - Utikuma | ||||||||||||
Plugging liability at Twin Lakes | ||||||||||||
Accretion expense | ||||||||||||
Foreign currency translations | ||||||||||||
Asset retirement obligations, December 31, 2020 | ||||||||||||
Accretion expense | ||||||||||||
Foreign currency translation | ( | ) | ( | ) | ||||||||
Asset retirement obligations, September 30, 2021 | $ | $ | $ |
15 |
NOTE 10. EQUITY
Preferred stock
The
holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of
In
accordance with the terms of the Preferred Stock, cumulative dividends of $
Common stock
As
of the year ended December 31, 2019, the Company closed private placements for $
On
August 8, 2019, director Joel Martin Oppenheim exercised warrants to purchase
On
August 14, 2019, director Joel Martin Oppenheim exercised warrants to purchase
On
July 23, 2019, Joel Oppenheim, a related party, purchased 1 unit of the debt private placement with gross proceeds of $
On
January 20, 2020, Jovian Petroleum, a related party,
On February 29, 2020, the Company signed a consulting agreement with a third party to provide Management services related to the SUDS field. The compensation related terms included the issuance of shares of Common Stock. The shares were not issued and earned until December 15, 2020.
On
September 1, 2020, the Company entered into an agreement with Mark Allen, to serve as President for a period of six months (with monthly
extensions). The President was to earn a fee of $
On
December 15, 2020, President Mark Allen exercised warrants to purchase
On
December 22, 2020, prior CFO Tariq Chaudhary was issued
On January 25, 2021, the Company signed an Executive Salary Payable Agreement with Zel Khan as the Chief Executive Officer. All of Mr. Khan’s previous salary obligation was satisfied by the issuance of shares of the Company on January 25, 2021.
Joel Oppenheim, former Director, was issued shares on January 25, 2021 pursuant to a Director’s Fees Payable Agreement. The agreement stated that the shares were issued in full satisfaction of all outstanding director fees payable.
16 |
On
March 30, 2021, Mark Allen converted $
On
March 30, 2021, Mark Allen converted a defaulted secured loan of $
More details on the transactions above can be found in Note 11. Related Party Transactions.
The common stock of Petrolia Energy Corporation is currently not actively traded because of SEC Rule 15c2-11.
Warrants
On September 24, 2015, the Board of Directors of the Company approved the adoption of the 2015 Stock Incentive Plan (the “Plan”). The Plan provides an opportunity, subject to approval of our Board of Directors, of individual grants and awards, for any employee, officer, director or consultant of the Company. The maximum aggregate number of shares of common stock which may be issued pursuant to awards under the Plan, as amended on November 7, 2017, was shares. The plan was ratified by the stockholders of the Company on April 14, 2016.
Continuity of the Company’s common stock purchase warrants issued and outstanding is as follows:
Warrants | Weighted Average Exercise Price | |||||||
Outstanding at year ended December 31, 2019 | $ | |||||||
Granted | ||||||||
Exercised | ( | ) | ||||||
Expired | ( | ) | ||||||
Outstanding at December 31, 2020 | $ | |||||||
Granted | ||||||||
Expired | ( | ) | ||||||
Outstanding at September 30, 2021 | $ |
As of September 30, 2021, the weighted-average remaining contractual life of warrants outstanding was years (December 31, 2020 – years).
As of September 30, 2021, the intrinsic value of warrants outstanding is $ (December 31, 2020 - $ ).
The table below summarizes warrant issuances during the nine months ended September 30, 2021, and year ended December 31, 2020:
September 30, 2021 | December 31, 2020 | |||||||
Warrants granted: | ||||||||
Board of Directors and Advisory Board service | ||||||||
Pursuant to employment agreements | ||||||||
Pursuant to financing arrangements | ||||||||
Pursuant to consulting agreements | ||||||||
Pursuant to loan agreements | ||||||||
Pursuant to extinguishment of debt | ||||||||
Total |
September 30, 2021 | December 31, 2020 | |||||||
Risk-free interest rate | % | % | ||||||
Expected life | ||||||||
Expected dividend rate | % | % | ||||||
Expected volatility | % | % |
NOTE 11. RELATED PARTY TRANSACTIONS
On
January 20, 2020, Jovian Petroleum, a related party, purchased 1 unit of the debt private placement with gross proceeds of $
On
May 29, 2020, Petrolia Energy Corporation acquired a
On
September 1, 2020, the Company entered into an agreement with Mark Allen, to serve as President for a period of six months (with monthly
extensions). The President was to earn a fee of $
On
December 15, 2020, President Mark Allen exercised warrants to purchase
17 |
On December 15, 2020, in accordance with Mark Allen’s Consulting agreement, the Company issued Mr. Allen shares of common stock as part of the compensation terms of that agreement.
