Quarterly report pursuant to Section 13 or 15(d)

ACQUISITION OF BOW ENERGY LTD., A RELATED PARTY

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ACQUISITION OF BOW ENERGY LTD., A RELATED PARTY
6 Months Ended
Jun. 30, 2018
Business Combinations [Abstract]  
ACQUISITION OF BOW ENERGY LTD., A RELATED PARTY

NOTE 4: ACQUISITION OF BOW ENERGY LTD., A RELATED PARTY

 

On November 30, 2017, we signed an Arrangement Agreement (the “Arrangement”) to acquire Bow Energy Ltd, a related party (“Bow” and the “Acquisition”). Bow is a Canadian company with corporate offices in Alberta, Calgary.

 

On February 27, 2018, the Acquisition closed and we acquired all of the issued and outstanding shares of capital stock of Bow (each a “Bow Share”). The Arrangement was approved at a special meeting of shareholders of Bow held on February 21, 2018. Final approval of the Arrangement was granted by the Court of Queen’s Bench of Alberta (the “Court”) on February 23, 2018.

 

Ilyas Chaudhary, is the father of Zel C. Khan, the Company's Chief Executive Officer. Mr. Chaudhary owned and controlled BSIH Ltd. (“BSIH”)

prior to the acquisition of Bow and through the ownership and control of BSIH, Mr. Chaudhary controlled Bow. Therefore, the BOW acquisition is a related party transaction. Additionally, BSIH was the largest shareholder of the Company prior to the cancellation of the shares pursuant to the terms of a Share Exchange Agreement between the Company and Blue Sky Resources Ltd dated August 31, 2018.

 

Under the terms of the Arrangement, Bow shareholders are deemed to have received 1.15 Petrolia common stock shares for each Bow Share. A total of 106,156,712 shares of the Company’s common stock were issued to the Bow shareholders as a result of the Arrangement, plus additional shares in connection with the rounding described below. The Arrangement provided that no fractional shares would be issued in connection with the Arrangement, and instead, each Bow shareholder otherwise entitled to a fractional interest would receive the nearest whole number of Company shares. For example, where such fractional interest is greater than or equal to 0.5, the number of shares to be issued would be rounded up to the nearest whole number and where such fractional interest is less than 0.5, the number of shares to be issued would be rounded down to the nearest whole number. In calculating such fractional interests, all shares issuable in the name of or beneficially held by each Bow shareholder or their nominee as a result of the Arrangement shall be aggregated.

 

The Arrangement provides that any certificate formerly representing Bow common stock not duly surrendered on or before the last business day prior to the third anniversary of the closing date will cease to represent a claim by, or interest of, any former shareholder of any kind of nature against Bow or the Company and on such date all consideration or other property to which such former holder was entitled shall be deemed to have been surrendered to the Company.

 

The Company also assumed all of the outstanding warrants to purchase shares of common stock of Bow (the “Bow Warrants”) and certain options to purchase shares of common stock of Bow (the “Bow Options”) in connection with the Arrangement (i.e., each warrant/option to purchase one (1) share of Bow represents the right to purchase one (1) share of the Company following the closing).

 

At the closing of the Acquisition, we issued the Bow shareholders the shares described above and assumed warrants to purchase 320,000 shares of common stock valued at $103,632.

 

A subsidiary of Bow Energy Ltd., Bow Energy Pte. Ltd. (“BEPL”), owns 75% of the issued and outstanding shares of Renco Elang Energy Pte. Ltd. (“REE”) which owns a 75% working interest in a Production Sharing Contract referred to as “South Block A” (the “Assets” or “SBA”) located onshore, North Sumatra, Indonesia. REE is the operator of the Assets. Effectively, the Company has a 44.48% working interest in the Assets.

 

On May 24, 2017, Bow’s wholly owned subsidiary, Bow Energy International Holdings Inc. (“BEIH”), acquired all of Bukit Energy Inc.’s shareholding interests (the “Subsidiary Shares”) in five Singapore holding companies (the “Holding Companies”) that own the interests in four Production Sharing Contracts (“PSCs”) and one non-conventional joint study agreement (“JSA”), all interests are located onshore in Sumatra, Indonesia. The Holding Companies being acquired were Bukit Energy Central Sumatra (Mahato) Pte. Ltd. (“Mahato”), Bukit Energy Palmerah Baru Pte. Ltd. (“Palmerah Baru”), Bukit Energy Resources Palmerah Deep Pte. Ltd. (“Palmerah Deep”), Bukit Energy Bohorok Pte. Ltd. (“Bohorok”), and Bukit Energy Resources North Sumatra Pte. Ltd. (“Bohorok Deep”), collectively referred to as the “Bukit assets”.

 

The Holding Companies own the following interests in the conventional and non-conventional PSCs and non-conventional JSA:

 

Bohorok PSC (conventional) – operated 50% participating interest, 465,266 net acres
Palmerah Baru PSC (conventional) – operated 54% participating interest, 98,977 net acres
Palmerah Deep PSC (non-conventional)- operated 69.36% participating interest, 170,398 net acres
Mahato PSC (conventional)- 20% participating interest, 167,115 net acres, non-operated
Bohorok Deep (non-conventional)- 20.25% participating interest in a JSA, non-operated with option to become operator

 

The fair value of the 106,156,712 common shares issued as part of the consideration paid for Bow ($34,607,088) was determined on the volume weighted average share price of Bow’s common stock for the 90 days before the transaction was complete.

 

The purchase price allocation can be summarized as follows:

 

Cash   $ 3,784  
Other current assets     4,763  
Deposits     337,997  
Furniture, equipment & software     12,059  
Unproved properties and properties not subject to amortization     9,705,590  
Goodwill     27,129,963  
Accounts payable     (1,157,876 )
Note payable     (1,429,192 )

 

The fair values of identifiable assets acquired as reported in the table above were estimated based on information available at the time of preparation of these interim condensed consolidated financial statements. The fair value was assessed based on the volume weighted average share price of Bow Energy Ltd. for the 90 days before the transaction was complete. Actual amounts recognized by the Company once the acquisition accounting is finalized may differ materially from these estimates. Fair value of cash, other current assets, deposits, furniture, equipment & software, accounts payable, and note payable was fair valued at the carrying value of Bow as this was deemed to be the most accurate measure of fair value. Fair value assigned to properties, which contain prospective oil and gas resources instead of reserves, was derived using market approach.

 

Acquisition costs included a finder’s fee grant of 100,000 shares ($37,000) of common stock as a bonus for the Bow Energy acquisition at a fair value of $0.37 per share. In addition, the Company incurred $103,632 in transaction costs associated with the issuance of warrants to purchase 320,000 shares of common stock in connection with the transaction.

 

The amount of Bow’s loss included in Petrolia’s consolidated income statement for the period ended June 30, 2018, and the loss of the combined entity had the acquisition date been January 1, 2018, and January 1, 2017, are as follows.

 

    Revenue   Earnings (Loss)
February 28, 2018 to June 30, 2018   $ —       $ (12,525 )
Supplemental pro forma from January 1, 2018 to June 30, 2018   $ 53,741     $ (30,912,230 )
Supplemental pro forma from January 1, 2017 to June 30, 2017   $ 3,104,316     $ (1,814,334 )

 

Impairment loss

 

On March 31, 2018, the Company recorded an impairment to goodwill of $27,129,963. The impairment was assessed based on future cash flow as of June 30, 2018 and no further impairment was recorded during the second period.