UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2022

 

☐ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

 

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 Road, Suite 400 Houston, Texas		77024
(Address of principal executive offices)		(Zip Code)

 

(832-723-1266)

(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 ☐ No ☒

 

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 ☐ No ☒

 

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 ☐
Non-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 ☐ No ☒

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 176,988,322 shares of common stock as of March 2, 2023.

 

 

 

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	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
Part II Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibit Index	29
SIGNATURES		30
EXHIBITS		31

 

 

PART I: Financial Information

 

Item 1. Consolidated Financial Statements

 

PETROLIA ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2022				December 31, 2021
		(unaudited)				(audited)
ASSETS
Current assets
Cash		$	1,054,109			$	14,058
Accounts receivable			338				5,942
Other current assets			6,397				5,641
Total current assets			1,060,844				25,641
Property & equipment
Oil and gas, on the basis of full cost accounting
Evaluated properties			6,756,794				6,797,025
Furniture, equipment & software			155,293				155,293
Less accumulated depreciation and depletion			(708,580	)			(603,135	)
Net property and equipment			6,203,507				6,349,183
Other assets
Operating lease right-of-use asset			7,454				12,821
Other assets			1,386,980				1,450,841
Total Assets		$	8,658,785			$	7,838,486
LIABILITIES & STOCKHOLDERS DEFICIT
Current liabilities
Accounts payable		$	1,732,868			$	320,088
Accounts payable – related parties			5,478				57,363
Operating lease liability – current			7,998				13,909
Accrued liabilities			1,420,609				1,149,012
Accrued liabilities – related parties			868,662				862,158
Notes payable, current portion			3,328,364				3,438,162
Notes payable – related parties, current portion			774,560				779,373
Total current liabilities			8,138,539				6,620,065
Asset retirement obligations			2,322,812				2,257,027
Derivative liability			5,215				22,554
Total Liabilities		$	10,466,566			$	8,899,646
Stockholders’ Deficit
Preferred stock, $0.001 par value, 1,000,000 shares authorized; 199,100 shares issued and outstanding		$	199			$	199
Preferred Series B stock, no par value; 3 shares authorized; 3 and 0 shares issued and outstanding			152,397				152,397
Preferred Series C stock, $0.10 par value, 11,000 shares authorized, 11,000 and 8,500 shares issued and outstanding			1,100				850
Preferred stock, value			1,100				850
Common stock, $0.001 par value; 400,000,000 shares authorized; 176,988,322 and 176,988,322 shares issued and outstanding			176,988				176,988
Additional paid in capital			60,242,888				60,216,722
Accumulated other comprehensive income			(302,057	)			(269,155	)
Accumulated deficit			(62,079,296	)			(61,339,161	)
Total Stockholders’ Deficit			(1,807,781	)			(1,061,160	)
Total Liabilities and Stockholders’ Deficit		$	8,658,785			$	7,838,486

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

PETROLIA ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

		Three months ended June 30, 2022				Three months ended June 30, 2021				Six months ended June 30, 2022				Six months ended June 30, 2021
Oil and gas sales
Oil and gas sales		$	1,137,890			$	1,248,359			$	2,974,250			$	2,330,607
Total Revenue			1,137,890				1,248,359				2,974,250				2,330,607
Operating expenses
Lease operating expense			1,622,399				1,613,076				2,898,236				2,148,469
Production tax			—				—				438				1,163
General and administrative expenses			149,757				190,942				297,603				521,956
Depreciation, depletion and amortization			60,682				253,285				113,198				436,424
Asset retirement obligation accretion			43,420				93,518				85,898				181,724
Total operating expenses			1,876,258				2,150,821				3,395,373				3,289,736
Loss from operations			(738,368	)			(902,462	)			(421,123	)			(959,129	)
Other income (expenses)
Interest expense			(123,080	)			(171,902	)			(248,017	)			(329,950	)
Other income (expense)			—				—				5,521				—
Change in fair value of derivative liabilities			(146	)			83,111				17,339				(104,605	)
Total other income (expenses)			(123,226	)			(88,791	)			(225,157	)			(434,555	)
Net loss before taxes			(861,594	)			(991,253	)			(646,280	)			(1,393,684	)
Series A Preferred Dividends			(44,798	)			(44,893	)			(89,595	)			(89,568	)
Series C Preferred Dividends			(2,194	)			—				(4,260	)			—
Net Loss Attributable to Common Stockholders			(908,586	)			(1,036,146	)			(740,135	)			(1,483,252	)
Loss per share
(Basic and fully diluted)		$	(0.01	)		$	(0.01	)		$	(0.00	)		$	(0.01	)
Weighted average number of common shares outstanding, basic & diluted			176,988,322				176,988,322				176,988,322				173,854,195
Other comprehensive income, net of tax
Foreign currency translation adjustments			(62,759	)			(39,732	)			(32,902	)			(37,405	)
Comprehensive income (loss)		$	(971,345	)		$	(1,075,878	)		$	(773,037	)		$	(1,520,657	)

