UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-52690

 

PETROLIA ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

TEXAS   86-1061005

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

710 N Post Oak, Suite 500

Houston, Texas

  77024
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (832-941-0011)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 Par Value Per Share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [  ] No [X ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [  ] No [X]

 

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2019 was approximately $6,202,203.

 

As of May 26, 2021, the registrant had 176,991,222 outstanding shares of common stock.

 

Documents Incorporated by Reference: None

 

 

 

 
 

 

Table of Contents

 

PART I  
  ITEM 1. BUSINESS 6
  ITEM 1A. RISK FACTORS 12
  ITEM 2. PROPERTIES 18
  ITEM 3. LEGAL PROCEEDINGS 18
  ITEM 4. MINE SAFETY DISCLOSURES 18
     
PART II  
  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 19
  ITEM 6. SELECTED FINANCIAL DATA 21
  ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 22
  ITEM 9A. CONTROLS AND PROCEDURES 24
  ITEM 9B. OTHER INFORMATION 25
     
PART III  
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 26
  ITEM 11. EXECUTIVE COMPENSATION 32
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 36
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 38
  ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 42
     
PART IV  
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 43
  ITEM 16. FORM 10–K SUMMARY 44

 

2
 

 

PART I

 

Glossary of Oil and Gas Terms

 

DEVELOPED ACREAGE. The number of acres that are allocated or assignable to productive wells or wells capable of production.

 

DISPOSAL WELL. A well employed for the reinjection of salt water produced with oil into an underground formation.

 

HELD BY PRODUCTION. A provision in an oil, gas and mineral lease that perpetuates an entity’s right to operate a property or concession as long as the property or concession produces a minimum paying quantity of oil or gas.

 

INJECTION WELL. A well employed for the injection into an underground formation of water, gas or other fluid to maintain underground pressures which would otherwise be reduced by the production of oil or gas.

 

LANDOWNER’S ROYALTY. A percentage share of production, or the value derived from production, which is granted to the lessor or landowner in the oil and gas lease, and which is free of the costs of drilling, completing, and operating an oil or gas well.

 

LEASE. Full or partial interests in an oil and gas lease, authorizing the owner thereof to drill for, reduce to possession and produce oil and gas upon payment of rentals, bonuses and/or royalties. Oil and gas leases are generally acquired from private landowners and federal and state governments. The term of an oil and gas lease typically ranges from three to ten years and requires annual lease rental payments. If a producing oil or gas well is drilled on the lease prior to the expiration of the lease, the lease will generally remain in effect until the oil or gas production from the well ends. The owner of the lease is required to pay the owner of the leased property a royalty which is usually between 12.5% and 25% of the gross amount received from the sale of the oil or gas produced from the well.

 

LEASE OPERATING EXPENSES. The expenses of producing oil or gas from a formation, consisting of the costs incurred to operate and maintain wells and related equipment and facilities, including labor costs, repair and maintenance, supplies, insurance, production, severance and other production excise taxes.

 

NET ACRES OR WELLS. A net well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres expressed as whole numbers and fractions.

 

NET REVENUE INTEREST. A percentage share of production, or the value derived from production, from an oil or gas well and which is free of the costs of drilling, completing and operating the well.

 

OVERRIDING ROYALTY. A percentage share of production, or the value derived from production, which is free of all costs of drilling, completing and operating an oil or gas well, and is created by the lessee or working interest owner and paid by the lessee or working interest owner to the owner of the overriding royalty.

 

3
 

 

PRODUCING PROPERTY. A property (or interest therein) producing oil or gas in commercial quantities or that is shut-in but capable of producing oil or gas in commercial quantities. Interests in a property may include working interests, production payments, royalty interests and other non-working interests.

 

PROSPECT. An area in which a party owns or intends to acquire one or more oil and gas interests, which is geographically defined on the basis of geological data and which is reasonably anticipated to contain at least one reservoir of oil, gas or other hydrocarbons.

 

PROVED RESERVES. Those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for the estimation.

 

SHUT-IN WELL. A well which is capable of producing oil or gas, but which is temporarily not producing due to mechanical problems or a lack of market for the well’s oil or gas.

 

UNDEVELOPED ACREAGE. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not such acreage contains proved reserves. Undeveloped acreage should not be confused with undrilled acreage which is “Held by Production” under the terms of a lease.

 

WORKING INTEREST. A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing and operating a well. After royalties are paid, the working interest also entitles its owner to share in production revenues with other working interest owners, based on the percentage of the working interest owned.

 

4
 

 

FORWARD-LOOKING STATEMENTS

 

This Report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words “may,” “will,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.

 

The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this report include:

 

  The sale prices of crude oil;
  The amount of production from oil wells in which we have an interest;
  Lease operating expenses;
  International conflict or acts of terrorism;
  General economic conditions; and
  Other factors disclosed in this Report.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

You should read the matters described in “Risk Factors” and the other cautionary statements made in this Report as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

 

Please see above the “Glossary of Oil and Gas Terms”, for a list of abbreviations and definitions used throughout this report.

 

Except where context otherwise requires and for purposes of the Annual Report on Form 10-K only:

 

  “we”, “us”, “our company”, “our”, “the company” refer to Petrolia Energy Corporation, and its subsidiaries;
  “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
  “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
   “Securities Act” refers to the Securities Act of 1933, as amended.

 

Available Information

 

We are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements and other information may be examined on the Internet at http://www.sec.gov.

 

Financial and other information about the Company is available on our website (http://www.petroliaenergy.com/). Information on our website is not incorporated by reference into this Report. We make available on our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

 

5
 

 

ITEM 1. BUSINESS.

 

Background

 

We were incorporated in Colorado on January 16, 2002. 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 and moved the corporation from Colorado to Texas, 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 strategy to acquire, enhance and redevelop high-quality, resource in place assets. As of 2018, the Company has been focusing on strategic acquisitions in western Canada while actively pursuing the strategy to execute low-cost operational solutions, and affordable technology. We believe our conventional, low-risk resource plays and the redevelopment of our late-stage plays is a solid foundation for continued oil production growth and future revenue growth.

 

Our strategy is to acquire and operate low risk, conventionally producing oil fields. This strategy allows us to incorporate new technology to minimize risk and maximize the recoverability of existing reservoirs. This approach allows us to reduce the environmental impact caused by exploratory development.

 

Our growth related activities will primarily be dependent upon oil prices and available financing.

 

Oil and gas leases are considered real property. Title to properties which we may acquire will be subject to landowner’s royalties, overriding royalties, carried working and other similar interests and contractual arrangements customary in the oil and gas industry, to liens for current taxes not yet due, liens for amounts owing to persons operating wells, and other encumbrances. As is customary in the industry, in the case of undeveloped properties, little investigation of record title will be made at the time of acquisition (other than a preliminary review of local records). However, drilling title opinions may be obtained before commencement of drilling operations.

 

6
 

 

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). The first oil well was completed in 1918 by Standard Oil of Ohio (“Sohio”), which at that time was owned by John D. Rockefeller. By 1959, approximately 14,000,000 barrels of oil had been recovered at an average well depth of 3,100 feet and over 100 wells in production. Our engineering reports and analysis indicate there is still considerable recoverable reserves remaining.

 

We have recently completed a capital project to rebuild our field tank battery, consisting of two free water knockout units, four oil stock tanks and one fiberglass saltwater tank. Additionally, we received a new 5-year permit for our disposal well and upgraded our flowlines for most of the field.

 

Twin Lakes San Andres Unit (“TLSAU”) Field

 

TLSAU is located 45 miles from Roswell, Chaves County, New Mexico and consists of 3,864 acres with 58 wells. The last independent reserve report prepared by MKM Engineering on December 31, 2019, reflects approximately 752,000 barrels of proven oil reserves remaining for the 100% working interest.

 

TLSAU is currently shut-in awaiting capital allocation to complete some regulatory plugging requirements and well workovers.

 

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.

 

The Company plans to engage in the oil field service business in the U.S. and Canada while researching various enhanced oil recovery (EOR) technologies and methods which it can use for the benefit of the Company’s oil fields.

 

Bow Energy Ltd., a related party

 

On February 27, 2018, we acquired all of the issued and outstanding shares in Bow Energy Ltd., which has contracts covering a total land position in Indonesia of 948,029 net acres, as described in greater detail below.

 

On August 31, 2018, the Company entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“Blue Sky” and the “Exchange Agreement”) to sell Bow Energy Ltd while retaining a 20% interest in Bow’s subsidiary, Bow Energy International Holdings Inc. (“BEIH”). The Chief Executive Officer of Blue Sky is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer.

 

7
 

 

The acquisition of Bow in February 2018 and the disposition of Bow in September 2018 are each discussed in greater detail in “Note 4. Acquisition of Bow Energy Ltd., a Related Party” and “Note 5. Disposition of Bow Energy Ltd., a Related Party”, in the consolidated audited financial statements included herein.

 

In connection with the closing of the Exchange Agreement, the Company cancelled shares of common stock previously held by Blue Sky (and affiliates) and returned such shares to the status of authorized but unissued shares of common stock. The 70,807,417 shares returned to treasury were subsequently cancelled including any outstanding warrants.

 

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 currently producing on the properties. Additionally, there are several idle wells with potential for reactivation and 34 sections of undeveloped land (approximately 21,760 acres). The Canadian Properties and the Working Interest were acquired from Blue Sky (a related party, as described above). Blue Sky 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 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 for the additional 3% Working Interest was $150,000. Funding for this additional interest came by borrowing against the LOC with Jovian Petroleum Corporation.

 

The following table shows our producing wells, developed acreage, and undeveloped acreage as of December 31, 2019, for the Oklahoma, New Mexico and Alberta/Saskatchewan properties:

 

State/Province  Productive Wells   Developed Acreage   Undeveloped Acreage (1) 
   Gross   Net   Gross   Net   Gross   Net 
Oklahoma   101(2)  7    2,604    1,050    0    0 
New Mexico   58(3)  0    3,864    0    0    0 
Alberta/Saskatchewan   252     186    41,526    19,766    21,760    21,760 

 

  (1) Undeveloped acreage includes leasehold interests on which wells have not been drilled or completed to the point that would permit the production of commercial quantities of natural gas and oil regardless of whether the leasehold interest is classified as containing proved undeveloped reserves.
     
  (2) Represents seven (7) wells that were worked-over and capable of producing oil.
     
  (3) The field was shut in for repairs and remediation work for the majority of 2019.

 

The following table shows the status of our gross acreage as of December 31, 2019, for the Oklahoma, New Mexico and Alberta/Saskatchewan properties:

 

State/Province  Held by
Production
   Not Held by
Production
 
Oklahoma   2,604     
New Mexico   3,864     
Alberta/Saskatchewan   41,526     

 

Leases on acres that are Held by Production remain in force so long as oil or gas is produced from one or more wells on the particular lease. Leased acres that are not held by Production require annual rental payments to maintain the lease until the first to occur of the following: the expiration of the lease or the time that oil or gas is produced from one or more wells drilled on the leased acreage. At the time oil or gas is produced from wells drilled on the leased acreage, the lease is considered to be Held by Production.

 

8
 

 

Proved Reserves

 

Below is a table that provides historical average sales price per barrel and average production cost per barrel by geographical location and by year, for the last three (3) fiscal years.

 

  

Average Sales
Price

(per Bbls)

($)

  

Average
Production Cost

(per Bbls)

($)

  

Oil Production

(Bbls)

 
Oklahoma               
2017   32.51    133.25    885 
2018   45.55    3,341.49    31 
2019   (1)   (1)   (1)
New Mexico               
2017   39.08    251.23    464 
2018   48.87    1,146.90    106 
2019   (1)   (1)   (1)
Alberta/ Saskatchewan               
2018   22.27    24.56    50,765 
2019   37.62    30.71    91,917 

 

(1)Note that in 2019, no sales or production occurred for the Oklahoma and New Mexico properties.

 

Below are estimates of our cumulative net proved reserves of all fields, as of December 31, 2019, net to our interest. Our proved reserves are located in Oklahoma, New Mexico and Canada.

 

Estimates of volumes of proved reserves at December 31, 2019 are presented in barrels (Bbls) for oil and, for natural gas, in thousands of cubic feet (Mcf) at the official temperature and pressure bases of the areas in which the gas reserves are located.

 

    Oil (Bbls)     Gas (Mcf)  
Proved:                
Developed     1,688,437       31,600  
Undeveloped     112,020        
Total     1,800,457       31,600  

 

  Bbl - refers to one barrel, or 42 U.S. gallons liquid volume, in reference to crude oil or other liquid hydrocarbons.
  Mcf - refers to one thousand cubic feet.
  A BOE (i.e., barrel of oil equivalent) combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl of oil.

 

Below are estimates of our present value of estimated future net revenues from our proved reserves based upon the standardized measure of discounted future net cash flows relating to proved oil and gas reserves in accordance with the provisions of Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. The standardized measure of discounted future net cash flows is determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on period-end economic conditions. The estimated future production is based upon benchmark prices that reflect the unweighted arithmetic average of the first day-of-the-month price for oil and gas during the twelve-month period ended December 31, 2019. The resulting estimated future cash inflows are then reduced by estimated future costs to develop and produce reserves based on period-end cost levels. No deduction has been made for depletion, depreciation or for indirect costs, such as general corporate overhead. Present values were computed by discounting future net revenues by 10% per year.

 

Future cash inflows  $95,308,110 
Deductions (including estimated taxes)  $(32,401,530)
Future net cash flow  $62,906,580 
Discounted future net cash flow  $25,824,730 

 

9
 

 

MKM Engineering prepared the estimates of our proved reserves, future production and income attributable to our leasehold interests in the United States and Canada as of December 31, 2019. Michele Mudrone was the technical person primarily responsible for overseeing the preparation of the 2019 reserve report. Ms. Mudrone has more than 25 years of practical experience in the estimation and evaluation of petroleum reserves. MKM Engineering is an independent petroleum engineering firm that provides petroleum consulting services to the oil and gas industry. The estimates of drilled reserves, future production and income attributable to certain leasehold and royalty interests are based on technical analysis conducted by engineers employed at MKM Engineering.

 

Zel C. Khan, our CEO, oversaw preparation of the reserve estimates by MKM Engineering. We do not have a reserve committee and we do not have any specific internal controls regarding the estimates of our reserves.

 

Our proved reserves include only those amounts which we reasonably expect to recover in the future from known oil and gas reservoirs under existing economic and operating conditions, at current prices and costs, under existing regulatory practices and with existing technology. Accordingly, any changes in prices, operating and development costs, regulations, technology or other factors could significantly increase or decrease estimates of proved reserves.

 

Proved reserves were estimated by performance methods, the volumetric method, analogy, or a combination of methods utilizing present economic conditions and limited to those proved reserves economically recoverable. The performance methods include decline curve analysis that utilize extrapolations of historical production and pressure data available through December 31, 2019 in those cases where such data was considered to be definitive.