On
December 22, 2020, prior CFO Tariq Chaudhary was issued
On
January 7, 2021, prior Board Member Joel Oppenheim was issued
On
January 11, 2021, prior CEO Zel Khan was issued
On
January 29, 2021, prior CFO Paul Deputy was reinstated as Interim Chief Financial Officer, and signed an agreement that in exchange for
On
March 30, 2021, President Mark Allen was issued
On
March 31, 2021, President Mark Allen was issued
On August 21,2021, the Company signed a Letter Agreement
to divest the Company’s wholly owned Canada subsidiary, Petrolia Canada Corporation (PCC) and its assets in consideration for $
NOTE 12. SEGMENT REPORTING
The Company has a single reportable operating segment, Oil and Gas Exploration and Production, which includes exploration, development, and production of current and potential oil and gas properties. Results of operations from producing activities were as follows:
Canada | United States | Total | ||||||||||
Nine months ended September 30, 2021 | ||||||||||||
Revenue | $ | $ | $ | |||||||||
Production costs | ( | ) | ( | ) | ( | ) | ||||||
Depreciation, depletion, amortization and accretion | ( | ) | ( | ) | ( | ) | ||||||
Results of operations from producing activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Total long-lived assets, September 30, 2021 | $ | $ | $ | |||||||||
Nine months ended September 30, 2020 | ||||||||||||
Revenue | $ | $ | $ | |||||||||
Production costs | ( | ) | ( | ) | ( | ) | ||||||
Depreciation, depletion, amortization, and accretion | ( | ) | ( | ) | ( | ) | ||||||
Loss on TLSAU abandonment | ( | ) | ( | ) | ||||||||
Results of operations from producing activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Total long-lived assets, September 30, 2020 | $ | $ | $ |
18 |
NOTE 13. SUBSEQUENT EVENTS
On August 21, 2021, the Company signed a Letter
Agreement to divest the Company’s wholly owned Canada subsidiary, Petrolia Canada Corporation (PCC) and its assets in
consideration for $
In
October and November of 2021 and January of 2022, the Company entered into various subscription agreements to sell an aggregate amount
of
On October 25, 2021, the Company issued one share each of its newly designated shares of Series B Preferred Stock to Board of Directors members James Burns, Leo Womack, and Ivar Siem. These shares vote in aggregate sixty percent of the total vote on all shareholder matters. See Form 8-K filing reference in Exhibits section below.
On
December 30, 2021, the Company reached a settlement with Argonaut Insurance Company (Argo), regarding a final judgement of $
On
February 16, 2022, the Company entered into both a Purchase and Sale Agreement and a Debt Settlement Agreement with Prospera Energy.
Prospera agreed to purchase the Company’s twenty-eight percent (28%) working interest in the Cuthbert, Luseland and Heart Hills
assets in Saskatchewan and Alberta. Under these agreements Prospera will forgive $
On March 11, 2022, the Company filed a lawsuit in Harris County Texas against Jovian Petroleum Corporation, Zel Khan and Quinten Beasley. The lawsuit claims fraud and breach of contract against all named defendants, as well as breach of fiduciary duty claims against Zel Khan and Quinten Beasley. See Form 8-K reference in Exhibits section below.
On March 16, 2022, Petrolia Canada Corporation received a Notice of Intention to Retain Collateral Pursuant to Section 62 of the Personal Property Security Act (Alberta) from the counsel of Blue Sky Resources Ltd. related to a Loan Agreement and General Security Agreement between Petrolia Canada Corporation and Emmett Lescroart. Petrolia Canada Corporation was notified that Blue Sky Resources Ltd., as assignee of the Emmet Lescroart loan, intends to retain the Utikuma loan collateral pursuant to the General Security Agreement with Petrolia Canada Corporation. On March 30, 2022, Petrolia Canada Corporation’s counsel responded to Blue Sky Resources, Ltd. with a Notice of Objection.