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

PETROLIA ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

		Preferred stock Series A								Preferred stock Series B								Preferred stock Series C								Common stock								Additional paid-in				Shares to be				Accumulated Other Comprehensive				Accumulated				Stockholders’ equity
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				capital				Issued				income				deficit				(deficit)
Balance at December 31, 2020			199,100			$	199				—			$	—				—			$	—				168,696,226			$	168,696			$	59,044,519			$	—			$	(266,432	)		$	(63,088,096	)		$	(4,141,114	)
Stock based compensation			—				—				—				—				—				—				—				—				54,923				—				—				—				54,923
Series A preferred dividends			—				—				—				—				—				—				—				—				—				—				—				(89,568	)			(89,568	)
Warrants issued as financing fee			—				—				—				—				—				—				—				—				16,614				—				—				—				16,614
Common shares issued for conversion of debt			—				—				—				—				—				—				2,700,000				2,700				86,400				—				—				—				89,100
Common shares issued for settlement of related party fee			—				—				—				—				—				—				5,592,096				5,592				158,895				—				—				—				164,487
Warrants issued for settlement of loans			—				—				—				—				—				—				—				—				200,378				—				—				—				200,378
Gain on modification of related party debt			—				—				—				—				—				—				—				—				181,791				—				—				—				181,791
Gain on issuance of shares for settlement of accrued related party fees			—				—				—				—				—				—				—				—				373,556				—				—				—				373,556
Other comprehensive income (loss)			—				—				—				—				—				—				—				—				—				—				(37,405	)			—				(37,405	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(1,393,684	)			(1,393,684	)
Balance at June 30, 2021			199,100			$	199				—			$	—				—			$	—				176,988,322			$	176,988			$	60,117,076			$	—			$	(308,837	)		$	(64,571,348	)		$	(4,580,922	)
Balance at December 31, 2021			199,100			$	199				3			$	152,397				8,500			$	850			$	176,988,322			$	176,988			$	60,216,722			$	—			$	(269,155	)		$	(61,339,161	)		$	(1,061,160	)
Series A preferred dividends			—				—				—				—				—				—				—				—				—				—				—				(89,595	)			(89,595	)
Series C preferred dividends			—				—				—				—				—				—				—				—				—				—				—				(4,260	)			(4,260	)
Preferred Series C issued for cash			—				—				—				—				2,500				250				—				—				24,750				—				—				—				25,000
Warrants issued as financing fee			—				—				—				—				—				—				—				—				1,416				—				—				—				1,416
Other comprehensive income (loss)			—				—				—				—				—				—				—				—				—								(32,902	)			—				(32,902	)
Net income (loss)			—				—				—				—				—				—				—				—				—				—				—				(646,280	)			(646,280	)
Balance at June 30, 2022			199,100			$	199				3			$	152,397				11,000			$	1,100			$	176,988,322			$	176,988			$	60,242,888			$	—			$	(302,057	)		$	(62,079,296	)		$	(1,807,781	)

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

PETROLIA ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six months ended June 30, 2022				Six months ended June 30, 2021
Cash Flows from Operating Activities
Net gain (loss)		$	(646,280	)		$	(1,393,684	)
Adjustment to reconcile net gain (loss) to net cash provided by (used in) operating activities:
Depletion, depreciation and amortization			113,198				436,424
Asset retirement obligation accretion			85,898				181,724
Operating lease			(544	)			(2,800	)
Amortization of debt discount			27,715				122,429
Change in fair value of derivative liabilities			(17,339	)			104,605
Stock-based compensation expense			—				54,923
Warrants issued as financing fees			1,416				16,614
Changes in operating assets and liabilities
Accounts receivable			5,601				(43	)
Other current assets			(756	)			—
Other assets			40,442				—
Accounts payable			1,363,562				163,234
Accounts payable – related parties			(3,110	)			15,452
Accrued liabilities			108,010				(127,235	)
Accrued liabilities – related parties			75,584				340,868
Net cash flows from operating activities			1,153,397				(87,489	)
Cash Flows from Investing Activities
Cash flows from investing activities			—				—
Cash Flows from Financing Activities
Repayments on notes payable			(133,491	)			(20,969	)
Repayments on related party notes payable			(4,813	)			(17,613	)
Series C preferred stock			25,000				—
Cash flows from financing activities			(113,304	)			(38,582	)
Changes in foreign exchange rate			(42	)			3,105
Net change in cash			1,040,051				(122,966	)
Cash at beginning of period			14,058				155,045
Cash at end of period		$	1,054,109			$	32,079

 

SUPPLEMENTAL DISCLOSURES

 

		Six months ended June 30, 2022				Six months ended June 30, 2021
SUPPLEMENTAL DISCLOSURES
Interest paid		$	99,195			$	165,354
Income taxes paid			—				—
NON-CASH INVESTING AND FINANCIAL DISCLOSURES
Series A preferred dividends accrued			89,595				89,568
Series C preferred dividends accrued			4,260				—
Conversion of related party debt and payables			—				527,520
Modification of related party debt			—				181,250
Settlement of notes payable related party for common shares			—				135,000
Utikuma acquisition – extra cost triggered by WTI			—				1,000,000

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

PETROLIA ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(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, 2021, 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.

 

7

 

 

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 June 30, 2022, 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.

 

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 June 30, 2022, and December 31,2021.

 

SCHEDULE OF DERIVATIVE LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS

June 30, 2022		Level 1				Level 2				Level 3				Total
Derivative liabilities			—				—				5,215				5,215
ARO liabilities			—				—				2,322,812				2,322,812
December 31, 2021
Derivative liabilities			—				—				22,554				22,554
ARO liabilities			—				—				2,257,027				2,257,027

 

Gain (loss) per share:

 

The computation of basic income (loss) per share of common stock is based on the weighted average number of shares outstanding during the period. Basic and diluted average shares outstanding during the period are the same, because there are no dilutive warrants or other instruments outstanding.

 

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 also needs to resolve its ongoing litigation, particularly in Canada with the Utikuma asset.

 

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, the company may need to cease operations. The Company may not be successful in raising the capital needed to drill and/or rework its existing 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 oilfield 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 Company is also actively working to resolve its ongoing litigation in both the U.S. and Canada. 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.