 

Forecasts for future production rates are based on historical performance from wells currently on production in the region with an economic cut-off for production based upon the projected net revenue being equal to the projected operating expenses. No further reserves or valuation were given to any wells beyond their economic cut-off. Where no production decline trends have been established due to the limited historical production records from wells on the properties, surrounding wells historical production records were used and extrapolated to wells of the property. Where applicable, the actual calculated present decline rate of any well was used to determine future production volumes to be economically recovered. The calculated present rate of decline was then used to determine the present economic life of the production from the reservoir.

 

For wells currently on production, forecasts of future production rates were based on historical performance data. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to economic depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future production rates.

 

Proved developed non-producing and undeveloped reserves were estimated primarily by the performance and historical extrapolation methods. Test data and other related information were used to estimate the anticipated initial production rates from those wells or locations that are not currently producing. For reserves not yet on production, sales were estimated to commence at a date we determined to be reasonable.

 

In general, the volume of production from our oil and gas properties declines as reserves are depleted. Except to the extent we acquire additional properties containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves will decline as reserves are produced. Accordingly, volumes generated from our future activities are highly dependent upon the level of success in acquiring or finding additional reserves and the costs incurred in doing so.

 

10
 

 

Government Regulation

 

Various state, province and federal agencies regulate the production and sale of oil and natural gas. All states and provinces in which we plan to operate impose restrictions on the drilling, production, transportation and sale of oil and natural gas.

 

The Federal Energy Regulatory Commission (the “FERC”) regulates the interstate transportation and the sale in interstate commerce for resale of natural gas. The FERC’s jurisdiction over interstate natural gas sales has been substantially modified by the Natural Gas Policy Act under which the FERC continued to regulate the maximum selling prices of certain categories of gas sold in “first sales” in interstate and intrastate commerce.

 

FERC has pursued policy initiatives that have affected natural gas marketing. Most notable are (1) the large-scale divestiture of interstate pipeline-owned gas gathering facilities to affiliated or non-affiliated companies; (2) further development of rules governing the relationship of the pipelines with their marketing affiliates; (3) the publication of standards relating to the use of electronic bulletin boards and electronic data exchange by the pipelines to make available transaction information on a timely basis and to enable transactions to occur on a purely electronic basis; (4) further review of the role of the secondary market for released pipeline capacity and its relationship to open access service in the primary market; and (5) development of policy and promulgation of orders pertaining to its authorization of market-based rates (rather than traditional cost-of-service based rates) for transportation or transportation-related services upon the pipeline’s demonstration of lack of market control in the relevant service market. We do not know what effect the FERC’s other activities will have on the access to markets, the fostering of competition and the cost of doing business.

 

Our sale of oil and natural gas liquids will not be regulated and will be at market prices. The price received from the sale of these products will be affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier pipelines.

 

Federal, state, and local agencies have promulgated extensive rules and regulations applicable to our oil and natural gas exploration, production and related operations. Most states require permits for drilling operations, drilling bonds and the filing of reports concerning operations, and impose other requirements relating to the exploration of oil and natural gas. Many states also have statutes or regulations addressing conservation matters including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of some states limit the rate at which oil and natural gas is produced from our properties. The federal and state regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Because these rules and regulations are amended or reinterpreted frequently, we are unable to predict the future cost or impact of complying with those laws.

 

Competition and Marketing

 

We will be faced with strong competition from many other companies and individuals engaged in the oil and gas business, many are very large, well established energy companies with substantial capabilities and established earnings records. We will be at a competitive disadvantage in acquiring oil and gas prospects since we must compete with these individuals and companies, many of which have greater financial resources and larger technical staffs. It is nearly impossible to estimate the number of competitors; however, it is known that there are a large number of companies and individuals in the oil and gas business.

 

Exploration for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil field equipment including drilling rigs and tools. We will depend upon independent drilling contractors to furnish rigs, equipment and tools to drill our wells. Higher prices for oil and gas may result in competition among operators for drilling equipment, tubular goods and drilling crews which may affect our ability to expeditiously drill, complete, recomplete and work-over wells.

 

The market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted. These factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental regulation. In addition, there is always the possibility that new legislation may be enacted that would impose price controls or additional excise taxes upon crude oil or natural gas, or both. Oversupplies of natural gas can be expected to recur from time to time and may result in the gas producing wells being shut-in. Imports of natural gas may adversely affect the market for domestic natural gas.

 

11
 

 

The market price for crude oil is significantly affected by policies adopted by the member nations of Organization of Petroleum Exporting Countries (“OPEC”). Members of OPEC establish prices and production quotas among themselves for petroleum products from time to time with the intent of controlling the current global supply and consequently price levels. We are unable to predict the effect, if any, that OPEC or other countries will have on the amount of, or the prices received for, crude oil and natural gas.

 

Employees

 

As of December 31, 2019, we have four (4) full-time employees and no part-time employees. As of May 10, 2021, the Company has (3) three full-time employees an no part-time employees.

 

ITEM 1A. RISK FACTORS

 

In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to us and our industry could materially impact our future performance and results of operations. We have provided below a list of known material risk factors that should be reviewed when considering buying or selling our securities. These are not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.

 

Capital Requirements

 

We will need to raise funds from additional financing in the future to complete our business plan and may need to raise additional funding in the future to support our operations. We have no commitments for any financing and any financing commitments may result in dilution to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our stockholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, we may raise funding by issuing convertible notes, which if converted into shares of our common stock would dilute our then stockholders’ interests. Lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.

 

Commodity Prices

 

The price we receive for our oil directly affects our revenues, profitability, access to capital and future rate of growth. Oil is a commodity that is subject to wide price fluctuations in response to relatively minor changes in supply and demand. Lower prices for our oil may not only decrease our revenues but may also reduce the amount of oil that we can produce economically. Historically, the markets for oil have been volatile and will likely continue to be volatile in the future. The prices we receive for our production and the volume of our production depend on numerous factors beyond our control. These factors include the following: changes in global supply and demand for oil, the actions of OPEC, the price and quantity of imports of foreign oil, acts of war, terrorism or political instability in oil producing countries and economic conditions.

 

The price of West Texas Intermediate (“WTI”) crude oil has impacted all oil and gas producers to varying degrees depending on hedging strategies and debt obligations. The 2019 WTI price decreased to an average of $56.99 per barrel

 

Accounting Rules

 

Accounting rules applicable to us require that we periodically review the carrying value of our oil properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development plans, production data, economics and other factors, we could be required to write down the carrying value of our oil and natural gas properties. Such write-downs constitute a non-cash charge to earnings. Impairment of proved properties under our full cost oil accounting method is largely driven by the present values of future net revenues of proved reserves estimated using SEC mandated 12-month un-weighted first-day-of-the-month commodity prices. No assurance can be given that we will not experience ceiling test impairments in future periods, which could have a material adverse effect on our results of operations in the periods taken. As a result of lower oil prices, we may also reduce our estimates of the reserve volumes that may be economically recovered, which would reduce the total value of our proved reserves.

 

12
 

 

Our undeveloped proved reserves and developed non-producing proved reserves require additional expenditures and/or activities to convert these into producing reserves. We cannot provide assurance these expenditures will be made and that activities will be entirely successful in converting these reserves. Furthermore, there can be no assurance that all of our undeveloped and developed non-producing reserves will ultimately be produced during the time periods we have planned, at the costs we have budgeted, or at all, which could result in the write-off of previously recognized reserves.

 

Reserve Replacement

 

Our future success depends largely upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Unless we replace the reserves we produce through successful exploration, development or acquisition activities, our proved reserves and production will decline over time. Our exploration, development and acquisition activities require substantial capital expenditures. The capital markets we have historically accessed are currently constrained, but we believe we could access other capital markets if the need arises. These limitations in the capital markets may affect our ability to grow and changes in our capitalization structure may significantly affect our financial risk profile. Furthermore, we cannot be certain that financing for future capital expenditures will be available if needed, and to the extent required, on acceptable terms.

 

Future cash flows are subject to a number of variables, such as the level of production from existing wells, the prices of oil and our success in developing and producing new reserves. Any reductions in our capital expenditures to stay within internally generated cash flow (which could be adversely affected by declining commodity prices) and cash on hand will make replacing produced reserves more difficult. If our cash flow from operations and cash on hand are not sufficient to fund our capital expenditure budget, we may be limited in our ability to access additional debt, equity or other methods of financing on an economic or timely basis to replace our proved reserves.

 

Regulatory Requirements

 

The Environmental Protection Agency (EPA) has adopted new regulations under the Clean Air Act (CAA) that, among other things, require additional emissions controls for the production of oil, including New Source Performance Standards to address emissions of sulfur dioxide and Volatile Organic Compounds (VOCs) and a separate set of emission standards to address hazardous air pollutants frequently associated with such production activities. For well completion operations occurring at such well sites before January 1, 2015, the final regulations allow operators to capture and direct flowback emissions to completion combustion devices, such as flares, in lieu of performing green completions. These regulations also establish specific new requirements regarding emissions from dehydrators, storage tanks and other production equipment. Compliance with these requirements could significantly increase our costs of development and production.

 

We are required to record a liability for the present value of our asset retirement obligation (“ARO”) to plug and abandon inactive non-producing wells, facilities and equipment, and to restore the land at the end of oil production operations. As a result, we may make significant increases or decreases to our estimated ARO in future periods. Accordingly, our estimate of future ARO could differ dramatically from what we may ultimately incur.

 

Drilling and Well Completion Success

 

Our development activities may be unsuccessful for many reasons, including adverse weather conditions, cost overruns, equipment shortages, geological issues and mechanical difficulties. Moreover, the successful drilling of an oil well does not assure us that we will realize a profit on our investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their costs, unsuccessful wells hinder our efforts to replace reserves.

 

Our oil exploration and production activities, including well stimulation and completion activities which include, among other things, hydraulic fracturing, involve a variety of operating risks, including fires, explosions, blow-outs and surface craters, uncontrollable flows of oil and formation water, natural disasters. If we experience any of these problems, well bores, platforms, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of injury or loss of life, damage to and destruction of property, natural resources and equipment, pollution and other environmental damage.

 

13
 

 

Acquisition Success

 

Our business strategy includes growing by making acquisitions, which may include acquisitions of exploration and production companies, producing properties and undeveloped leasehold interests. Our acquisition of oil and natural gas properties requires assessments of many factors that are inherently inexact and may be inaccurate, including the acceptable prices for available properties, amounts of recoverable reserves, estimates of future oil prices, estimates of future exploratory, development and operating costs, estimates of the costs and timing of plugging, and abandonment and estimates of potential environmental and other liabilities.

 

If we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following: the difficulty of integrating acquired products, services or operations; the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; difficulties in maintaining uniform standards, controls, procedures and policies; the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; the potential inability or failure to achieve additional sales; the effect of any government regulations which relate to the business acquired; potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition; and potential expenses under the labor, environmental and other laws of various jurisdictions. Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

 

Capital Deployment Risk

 

Exploring for and developing hydrocarbon reserves involves a high degree of operational and financial risk, which precludes us from definitively predicting the costs involved and time required to reach certain objectives. The budgeted costs of planning, drilling, completing, and operating wells are often exceeded, and such costs can increase significantly due to various complications that may arise during the drilling and operating processes. Before a well is spud, we may incur significant geological and geophysical (seismic) costs, which are incurred whether a well eventually produces commercial quantities of hydrocarbons or is drilled at all. Exploration wells bear a much greater risk of loss than development wells. The analogies we draw from available data from other wells, more fully explored locations or producing fields may not be applicable to our drilling locations. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our operations as proposed and could be forced to modify our drilling plans accordingly.

 

If we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found or produced. We may drill or participate in new wells that are not productive. We may drill wells that are productive, but that do not produce sufficient net revenues to return a profit after drilling, operating and other costs. There is no way to predict in advance of drilling and testing whether any location will yield oil or natural gas in sufficient quantities to recover exploration, drilling or completion costs or to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive hydrocarbon-bearing formation or experience mechanical difficulties while drilling or completing the well, resulting in a reduction in production and reserves from the well or abandonment of the well. Whether a well is ultimately productive and profitable depends on a number of additional factors, including the following: general economic and industry conditions, including the prices received for oil and natural gas; shortages of, or delays in, obtaining equipment, including hydraulic fracturing equipment, and qualified personnel; potential drainage by operators on adjacent properties; loss of or damage to oilfield development and service tools; problems with title to the underlying properties; increases in severance taxes; adverse weather conditions that delay drilling activities or cause producing wells to be shut down; domestic and foreign governmental regulations; and proximity to and capacity of transportation facilities. If we do not drill productive and profitable wells in the future, our business, financial condition and results of operations could be materially and adversely affected.

 

14
 

 

We review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment at least annually on December 31 of each year, or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value. If conditions in any of the businesses in which we compete were to deteriorate, we could determine that certain of our assets were impaired and we would then be required to write-off all or a portion of our costs for such assets. Any such significant write-offs would adversely affect our balance sheet and results of operations.

 

Economic Uncertainty

 

Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit, the United States mortgage market and a declining real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of oil and natural gas, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a recession. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could diminish, which could impact the price at which we can sell our oil, natural gas and natural gas liquids, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition.

 

Our exploration and development activities are capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. Our cash on hand, our operating cash flows and future potential borrowings may not be adequate to fund our future acquisitions or future capital expenditure requirements. The rate of our future growth may be dependent, at least in part, on our ability to access capital at rates and on terms we determine to be acceptable.

 

Cash Management

 

Our cash flows from operations and access to capital are subject to a number of variables, including: our estimated proved oil and natural gas reserves; the amount of oil and natural gas we produce from existing wells; the prices at which we sell our production; the costs of developing and producing our oil and natural gas reserves; our ability to acquire, locate and produce new reserves; the ability and willingness of banks to lend to us; and our ability to access the equity and debt capital markets. In addition, future events, such as terrorist attacks, wars or combat peace-keeping missions, financial market disruptions, general economic recessions, oil and natural gas industry recessions, large company bankruptcies, accounting scandals, overstated reserves estimates by major public oil companies and disruptions in the financial and capital markets have caused financial institutions, credit rating agencies and the public to more closely review the financial statements, capital structures and earnings of public companies, including energy companies. Such events have constrained the capital available to the energy industry in the past, and such events or similar events could adversely affect our access to funding for our operations in the future.