On January 28, 2022, the Securities and Exchange Commission filed an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934 to suspend for a period not exceeding twelve months or revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act of the Company. The Division of Enforcement at the Securities and Exchange Commission (the “Division”) filed a Motion for Summary Disposition in this matter and the Company filed a Response to the Motion for Summary Disposition in April 2022. On May 5, 2022, the Division filed its Response in Support of its Motion for Summary Disposition.
On
June 13, 2022, a Letter Agreement was signed between Blue Sky Resources Ltd. (“BSR”) and Petrolia Energy Corporation whereby
Petrolia Canada Corporation (“PCC”) will sell to Blue Sky Resources its
Effective June 15, 2022, Heather Monk was promoted from Corporate Controller to Interim Chief Financial Officer.
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FORWARD LOOKING STATEMENTS
This Report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words “may,” “will,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.
The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this report include:
● | The sale prices of crude oil; | |
● | The amount of production from oil wells in which we have an interest; | |
● | Lease operating expenses; | |
● | International conflict or acts of terrorism; | |
● | General economic conditions; and | |
● | Other factors disclosed in this report. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read the matters described in “Risk Factors” and the other cautionary statements made in, and incorporated by reference in, this Report as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Please see the “Glossary of Oil and Gas Terms” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on May 16, 2022 (the “2020 Annual Report”) for a list of abbreviations and definitions used throughout this Report.
This information should be read in conjunction with the unaudited condensed consolidated interim financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2020 Annual Report.
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “Part I – Financial Information” – “Item 1. Consolidated Financial Statements”.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Petrolia” and “Petrolia Energy Corp.” refer specifically to Petrolia Energy Corp. and its wholly owned subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this Report only:
● | “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this Report in reference to crude oil or other liquid hydrocarbons; | |
● | “Boe” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate, or natural gas liquids, to six Mcf of natural gas; | |
● | “Mcf” refers to a thousand cubic feet of natural gas; | |
● | “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. |
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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
We were incorporated in Colorado on January 16, 2002. In February 2012, we decided it would be in the best interests of our shareholders to no longer pursue our original business plan 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.
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 producing assets in the Southwest United States and Canada while actively pursuing our strategy to offer low-cost operational solutions in established Oil and Gas regions. We believe our mix of 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.
Slick Unit Dutcher Sands (“SUDS”) Field
The SUDS oilfield consists of 2,604 acres located in Creek County, Oklahoma and Petrolia owns a 100% Working Interest (“WI”) with a 76.5% net revenue interest (NRI). Our engineering reports and analysis indicate there is still considerable recoverable reserves remaining.
A capital project was completed to rebuild our field tank battery, consisting of two free water knockout units, four oil stock tanks and one fiberglass saltwater tank. We also have one disposal well. The SUDS field is currently shut-in while awaiting sufficient capital to recomplete the wells and repair the flow lines.
Twin Lakes San Andres Unit (“TLSAU”) Field
TLSAU is located 45 miles from Roswell, Chaves County, New Mexico. TLSAU is currently shut-in awaiting confirmation of lease acreage held, then capital allocation to complete some regulatory plugging requirements. The Company plugged two wells at Twin Lakes in June 2022.
Askarii Resources, LLC
Effective February 1, 2016, the Company acquired 100% of the issued and outstanding interests of Askarii Resources LLC (“Askarii”), a private Texas based oil & gas service company for the aggregate value of $50,000.
Canadian properties – Luseland, Hearts Hill and Cuthbert fields
On June 29, 2018, the Company acquired a 25% working interest in approximately 41,526 acres located in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest Saskatchewan and Eastern Alberta, Canada (collectively, the “Canadian Properties” and the “Working Interest”). The Canadian Properties currently encompass 64 sections, with 240 oil and 12 natural gas wells. Additionally, there are several idle wells with potential for reactivation and 34 sections of undeveloped land (approximately 21,760 acres). The Canadian Properties and the Working Interest were acquired from Blue Sky Resources (a related party). Blue Sky Resources had previously acquired an 80% working interest from Georox Resources Inc., who had acquired the Canadian Properties from Cona Resources Ltd.