 

SCHEDULE OF COMPANY’S CURRENT PROPERTIES

Cost		Canadian properties				United States properties				Total
As of December 31, 2020		$	4,314,805			$	4,304,622			$	8,619,427
Additions			787,250				—				787,250
Dispositions			(2,563,434	)			—				(2,563,434	)
Foreign currency translation			(46,218	)			—				(46,218	)
As of December 31, 2021		$	2,492,403			$	4,304,622			$	6,797,025
Foreign currency translations			(40,231	)			—				(40,231	)
As of June 30, 2022		$	2,452,172			$	4,304,622			$	6,756,794
Accumulated depletion
As of December 31, 2020		$	2,631,749			$	61,551			$	2,693,300
Dispositions			(2,629,672	)			—				(2,629,672	)
Depletion			378,306				—				378,306
Foreign currency translation			7,026				—				7,026
As of December 31, 2021		$	387,409			$	61,551			$	448,960
Depletion			112,081				—				112,081
Foreign currency translation			(7,755	)			—				(7,755	)
As of June 30, 2022		$	491,736			$	61,551			$	553,287
Net book value as of December 31, 2021		$	2,104,994			$	4,243,071			$	6,348,065
Net book value as of June 30, 2022		$	1,960,435			$	4,243,071			$	6,203,506

 

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 $400,000 for the NOACK Assets including a $20,000 deposit that was received on August 15, 2019, and the remaining balance of $380,000 to be received by September 30, 2019. By December 31, 2019, FT had made cumulative payments of $375,000, resulting in a $25,000 account receivable to the Company on June 30, 2021, which was included in other current assets. The $400,000 was recorded as a gain on sale of properties. On July 6, 2021, the remaining $25,000 accounts receivable was settled via the following: the purchaser remitted a cash payment of $8,995, as well as paying (on the Company’s behalf) $16,005 of outstanding property tax invoices previously incurred by the Company.

 

On May 1, 2020, Petrolia Energy Corporation acquired a 50% working interest in approximately 28,000 net working interest acres located in the Utikuma Lake area in Alberta, Canada. The property is an oil-weighted asset currently producing approximately 500 bopd of light oil. The working interest was acquired from Blue Sky Resources Ltd. in an affiliated party transaction as Zel C. Khan, the Company’s former Chief Executive Officer, is related to the CEO of Blue Sky. Blue Sky acquired a 100% working interest in the Canadian Property from Vermilion Energy Inc. via Vermilion’s subsidiary Vermilion Resources. The effective date of the acquisition was May 1, 2020. The total purchase price of the property was $2,000,000 (CND), 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 (CND). In addition, at the time WTI price exceeded $57/bbl the Company would pay an additional $250,000 (CND) (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 ($592,699 USD), necessary for the wells to continue in production after the acquisition. Additional funds ($380,742 USD) remain in the other current asset balance for future payments from BSR, related to the acquisition.

 

9

 

 

On July 27, 2020, the Company entered into a settlement agreement pursuant to which nine leases totalling approximately 3,800 acres of the 4,880-acre Twin Lakes San Andres Unit were forfeited as a part of the settlement agreement. Consequently, the Company no longer has the right to produce oil, gas, or other hydrocarbons and any other minerals from the mineral estate encumbered by the leases and owned by the Trustee. The company accounted for the forfeiture of the TLSAU properties, in accordance with Reg S-W.T.Rule 4-10(c)(6). Accordingly, an analysis of multi-period reserve reports was performed to determine the percentage of the cumulative US full cost pool’s reserves that were forfeited (56% or 943,820). Then that percentage was multiplied by the period end net property balance of $10,175,456. This resulted in a write down of $5,648,994 ($10,175,456 * 56%) of the US cost pool, which was recorded as part of operating expenses for the year ended December 31, 2020. Note that both TLSAU and SUDS make up the US full cost pool.

 

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.

 

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 June 30, 2022, we did not have any short-term leases.

 

The tables below present financial information associated with our lease.

 

SCHEDULE OF FINANCIAL INFORMATION LEASE

		Balance Sheet Classification		June 30, 2022				December 31, 2021
Right-of-use assets		Other long-term assets			7,454				12,821
Current lease liabilities		Other current liabilities			7,998				13,909
Non-current lease liabilities		Other long-term liabilities			—				—

 

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As of June 30, 2022, the maturities of our lease liability are as follows:

 SCHEDULE OF MATURITIES LEASE LIABILITY

2022		$	7,998
Less: Imputed interest			(544	)
Present value of lease liabilities		$	7,454

 

NOTE 6. NOTES PAYABLE

 

The following table summarizes the Company’s notes payable:

 

 SCHEDULE OF NOTES PAYABLE

		Interest rate				Date of maturity		June 30, 2022				December 31, 2021
Truck loan (ii)			5.49	%		January 20, 2022		$	—			$	4,021
Credit note IV (iii)			10	%		January 01, 2020			697,895				831,387
Discount on credit note IV									(69,286	)			(97,001	)
Credit note V(iv)			10	%		December 31, 2022			2,085,432				2,085,432
Lee Lytton						On demand			3,500				3,500
Credit note VI (v)			10	%		December 31, 2021			266,900				416,900
Credit note VII (vi)			10	%		December 31, 2021			150,000				—
Quinten Beasley			10	%		October 14, 2016			5,000				5,000
Jovian Petroleum Corporation (vii)			3.5	%		December 31, 2021			178,923				178,923
M. Horowitz			10	%		October 14, 2016			10,000				10,000
								$	3,328,364			$	3,438,162

 