 

If our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels, further develop and exploit our current properties or invest in additional exploration opportunities. Alternatively, a significant improvement in oil and natural gas prices or other factors could result in an increase in our capital expenditures and we may be required to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production payments, the sale or farm out of interests in our assets, the borrowing of funds or otherwise to meet any increase in capital needs. If we are unable to raise additional capital from available sources at acceptable terms, our business, financial condition and results of operations could be adversely affected. Further, future debt financings may require that a portion of our cash flows provided by operating activities be used for the payment of principal and interest on our debt, thereby reducing our ability to use cash flows to fund working capital, capital expenditures and acquisitions. Debt financing may involve covenants that restrict our business activities. If we succeed in selling additional equity securities to raise funds, at such time the ownership percentage of our existing shareholders would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing shareholders. If we choose to farm-out interests in our prospects, we may lose operating control over such prospects.

 

15
 

 

Terrorist Attack

 

We cannot assess the extent of either the threat or the potential impact of future terrorist attacks on the energy industry in general, and on us in particular, either in the short-term or in the long-term. Uncertainty surrounding such hostilities may affect our operations in unpredictable ways, including the possibility that infrastructure facilities, including pipelines and gathering systems, production facilities, processing plants and refineries, could be targets of, or indirect casualties of, an act of terror, a cyber-attack or electronic security breach, or an act of war.

 

There are numerous operational hazards inherent in oil and natural gas exploration, development, production and gathering, including: unusual or unexpected geologic formations; natural disasters; adverse weather conditions; unanticipated pressures; loss of drilling fluid circulation; blowouts where oil or natural gas flows uncontrolled at a wellhead; cratering or collapse of the formation; pipe or cement leaks, failures or casing collapses; fires or explosions; releases of hazardous substances or other waste materials that cause environmental damage; pressures or irregularities in formations; and equipment failures or accidents.

 

Production Goodwill

 

In addition, there is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations, some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground injection or other disposal of our wastes, the use of hydraulic fracturing fluids and historical industry operations and waste disposal practices.

 

The rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional oil and natural gas producing properties. In the future, we may have difficulty acquiring new properties. During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely affected.

 

Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, and many of our competitors have more established presences in the United States and in foreign locations than we have. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased in recent years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which could have a material adverse effect on our business, financial condition and results of operations.

 

Technology and Innovation

 

Our industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become obsolete, and we may be adversely affected.

 

16
 

 

Consumer Confidence

 

Our results of operations are materially affected by the conditions of the global economies and the credit, commodities and stock markets. Among other things, we may be adversely impacted if consumers of oil and gas are not able to access sufficient capital to continue to operate their businesses or to operate them at prior levels. A decline in consumer confidence or changing patterns in the availability and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result our results of operations.

 

Alternative Energy

 

Because our operations depend on the demand for oil and used oil, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil, gas and oil and gas related products could have a material adverse impact on our business, financial condition and results of operations.

 

Reserve Valuation

 

The process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and the calculation of the present value of our reserves. In order to prepare our year-end reserve estimates, our independent petroleum consultant projected our production rates and timing of development expenditures. Our independent petroleum consultant also analyzed available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary and may not be under our control. The process also requires economic assumptions about matters such as oil and natural gas prices, operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.

 

You should not assume that the present value of future net revenues from our proved oil and natural gas reserves is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on the 12-month un-weighted first-day-of-the-month average price for each product and costs in effect on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate.

 

Future Regulations

 

Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration, development, production and transportation of oil and natural gas and operational safety. Future laws or regulations, any adverse change in the interpretation of existing laws and regulations or our failure to comply with such legal requirements may harm our business, results of operations and financial condition.

 

Employee Retention

 

To a large extent, we depend on the services of our senior management. The loss of the services of any of our senior management, could have a negative impact on our operations. We do not maintain or plan to obtain for the benefit of the Company any insurance against the loss of any of these individuals.

 

Equity Dilution

 

Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock, preferred stock or warrants to purchase shares of our common stock. Our board of directors has authority, without action or vote of the shareholders to issue all or part of the authorized but unissued shares of common stock, preferred stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.

 

17
 

 

Illiquid and Volatile Equity Environment

 

We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:

 

  our actual or anticipated operating and financial performance and drilling locations, including reserves estimates;
  quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and cash flows, or those of companies that are perceived to be similar to us;
  changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts;
  speculation in the press or investment community;
  public reaction to our press releases, announcements and filings with the SEC;
  sales of our common stock by us or other shareholders, or the perception that such sales may occur;
  the limited amount of our freely tradable common stock available in the public marketplace;
  general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices;
  the realization of any of the risk factors presented in this Annual Report;
  the recruitment or departure of key personnel;
  commencement of, or involvement in, litigation;
  the prices of oil and natural gas;
  the success of our exploration and development operations, and the marketing of any oil and natural gas we produce;
  changes in market valuations of companies similar to ours; and
  domestic and international economic, legal and regulatory factors unrelated to our performance.

 

Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in us.

 

Additionally, as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability to acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect on the market price of our common stock. In addition, a shareholder may not be able to borrow funds using our common stock as collateral because lenders may be unwilling to accept the pledge of securities having such a limited market. We cannot assure you that an active trading market for our common stock will develop or, if one develops, be sustained.

 

Our common stock will be subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market. In addition, various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.

 

ITEM 2. PROPERTIES.

 

Our principal office is located at 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024.

 

At December 31, 2019 we terminated our sublease of office space and entered into an executive office sharing agreement which allows the Company to use approximately 800 square feet of work space, on an as needed basis.

 

The Company’s oil and gas properties are described under “Item 1. Business”, above, and below under “Note 16. Supplemental Information Relating to Oil and Gas Producing Activities (Unaudited)” in the consolidated audited financial statements attached hereto.

 

ITEM 3. LEGAL PROCEEDINGS.

 

We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We are not currently a party to any material legal proceeding. In addition, we are not aware of any material legal or governmental proceedings against us or contemplated to be brought against us.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

18
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is quoted under the symbol “BBLS” on the OTC Pink Sheet market operated by OTC Markets Group.

 

Only a limited market exists for our securities. There is no assurance that a regular trading market will develop, or if developed, that it will be sustained. Therefore, a shareholder may be unable to resell his securities in our company.

 

The following tables set forth the range of high and low sales prices for our common stock for the periods indicated as reported by the OTC Pink Sheet market operated by the OTC Markets Group. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

Quarter Ended   High     Low  
             
March 31, 2019   $ 0.140     $ 0.065  
June 30, 2019   $ 0.108     $ 0.040  
September 30, 2019   $ 0.087     $ 0.055  
December 31, 2019   $ 0.090     $ 0.035  

 

Quarter Ended   High     Low  
             
March 31, 2018   $ 0.450     $ 0.080  
June 30, 2018   $ 0.100     $ 0.050  
September 30, 2018   $ 0.220     $ 0.060  
December 31, 2018   $ 0.130     $ 0.080  

 

Penny Stock

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

19
 

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

 

Holders of Our Common Stock

 

As of December 31, 2019, we had 164,548,726 outstanding shares of common stock and approximately 279 shareholders of record. As of May 10, 2021, we had 176,991,222 outstanding shares of common stock and approximately 274 shareholders of record.

 

Preferred Stock

 

Our Certificate of Formation authorizes our Board of Directors to issue up to 1,000,000 shares of preferred stock. The provisions in the Certificate of Formation, relating to the preferred stock, allow our directors to issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of our common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by our management.

 

As of December 31, 2019, there are 199,100 preferred shares are outstanding with 25 preferred shareholders of record.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information, as of December 31, 2019, with respect to our compensation plans under which common stock is authorized for issuance.

 

20
 

 

Equity Compensation Plan Information

 

   (A)   (B)  (C) 
Plan Category  Number of securities to issue upon exercise of outstanding options and warrants   Weighted-average exercise price of outstanding options and warrants  Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A) 
            
Equity compensation plans approved by shareholders (1)      N/A   40,000,000 
Equity compensation plans not approved by shareholders   57,043,837   $0.16 per share    
Total   57,043,837   $0.16 per share   40,000,000 

 

  (1) The Company’s 2015 Stock Incentive Plan, as amended (the “Plan”) provides for up to 40,000,000 of awards. At present, no shares have been issued from the Plan.

 

Recent Sales of Unregistered Securities

 

On August 21, 2019, the Company closed private placements with related parties for gross proceeds of $150,000, consisting of 1,875,000 shares of common stock and warrants to purchase 3,750,000 shares of common stock, exercisable at a price of $0.10 per share at any time prior to November 1, 2020. American Resources Offshore Inc. (of which Ivar Siem, our director) subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock. Leo Womack, our director, subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock. Jovian Petroleum Corporation, a greater than 5% shareholder of the Company, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock. Joel Martin Oppenheim, our former director, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock.

 

All shares granted for goods or services and settlement of liabilities during the year ended December 31, 2019, and through the date of the filing of this Report were valued based on the fair value of the shares issued.

 

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. SELECTED FINANCIAL DATA

 

Not required under Regulation S-K for a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution you that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Risk Factors” and “Forward Looking Statements.”

 

21
 

 

Results of Operations

 

Revenues

 

Revenue for the year ended December 31, 2019 was $2,916,734, an increase of $1,743,674 from the prior year. The increase was primarily due to $2,827,877 in revenue from the Company’s Canadian Properties with an additional increase in revenue of $34,080 from the Company’s United States properties. The increase in revenue for the U.S. properties, specifically the Noack properties, was due to the Company’s effective work-over programs that accommodate new enhanced oil recovery methods.

 

Operating Expenses

 

Operating expenses for the year ended December 31, 2019 were $5,985,991, a decrease of $3,269,640 from the prior year. This was primarily due to the absence of an impairment of oil and gas properties in 2019 compared to 2018. In addition, there was a decrease of $3,415,180 in general and administrative expenses, resulting primarily from a decrease in stock compensation expense from 2018.

 

Other Income/Expenses

 

Other income/expenses for the year ended December 31, 2019 were $178,359, a increase of $30,124,398 from the prior year. The primary cause for the increase was the $29,319,554 loss on the disposition of Bow Energy recognized in 2018. In addition, a $280,000 gain was recognized in 2019 on the re-sale of the Noack property. These two year over year increases were offset somewhat by a $122,280 increase in interest expense due to the issuance of new credit notes.

 

Net Loss

 

The net loss for the year ended December 31, 2019 was $2,890,898, compared to net loss of $38,028,610 for the year ended December 31, 2018, a decrease of $35,137,712 from the prior year for the reasons described above, primarily the BOW sale.

 

Liquidity and Capital Resources

 

As of December 31, 2019, we had total current assets of $174,708 and total assets of $12,569,851. Our total current liabilities as of December 31, 2019 were $3,991,901 and our total liabilities were $7,183,312. We had negative working capital of $3,817,193 as of December 31, 2019.

 

Our material asset balances are made up of oil and gas properties and related equipment. Our most significant liabilities include asset retirement obligations of $1,723,364, accrued liabilities and related party accrued liabilities of $1,731,455, notes payable of $2,097,078 and related party notes payable of $983,291.

 

Operating activities used $845,719 in cash for the year ended December 31, 2019. Our net loss of $2,890,898 was the main component of our negative operating cash flow, partially offset by an increase in accounts payable of $333,375 and an increase in accrued liabilities of $513,681.

 

Net cash used by investing activities for the year ended December 31, 2019 was $449,055, which was due to escrow funds of $944,055 being released for an upcoming Canadian property purchase. This funds use was offset by the initial sale, as well as the subsequent sale, of the Noack property for a cumulative total of $495,000.

 

Cash provided by financing activities during the year ended December 31, 2019 was $1,542,346 and consisted primarily of $1,225,000 of proceeds from notes payable, $797,793 of proceeds from related party advances. This was partially offset by $558,726 of repayments of related party notes payable.

 

During the year ended December 31, 2019, the Company operated at a negative cash flow from operations of approximately $10,000 per month and our auditors have raised a going concern in their audit report as contained herein. Management is pursuing several initiatives to secure funding to increase production at both the SUDS and TLSAUs fields which together with anticipated increases in the price of crude oil may reduce the Company’s monthly cash shortfall. The total amount required by the Company to accomplish this objective is approximately $2,000,000. The sale of the NOACK field and the addition of the revenue from our 28% ownership of the Canadian Properties has enhanced cashflow and allowed the Company to allocate funds for SUDS and TLSAU development plans. The Company has resumed workover activities at SUDS and expects progress to continue past the 1st Quarter of 2020, funding permitting.

 

22
 

 

The Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We plan to generate profits by working over existing wells and drilling productive oil or gas wells. However, we will need to raise additional funds to workover or drill new wells through the sale of our securities, through loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available when needed, we may need to cease operations. There can be no assurance that we will be successful in raising the capital needed to drill oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all. Any wells which we may drill may not be productive of oil or gas. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, and results of operations, liquidity or capital resources.

 

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. During calendar year 2021, oil prices have trended upward to approximately $65.00 per barrel.

 

Other than the foregoing, we do not know of any trends, events or uncertainties that will have, or are reasonably expected to have, a material impact on our sales, revenues or expenses.

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

23
 

 

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 $52,489,891 since its inception and requires capital for its contemplated operational and marketing activities to take place. The Company’s ability to raise additional capital through the future sales of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 

Recently Issued Accounting Pronouncements

 

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The consolidated audited financial statements and supplementary data required by this Item are presented beginning on page F-1 of this Annual Report on Form 10-K, which follows “Signatures” below.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

An evaluation was carried out under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, our management concluded that, as of December 31, 2019, our disclosure controls and procedures were not effective.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of our Principal Executive and Financial Officer and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

24
 

 

Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019, 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, 2019.

 

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.”

 

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. During the remainder of the year, 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 could make it difficult for us to undertake the planned remediation steps outlined above.

 

Changes in Internal Control Over Financial Reporting

 

Except as noted above, there was no change in our internal control over financial reporting that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

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. The CEO of Jovian is Quinten Beasley, our former director (resigned October 31, 2018), and 25% of Jovian is owned by Zel C. Khan, our CEO and director. The initial agreement was for a period of 6 months and could be extended for up to 5 additional terms of 6 months each. All amounts advanced pursuant to the LOC bear interest from the date of advance until paid in full at 3.5% simple interest per annum. Interest is calculated on a basis of a 360-day year and charged for the actual number of days elapsed. On December 31, 2019, the due date of the LOC was extended until December 31, 2021.

 

25
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The following information sets forth the names, ages, and positions of our current directors and executive officers as of December 31, 2019.