On September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky Resources to obtain the rights to acquire an additional 3% working interest in the Canadian Properties, increasing our Working Interest to 28%. Total consideration paid from the Company to Blue Sky Resources for the additional 3% Working Interest was $150,000.
On February 16, 2022, Petrolia Canada Corporation (PCC), a wholly owned subsidiary of Petrolia Energy Corporation (PEC), entered into a Purchase and Sale Agreement (PSA) and Debt Settlement Agreement (DSA) with Prospera Energy, Inc. whereby PCC sold its 28% working interest in the Luseland, Hearts Hill and Cuthbert fields.
21 |
Utikuma Lake field
On May 1, 2020, Petrolia Energy Corporation acquired a 50% working interest in approximately 28,000 acres located in the Utikuma Lake area in Alberta, Canada. The property is an oil-weighted asset currently producing a total of approximately 500 bpd of light oil. The working interest was acquired from Blue Sky Resources in an affiliated party transaction as Zel C. Khan, the Company’s former Chief Executive Officer, is related to the ownership of Blue Sky Resources.
Blue Sky Resources acquired a 100% working interest in the Canadian Property from Vermilion Energy Inc. via Vermilion’s subsidiary Vermilion Resources. The effective date of the acquisition was May 1, 2020. The total purchase price of the property was $2,000,000 (CAD), with $1,000,000 of that total due initially. The additional $1,000,000 was contingent on the future price of WTI crude. At the time WTI price exceeded $50/bbl, the Company would pay an additional $750,000. In addition, at the time WTI price exceeded $57/bbl the Company would pay an additional $250,000 (for a cumulative contingent total of $1,000,000). The price of WTI crude exceeded $50/bbl on January 6, 2021 and exceeded $57/bbl on February 8, 2021. The additional payments due were netted with the accounts receivable balance from previous Joint Interest Billing statements from BSR. The total USD value of the addition was $787,250, using prevailing exchange rates on the respective dates. Included in the terms of the agreement, the Company also funded their portion of the Alberta Energy Regulator (“AER”) bond fund requirement ($599,044 USD), necessary for the wells to continue in production after the acquisition. Additional funds ($385,075 USD) remain in the other current asset balance for future payments to BSR, related to the acquisition.
On June 13, 2022, a Letter Agreement was signed between Blue Sky Resources Ltd. (“BSR”) and Petrolia Energy Corporation whereby Petrolia Canada Corporation (“PCC”) will sell to BSR its 50% working interest in the Utikuma Lake oil field. See Form 8-K reference in Exhibits section below.
Results of Operations
Revenues
Our oil and gas revenue reported for the nine months ended September 30, 2021 was $4,054,313, an increase of $2,110,447 from the nine months ended September 30, 2020. The increase was due to revenue from the Utikuma field. Revenues associated with our US properties totaled $12,175.
Operating Expenses
Operating expenses decreased by $2,279,650, to $5,258,824 for the nine-month period ended September 30, 2021, compared to $7,538,474 for the nine months ended September 30, 2020. The operating expense decrease was primarily due to the loss recognized on the abandonment of the Twin Lakes field in 2020, of $3,225,928. It was partially reduced by an increase in lease operating expense from the Utikuma field. There was also decreased depletion from the Cona field between the nine months ended September 30, 2020, and the nine months ended September 30, 2021.
Other income (expense)
The Company had net other expense of $261,657 for the nine-month period ended September 30, 2021, compared to a net other expense of $900,896 for the nine-month ended September 30, 2020. This difference was caused by changes in the fair market value of our derivatives, and the forgiveness of the PPP loan.
Foreign exchange gain was $11,409 for the nine-month period ended September 30, 2021, compared to a loss of $1,811 for the nine-month period ended September 30, 2020. The increase resulted from fluctuations in the value of the United States dollar against the Canadian dollar.
Net Income (Loss)
Net loss for the nine months ended September 30, 2021, was $1,466,168, compared to a net loss of $6,495,504 for the nine months ended September 30, 2020. The primary reasons for the decrease in net loss is the loss taken on the abandonment of the TLSAU property in 2020, as well the increased production from the Utikuma field.
Liquidity and Capital Resources
The financial condition of the Company has not changed significantly throughout the period from December 31, 2020 to September 30, 2021.