	(i)	All notes are current liabilities (due within one year or less from June 30, 2022.)
	(ii)	On January 6, 2017, the Company purchased a truck and entered into an installment note in the amount of $35,677 for a term of five years and interest at 5.49% per annum. Payments of principal and interest in the amount of $683 are due monthly. The note was paid off in January of 2022.
	(iii)	On January 2, 2020, the Company entered into a loan agreement in the amount of $1,000,000 with a third party (including a $120,000 origination fee). The note bore interest at an interest rate of $10% per annum and matures on June 30, 2020, with warrants to purchase 5,000,000 shares of common stock (the “Loan Warrants”), at an exercise price of $0.10 per share in Canadian dollars and expire on January 2, 2023. The fair value of issued warrants were recorded as a debt discount of $266,674 and monthly amortization of $11,111. These funds were initially placed in escrow, then on May 29, 2020, they were used for the purchase of the Utikuma oil field. Pursuant to a loan extension agreement, on October 30, 2020, the Company issued warrants to purchase 5,000,000 of common stock, at an exercise price of $0.05 per share, expiring on January 6, 2023. The fair value of the issued warrants was recorded as a debt discount of $166,289 and monthly amortization of $4,619.14.

 

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	(iv)	On May 9, 2018, Bow entered into an Amended and Restated Loan Agreement with a third party. The Loan Agreement increased by $800,000 the amount of a previous loan agreement entered into between Bow and the Lender, to $1,530,000. The amount owed under the Loan Agreement accrues interest at the rate of 12% per annum (19% upon the occurrence of an event of default) and is due and payable on May 11, 2021, provided that the amount owed can be prepaid prior to maturity, beginning 60 days after the date of the Loan Agreement, provided that the Company gives the Lender 10 days’ notice of our intent to repay and pays the Lender the interest which would have been due through the maturity date at the time of repayment. The Loan Agreement contains standard and customary events of default, including cross defaults under other indebtedness obligations of us and Bow, and the occurrence of any event which would have a material adverse effect on us or Bow. The Company is required to make principal payments of $10,000 per month from January through September 2019 with the remaining balance of $710,000 due at maturity on May 11, 2021. The additional $800,000 borrowed in connection with the entry into the Loan Agreement was used by the Company to acquire 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”). Upon the disposition of Bow, a total of $730,000 of the obligations owed under the Loan Agreement were transferred to Blue Sky Resources Ltd. (“Blue Sky”).
		In order to induce the Lender to enter into the Loan Agreement, the Company agreed to issue the Lender 500,000 shares of restricted common stock (the “Loan Shares”), which were issued on May 18, 2018, and warrants to purchase 2,320,000 shares of common stock (the “Loan Warrants”), of which warrants to purchase (a) 320,000 shares of common stock have an exercise price of $0.10 per share in Canadian dollars and expired on May 15, 2021, (b) 500,000 shares of common stock have an exercise price of $0.12 per share in U.S. dollars, and expired on May 15, 2021; and (c) 1,500,000 shares of common stock have an exercise price of $0.10 per share in U.S. dollars and expire on May 15, 2020. The fair value of the 500,000 common shares issued were assessed at the market price of the stock on the date of issuance and valued at $47,500. The fair value of the Canadian dollar denominated warrants issued were assessed at $30,012 using the Black Scholes Option Pricing Model. The fair value of the U.S. dollar denominated warrants issued were assessed at $182,650 using the Black Scholes Option Pricing Model. The Company determined the debt modification to be an extinguishment of debt and recorded a total loss on extinguishment of debt of $260,162.
		On September 17, 2018, the Company entered into a loan agreement with a third party for $200,000 to acquire an additional 3% working interest in the Canadian Properties. The loan bears interest at 12% per annum and has a maturity date of October 17, 2019. Payments of principal and interest in the amount of $6,000 are due monthly. The loan is secured against the Company’s 3% working interest in the Canadian Properties and has no financial covenants. During 2020, the balance increased by $146,000 resulting in a $346,038 ending balance. On January 1, 2021, the Lender signed amended loan agreements, which moved the balance of this note to new credit notes.
		On April 25, 2019, the Company entered into a promissory note (an “Acquisition Note”) with a third-party in the amount of $750,000 to acquire working interests in the Utikuma oil field in Alberta Canada. The Note bears interest at 9% per annum and is due in full at maturity on April 25, 2021. No payments are required on the note until maturity while interest is accrued. In addition, warrants to purchase 500,000 shares of common stock with an exercise price of $0.12 per share expiring on May 1, 2021, were issued associated with the note. The fair value of issued warrants were recorded as a debt discount of $38,249 and amortization of $8,366. The notes hold a security guarantee of working interest in the Utikuma oil field and a working interest in the TLSAU field. On January 1, 2021, the Lender signed an amended loan agreement consolidating this loan with $146,038 of another credit note and accrued interest on those amounts.
		On December 1, 2021, the Company signed an amended loan agreement with third party for $2,085,432, which combined all notes described above and accrued interest on those amounts. The loan bears interest at 10% per annum and has maturity date of December 31, 2022. The note holds a security interest against the 25% Working Interest in the Cona assets and a security guarantee of a working interest in the Utikuma oil field and a working interest in the TLSAU field. On January 1, 2022, this note was assigned to Blue Sky Resources.
	(v)	Various shareholder advances provided by a lender during 2018 and 2019. There were no formal documents drawn. Interest rates were applied based on other similar loan agreements entered into by the Company during that period. On February 12, 2021, the Company entered into an amended loan agreement in the amount of $416,900 that consolidated these amounts. The loan bears interest at 10% per annum and has a maturity date of December 31, 2021. On August 31, 2021, this loan was in default due to missed interest payments, and a default interest rate was applied to the principal balance. On February 3, 2022, $150,000 of this note was assigned by the holder to Blue Sky Resources, as reflected in Credit note VII.