 

Name   Age   Position   Director/Officer Since
Zel C. Khan   47   Chief Executive Officer and Director   April 2016
Leo Womack   77   Director   August 2014
Joel Oppenheim   77   Director   June 2015
James Edward Burns   51   Chairman   April 2017
Saleem Nizami   69   Director   April 2017
Ivar Siem   74   Director   April 2018
Richard Dole   75   Director   October 2018

 

Set forth below is a brief description of the background and business experience of each of our current executive officers and directors:

 

Zel C. Khan is an oilfield operator with over 25 years of experience in the Oil & Gas industry. He has successfully operated, both on and offshore, in Texas, Oklahoma, New Mexico and California. Mr. Khan has served as the CEO of the Company since February 2015. Prior to joining the Company, from March 2010 to February 2015, Mr. Khan was the CEO of Jovian Petroleum Corporation, an oil and gas operator in California, Oklahoma, New Mexico, and Texas. From August 2006 to March 2010, Mr. Khan served as Operating Manager of Pyramid GOM Inc., an offshore deep-water operator. He has established a reputation for reducing operating costs on various projects, including a former ConocoPhillips offshore facility located in deep water Gulf of Mexico where he was the Operating Manager. Mr. Khan has also operated in Kern County, California and Alberta, Canada, both are heavy oil fields requiring special operational procedures to maintain low lift costs and strict environmental policies as set by the respective governmental agencies. Mr. Khan holds a Bachelor of Science degree and a Master’s degree from Chapman University, California.

 

Leo Womack has over 40 years of experience in advising and serving as Director of small micro-capitalization public and private companies. Mr. Womack has been the President of Gulf Equities Realty Advisors, Inc., a diversified real estate portfolio management company, since 1986. For more than five (5) years, from March 1986 to the present, Mr. Womack has been and continues to be employed as the President of Gulf Equities Realty Advisors Inc. He has been the Chairman of Fairway Medical Technologies, Inc., a medical device company and a portfolio company of the Baylor College of Medicine Venture Fund since 1996. From 1969 to 1978, he was the managing partner of a local and later national CPA firm. He has served on the Board and as Chairman of the Houston Angel Network and on National Committees of the Angel Capital Association. Prior to its acquisition by ITT Corporation in 2010, he served as a board member and the audit committee chair for OI Corporation (NASDAQ:OICO). Mr. Womack continues to serve on the Boards of Directors of five early-stage companies that he or his Family Trust have invested in. Mr. Womack earned a Bachelor of Business Administration in Accounting from Texas A&M University-Kingsville in 1965 and holds a Series 7 Securities License. Mr. Womack is also a licensed Certified Public Accountant (CPA).

 

Joel Oppenheim currently owns and has operated the Oppenheim Group since 1991. Mr. Oppenheim has served as a partner and manager of Oppenheim Group since 1991. The Oppenheim Group is a real estate consulting firm that has represented multiple Fortune 10 and Fortune 100 Companies on their commercial real estate needs throughout the United States. In 2014, Mr. Oppenheim began concentrating on the Oppenheim Group’s investment portfolio including several successful oil and gas investments both in Texas and California. Mr. Oppenheim is a licensed Commercial Real Estate Broker in Texas and graduated from City College of New York - Bernard Baruch School of Business, with a degree in accounting. Mr. Oppenheim has been an active member of the Houston Angel Network since 2009. He has successfully started and sold numerous businesses throughout his career, including some of the most successful restaurants and clubs in Houston.

 

James Edward Burns is an oil and gas executive who brings more than 25 years of energy experience to Petrolia Energy’s Board. Most recently, he served as President of BLU LNG, a domestic LNG provider, from December 2014 to February 2016, where he created a coherent commercial and operational strategy serving as catalyst for renewed efficiency and effectiveness. Prior to his role at BLU LNG, Mr. Burns was President of Fortress Energy Partners a division of Fortress Investment Group and worked in various executive roles globally at Royal Dutch Shell, and Texaco. Mr. Burns also serves as a member of the Houston Angel Network’s Energy Council and is the chairman of the board of Triple E Real Estate Investments. He holds a BS in Business Administration from California State University and an Executive MBA from the University of Houston.

 

Saleem Nizami is a Petroleum Geologist with over 40 years of Oil & Gas experience. Prior to founding APEC, Inc., an Oklahoma-based Petroleum and Environmental Consulting firm in 1989. Mr. Nizami served as a Senior Geologist and Manager in the Division of Oil & Gas at the Oklahoma Corporate Commission. Mr. Nizami has worked with numerous small to mid-sized Oil & Gas companies along with Major’s such as Chevron, ExxonMobil and Chesapeake Energy Corp. Mr. Nizami holds an MSc. in Petroleum Geology from Osmania University.

 

26
 

 

Ivar Siem is the Chairman of American Resources Inc. (“American”). Mr. Siem previously also served as the Chairman and CEO of American and its predecessor from September 2000 to August 1, 2017. Mr. Siem has broad experience from both the upstream and the service segments of the oil and gas industry. He has been the founder of several companies and involved in multiple roll-ups and restructuring processes throughout his career. These include Fred Olsen, Inc., Dolphin International, Inc., Blue Dolphin Energy, Seateam Technology ASA, DI Industries/Grey Wolf Drilling, American Resources Offshore, Inc., and Equimavenca SA. He has served on a number of public and private company boards including Frupor SA, Avenir ASA, Wellcem AS, and Siem Industries, Inc. Since July 2018, Mr. Siem has served as a member of the Board of Directors of PEDEVCO Corp. (NYSE American:PED), a company with securities registered under the Exchange Act.

 

Richard Dole has served as Chief Executive Officer of RDD Consulting, LLC since April 2015. He served as President and CEO (beginning in 2008) and as a director of the Double Eagle Petroleum Co. (Double Eagle) from 2005 to March 2014. Mr. Dole also served as Chairman, President and CEO of Petrosearch Energy Corporation from 2004 until August 2014, when Petrosearch was merged with Double Eagle. Mr. Dole previously served as Vice President and Chief Financial Officer for Burlington Resources International from 1998-2000. Mr. Dole was employed by PricewaterhouseCoopers (formerly Coopers & Lybrand) where he served as Assurance and Business Advisory Partner for nearly 20 years. He was also the National Partner-in-Charge of Business Process Solutions at KPMG from 1995-1998. He graduated from Colorado State University with a degree in business and was a business school commencement speaker as Alumni of the Year.

 

On September 1, 2020, Mark Allen was appointed President. Additionally, on February 1, 2021, Paul Deputy was appointed interim CFO.

 

On July 13, 2020, the following Board members resigned: Joel Oppenheim, Richard Dole and Saleem Nizami. On September 16. 2020 Zel Khan resigned as a board member but remined as Chief Executive Officer.

 

Term of Office

 

Our Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

 

CORPORATE GOVERNANCE

 

The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.

 

Board Leadership Structure

 

The roles of Chairman and Chief Executive Officer of the Company are currently held separately. Mr. Burns serves as Chairman and Mr. Khan serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an independent director, an affiliated director, or a member of management. Our Board believes that the Company’s current leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management and the members of our Board (currently Mr. Burns as Chairman). It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to its Chief Executive Officer, while enabling our Chairman to facilitate our Board’s oversight of management, promote communication between management and our Board, and support our Board’s consideration of key governance matters. The Board believes that its programs for overseeing risk, as described below, would be effective under a variety of leadership frameworks and therefore do not materially affect its choice of structure.

 

27
 

 

Risk Oversight

 

Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The directors exercise direct oversight of strategic risks to the Company.

 

Family Relationships

 

None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.

 

Arrangements Between Officers and Directors

 

To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.

 

Other Directorships

 

No directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act), except as discussed in their bios above.

 

Director Qualifications

 

The Board believes that each of our directors is highly qualified to serve as a member of the Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our executive officers or directors has been involved in any of the following events during the past ten years:

 

(1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and minor offenses);
(3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
(4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law;
(5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section (1a)(40) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member.

 

28
 

 

Board of Directors Meetings

 

The Company had ten (10) official meetings of the Board of Directors during the fiscal year 2019 and nine (9) during the previous fiscal year ending December 31, 2018. All directors attended at least 75% of the meetings of the Board of Directors and meetings of Committees of the Board of Directors, for committees on which they served. The Company has not adopted a policy requiring its directors to attend its annual meeting. The Company’s majority shareholders took action via written consent during fiscal 2019, in lieu of a meeting of shareholders.

 

Hedging, Clawbacks and Insider Trading Policies

 

The Company does not currently hedge any oil and gas products.

 

Insider trading includes the trading of our stock and options (put and call), based on material, non-public information about the Company. The Company prohibits any insider trading shares based on insider information and could be exposed to potential civil and/or criminal penalties. It also prohibits the sharing of that information with other non-insider individuals. This policy applies to the purchase/sale of common stock and preferred stock. The Company prohibits the trading of options at any time, irrespective of stock trading restrictions. This policy applies to all directors, officers, employees and consultants of the Company, as well as their family members. This policy imposes special additional temporary trading restrictions applicable to directors and officers of the Company.

 

COMMITTEES OF THE BOARD

 

Board Committee Membership

 

    Independent   Audit
Committee
  Compensation Committee   Nominating
and
Corporate
Governance
Committee
James E. Burns (1)                
Zel C. Khan                
Leo Womack   X   C       M
Joel Oppenheim   X   M   C    
Richard Dole   X            
Saleem Nizami   X   M   M    
Ivar Siem   X           C

 

(1) Chairman of Board of Directors.

C - Chairman of Committee.

M - Member.

 

The charter for each committee of the Board identified below is available on our website at www.petroliaenergy.com. Copies of the committee charters are also available for free upon written request to our Corporate Secretary. Additionally, the committee charters are filed as exhibits to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 24, 2018 (the “Form 8-K”).

 

Audit Committee

 

The Audit Committee, which is comprised exclusively of independent directors, has been established by the Board to oversee our accounting and financial reporting processes and the audits of our financial statements.

 

The Board has selected the members of the Audit Committee based on the Board’s determination that the members are financially literate (as required by NASDAQ rules) and qualified to monitor the performance of management and the independent auditors and to monitor our disclosures so that our disclosures fairly present our business, financial condition and results of operations.

 

29
 

 

The Board has also determined that Mr. Womack, is an “audit committee financial expert” (as defined in the SEC rules) because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States of America (“GAAP”) and financial statements; (ii) the ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions. Mr. Womack has acquired these attributes by means of having held various positions that provided relevant experience, as described in his biographical above.

 

The Audit Committee has the sole authority, at its discretion and at our expense, to retain, compensate, evaluate and terminate our independent auditors and to review, as it deems appropriate, the scope of our annual audits, our accounting policies and reporting practices, our system of internal controls, our compliance with policies regarding business conduct and other matters. In addition, the Audit Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Audit Committee.

 

The Audit Committee was formed on May 21, 2018.

 

The Audit Committee Charter is filed as Exhibit 99.3 to the Form 8-K filed on May 24, 2018.

 

Compensation Committee

 

The Compensation Committee, which is comprised exclusively of independent directors, is responsible for the administration of our stock compensation plans, approval, review and evaluation of the compensation arrangements for our executive officers and directors and oversees and advises the Board on the adoption of policies that govern the Company’s compensation and benefit programs. In addition, the Compensation Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Compensation Committee.

 

The Compensation Committee was formed on May 21, 2018.

 

The Compensation Committee Charter is filed as Exhibit 99.4 to the Form 8-K filed on May 24, 2018.

 

On July 13, 2020, when Joel Oppenheim resigned as Chairman, James Burns replace him as Chairman of the Compensation Committee.

 

Nominating and Corporate Governance Committee

 

The Nominating and Governance Committee, which is comprised exclusively of independent directors, is responsible for identifying prospective qualified candidates to fill vacancies on the Board, recommending director nominees (including chairpersons) for each of our committees, developing and recommending appropriate corporate governance guidelines and overseeing the self-evaluation of the Board.

 

In considering individual director nominees and Board committee appointments, our Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board and Board committees and to identify individuals who can effectively assist the Company in achieving our short-term and long-term goals, protecting our stockholders’ interests and creating and enhancing value for our stockholders. In so doing, the Nominating and Governance Committee considers a person’s diversity attributes (e.g., professional experiences, skills, background, race and gender) as a whole and does not necessarily attribute any greater weight to one attribute. Moreover, diversity in professional experience, skills and background, and diversity in race and gender, are just a few of the attributes that the Nominating and Governance Committee takes into account. In evaluating prospective candidates, the Nominating and Governance Committee also considers whether the individual has personal and professional integrity, good business judgment and relevant experience and skills, and whether such individual is willing and able to commit the time necessary for Board and Board committee service.

 

30
 

 

While there are no specific minimum requirements that the Nominating and Governance Committee believes must be met by a prospective director nominee, the Nominating and Governance Committee does believe that director nominees should possess personal and professional integrity, have good business judgment, have relevant experience and skills, and be willing and able to commit the necessary time for Board and Board committee service. Furthermore, the Nominating and Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending individuals that can best perpetuate the success of our business and represent stockholder interests through the exercise of sound business judgment using their diversity of experience in various areas. We believe our current directors possess diverse professional experiences, skills and backgrounds, in addition to (among other characteristics) high standards of personal and professional ethics, proven records of success in their respective fields and valuable knowledge of our business and our industry.

 

The Nominating and Governance Committee uses a variety of methods for identifying and evaluating director nominees. The Nominating and Governance Committee also regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or other circumstances. In addition, the Nominating and Governance Committee considers, from time to time, various potential candidates for directorships. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee and may be considered at any point during the year.

 

The Committee evaluates director nominees at regular or special Committee meetings pursuant to the criteria described above and reviews qualified director nominees with the Board. The Committee selects nominees that best suit the Board’s current needs and recommends one or more of such individuals for election to the Board.

 

The Nominating and Governance Committee was formed on May 21, 2018.

 

The Nominating and Governance Committee Charter is filed as Exhibit 99.5 to the Form 8-K filed on May 24, 2018.

 

Stockholder Communications with the Board

 

Our Company has defined policy and procedural requirements for stockholders to submit recommendations or nominations for directors as set forth in the Company’s Bylaws and described below. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The Nominating and Governance Committee will assess all candidates, whether submitted by management or stockholders, and make recommendations for election or appointment.

 

The Nominating and Governance Committee will consider candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described below. The Secretary will send properly submitted stockholder recommendations to the Nominating and Governance Committee. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Nominating and Governance Committee through other means. The Nominating and Governance Committee also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical information, if submitted in writing to the Secretary.

 

Our stockholders and other interested parties may communicate with members of the Board of Directors by submitting such communications in writing to our Corporate Secretary, 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024, who, upon receipt of any communication other than one that is clearly marked “Confidential,” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Corporate Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication will be forwarded to a Board member to bring to the attention of the Board.

 

31
 

 

Code of Conduct

 

We have adopted a Code of Ethical Business Conduct (“Code of Conduct “) that applies to all of our directors, officers and employees.

 

Any stockholder who so requests may obtain a free copy of our Code of Conduct by submitting a written request to our Corporate Secretary. Additionally, the Code of Conduct was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed with the SEC on November 23, 2015, as Exhibit 14.1.