As of September 30, 2021, we had total current assets of $54,919 and total assets of $7,221,842. Our total current liabilities as of September 30, 2021 were $7,949,655 and our total liabilities as of September 30, 2021 were $11,868,411. We had negative working capital of $7,894,736 as of September 30, 2021.
Our material asset balances are made up of oil and gas properties and related equipment. Our most significant liabilities are notes payable and notes payable related party of $4,142,897 along with accounts payable and accrued liabilities. Our largest accounts payable balances are with the operators of the Cona field, and Blue Sky Resources. The largest accrued liabilities are $765,058 of accrued dividends on our preferred stock and $528,500 owed to related parties for board fees and other compensation.
Net cash used in operating activities was $3,580 and $744,433 for the nine months ended September 30, 2021, and 2020, respectively. The primary cause for the decrease was an increase in net income, due to the increased production in Canada.
Net cash from investing activities was $0.00 for the nine months ended September 30, 2021, and the nine months ended September 30, 2020.
22 |
Net cash used by financing activities was $116,935 for the nine months ended September 30, 2021; net cash provided by financing activities was $770,138 for the nine months ended September 30, 2020. The decrease was caused by proceeds from issuance of common stock and new borrowing in 2020, while no new notes payable were incurred in the first three quarters of 2021 (see “Part I – Item 1. Financial Statements - Note 6. Notes Payable”, above for information regarding outstanding debt obligations).
During the nine months ended September 30, 2021, the Company operated at a negative cash flow from operations of approximately $400 per month and our auditors have raised a going concern in their audit report as contained herein.
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, reducing general and administrative expenses and optimizing the cashflow from our producing assets. However, we may need to raise additional funds to workover 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 recomplete oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all.
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
As of September 30, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources or change our financial condition.
Trends Affecting Future Operations
The factors that will most significantly affect our results of operations will be (i) the sale prices of crude oil and natural gas, (ii) the amount of production from oil or gas wells in which we have an interest, and (iii) lease operating expenses. Our revenues will also be significantly impacted by our ability to maintain or increase oil or gas production through exploration and development activities, and the availability of funding to complete such activities.
It is expected that our principal source of cash flow will be from the production and sale of crude oil and natural gas reserves which are depleting assets. Cash flow from the sale of oil and gas production depends upon the quantity of production and the price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining financing. However, price increases heighten the competition for oil and gas prospects, increase the costs of exploration and development, and, because of potential price declines, increase the risks associated with the purchase of producing properties during times that prices are at higher levels.
A decline in oil and gas prices (i) will reduce the cash flow internally generated by the Company which in turn will reduce the funds available for exploring for and replacing oil and gas reserves, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be obtained, (iii) will reduce the number of oil and gas prospects which have reasonable economic terms, (iv) may cause us to permit leases to expire based upon the value of potential oil and gas reserves in relation to the costs of exploration, (v) may result in marginally productive oil and gas wells being abandoned as non-commercial, and (vi) may increase the difficulty of obtaining financing. However, price declines reduce the competition for oil and gas properties and correspondingly reduce the prices paid for leases and prospects.
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.
23 |
Critical Accounting Policies and New Accounting Pronouncements
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 $64,688,657 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.
Item 3 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 4 Controls and Procedures
(a) 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, 2020, 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 ineffective as of December 31, 2020.
A material weakness is defined as “a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
24 |
The ineffectiveness of our internal control over financial reporting was due to an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel, and the lack of a formalized and complete set of policy and procedure documentation evidencing our system of internal controls over financial reporting. These factors led to certain adjustments which have been reflected in our audited financial statements. These weaknesses are not uncommon in a company of our size due to personnel and financial limitations.
Management is committed to remediating the identified material weakness in a timely manner, with appropriate oversight from our Audit Committee. Over the coming years, we intend to work to remediate the material weaknesses identified above, which is expected to include (i) the addition of accounting and financial personnel with experience in the implementation of accounting principles generally accepted in the United States of America and SEC reporting requirements, funding permitting, (ii) the engagement of accounting consultants on a limited-time basis to provide expertise on specific areas of the accounting literature, (iii) the modification to our accounting processes and enhancement to our financial controls, and/or (iv) the hiring of an independent consulting or accounting firm to review and document our internal control system to ensure compliance with COSO. However, our current financial position will make it difficult for us to undertake the planned remediation steps outlined above.