 

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	(vi)	On February 3, 2022, $150,000 of Credit Note VI was assigned by the holder to Blue Sky Resources
	(vii)	On February 9, 2018, the Company entered into a Revolving Line of Credit Agreement (“LOC”) for $200,000 (subsequently increased to $500,000 on April 12, 2018) with Jovian Petroleum Corporation (“Jovian”). The initial agreement was for a period of 6 months, and it can be extended for up to 5 additional terms of 6 months each. All amounts advanced pursuant to the LOC will bear interest from the date of advance until paid in full at 3.5% simple interest per annum. Interest will be calculated on a basis of a 360-day year and charged for the actual number of days elapsed. Subsequent to period-end this LOC has been extended until December 31, 2021. As of September 1, 2021, Zel Khan and Quinten Beasley resigned from their positions at Petrolia Energy, so this note has been removed from the related party section. Also, see Note 13. Subsequent Events regarding the dispute of this value.

 

The following is a schedule of future minimum repayments of notes payable as of June 30, 2022:

 

 SCHEDULE OF FUTURE MINIMUM REPAYMENTS OF NOTES PAYABLE

2022		$	3,397,650
Thereafter			—
Total		$	3,397,650

 

NOTE 7. RELATED PARTY NOTES PAYABLE

 

The following table summarizes the Company’s related party notes payable:

 

SCHEDULE OF RELATED PARTY NOTES PAYABLE 

		Interest rate				Date of maturity		June 30, 2022				December 31, 2021
Ivar Siem (i)			9	%		December 31, 2021			278,435				278,435
Mark Allen (ii)			9	%		August 15, 2021			55,000				55,000
Mark Allen (iii)			12	%		June 30, 2020			200,000				200,000
Mark Allen (iv)			9	%		June 30, 2021			241,125				245,938
								$	774,560			$	779,373

 

	(i)	On August 15, 2019, the Company entered into a loan agreement in the amount of $75,000 with Ivar Siem. The note bears interest at an interest rate of 12% per annum with a four (4) month maturity. On December 4, 2019, the Company entered into a loan agreement in the amount of $100,000 with Ivar Siem. The note bears interest at an interest rate of 12% per annum with a six (6) month maturity. At the maturity date, the note holder has the right to collect the principal plus interest or convert into 1,250,000 shares of common stock at $0.08 per share. In addition, if converted, the note holder will also receive 5,000,000 warrants at an exercise price of $0.10 per share, vesting immediately with a 36-month expiration period. On February 28, 2020, the Company entered into a $50,000 loan agreement with Ivar Siem. The note does not bear any interest (0% interest rate) and is due on demand. The note includes warrants to purchase 200,000 shares of common stock (the “Loan Warrants”), at an exercise price of $0.10 per share in Canadian dollars and expire on March 1, 2022. On January 1, 2021, the Company entered into an amended loan agreement in the amount of $278,435, which combined the three previous loans, along with accrued interest. The note bears an interest rate of 9% and matured on December 21, 2021.
	(ii)	On April 15, 2020, the Company entered into an agreement, with Mark Allen, that included a funding clause where the Company borrowed $55,000 from Mr. Allen. The note bears interest at an interest rate of 9% per annum and matured on August 15, 2021.

 

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	(iii)	During 2019, the Company entered into a loan agreement in the amount of $200,000 with Mark Allen. The note bears interest at an interest rate of 12% per annum and matured on June 30, 2020. At the maturity date, the note holder has the right to collect the principal plus interest or convert into 2,500,000 shares of common stock at $0.08 per share. In addition, upon conversion, the note holder will also receive 10,000,000 warrants at an exercise price of $0.10 per share, vesting immediately with a 36-month expiration period.
	(iv)	On January 3, 2020, the Company entered into a loan agreement in the amount of $100,000 with Mark Allen. The note bears interest at an interest rate of $10% per annum and matures on June 1, 2020, with warrants to purchase 400,000 shares of common stock (the “Loan Warrants”), at an exercise price of $0.10 per share in Canadian dollars and expire on January 3, 2023. The fair value of issued warrants were recorded as a debt discount of $31,946 and monthly amortization of $1,775. On February 14, 2020, the Company entered into a loan agreement in the amount of $125,000 with Mark Allen. The note bears interest at an interest rate of 10% per annum and matures on June 1, 2020, with warrants to purchase 750,000 shares of common stock (the “Loan Warrants”), at an exercise price of $0.10 per share in Canadian dollars and expire on February 14, 2022. The fair value of issued warrants were recorded as a debt discount of $38,249 and monthly amortization of $1,903. On January 1, 2021, the Company entered into an amended loan agreement in the amount of $245,938, which combined the two previous loans, along with accrued interest. The note bears an interest rate of 9% and matured on June 30, 2021.

 

The following is a schedule of future minimum repayments of related party notes payable as of June 30, 2022:

 

SCHEDULE OF FUTURE MINIMUM REPAYMENTS OF RELATED PARTY NOTES PAYABLE 

2022		$	774,560
Thereafter			—
Total		$	774,560

 

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

 

On May 18, 2018, as an inducement to enter into an Amended and Restated Loan Agreement, the Company issued, among other instruments, warrants to acquire 320,000 shares of common stock with an exercise price of $0.10 per share in Canadian dollars. The warrants are valued using the Black Scholes Option Pricing Model and the derivative is fair valued at the end of each reporting period. The Company valued the derivative liability at initial recognition as $30,012. These warrants expired on May 11, 2021.