 

We intend to disclose any amendments to our Code of Conduct and any waivers with respect to our Code of Conduct granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.petroliaenergy.com within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Code of Conduct to any such officers or employees.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

Based solely upon a review by us of Forms 3 and 4, relating to fiscal year 2018 as furnished to us under Rule 16a-3(d) under the Securities Act, and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2018, we believe that during fiscal 2018, that no director, executive officer, or beneficial owner of more than 10% of our common stock failed to file a report on a timely basis during 2018, except for: (i) James E. Burns, who inadvertently failed to timely file five Form 4s to report 12 transactions on Form 4; (ii) Leo Womack, who inadvertently failed to timely file two Form 4s to report seven transactions on Form 4; (iii) Joel Oppenheim, who inadvertently failed to timely file four Form 4s to report 19 transactions on Form 4; (iv) Tariq Chaudhary, who inadvertently failed to timely file one Form 4 to report one transaction on Form 4; (v) Ivar Siem, who inadvertently failed to timely file three Form 4s to report 20 transactions on Form 4; (vi) Quinten Beasley, who inadvertently failed to timely file two Form 4s to report four transactions on Form 4; (vii) Richard Dole, who inadvertently failed to timely file two Form 4s to report four transactions on Form 4; and (viii) Zel C. Khan, who inadvertently failed to timely file one Form 4 to report seven transactions on Form 4.

 

Pursuant to SEC rules, we are not required to disclose in this filing any failure to timely file a Section 16(a) report that has been disclosed by us in a prior annual report or proxy statement.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the compensation of (i) all individuals serving as our principal executive officer (PEO) or acting in a similar capacity during the last completed fiscal year, regardless of compensation level; (ii) our two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year and who were paid more than $100,000 of total compensation; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to paragraph (ii) but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year (collectively, the “Named Executive Officers”).

 

32
 

 

The following table summarizes all compensation paid or accrued to our former or current executive officers during the years ended December 31, 2019 and December 31, 2018:

 

Name and Principal Position   Fiscal
Year
    Salary (1)     Bonus (2)     Stock
Awards (3)
    Option and Warrant Awards (4)     All Other Compensation (5)     Total  
Zel Khan (Principal Executive Officer) (6)   2019     $     $     $     $ 67,622     $   —     $ 67,622  
    2018     $ 10     $     $     $ 100,851     $   —     $ 100,861  
                                                       
Horacio Alfredo Fernandez (Interim Principal Financial and Accounting Officer) (7)   2019       68,000                               68,000  
    2018       68,000                               68,000  
                                                       
Tariq Chaudhary (Principal Financial and Accounting Officer) (8)   2019                                      
    2018       77,500             50,000                   127,500  
                                                       
James E. Burns (President) (9)   2019       71,000                   67,622       18,788       157,410  
    2018       29,167             215,000       252,731             496,898  
                                                       
Paul Deputy (Principal Financial and Accounting Officer) (10)   2019                                      
    2018       5,833                   111,569             117,402  

 

Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. None of our executive officers received any change in pension value and nonqualified deferred compensation earnings during the periods presented.

 

  (1) The dollar value of base salary (cash and non-cash) earned. Executive salaries in 2018 were accrued but not paid, except $5,833 paid to Mr. Deputy, included in the $140,000 total salary.
  (2) The dollar value of bonus (cash and non-cash) earned.
  (3) The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
  (4) The fair value of options and warrants granted computed in accordance with ASC 718 on the date of grant.
  (5) All other compensation received that we could not properly report in any other column of the table.
  (6) Zel C. Khan was appointed as President and Chief Executive Officer of the Company, on March 1, 2015.
  (7) Horacio Alfredo Fernandez was appointed as interim Chief Financial Officer on October 31, 2018. He resigned on March 20, 2020
  (8) Tariq Chaudhary was appointed as Chief Financial Officer on January 16, 2018 and resigned on October 31, 2018. On May 22, 2018, Tariq Chaudhary received 500,000 shares of common stock in consideration for agreeing to serve as Chief Financial Officer of the Company.
  (9) On April 19, 2018, James E. Burns received warrants to purchase 3,000,000 shares of common stock and 2,000,000 shares of restricted common stock pursuant to a termination agreement and his cessation as Chief Executive Officer. In 2019, $71,000 was accrued related to director compensation. The Company also paid $18,788 to provide his health insurance, pursuant to his termination agreement.
  (10) Appointed as Chief Financial Officer July 1, 2016 and resigned as Chief Financial Officer on January 16, 2018. On March 31, 2018, Paul Deputy received warrants to purchase 250,000 shares of common stock pursuant to a termination agreement and his cessation as Chief Financial Officer.

 

Paul Deputy was re-appointed Interim Chief Financial Officer as of February 1, 2021.

 

We do not provide our officers or employees with pension, stock appreciation rights, long-term incentive, profit sharing, retirement or other plans, although we may adopt one or more of such plans in the future.

 

We do not maintain any life or disability insurance on any of our officers.

 

33
 

 

Employment Agreements

 

Zel C. Khan (CEO)

 

On September 23, 2015, Zel C. Khan, entered into an employment agreement with the Company effective October 1, 2015 to serve as our President and Chief Executive Officer for an initial term of twenty-four (24) months (automatically renewable thereafter for additional one-year terms), which agreement automatically extended from October 1, 2017 to September 30, 2018 and from October 1, 2018 to September 30, 2019. The agreement provides that the Company will pay Mr. Khan an annual base salary of $160,000, with a provision for deferral of current payments until such time that the Company is cash flow positive. The Company will issue one warrant to purchase one share of the Company’s restricted common stock at an exercise price of $0.20 per share for each dollar of gross salary that is deferred. The Warrants will have a term of 36 months from date of grant, which will vest quarterly.

 

In the event Mr. Khan’s employment is terminated by the Company without cause, he is required to receive severance pay equal to two months of his base salary. “Cause” means (i) the commission of a felony or other crime involving moral turpitude or the commission of any other act or omission involving misappropriation, dishonesty, unethical business conduct, disloyalty, fraud or breach of fiduciary duty, (ii) reporting to work under the influence of alcohol, (iii) the use of illegal drugs (whether or not at the workplace) or other conduct, which could reasonably be expected to, or which does, cause the Company or any of its affiliates public disgrace or disrepute or economic harm, (iv) repeated failure to perform duties as reasonably directed by the Board of Directors, (v) gross negligence or willful misconduct with respect to the Company or its affiliates or in the performance of Mr. Khan’s duties under the agreement, (vi) obtaining any personal profit not thoroughly disclosed to and approved by the board in connection with any transaction entered into by, or on behalf of, the Company or any of its affiliates, or (vii) violating any of the terms of the Company’s or its affiliates’ rules or policies applicable to Mr. Khan which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to Mr. Khan, or any other material breach of the agreement or any other agreement between Mr. Khan and the Company or any of its affiliates which, if curable, is not cured to the board’s reasonable satisfaction within fifteen (15) days after written notice thereof to Mr. Khan.

 

The employment agreement includes a non-solicitation/non-interference clause which applies for two years after the termination date of the employment agreement. The employment agreement also requires Mr. Khan to submit to the board all business, commercial and investment opportunities or offers presented to Mr. Khan or of which Mr. Khan becomes aware which relate to the business of the Company or its affiliates.

 

The following shows the amount of time Mr. Khan expects to devote to our business:

 

Name   Percent  
         
Zel C. Khan     100 %

 

James E. Burns (Former President)

 

On April 19, 2018, we entered into a Separation and Release Agreement with Mr. Burns (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Burns and the Company agreed:

 

  (a) that Mr. Burns would resign as President of the Company, effective May 1, 2018;
  (b) that the Company would pay Mr. Burns $33,000 in cash, issue him a warrant to purchase 3,000,000 shares of common stock (the “Separation Warrants” (which have a term of three years and an exercise price of $0.10 per share)) and issue him 2,000,000 shares of restricted common stock (the “Separation Shares”);

 

  (c) that Mr. Burns would release the Company from any further obligations under his prior employment agreement and release the Company from any other liabilities or claims; and
  (d) that Mr. Burns would refrain from using the Company’s confidential information, pursuant to the terms of the Separation Agreement.

 

Effective on May 1, 2018, the Board of Directors of the Company (a) appointed Zel C. Khan (the current Chief Executive Officer and Director of the Company) as President of the Company; and (b) appointed James E. Burns, the Company’s President prior to May 1, 2018, as Chairman of the Board of Directors of the Company.

 

34
 

 

On April 26, 2018, and effective May 1, 2018, the Company entered into a letter agreement with Mr. Burns dated April 20, 2018, pursuant to which, he agreed to serve as Chairman of the Company and the Company agreed to pay him (a) $500 per month as an automobile allowance, (b) up to $25,000 per year for he and his family’s health insurance, (c) $65,000 per year for compensation as Chairman (provided that such compensation is accrued until the Company has sufficient available capital to pay such amounts in cash and Mr. Burns is to receive 1-for-1 warrant coverage, with a $0.10 per share exercise price, for all accrued salary, issuable at the end of each calendar quarter), (d) 500,000 shares of the Company’s restricted common stock (the “Letter Shares”), (e) warrants to purchase 2,000,000 shares of the Company’s common stock, vesting at the rate of 750,000 of such warrants per quarter, upon completing and filing of each of the following four periodic filings with the Securities and Exchange Commission, having a term of 36 months, and an exercise price of $0.10 per share (the “Letter Warrants”), and (f) the right to earn bonuses as approved by the Board of Directors in its discretion from time to time. An additional 500,000 shares of restricted common stock will be issued upon a successful listing of the Company on the NASDAQ or NYSE exchanges. Mr. Burns was granted fully vested warrants to purchase 2,000,000 shares of common stock exercisable at $0.10 per share expiring in 36 months. The warrants were granted at fair value using a Black Scholes model for $147,600 and the restricted shares were valued at the closing price of the Company’s common stock on the date of the agreement for $45,000. The letter agreement has a term through April 30, 2019, provided that Mr. Burn’s position as Chairman and/or director can be terminated at any time if he is not re-nominated to serve as Chairman/director, at which time the Company is required to pay the compensation due to Mr. Burns pursuant to the terms of the agreement for the lesser of three months and until the end of the term.

 

Mark Allen (President)

 

On September 1, 2020, the Board of Directors approved a contractual Employment Agreement between the Company and Mark Allen to appoint him as the new President of the Company. Mr. Allen’s contract term is 6 months, with a cash payment of $90,000 in equal monthly installments of $15,000, including an option to extend. In addition, Mr. Allen is due to receive incentive compensation of 2,000,000 shares of common stock (1,000,000 at signing and the remaining at the end of the contract period). He also is to receive 1,000,000 warrants at $0.08 per share that expire in 36 months and vest over a two-year period.

 

Director Compensation

 

The table below summarizes all compensation of our directors for the year ended December 31, 2019, other than Mr. Khan, whose compensation is included in the executive compensation table above:

 

Name  Fees Earned or Paid in Cash (1)   Stock Awards (2)   Option and Warrant Awards (3)   Non-Equity Incentive Plan Compensation   Non-Qualified Deferred Compensation Earnings   All Other Compensation   Total ($) 
James E. Burns  $71,000(4,5)  $   —   $67,622   $         —   $          —   $18,788(5)  $157,410 
Leo Womack           67,622                  —    67,622 
Joel Oppenheim           67,622                67,622 
Quinten Beasley                             
Saleem Nizami           67,622                67,622 
Richard Dole           67,622                67,622 
Ivar Siem  $   $   $67,622   $   $   $   $67,622 

 

The notes below summarizes all compensation of our directors for the year ended December 31, 2019.

 

  (1) Fees earned due to retainers, meetings, committees and chairman services. These fees were not paid in cash to date but were accrued.
  (2) The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
  (3) The fair value of warrants granted computed in accordance with ASC 718 on the date of grant.
  (4) Includes $65,000 which was accrued and not paid for salary and $6,000 which was accrued and not paid for fees.
  (5) Payment for health insurance benefits was included in James Burns employment agreement.

 

The fair value of stock issued for services computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 on the date of grant.

 

35
 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth certain information regarding the beneficial ownership of our common stock and preferred stock by (i) each person who is known by the Company to own beneficially more than five percent (5%) of our outstanding voting stock; (ii) each of our directors and director nominees; (iii) each of our executive officers and significant employees; and (iv) all of our current executive officers, significant employees and directors as a group, as of October 15, 2019 (the “Date of Determination”).

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the Date of Determination, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.

 

We believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person. Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024.

 

   

Number of Common

Stock Shares (1)

    Percent of
Common Stock (2)
   

Number of Series A

Convertible Preferred

Stock Shares

   

Percent of

Series A

Convertible

Preferred Stock (2)

   

Total

Beneficial Ownership

    Percent of Total Voting Shares (3)  
Named Executive Officers and Directors                                                
Zel C. Khan     3,800,100 (4)     1.7 %           %     3,800,100       1.6 %
Joel Oppenheim     16,534,206 (5)     7.5 %     20,490       16.4 %     17,997,786       7.6 %
Leo Womack     7,993,896 (6)     3.6 %     8,400       6.7 %     8,593,900       3.6 %
James E. Burns     14,474,566 (7)     6.5 %     16,400       13.2 %     15,646,002       6.6 %
Saleem Nizami     2,712,500 (8)     1.2 %           %     2,712,500       1.2 %
Ivar Siem     5,458,334 (9)     2.5 %           %     5,458,334       2.3 %
Richard Dole     2,687,500 (10)     1.2 %           %     2,687,500       1.2 %
All Named Executive Officers and Directors as a Group (7 persons)     53,661,102       24.2 %     45,290       22.7 %     56,896,121       24.1 %
                                                 
5% Stockholders                                                
Common Stock                                                
Quinten Beasley (12)     67,373,225 (12)     30.4 %     24,410       19.6 %     69,116,807       29.3 %
                                                 
Series A Convertible Preferred Stock                                                
Rick Wilber (13)     4,050,000       1.8 %     55,000       44.1 %     7,978,595       3.4 %

 

36
 

 

Under Rule 13d-3 of the Exchange Act, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares, and/or (ii) investment power, which includes the power to dispose or direct the disposition of shares. Also under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the number of shares is deemed to include the number of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

 

  (1)  Not including shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by each holder.

 

  (2) Except as otherwise indicated, all shares are owned directly, and the percentage shown is based on 164,548,726 shares of common stock and 199,100 shares of Series A Convertible Preferred Stock issued and outstanding as of the Date of Determination. The Series A Preferred Stock (and accrued and unpaid dividends thereon) are convertible into shares of common stock of the Company on a 71.429-for-one basis. The Series A Preferred Stock includes a blocker prohibiting the conversion of the Series A Preferred Stock into common stock of the Company, if upon such conversion/exercise the holder thereof would beneficially own more than 4.999% of the Company’s then outstanding common stock, provided such limitation shall not apply in the event of an automatic conversion of the Series A Preferred Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation also limits the voting rights of any holders of the Series A Preferred Stock, the effects of which have been reflected in the table above. The Beneficial Ownership Limitation may be waived by any holder with 61 days prior written notice to the Company.