(b) Changes in Internal Controls. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
On March 11, 2022, Petrolia Energy Corporation (“Petrolia” or the “Company”) and Petrolia Canada Corporation (“Petrolia Canada”), an affiliate of Petrolia’s, filed a lawsuit in District Court, Harris County Texas against Jovian Petroleum Corporation, Zel Khan and Quinten Beasley (herein collectively after referred to as the “Defendants”). The case is assigned to Judge Jaclanel McFarland, of the 133rd Judicial District Court of Harris County, Texas under Cause No. 2022-15278.
In their filed petition against the Defendants, Petrolia and Petrolia Canada claim fraud and breach of contract against all the named Defendants and, in addition to those two (2) claims, they also assert breach of fiduciary duty claims against Defendants Zel Khan and Quinten Beasley. Defendant Zel Khan was a former CEO and Director of Petrolia, and Defendant Quinten Beasley was a former Senior Vice President and Director of Petrolia Canada.
Petrolia and Petrolia Canada are demanding a jury trial and are seeking monetary relief of more than ONE MILLION US DOLLARS ($1,000,000.00) in their lawsuit filed against the Defendants. In the lawsuit filed by the two (2) companies against the Defendants, referenced above, they seek judgment against the Defendants for (i) actual damages in the amount of lost revenue and economic losses, (ii) punitive damages, (iii) pre-and post-judgment interest, (iv) court costs, (v) attorneys’ fees, and (vi) any other relief to which Petrolia and Petrolia Canada are entitled.
On March 16, 2022, Petrolia Canada Corporation received a Notice of Intention to Retain Collateral Pursuant to Section 62 of the Personal Property Security Act (Alberta) from the counsel of Blue Sky Resources Ltd. related to a Loan Agreement and General Security Agreement between Petrolia Canada Corporation and Emmett Lescroart. Petrolia Canada Corporation was notified that Blue Sky Resources Ltd., as assignee of the Emmet Lescroart loan, intends to retain the Utikuma loan collateral pursuant to the General Security Agreement with Petrolia Canada Corporation. On March 30, 2022, Petrolia Canada Corporation’s counsel responded to Blue Sky Resources, Ltd. with a Notice of Objection.
On January 28, 2022, the Securities and Exchange Commission filed an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934 to suspend for a period not exceeding twelve months or revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act of the Company. The Division of Enforcement at the Securities and Exchange Commission (the “Division”) filed a Motion for Summary Disposition in this matter and the Company filed a Response to the Motion for Summary Disposition in April 2022. On May 5, 2022, the Division filed its Response in Support of its Motion for Summary Disposition.
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Item 1A Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Commission on May 15, 2022 under the heading “Risk Factors”, except as set forth below and investors should review the risks provided in the Form 10-K and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Form 10-K for the year ended December 31, 2020 under “Risk Factors” and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
We are currently behind in our SEC filing obligations.
This Form 10-Q filing is being filed well past the due date. As of the date of this filing, we are deficient in filing our quarterly reports on Form 10-Q for the calendar year 2022, and our 10-K for the calendar year 2021. Shareholders may have less information to determine the value of our common stock if we fail to timely make filings with the SEC and/or fail to make such filings with the SEC.
Administrative Proceedings
File No. 3-20724 was filed by the SEC seeking to revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act. The Company has filed a response to the SEC’s motion, but there is no assurance that the Company will be successful, and that the registration of the Company’s securities will not be revoked.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
There were no securities sold by the Company during the period covered by this report and through the date of filing of this report, that were not registered under the Securities Act, which has not previously been included in a Current Report on Form 8-K or the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506(b) 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 and grants 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.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Not Applicable.
Item 5 Other Information
We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506(b) 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 and grants 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.
Item 6 Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements 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 | ||
July 29, 2022 | By: | /s/ Mark M Allen |
Mark M. Allen | ||
Chief Executive Officer | ||
(Principal Executive) |
July 29, 2022 | By: | /s/ Heather M Monk |
Heather M. Monk | ||
Interim Chief Financial Officer | ||
(Financial and Accounting Officer) |
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EXHIBIT INDEX
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