 

On January 06, 2020, as an inducement to enter into a Loan Agreement, the Company issued, among other instruments, warrants to acquire 5,000,000 shares of common stock with an exercise price of $0.10 per share. The warrants are valued using the Black Scholes Option Pricing Model and the derivative is fair valued at the end of each reporting period. The Company valued the derivative liability at initial recognition as $144,259.

 

On October 30, 2020, as an inducement to extend the principal payment deadline from the previously issued Loan Agreement, the Company issued additional warrants to acquire 5,000,000 shares of common stock with an exercise price of $0.10 per share. The warrants are valued using the Black Scholes Option Pricing Model and the derivative is fair valued at the end of each reporting period. The Company valued the derivative liability at initial recognition as $95,352.

 

A summary of the activity of the derivative liabilities is shown below:

 

 SCHEDULE OF DERIVATIVE LIABILITIES

As of December 31, 2021			22,554
Additions			—
Fair value adjustment			(17,339	)
As of June 30, 2022		$	5,215

 

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.

 

 SCHEDULE OF DERIVATIVE LIABILITY OF FAIR VALUE ASSUMPTION

		June 30, 2022
Risk-free interest rate			2.51	%
Expected life			0.5 years
Expected dividend rate			0	%
Expected volatility			281	%

 

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NOTE 9. ASSET RETIREMENT OBLIGATIONS

 

The Company has a number of oil and gas wells in production and will have AROs once the wells are permanently removed from service. The primary obligations involve the removal and disposal of surface equipment, plugging and abandoning the wells and site restoration.

 

Petrolia Energy Corporation (“Petrolia” or the “Company”) is the operator of certain wells located in New Mexico, at the Twin Lakes San Andres Unit (“TLSAU”) Field. TLSAU is located 45 miles from Roswell, Chaves County, New Mexico.

 

On March 4, 2021, the Company received a letter from the Commissioner of Public Lands of the State of New Mexico, which was sent to us and certain other parties notifying such parties of certain non-compliance with the laws and regulations that it administers. The deficiencies are currently in the process of being settled by a third party agreeing to plug six wells, including at least two Company operated wells (TLSAU wells #316 and #037). The scope of the matter above included only 240 acres of the 640 acres of The New Mexico State Land Office (SLO) lease.

 

On April 8, 2021, the State of New Mexico Energy, Minerals and Natural Resources Department Oil Conservation Division (“OCD”) sent the Company a Notice of Violation alleging that the Company was not in compliance with certain New Mexico Oil and Gas Act regulations (the “NMAC”), associated with required reporting, inactive wells and financial assurance requirements, plugging certain abandoned wells, providing required financial assurance in connection with plugging expenses, and proposing to assess certain civil penalties in the amount of an aggregate of approximately $35,100.

 

As previously reported and in Petrolia’s Form 8-K dated October 25, 2021 (reference to which is hereby made), on April 8, 2021, the State of New Mexico Energy, Minerals and Natural Resources Department, Oil Conservation Division (the “OCD”) issued a Notice of Violation (the “NOV”) to Petrolia alleging that the Company violated four regulations under Title 19, Chapter 15 of the New Mexico Administrative Code (the “NMAC”) by: (i) failing to file production reports for certain wells, (ii) exceeding the number of inactive wells allowed, (iii) failing to provide financial assurance in the amount required, and (iv) failing to provide additional financial assurance in the amount required.

 

The Company acknowledged the violations alleged in the NOV and requested an informal resolution. On December 30, 2021, to resolve this matter, Petrolia entered into a Stipulated Final Order (the “SFO”) in Case No. 21982 with the OCD whereby Petrolia among other things agreed to: (i) submit appropriate forms for wells identified on the SFO Inactive Well List, (ii) plug the specific TLSAU wells listed in section 8 (c) and (d) of the SFO, as well as submit all required information and forms specified in the SFO, (iii) open an escrow account meeting the terms listed in the SFO, (iv) deposit funds into an escrow account within the timeframe described in the SFO, and (v) provide the OCD with a report proposing deadlines for bringing all remaining wells into compliance.

 

The Company entered into a settlement agreement on July 27, 2020 with Moon Company, Trustee of the O’Brien Mineral Trust pursuant to which nine leases totaling approximately 3,800 acres of the 4,880 acre Twin Lakes San Andres Unit were terminated as a part of the settlement agreement. Pursuant to this settlement agreement, the Company no longer has the right to produce oil, gas, or other hydrocarbons and any other minerals from the mineral estate encumbered by the leases and owned by the trustee of the O’Brien Mineral Trust.

 

AROs associated with the retirement of tangible long-lived assets are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets in the period incurred. The fair value of AROs is recognized as of the acquisition date of the working interest. The cost of the tangible asset, including the asset retirement cost, is depleted over the life of the asset. AROs are recorded at estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the long-lived asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated discount rates and changes in the estimated timing of abandonment.