 

  (3) Includes all shares of common stock beneficially owned by each named person, all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to the named person, and all shares of common stock issuable upon conversion of Series A Preferred Stock held by the named person, subject to the Beneficial Ownership Limitation.
     
  (4) Includes all shares of common stock and warrants to purchase shares of common stock held by Mr. Khan, which have vested or which will vest within 60 days of the Date of Determination.

 

  (5) Includes all shares of common stock beneficially owned by Mr. Oppenheim, all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr. Oppenheim, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Oppenheim, subject to the Beneficial Ownership Limitation.
     
  (6) Includes all shares of common stock beneficially owned by Mr. Womack and the Leo B. Womack Family Trust, which Mr. Womack is deemed to beneficially own (the “Trust”), all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr. Womack and the Trust, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Womack and the Trust, subject to the Beneficial Ownership Limitation.

 

  (7) Includes all shares of common stock beneficially owned by Mr. Burns, all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr. Burns, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Burns, subject to the Beneficial Ownership Limitation.
     
  (8) Includes all shares of common stock and warrants to purchase shares of common stock held by Mr. Nizami, which have vested or which will vest within 60 days of the Date of Determination.
     
  (9) Includes all shares of common stock beneficially owned by Mr. Siem and American Resources Offshore Inc. (“American Resources”) and all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr. Siem and American Resources. Mr. Siem is deemed to beneficially own the securities held by American Resources due to his position as Director and CEO of American Resources.

 

37
 

 

  (10) Includes all shares of common stock and warrants to purchase shares of common stock held by Mr. Dole, which have vested or which will vest within 60 days of the Date of Determination.
     
  (11) Includes all shares of common stock and warrants to purchase shares of common stock held by Mr. Fernandez, which have vested or which will vest within 60 days of the Date of Determination.
     
  (12) Address: 710 N. Post Oak Rd., Suite 500, Houston, Texas 77024. Includes all shares of common stock beneficially owned by Mr. Beasley, Critical Communication LLC (“Critical”) and Jovian Petroleum Corporation (“Jovian”), all shares of common stock issuable upon exercise of warrants which have vested or which will vest within 60 days of the Date of Determination to Mr. Beasley, Critical and Jovian, and for the “Total Beneficial Ownership” column, shares of common stock issuable upon conversion of outstanding shares of Series A Preferred Stock held by Mr. Beasley, Critical and Jovian, subject to the Beneficial Ownership Limitation. Mr. Beasley is deemed to beneficially own the securities held by Critical due to his position as Managing Director of Critical. Mr. Beasley is deemed to beneficially own the securities held by Jovian due to his position as CEO of Jovian.
     
  (13) Address: 10360 Kestrel Street, Plantation, Florida, 33324.

 

Changes in Control

 

The Company is not aware of any arrangements, which may at a subsequent date result in a change of control of the Company.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Except as discussed below or otherwise disclosed above under “Item 11. Executive Compensation,” or in Note 4 – Acquisition of Bow Energy, Ltd., a Related Party, Note 5 – Disposition of Bow Energy, Ltd., a Related Party, Note 8 – Related Party Notes Payable, Note 11 - Equity and Note 12 - Related Party Transactions, of the consolidated audited financial statements included herein, all of which information is incorporated by reference into this Item 13, there have been no transactions since the beginning of the Company’s last fiscal year, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end, for the last two completed fiscal years, and in which any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, nor any member of the above referenced individual’s immediate family, had or will have a direct or indirect material interest.

 

On February 1, 2018, former director Quinten Beasley, exercised warrants to purchase 1,110,000 shares of common stock by settling $102,590 of accounts payable, due to a company controlled by the former director, at an average share price of $0.092 per share. No gain or loss was recorded on settlement.

 

On February 1, 2018, director Joel Oppenheim subscribed for a private placement resulting in the issuance of 208,333 shares of common stock and warrants for gross proceeds of $25,000 at a price of $0.12 per unit.

 

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. The CEO of Jovian is Quinten Beasley, our former director (resigned October 31, 2018), and 25% of Jovian is owned by Zel C. Khan, our CEO and director. The initial agreement is for a period of 6 months and 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. The LOC currently has a term through December 31, 2020.

 

On February 23, 2018, director Saleem Nizami was issued 100,000 shares of common stock, valued at $13,000 or $0.13 per share, in exchange for his professional consulting services at the SUDS, Oklahoma lease.

 

38
 

 

On February 27, 2018, the transactions contemplated by the November 30, 2017, Arrangement (the “Arrangement”) entered into to acquire Bow Energy Ltd (“Bow” and the “Acquisition”), a Canadian company with corporate offices in Alberta, Calgary, closed and the Company acquired Bow Energy Ltd., a related party and all of the issued and outstanding shares of capital stock of Bow (each a “Bow Share”). Under the terms of the Arrangement, Bow shareholders are deemed to have received 1.15 common stock shares for each Bow Share. A total of 106,156,712 shares of the Company’s common stock were issued to the Bow shareholders as a result of the Arrangement, plus additional shares in connection with rounding. Prior to the acquisition of Bow, BSIH, Ltd., was the largest shareholder of Bow. BSIH’s Chief Executive Officer, Ilyas Chaudhary, is the father of Petrolia’s CEO, Zel C. Khan. Mr. Chaudhary had a controlling interest in BSIH prior to the acquisition of Bow. Therefore, the Bow acquisition is a related party transaction.

 

On February 28, 2018, director Joel Oppenheim exercised warrants to purchase 630,000 shares of common stock for cash proceed of $61,800 at an average exercise price of $0.098 per share.

 

On March 23, 2018, director, Joel Oppenheim subscribed in a private placement for 104,167 shares of common stock and warrants to purchase 104,167 shares of common stock, for gross proceeds of $12,500 at a price of $0.12 per unit. The warrants have a contractual life of two years and an exercise price of $0.20 per warrant.

 

On March 31, 2018, 350,000 shares of common stock, valued at $35,000 or $0.10 per share, were issued in accordance with Mr. James Burns’ common stock related salary compensation.

 

On April 12, 2018, the Board of Directors approved (a) the entry by the Company into a $500,000 Convertible Promissory Note with Blue Sky International Holdings Inc., a related party. The note, effective April 1, 2018, is due on April 1, 2019, accrues interest at the rate of 11% per annum until paid in full, and is convertible into shares of common stock of the Company at the rate of $0.12 per share. This note was never utilized and subsequently cancelled on April 27, 2018; and (b) the entry into an Amended Revolving Line of Credit Agreement with Jovian, a related party, which establishes a revolving line of credit in the amount of $500,000 with amounts borrowed thereunder due at the expiration of the line of credit and accruing interest at the rate of 3.5% per annum unless there is a default thereunder at which time amounts outstanding accrue interest at the rate of 7.5% per annum until paid in full, with such interest payable every 90 days. Both the BSIH Promissory Note and the Jovian Line of Credit are related party transactions. Blue Sky International Holdings Inc. is owned by Mr. Ilyas Chaudhary, father of Zel C. Khan, former Director and Officer of Jovian and current CEO and President of Petrolia.

 

On April 26, 2018, Joel Oppenheim, Director, exercised warrants to purchase 500,000 shares of common stock for cash proceed of $50,000 at an average exercise price of $0.10 per share.

 

On May 22, 2018, the Company issued 500,000 shares of common stock to officer Tariq Chaudhary, who had served as the Chief Financial Officer, as part of his compensation package. The shares had a fair value of $50,000, or $0.10 per share, based on the closing price of Petrolia’s stock on the grant date.

 

Effective on June 29, 2018, the Company acquired a 25% working interest in approximately 41,526 acres located in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest Saskatchewan and Eastern Alberta, Canada, from Blue Sky. The President of Blue Sky is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer.

 

On August 17, 2018, the Company sold an aggregate of $90,000 in Convertible Promissory Notes (the “Director Convertible Notes”), to the Company’s directors, Ivar Siem ($20,000) through an entity that he is affiliated with; Leo Womack ($60,000); and Joel Oppenheim ($10,000). The Director Convertible Notes accrue interest at the rate of 12% per annum until paid in full and are due and payable on October 17, 2018. The amount owed may be prepaid at any time without penalty. The outstanding principal and interest owed under the Director Convertible Notes are convertible into common stock of the Company, from time to time, at the option of the holders of the notes, at a conversion price of $0.10 per share. As additional consideration for entering into the notes, the Company agreed to grant warrants to purchase one share of the Company’s common stock at an exercise price of $0.10 per share for each dollar loaned pursuant to the Director Convertible Notes (the “Bridge Note Warrants”). The warrants have a contractual life of one year. As such, the Company granted (a) 20,000 Bridge Note Warrants to an entity affiliated with Ivar Siem; (b) 60,000 Bridge Note Warrants to Leo Womack; and (c) 10,000 Bridge Note Warrants to Joel Oppenheim. The Director Convertible Notes contain standard and customary events of default. The Company fair valued the warrants issued using a Black Scholes model for a total fair value of $6,249.

 

39
 

 

Effective on August 31, 2018, the Company entered into and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky, pursuant to which, among other things, the Company sold Blue Sky 100% of our ownership of Bow and 70,807,417 shares of the Company’s common stock owned and controlled by Blue Sky and BSIH were returned to the Company and cancelled.

 

On September 14, 2018, warrants to purchase 150,000 shares of common stock with a fair value of $11,242 were granted to director Joel Oppenheim pursuant to a loan agreement. Each warrant is exercisable into shares of common stock at an exercise price of $0.10 per share and has a contractual life of two years. The warrants were valued using the Black-Scholes Option Pricing Model.

 

On September 17, 2018, the Company entered into a Memorandum of Understanding (“MOU”) with Blue Sky. Pursuant to the MOU, the Company acquired an additional 3% working interest in the Canadian Properties, increasing our Working Interest to 28%. Total consideration paid from the Company to Blue Sky for the additional 3% Working Interest was $150,000.

 

On October 17, 2018, 2,000,000 shares of common stock with a fair value of $256,000 were granted to a company controlled by a former director Quinten Beasley, Critical Communication LLC, pursuant to a separation agreement and his resignation as a member of the Board of Directors. Furthermore, warrants to purchase 2,000,000 shares of common stock with a fair value of $244,429 were granted. Each warrant is exercisable into shares of common stock at an exercise price of $0.10 per share and has a contractual life of two years. The warrants were valued using the Black-Scholes Option Pricing Model.

 

On October 22, 2018, director Leo B. Womack exercised warrants to purchase 1,000,000 shares of common stock. The exercise price of $60,000 or $0.06 per share was satisfied by forgiving debt outstanding and due to the holder of $60,000, with no gain or loss recognized.

 

On October 31, 2018, director Joel Oppenheim subscribed in a private placement for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.

 

On November 1, 2018, director Richard Dole subscribed in a private placement for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock for gross proceeds of $25,000 at a price of $0.08 per unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.

 

On November 2, 2018, Jovian, a related party, subscribed in a private placement for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock for gross proceeds of $50,000 at a price of $0.08 per unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.

 

On December 14, 2018, director Joel Oppenheim subscribed in a private placement for 156,250 shares of common stock and warrants to purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.

 

On December 14, 2018, American Resources Offshore Inc., a related party, subscribed in a private placement for 156,250 shares of common stock and warrants to purchase 312,500 shares of common stock for gross proceeds of $12,500 at a price of $0.08 per unit. Each warrant has an exercise of $0.10 per share and expires on November 1, 2020.

 

During the year ended December 31, 2018, warrants to purchase 1,000,000 shares of common stock with an aggregate fair value of $104,009 were granted to director Joel Oppenheim, pursuant to a loan agreement. Each warrant is exercisable into shares of common stock of the Company at an exercise price of $0.10 - $0.14 per share and has a contractual life of three years. The warrants were valued using the Black-Scholes Option Pricing Model.

 

40
 

 

On August 21, 2019, the Company closed private placements with related parties for gross proceeds of $150,000, consisting of 1,875,000 shares of common stock and 3,750,000 warrants to purchase shares of common stock, exercisable at a price of $0.10 per share at any time prior to November 1, 2020. American Resources Offshore Inc. (of which Ivar Siem, our director) subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock. Leo Womack, our director, subscribed for 312,500 shares of common stock and warrants to purchase 625,000 shares of common stock. Jovian Petroleum Corporation, a greater than 5% shareholder of the Company, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock. Joel Martin Oppenheim, our director, subscribed for 625,000 shares of common stock and warrants to purchase 1,250,000 shares of common stock.

 

Review, Approval and Ratification of Related Party Transactions

 

On August 22, 2018, the Company adopted a formal related party transaction policy (the “Policy”) for the review, approval or ratification of transactions, such as those described above, with our directors, nominees for director, executive officers and significant shareholders or certain entities or persons related to them.

 

Under the terms of the Policy, the Audit Committee shall review the material facts of all related party transactions and may approve or disapprove of the entry into the related party transaction. Where advance Audit Committee review of a related party transaction is not feasible or has otherwise not been obtained, then the related party transaction shall be reviewed subsequently by the Audit Committee (and such transaction may be ratified subsequently by the Audit Committee). The Audit Committee may also disapprove of a previously entered into related party transaction and may require that management of the Company take all reasonable efforts to terminate, unwind, cancel or annul the related party transaction. The Audit Committee shall be authorized to review in advance and provide standing pre-approval in advance of certain related party transactions or categories of related party transactions which include employment of executive officers, director compensation and others. The Audit Committee or the Board of Directors may recommend the creation of a special Audit Committee to review any related party transaction.

 

Each officer and/or director who is a related party with respect to a particular related party transaction shall disclose all material information to the Audit Committee concerning such related party transaction and his or her interest in such transaction. Any member of the Audit Committee who has a potential interest in any related party transaction shall recuse himself or herself and abstain from voting on the approval or ratification of the related party transaction, but may participate in all or a portion of the Audit Committee’s discussions of the related party transaction, if requested by the Audit Committee.

 

In connection with its review of a related party transaction, the Audit Committee shall take into account, among other factors it deems appropriate, including the following factors, among others, to the extent relevant to the related party transaction:

 

● Whether the terms of the related party transaction are fair to the Company and would apply on the same basis if the transaction did not involve a related party, i.e., whether the terms of the transaction would be the same if the transaction was undertaken on an arms-length basis;

 

● Whether there are any compelling business reasons for the Company to enter into the related party transaction and the nature of alternative transactions, if any;

 

● Whether the related party transaction would impair the independence of an otherwise independent director or nominee for director;

 

● Whether the Company was notified about the related party transaction before its commencement and if not, why pre-approval was not sought and whether subsequent ratification would be detrimental to the Company; and

 

● Whether the related party transaction would present an improper conflict of interest for any related party, taking into account the size of the transaction, the overall financial position of the related party, the direct or indirect nature of the related party’s interest in the transaction and the ongoing nature of any proposed relationship and any other factors the Audit Committee deems relevant.

 

41
 

 

If a related party transaction will be ongoing, the Audit Committee may establish guidelines for the Company’s management to follow in its ongoing dealings with the related party. Thereafter, the Audit Committee shall periodically review and assess ongoing relationships with the related party. Any material amendment, renewal or extension of a transaction, arrangement or relationship previously reviewed under the Policy shall also be subject to subsequent review under the Policy.

 

In addition to guidelines for ongoing related party transactions, the Audit Committee may, as it deems appropriate and reasonable, establish from time to time guidelines regarding the review of other related party transactions including those that (i) involve de minimus amounts, (ii) do not require public disclosure, or (iii) involve transactions that have primarily a charitable purpose.

 

Director Independence

 

Our common stock is quoted for trading on the OTC Pink Sheet market operated by OTC Markets Group and we are not required to have independent members of our Board of Directors pursuant to OTC Pink Sheet market rules. Notwithstanding that we currently consider Leo Womack, Joel Oppenheim, Saleem Nizami, Ivar Siem and Richard Dole as independent directors.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

M&K CPAS, PLLC (“M&K”) served as our independent registered public accounting firm for the year ended December 31, 2018. MaloneBailey, LLP (“MaloneBailey”) served as our independent registered public accounting firm for the year ended December 31, 2017 and resigned effective January 29, 2019. The following table shows the aggregate fees billed to us for these years by M&K and MaloneBailey.

 

   

Year Ended

December 31,

 
    2019     2018  
             
Audit Fees   $ 36,500     $ 95,500  
Audit-Related Fees            
Tax Fees            
All Other Fees            
Total   $ 36,500     $ 95,500  

 

Audit fees represent amounts billed for professional services rendered for the audit of our annual consolidated financial statements and the reviews of the financial statements included in our Form 10-Q reports. Prior to contracting with M&K to render audit or non-audit services, each engagement was approved by our directors.

 

It is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and non-audit services, must be pre-approved by our Board of Directors. Our Board of Directors pre-approved all services, audit and non-audit related, provided to us by M&K for 2019 and 2018.

 

In order to assure continuing auditor independence, the Board of Directors periodically considers the independent auditor’s qualifications, performance and independence and whether there should be a regular rotation of our independent external audit firm.

 

42
 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

INDEX TO FINANCIAL STATEMENTS

 

Audited Financial Statements for Years Ended December 31, 2019 and 2018

 

Report of Independent Registered Public Accounting Firms F-1
Consolidated Balance Sheets as of December 31, 2019 and 2018 F-2
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018 F-3
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 F-4
Consolidated Statement of Shareholders’ Equity for the Years Ended December 31, 2019 and 2018 F-6
Notes to Consolidated Financial Statements F-7

 

(2) Financial Statement Schedules

 

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.

 

(3) Exhibits required by Item 601 of Regulation S-K

 

            Incorporated by Reference

Exhibit

Number

     

Filed or

Furnished

Herewith

  Form Exhibit Number Filing Date/ Period End Date File No.
04.01   Exhibit 4.1 - Description of Company’s Capital Stock     10-Q 04.01 06/30/2019  
10.01   $500,000 Convertible Promissory Note dated April 1, 2018 entered into with Blue Sky International Holdings Inc.       10-K 10.01 12/30/2017 000-52690
10.02   Amended Revolving Line of Credit Agreement with Jovian Petroleum Corporation dated February 9, 2018 and amended April 12, 2018       10-K 10.02 12/30/2017 000-52690
10.03   Separation and Release Agreement dated April 19, 2018, by and between James E. Burns and Petrolia Energy Corporation       8-K 10.03 5/1/2018 000-52690
10.04   Chairman Offer Letter dated April 20, 2018, by and between James E. Burns and Petrolia Energy Corporation       8-K 10.04 5/1/2018 000-52690
10.05   Warrant to Purchase Common Stock, evidencing warrants to purchase 5,000,000 shares of common stock granted to James E. Burns on April 19, 2018       8-K 10.05 5/1/2018 000-52690
10.06   Tariq Chaudhary Offer Letter dated January 12, 2018       10-Q  10.06  3/31/2018 000-52690
10.07   Bukit Energy Inc. $500,000 Promissory Note dated August 31, 2017 and amendment        10-Q  10.07  3/31/2018 000-52690
10.08   Memorandum of Understanding between Blue Sky Resources Ltd. and Petrolia Energy Corporation dated June 29, 2018       8-K 10.08 7/6/2018 000-52690
10.09   Conveyance between Blue Sky Resources Ltd. and Petrolia Energy Corporation dated June 29, 2018       8-K 10.09 7/6/2018 000-52690
10.10   CAD $406,181 Promissory Note by Petrolia Energy Corporation in favor of Blue Sky Resources Ltd. dated June 8, 2018       8-K 10.10 7/6/2018 000-52690
10.11   EJL Debt Repayment Agreement effective July 31, 2018, by and between Petrolia Energy Corporation and Blue Sky Resources Ltd (incorporated by reference to Schedule 2A of the Share Exchange Agreement incorporated by reference herewith as Exhibit 2.3)       8-K 10.11 9/5/2018 000-52690
10.12   Assignment of 20% BOW EIH effective July 31, 2018, by and between Petrolia Energy Corporation and Bow Energy Ltd. (incorporated by reference to Schedule 3 of the Share Exchange Agreement incorporated by reference herewith as Exhibit 2.3)       8-K 10.12 9/5/2018 000-52690

 

43
 

 

10.13   Assignment of Petrolia Royalty effective July 31, 2018, by and between Petrolia Energy Corporation and Bow Energy Ltd. (incorporated by reference to Schedule 4 of the Share Exchange Agreement incorporated by reference herewith as Exhibit 2.3)       8-K 10.13 9/5/2018 000-52690
10.14   Petrolia Carry Agreement, by and between Petrolia Energy Corporation and Bow Energy Ltd. (incorporated by reference to Schedule 5 of the Share Exchange Agreement incorporated by reference herewith as Exhibit 2.3)       8-K 10.14 9/5/2018 000-52690
10.15   Form of 12% Bridge Note – 2018       8-K 10.15 9/5/2018 000-52690
10.16   Purchase and Sale Agreement dated and effective November 1, 2018, by and between Petrolia Energy Corporation and Crossroads Petroleum L.L.C.       10-Q 10.16 9/30/2018 000-52690
10.17   $240,000 Promissory Note dated November 2, 2018, by Crossroads Petroleum L.L.C. in favor of Petrolia Energy Corporation       10-Q 10.17 9/30/2018 000-52690
10.18   Loan Agreement dated September 17, 2018 with Emmett Lescroart       10-Q 10.18 9/30/2018 000-52690
10.19   Purchase and Sale Agreement dated and effective August 6, 2019, by and between Petrolia Energy Corporation and FlowTex Energy LLC     10-Q 10.19 06/30/19  
10.20   Jovian Petroleum Corporation Line of Credit Extension, dated December 31, 2019     10-Q 10.20 06/30/2019  
10.21   Employment Agreement - Mark Allen dated September 1, 2020       8-K 10.21 09/1/2020  
10.22   Executive Salary Payment Agreement – Zel Khan dated January 11, 2021  

 
  10-Q 10.22 06/30/2019  
10.23   Utikuma Letter Agreement between BSR and Petrolia dated June 29, 2020  

 
  10-Q 10.23 06/30/2019  
10.24   Executive Salary Payable Agreement – Mark Allen dated March 30, 2021     10-Q 10.24 06/30/2019  
10.25   Debt to Equity Conversion Agreement – Mark Allen dated March 30, 2021     10-Q 10.25 06/30/2019  
10.26   Settlement and Mutual Release Agreement – Paul Deputy dated January 29, 2021     10-Q 10.26 06/30/2019  
14.1   Code of Ethical Business Conduct       10-Q 14.1 9/30/2015 000-52690
14.2   Whistleblower Protection Policy       8-K 14.1  5/24/2018 000-52690
14.3   Insider Trading Policy     10-Q 14.3 06/30/2019  
14.4   Related Party Transaction Policy     10-Q 14.4 06/30/2019  
16.1   Letter to Securities and Exchange Commission from MaloneBailey, LLP, LLP, dated February 22, 2019       8-K 16.1 2/25/2019 000-52690
21.1*   Subsidiaries   X          
23.1*   Consent of MKM Engineering dated October 15, 2019   X          
31.1*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X          
31.2*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X          
32.1**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act   X          
32.2**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act   X          
99.1*   Oil and gas reserve report for United States Properties at December 31, 2018, dated April 12, 2019   X          
99.2*   Oil and gas reserve report for Canadian Properties at December 31, 2018, dated September 22, 2019   X          
99.3   Charter of the Audit Committee       8-K 99.1  5/24/2018 000-52690
99.4   Charter of the Compensation Committee       8-K 99.2  5/24/2018 000-52690
99.5   Charter of the Nominating and Corporate Governance Committee       8-K 99.3  5/24/2018 000-52690
99.6*   Revised oil and gas reserve report for United States Properties at December 31, 2017, dated April 12, 2018   X          
101.INS+   XBRL Instance Document   X          
101.SCH+   XBRL Taxonomy Extension Schema Document   X          
101.CAL+   XBRL Taxonomy Extension Calculation Linkbase Document   X          
101.DEF+   XBRL Taxonomy Extension Definition Linkbase Document   X          
101.LAB+   XBRL Taxonomy Extension Label Linkbase Document   X          
101.PRE+   XBRL Taxonomy Presentation Linkbase Document   X          

 

ITEM 16. FORM 10–K SUMMARY.

 

None.

 

44
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PETROLIA ENERGY CORPORATION
   
  By: /s/ Zel Khan
    Zel Khan    
    Chief Executive Officer
    (Principal Executive Officer)
Date: May 27, 2021    

 

  By: /s/ Paul M. Deputy
    Paul M Deputy
    Interim Chief Financial Officer
    (Principal Financial/Accounting Officer)
Date: May 27, 2021    

 

Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Zel C Khan   Chief Executive Officer    
Zel C. Khan   (Principal Executive Officer), and Director   May 27, 2021
         
/s/ Paul M Deputy   Interim Chief Financial Officer    
Paul M Deputy   (Principal Financial/Accounting Officer)   May 27, 2021
         
/s/ Leo Womack        
Leo Womack   Director   May 27, 2021
         
/s/ Joel Oppenheim        
Joel Oppenheim   Director   May 27, 2021
         
/s/ James E. Burns        
James E. Burns   Director   May 27, 2021
         
/s/ Saleem Nizami        
Saleem Nizami   Director   May 27, 2021
         
/s/ Ivar Siem        
Ivar Siem   Director   May 27, 2021
         
/s/ Richard Dole        
Richard Dole   Director   May 27, 2021

 

45
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and

Stockholders

Petrolia Energy Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Petrolia Energy Corporation (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the period ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company suffered recurring net losses from operations for the years ended December 31, 2019 and 2018 and has a working capital deficit as of December 31, 2019, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ M&K CPAS, PLLC  
   
We have served as the Company’s auditor since 2019.  
   
Houston, Texas  
May 26, 2021  

 

F-1
 

 

PETROLIA ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2019   December 31, 2018 
ASSETS          
Current assets          
Cash  $34,513   $13,779 
Accounts receivable   5,000     
Other current assets   135,195    255,180 
Total current assets   174,708    268,959 
           
Property & equipment          
Oil and gas, on the basis of full cost accounting          
Evaluated properties   12,913,972    12,794,285 
Furniture, equipment & software   201,110    201,110 
Less accumulated depreciation, depletion and impairment   (1,663,994)   (586,488)
Net property and equipment   11,451,088    12,408,907 
           
Other assets          
Other Asset   944,055     
           
Total assets  $12,569,851   $12,677,866 
           
LIABILITIES & STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable  $598,028   $264,654 
Accounts payable – related parties   25,587    42,494 
Accrued liabilities   677,891    608,357 
Accrued liabilities – related parties   1,053,564    649,633 
Notes payable   653,540    335,877 
Notes payable – related parties   983,291    610,748 
Total current liabilities   3,991,901    2,511,763 
           
Asset retirement obligations   1,723,364    1,509,622 
Notes payable   1,443,538    725,999 
Derivative liability   24,509    37,013 
Total liabilities   7,183,312    4,784,397 
           
Stockholders’ equity          
Preferred stock, $0.001 par value; 1,000,000 shares authorized; 199,100 and 199,100 shares issued and outstanding   199    199 
Common stock, $0.001 par value; 400,000,000 shares authorized; 164,548,726 and 162,673,726 shares issued and outstanding   164,549    162,674 
Additional paid in capital   57,985,359    57,253,595 
Shares to be issued   

55,375

    

 
Accumulated other comprehensive income   (218,565)   8,273 
Accumulated deficit   (52,600,378)   (49,531,272)
Total stockholders’ equity   5,386,539    7,893,469 
           
Total liabilities and stockholders’ equity  $12,569,851   $12,677,866 

 

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

 

F-2
 

 

PETROLIA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   Year ended   Year ended 
   December 31, 2019   December 31, 2018 
         
Oil and gas sales  $2,916,734   $1,173,060 
Total revenue   2,916,734    1,173,060 
           
Operating expenses          
Lease operating expense   3,382,133    1,537,405 
Production tax   4,966    4,014 
General and administrative expenses   1,412,249    4,827,429 
Depreciation, depletion and amortization   1,037,019    486,671 
Asset retirement obligation accretion   149,624    27,971 
Impairment of oil and gas properties       2,322,255 
Impairment of intangible assets       49,886 
Total operating expenses   5,985,991    9,255,631 
           
Loss from operations   (3,069,256)   (8,082,571)
           
Other income (expenses)          
Loss on disposal of equipment       (13,783)
Interest expense   (279,141)   (156,861)
Foreign exchange gain   62,004    14,671 
Loss on related party debt settlement of accrued salaries       (203,349)
Change in fair value of derivative liabilities   12,504    (7,001)
Gain on settlement of accrued compensation   92,750    

 
Gain on sale of assets   280,000     
Loss on debt extinguishment       (260,162)
Loss on acquisition and disposition of Bow Energy Ltd.       (29,319,554)
Other income   10,242     
Total other income (expense)   178,359    (29,946,039)
           
Net loss before taxes   (2,890,898)   (38,028,610)
Income tax provision (benefit)        
           
Net loss  $(2,890,898)  $(38,028,610)
           