 

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For the purpose of determining the fair value of AROs incurred during the years presented, the Company used the following assumptions:

SCHEDULE OF FAIR VALUE OF ASSET RETIREMENT OBLIGATIONS

 

			June 30, 2022
Inflation rate			1.92 - 2.15	%
Estimated asset life			12-21 years

 

The following table shows the change in the Company’s ARO liability:

 

SCHEDULE OF CHANGE IN ASSET RETIREMENT OBLIGATIONS

		Canadian properties				United States properties				Total
Asset retirement obligations, December 31, 2020		$	2,711,909			$	912,224			$	3,624,133
Plugging liability at Twin Lakes			—				132,000				132,000
Accretion expense			290,367				26,506				316,873
Disposition			(1,824,339	)			—				(1,824,339	)
Foreign currency translation			8,360				—				8,360
Asset retirement obligations, December 31, 2021		$	1,186,297			$	1,070,730			$	2,257,027
Accretion expense			72,043				13,855				85,898
Foreign currency translation			(20,113	)			—				(20,113	)
Asset retirement obligations, June 30, 2022		$	1,238,227			$	1,084,585			$	2,322,812

 

NOTE 10. EQUITY

 

Preferred stock

 

The holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 9% per annum. The Preferred Stock will automatically convert into common stock when the Company’s common stock market price equals or exceeds $0.28 per share for 30 consecutive days. At conversion, the value of each dollar of preferred stock (based on a $10 per share price) will convert into 7.1429 common shares (which results in a $0.14 per common share conversion rate).

 

In accordance with the terms of the Preferred Stock, cumulative dividends of $89,595 were declared for the six months ended June 30, 2022, and $89,568 the six months ended June 30, 2021.

 

The holders of Series B Preferred Stock do not accrue dividends and have no conversion rights. For so long as any shares of Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, have the right to vote on all shareholder matters (including, but not limited to at every meeting of the stockholders of the Company and upon any action taken by stockholders of the Company with or without a meeting) equal to sixty percent (60%) of the total vote. No shares of Series B Preferred Stock held by any person who is not then a member of Board of Directors of the Company shall have any voting rights.

 

The holders of Series C Preferred Stock are entitled to receive cumulative dividends at a rate of 8% per annum. If any shares of Series C Preferred Stock remain outstanding as of December 31, 2023, the dividend rate will increase to 11% per annum. The Series C Preferred Stock will automatically convert into common stock upon any registered public offering of the Company’s common stock. At conversion, the value of each dollar of Series C Preferred Stock (based on a $10 per share price) will convert into 100 common shares (which results in a $0.01 per common share conversion rate).

 

In accordance with the terms of the Series C Preferred Stock, cumulative dividends of $4,260 and $0 were declared for the six months ended June 30, 2022, and June 30, 2021, respectively.

 

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Common stock

 

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 1,992,272 shares of the Company on January 25, 2021.

 

Joel Oppenheim, former Director, was issued 316,491 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.

 

Paul Deputy was reinstated Interim Chief Financial Officer and signed a Settlement and Mutual Release Agreement. In exchange for releasing the Company for any current, outstanding payroll and/or service-related liability on January 29, 2021, the Company agreed to pay Mr. Deputy $50,000, to be paid in $2,500 monthly increments, starting April 1, 2021. In addition, Mr. Deputy was issued 250,000 shares of Petrolia common stock on January 29, 2021. The shares were issued at the price on that date of $0.033. This created a gain of $134,270 that was recorded as additional paid in capital, due to the related party nature of the transaction.

 

On March 30, 2021, Mark Allen converted $30,000 of unpaid contract wages from early 2020 into 333,333 common shares of common stock. A conversion price of $0.09 per share was used to determine the number of shares.

 

On March 30, 2021, Mark Allen converted a defaulted secured loan of $135,000 and $9,888 of accrued interest as well as $135,000 of guaranteed return that was due on December 15, 2019. The conversion consisted of 5,400,000 shares of common stock and 5,400,000 warrants to purchase common stock. The warrants have a strike price of $0.08 per share and expire in 36 months.

 

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 traded. On September 27, 2022, the Financial Industry Regulatory Authority (“FINRA”) pulled the Company’s stock symbol due to inactivity in the Company’s security for a year. The Company is taking steps to become current in its filings with the Securities and Exchange Commission and upon becoming current in its filings with the Securities and Exchange Commission, it plans to engage a market maker to file a Form 15c2-11 with FINRA and obtain a stock symbol.

 

Warrants

 

On September 24, 2015, the Board of Directors of the Company approved the adoption of the 2015 Stock Incentive Plan (the “Plan”). The Plan provides an opportunity, subject to approval of our Board of Directors, of individual grants and awards, for any employee, officer, director or consultant of the Company. The maximum aggregate number of shares of common stock which may be issued pursuant to awards under the Plan, as amended on November 7, 2017, was 40,000,000 shares. The plan was ratified by the stockholders of the Company on April 14, 2016.

 

Continuity of the Company’s common stock purchase warrants issued and outstanding is as follows:

 

SCHEDULE OF COMMON STOCK PURCHASE WARRANTS ISSUED AND OUTSTANDING

		Warrants				Weighted Average Exercise Price
Outstanding at year ended December 31, 2020			40,764,666			$	0.13
Granted			9,400,000				0.09
Expired			(20,464,666	)			0.11
Outstanding at December 31, 2021			29,700,000			$	0.13
Granted			500,000				0.10
Expired			(4,480,000	)			0.11
Outstanding at June 30, 2022			25,720,000			$	0.13

 

As of June 30, 2022, the weighted-average remaining contractual life of warrants outstanding was 1.15 years (December 31, 2021 – 1.71 years).

 

As of June 30, 2022, the intrinsic value of warrants outstanding is $0.00 (December 31, 2021 - $0.00).

 

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The table below summarizes warrant issuances during the six months ended June 30, 2022, and year ended December 31, 2021:

SCHEDULE OF WARRANTS ISSUANCE DURING PERIOD 

		June 30, 2022				December 31, 2021
Warrants granted:
Board of Directors and Advisory Board service			—				3,000,000
Pursuant to financing arrangements			500,000				1,000,000
Pursuant to loan agreements			—				5,400,000
Total			500,000				9,400,000

 

The warrants were valued using the Black Scholes Option Pricing Model with the range of assumptions outlined below. Expected life was determined based on historical data of the Company.