Series A preferred dividends   (178,208)   (179,279)
           
Net loss attributable to common stockholders   (3,069,106)   (38,207,889)
           
Loss per share          
(Basic and fully diluted)  $(0.02)  $(0.21)
           
Weighted average number of common shares outstanding, basic and diluted   162,673,726    184,564,874 
           
Other comprehensive income (loss)          
Foreign currency translation adjustments   (226,838)   8,273 
Comprehensive loss   (3,295,944)   (38,020,337)

 

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

 

F-3
 

 

PETROLIA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended
December 31, 2019
    Year Ended
December 31, 2018
 
             
Cash Flows from Operating Activities                
Net loss   $ (2,890,898 )   $ (38,028,610 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depletion, depreciation and amortization     1,037,019       486,671  
Asset retirement obligation accretion     149,624       27,971  
Bad debt expense           25,000  
Amortization of debt discount     13,148        
Loss on related party debt settlement of accrued salaries           203,349  
Change in fair value of derivative liabilities     (12,504 )     7,001  
Loss on extinguishment of debt           260,162  
Equity settled finance fees           112,773  
Warrant expense related to business combination     72,037       103,632  
Stock-based compensation expense     473,353       3,451,739  
Gain on settlement of accrued salaries     (92,750 )      
Gain on extinguishment of debt     (32,600 )      
Gain on sale of assets     (280,000 )      
Loss on acquisition and disposition of Bow Energy Ltd.           29,319,554  
Loss on disposal of equipment           13,980  
Impairment of oil and gas properties           2,322,255  
Impairment of intangible assets           49,886  
Changes in operating assets and liabilities                
Accounts receivable     (5,000 )     (211,332 )
Prepaids     1,379        
Other current assets           (6,187 )
Deposits           240,000  
Accounts payable     333,375       248,013  
Accounts payable – related parties     (16,907)       (14,794 )
Accrued liabilities     (108,676 )     354,410  
Accrued liabilities – related parties     513,681       (104,560  
Net cash used in operating activities     (845,719 )     (1,139,087 )
                 
Cash Flows from Investing Activities                
Purchase of working interest in Canadian Properties     (944,055 )     (932,441 )
Sale of NOACK property     120,000       135,000  
Proceeds from 2nd NOACK sale     375,000        
Net cash acquired in acquisition of Bow Energy Ltd.           3,784  
Net cash disposed of in sale of Bow Energy Ltd.           (4,003 )
Cash used in investing activities     (449,055 )     (797,660 )
                 
Cash Flows from Financing Activities                
Proceeds from issuance of common stock     30,000       397,500  
Proceeds from exercise of warrants           179,675  
Proceeds from issuance of preferred stock           20,000  
Proceeds from notes payable     1,225,000       1,000,000  
Repayments of notes payable     (7,096 )     (41,325 )
Proceeds from related party notes payable     797,793       494,477  
Repayments of related party notes payable     (558,726 )     (194,104 )
Shares to be issued     55,375        
Cash provided by financing activities     1,542,346       1,856,223  
                 
Foreign exchange     (226,838 )     11,710  
                 
Net change in cash     20,734       (68,814 )
                 
Cash at beginning of period     13,779       82,593  
                 
Cash at end of period   $ 34,513     $ 13,779  

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

F-4
 

  

   Year Ended
December 31, 2019
   Year Ended
December 31, 2018
 
SUPPLEMENTAL DISCLOSURES          
Interest paid  $82,657   $28,057 
Income taxes paid        
NON-CASH INVESTING AND FINANCIAL DISCLOSURES          
Settlement of related party accrued liabilities for common shares   17,000      
Settlement of notes payable related party for common shares   113,000      
Assumption of note payable by related party   125,000      
Common shares issued for acquisition of Bow Energy Ltd. (Note 4)       34,607,088 
Shares cancelled as proceeds in sale of Bow Energy Ltd. (Note 5)       4,956,519 
Debt discount from warrant issuance   38,249     
Settlement of accrued salaries for related parties with common shares       61,621 
Settlement of account payable – related parties for common shares, related party       102,590 
Accrued Series A preferred dividends   178,208    179,279 
Proceeds from notes payable paid directly by the related party creditor to seller for acquisition of working interests       313,775 
Warrants exercised with proceeds satisfied through settlement of debt       60,000 
Note receivable recognized on sale of oil and gas property       240,000 

 

F-5
 

 

PETROLIA ENERGY CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

   Preferred stock   Common stock  

Additional

paid-in

  

Shares

to be

  

Accumulated Other

Comprehensive

   Accumulated  

Stockholders’

equity

 
   Shares   Amount   Shares   Amount   capital   Issued   income   deficit   (deficit) 
Balance at December 31, 2017   19,100    197    111,698,222    111,698    22,730,974    —         (11,323,383)     11,519,486 
                                              
Preferred shares issued   2,000    2            19,998    —             20,000 
Common shares issued           3,750,000    3,750    393,750    —             397,500 
Exercise of warrants           3,910,000    3,910    338,355    —             342,265 
Shares issued to settle liabilities           1,216,209    1,216    479,267    —             480,483 
Stock-based compensation           6,750,000    6,750    3,459,626    —             3,466,376 
Warrants issued as financing fees                   112,773    —             112,773 
Acquisition of Bow Energy Ltd.           106,156,712    106,157    34,500,931    —             34,607,088 
Warrants issued related to acquisition of Bow Energy Ltd.                   103,633    —             103,633 
Sale of Bow Energy Ltd.           (70,807,417)   (70,807)   (4,885,712)   —             (4,956,519)
Series A preferred dividends                       —         (179,279)   (179,279)
Other comprehensive income (loss)                       —     8,273        8,273 
Net loss                                (38,028,610)   (38,028,610)
Balance at December 31, 2018   199,100   $199    162,673,726   $162,674   $57,253,595  

$

—    $8,273   $(49,531,272)  $7,893,469 
                                              
Common shares issued           1,875,000    1,875    148,125    —     —     —     150,000 
Stock based compensation                     473,353    —         —     473,353 
Warrants issued as financing fee   —     —     —     —     72,037    —     —     —     72,037 
Series A preferred dividends                       —         (178,208)   (178,208)
Shares to be issued   —     —     —     —     —     55,375    —     —     55,375 
Warrants issued for loans   —     —     —     —     38,249    —     —     —     38,249 
Other comprehensive income (loss)                       —     (226,838)       (226,838)
Net loss                       —         (2,890,898)   (2,890,898)
Balance at December 31, 2019   199,100   $199    164,548,726    164,549    57,985,359    55,375    (218,565)   (52,600,378)   5,386,539 

 

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

 

F-6
 

 

PETROLIA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Askarii Resources and Petrolia Canada Corporation. All significant intercompany balances and transactions have been eliminated upon consolidation.

 

The Company accounts for its investment in companies in which it has significant influence by the equity method. The Company’s proportionate share of earnings is included in earnings and added to or deducted from the cost of the investment.

 

Foreign currency translation

 

The functional and reporting currency of the Company is the United States dollar. The functional currencies of the Company’s wholly-owned subsidiaries, Askarii Resources and Petrolia Canada Corporation, are the United States dollar and the Canadian dollar, respectively. Transactions involving foreign currencies are converted into the Company’s functional currency using the exchange rates in effect at the time of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the Company’s functional currency are translated using exchange rates at that date. Exchange gains and losses are included in net earnings. On consolidation, Petrolia Canada Corporation’s income statement amounts are translated at average exchange rates for the year, while the assets and liabilities are translated at year-end exchange rates. Translation adjustments are accumulated as a separate component of stockholders’ equity in other comprehensive income.

 

Management estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include depreciation of furniture, equipment and software, asset retirement obligations (“AROs”) (Note 10), income taxes (Note 14) and the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom (Note 16).

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity date of three months or less to be cash equivalents. At December 31, 2019, the Company did not hold any cash equivalents.

 

Receivables and allowance for doubtful accounts

 

Oil revenues receivable do not bear any interest. These receivables are primarily comprised of joint interest billings. Management regularly reviews collectability and establishes or adjusts an allowance for uncollectible amounts as necessary using the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management has determined that a reserve for uncollectible amounts was not required in the periods presented.

 

F-7
 

 

Oil and gas properties

 

The Company follows the full cost accounting method to account for oil and natural gas properties, whereby costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on nonproducing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to operations.

 

The capitalized costs of oil and gas properties, excluding unevaluated and unproved properties, are amortized as depreciation, depletion and amortization expense using the units-of-production method based on estimated proved recoverable oil and gas reserves.

 

The costs associated with unevaluated and unproved properties, initially excluded from the amortization base, relate to unproved leasehold acreage, wells and production facilities in progress and wells pending determination of the existence of proved reserves, together with capitalized interest costs for these projects. Unproved leasehold costs are transferred to the amortization base with the costs of drilling the related well once a determination of the existence of proved reserves has been made or upon impairment of a lease. Costs associated with wells in progress and completed wells that have yet to be evaluated are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. Costs of dry wells are transferred to the amortization base immediately upon determination that the well is unsuccessful.

 

All items classified as unproved property are assessed on a quarterly basis for possible impairment or reduction in value. Properties are assessed on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization.

 

Under full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the “cost ceiling”) equal to the sum of (a) the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current prices and operating conditions, discounted at ten percent (10%), plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs exceed this limit, the excess is charged to operations. For purposes of the ceiling test calculation, current prices are defined as the un-weighted arithmetic average of the first day of the month price for each month within the 12 month period prior to the end of the reporting period. Prices are adjusted for basis or location differentials. Unless sales contracts specify otherwise, prices are held constant for the productive life of each well. Similarly, current costs are assumed to remain constant over the entire calculation period.

 

Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that impairments of oil and gas properties could occur. In addition, it is reasonably possible that impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.

 

Furniture, equipment and software

 

Furniture, equipment, and software are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related asset, generally three to five years. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. Management performs ongoing evaluations of the estimated useful lives of the property and equipment for depreciation purposes. Maintenance and repairs are expensed as incurred. Management periodically reviews long-lived assets, other than oil and gas property, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

F-8
 

 

Derivative financial instruments

 

The Company’s derivative financial instruments consist of warrants with an exercise price denominated in a currency other than the Company’s functional currency. These derivative financial instruments are measured at their fair value at the end of each reporting period. Changes in fair value are recorded in net income.

 

Asset retirement obligations

 

The Company records a liability for Asset Retirement Obligations (“AROs”) associated with its oil and gas wells when those assets are placed in service. The corresponding cost is capitalized as an asset and included in the carrying amount of oil and gas properties and is depleted over the useful life of the properties. Subsequently, the ARO liability is accreted to its then-present value.

 

Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.

 

Debt issuance costs

 

Costs incurred in connection with the issuance of long-term debt are presented as a direct deduction from the carrying value of the related debt and amortized over the term of the related debt.

 

Revenue recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which includes (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue as each performance obligation is satisfied. The Company adopted this standard on a modified retroactive basis on January 1, 2018. No financial statement impact occurred upon adoption.

 

Revenue from contracts with customers

 

The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is measured based on the consideration the Company expects to receive in exchange for those products.

 

Performance obligations and significant judgments

 

The Company sells oil and natural gas products in the United States through a single reportable segment. The Company enters into contracts that generally include one type of distinct product in variable quantities and priced based on a specific index related to the type of product.

 

The oil and natural gas is typically sold in an unprocessed state to processors and other third parties for processing and sale to customers. The Company recognizes revenue at a point in time when control of the oil or natural gas passes to the customer or processor, as applicable, discussed below. For oil sales, control is typically transferred to the customer upon receipt at the wellhead or a contractually agreed upon delivery point. Under our natural gas contracts with processors, control transfers upon delivery at the wellhead or the inlet of the processing entity’s system. For our other natural gas contracts, control transfers upon delivery to the inlet or to a contractually agreed upon delivery point. In the cases where the Company sells to a processor, management has determined that the Company is the principal in the arrangement and the processors are customers. The Company recognizes the revenue in these contracts based on the net proceeds received from the processor.

 

F-9
 

 

Transfer of control drives the presentation of transportation and gathering costs within the accompanying consolidated statements of operations. Transportation and gathering costs incurred prior to control transfer are recorded within the transportation and gathering expense line item on the accompanying consolidated statements of operations, while transportation and gathering costs incurred subsequent to control transfer are recorded as a reduction to the related revenue.

 

A portion of our product sales are short-term in nature. For those contracts, the Company uses the practical expedient in Accounting Standards Codification (“ASC”) 606-10-50-14 exempting us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

For our product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC 606-10-50-14(a) which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to an unsatisfied performance obligation. Under these sales contracts, each unit of product represents a separate performance obligation; therefore, future volumes are unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. The Company has no unsatisfied performance obligations at the end of each reporting period.

 

Management does not believe that significant judgments are required with respect to the determination of the transaction price, including any variable consideration identified. There is a low level of uncertainty due to the precision of measurement and use of index-based pricing with predictable differentials. Additionally, any variable consideration identified is not constrained.

 

Stock-based compensation

 

The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718. Stock-based compensation to employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service period. The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized as expense over the service period. The Company estimates the fair value of stock-based payments using the Black-Sholes Option Pricing Model for common stock options and warrants and the closing price of the Company’s common stock for common share issuances. The Company may grant stock to employees and non-employees in exchange for goods, services or for settlement of liabilities. Shares granted to employees in exchange for goods, services or settlement of liabilities are measured based on the fair value of the shares issued. Shares granted to non-employees in exchange for goods or services are measured based on the fair value of the consideration received or the fair value of the shares issued, whichever is more reliably measurable.

 

Income taxes

 

Income taxes are accounted for pursuant to ASC 740, Income Taxes, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.

 

Uncertain tax positions are recognized in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision. There are currently no unrecognized tax benefits that if recognized would affect the tax rate. There was no interest or penalties recognized for the twelve months ended December 31, 2019 and 2018.

 

The Company is required to file federal income tax returns in the United States and Canada, and in various state and local jurisdictions. The Company’s tax returns filed since the 2018 tax year are subject to examination by taxing authorities in the jurisdictions in which it operates in accordance with the normal statutes of limitations in the applicable jurisdiction.

 

F-10
 

 

Earnings (loss) per share

 

Basic earnings (loss) per share has been calculated based on the weighted-average number of common shares outstanding. The treasury stock method is used to compute the dilutive effect of the Company’s share-based compensation awards. Under this method, the incremental number of shares used in computing diluted earnings per share (“EPS”) is the difference between the number of shares assumed issued and purchased using assumed proceeds. Diluted EPS amounts would include the effect of outstanding stock options, warrants, and other convertible securities if including such potential shares of common stock is dilutive. Basic and diluted earnings per share are the same in all periods presented as all outstanding instruments are anti-dilutive.

 

Concentration of credit risk