 

SCHEDULE OF FAIR VALUE OF ASSUMPTION OF WARRANTS

		June 30, 2022				December 31, 2021
Risk-free interest rate			2.99	%			0.16% to 0.97	%
Expected life			3.0 years				2.0 – 3.0 years
Expected dividend rate			0	%			0	%
Expected volatility			281	%			277% to 356	%

 

NOTE 11. RELATED PARTY TRANSACTIONS

 

On January 25, 2021, prior Board Member Joel Oppenheim was issued 316,491 shares of common stock. These shares were in exchange for Mr. Oppenheim releasing the Company of his remaining board compensation balance of $60,000. The shares were issued at the price on that date of $0.02. This created a gain of $53,670 that was recorded as additional paid in capital, due to the related party nature of the transaction.

 

On January 25, 2021, prior CEO Zel Khan was issued 1,992,272 shares of common stock. These shares were in exchange for Mr. Khan releasing the Company of his remaining deferred outstanding salary balance of $325,000. The shares were issued at the price on that date of $0.025. This created a gain of $275,193 that was recorded as additional paid in capital, due to the related party nature of the transaction.

 

On January 29, 2021, prior CFO Paul Deputy was reinstated as Interim Chief Financial Officer and signed an agreement that in exchange for 250,000 shares of common stock and 20 monthly payments of $2,500 starting in April 2021, he would release the Company of his remaining deferred outstanding salary balance of $192,520.04. The shares were issued at the price on that date of $0.033. This created a gain of $134,270 that was recorded as additional paid in capital, due to the related party nature of the transaction.

 

On March 30, 2021, prior President Mark Allen was issued 333,333 shares of common stock. A conversion price of $0.09 per share was used to determine the number of shares. These shares were in exchange for Mr. Allen releasing the company of an outstanding consulting fee balance of $30,000. The shares were issued at the price on that date of $0.033. This created a gain of $19,001 that was recorded as additional paid in capital, due to the related party nature of the transaction.

 

On March 30, 2021, prior President Mark Allen was issued 5,400,000 shares of common stock. These shares were in exchange for Mr. Allen releasing the company of an outstanding loan of $135,000 with $9,888 of accrued interest and outstanding guaranteed return on that loan of $135,000. The shares were issued at the price on that date of $0.033. In addition, Mr. Allen was granted warrants to purchase 5,400,000 shares of common stock at $0.08, vesting immediately. The warrants expire in 36 months. The warrants were valued at $200,378 using the Black Scholes method. This created a loss of $98,690 that was recorded as a reduction to additional paid in capital, due to the related party nature of the transaction.

 

18

 

 

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 $6,500,000 in Canadian dollars (approximately $5,150,000 in U.S. dollars) less any contingent liabilities. The buyer is Blue Sky Resources Ltd. (“Blue Sky”), an affiliated party to Zel C. Khan, the Company’s former Chief Executive Officer. Petrolia Canada Corporation assets include a 50% working interest in approximately 28,000 acres located in the Utikuma Lake area in Alberta, Canada, and 28% working interest in the Luseland, Hearts Hill, and Cuthbert fields located in Southwest Saskatchewan and Eastern Alberta. The Company received a non-refundable deposit of $200,000 CAD on August 31, 2021. The remaining payment schedule is as follows: $2,000,000 CAD on the Closing Date (scheduled for September 30, 2021), $1,000,000 CAD on October 31, 2021, less Petrolia’s contingent liabilities associated with the acquisition of Utikuma, and $3,300,000 CAD on December 31, 2021. See Form 8-K reference in Exhibits section. This transaction did not close, and the $200,000 CAD was added to other payables due to Blue Sky Resources in the fourth quarter of 2021.

 

On October 25, 2021, Petrolia Energy Corporation issued one share of its newly designated shares of Series B Preferred Stock to each of the three members of its then Board of Directors, (1) James E. Burns, (2) Leo Womack and (3) Ivar Siem, in consideration for services rendered to the Company as members of the Board of Directors. Such shares of Series B Preferred Stock vote in aggregate sixty percent (60%) of the total vote on all shareholder matters, voting separately as a class. This stock was valued by an independent party at $50,799 per share. For further information, see Form 8-K reference in Exhibits section. The purpose of issuing the three Series B Preferred shares is to protect the company while the disputes described in the Form 8-KCurrent Report, filed on March 18, 2022, are heard and resolved through the U.S. court system. The Series B Preferred shares will likely be retired once the litigation is resolved.

 

In October and November of 2021, Board Member Leo Womack purchased an aggregate of 2,500 shares of Series C Preferred Stock for cash of $25,000.

 

On January 31, 2022, Board Member Leo Womack purchased 2,500 more shares of Series C Preferred Stock for cash of $25,000.

 

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:

 

SCHEDULE OF LONG-LIVED ASSETS

		Canada				United States				Total
Six months ended June 30, 2021
Revenue		$	2,318,321			$	12,286			$	2,330,607
Production costs			(2,106,632	)			(43,000	)			(2,149,632	)
Depreciation, depletion, amortization and accretion			(589,631	)			(28,517	)			(618,148	)
Results of operations from producing activities		$	(377,942	)		$	(59,231	)		$	(437,173	)
Total long-lived assets, June 30, 2021		$	2,132,294			$	4,253,535			$	6,385,829
Six months ended June 30, 2022
Revenue		$	2,968,171			$	6,079			$	2,974,250
Production costs			(2,789,296	)			(109,378	)			(2,898,674	)
Depreciation, depletion, amortization, and accretion			(184,124	)			(14,972	)			(199,096