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.

Plan of Operation

Since 2015, we have established a strategy to acquire, enhance and redevelop high-quality, resource in place oil and gas assets. The Company has been focusing on producing assets in the United States and Canada while actively pursuing our strategy to offer low-cost operational solutions in established oil and gas regions. We believe our mix of oil-in-place conventional plays, low-risk resource plays and the redevelopment of our late-stage plays is a solid foundation for continued growth and future revenue growth.

Slick Unit Dutcher Sands ("SUDS") Field

The SUDS oilfield consists of approximately 2,604 acres located in Creek County, Oklahoma and Petrolia owns a 100% Working Interest ("WI") with a 76.5% net revenue interest (NRI). Our engineering reports and analysis indicate there is still considerable recoverable reserves remaining.

The SUDS field is currently shut-in while awaiting sufficient capital to recomplete the wells and repair the flow lines that were damaged in a grass fire.

Twin Lakes San Andres Unit ("TLSAU") Field

TLSAU is located 45 miles from Roswell, Chaves County, New Mexico. TLSAU is currently shut-in awaiting confirmation of lease acreage held, then capital allocation to complete some regulatory plugging requirements. The Company plugged two wells at Twin Lakes in June 2022 and is currently working on surface remediation activities.

The Company is reviewing strategic options with the TLSAU asset, with a bias toward divesting the asset.

Askarii Resources, LLC

Effective February 1, 2016, the Company acquired 100% of the issued and outstanding interests of Askarii Resources LLC, a private Texas based oil and gas service company for the aggregate value of $50,000. The Company currently has no intent of further investing in the Askarii Resources, LLC acquisition.

Luseland, Hearts Hill and Cuthbert fields

On June 29, 2018, the Company acquired a 25% working interest in approximately 41,526 acres in the Luseland, Hearts Hill, and Cuthbert fields, located in Southwest Saskatchewan and Eastern Alberta, Canada. The working interest was acquired from Blue Sky Resources (a related party). Blue Sky Resources had previously acquired an 80% working interest from Georox Resources Inc., who had acquired the Canadian Properties from Cona Resources Ltd.

On September 17, 2018, the Company entered into a Memorandum of Understanding ("MOU") with Blue Sky Resources to obtain the rights to acquire an additional 3% working interest, increasing our working interest to 28%. Total consideration paid from the Company to Blue Sky Resources for the additional 3% Working Interest was $150,000.

On February 16, 2022, Petrolia Canada Corporation (PCC), a wholly owned subsidiary of Petrolia Energy Corporation (PEC), entered into a Purchase and Sale Agreement (PSA) and Debt Settlement Agreement (DSA) with Prospera Energy, Inc. whereby PCC sold its 28% working interest in the Luseland, Hearts Hill and Cuthbert fields. The agreements were effective as of October 1, 2021.

Utikuma Lake field

On May 1, 2020, Petrolia Energy Corporation acquired a 50% working interest in approximately 28,000 acres located in the Utikuma Lake area in Alberta, Canada. The property is an oil-weighted asset currently producing a total of approximately 500 bpd of light oil. The working interest was acquired from Blue Sky Resources in an affiliated party transaction as Zel C. Khan, the Company's former Chief Executive Officer, is related to the CEO of Blue Sky Resources.



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Blue Sky Resources acquired a 100% working interest in the Canadian Property from Vermilion Energy Inc. via Vermilion's subsidiary Vermilion Resources. The effective date of the acquisition was May 1, 2020. The total purchase price of the property was $2,000,000 (CAD), with $1,000,000 (CAD) of that total due initially. The additional $1,000,000 (CAD) was contingent on the future price of WTI crude. At the time WTI price exceeded $50/bbl, the Company would pay an additional $750,000 (CAD). In addition, at the time WTI price exceeded $57/bbl the Company would pay an additional $250,000 (CAD) (for a cumulative contingent total of $1,000,000 (CAD)). The price of WTI crude exceeded $50/bbl on January 6, 2021 and exceeded $57/bbl on February 8, 2021. The additional payments due were netted with the accounts receivable balance from previous Joint Interest Billing statements from BSR. The total USD value of the addition was $787,250, using prevailing exchange rates on the respective dates. Included in the terms of the agreement, the Company also funded their portion of the Alberta Energy Regulator ("AER") bond fund requirement ($592,699 USD), necessary for the wells to continue in production after the acquisition. Additional funds ($380,742 USD) remain in the other current asset balance for future payments to BSR, related to the acquisition.



Results of Operations

Revenues

Our oil and gas revenue reported for the six months ended June 30, 2022 was $2,974,250, an increase of $643,643 from the six months ended June 30, 2021. The increase was due to revenue from the Utikuma field, and was offset by the sale of the CONA asset in the third quarter of 2021. Revenues associated with our US properties totaled $6,079.

Operating Expenses

Operating expenses increased by $105,637, to $3,395,373 for the three-month period ended June 30, 2022, compared to $3,289,736 for the six months ended June 30, 2021. The operating expense increase was primarily due to increased production at Utikuma Field - lease operating expense for the six months ended June 30, 2022 was $2,898,236, compared to $2,148,469 for the six months ended June 30, 2021. It was partially reduced by the sale of the CONA asset. Depreciation, depletion and amortization and the accretion of asset retirement obligations were reduced because of the smaller base for these items after the sale of CONA. The reduction in general and administrative costs by $224,353 to $297,603 for the six months ended June 30, 2022, compared to $521,956 was caused by the decrease in employees and contractor and related overhead expenses.

Other income (expense)

The Company had net other expense of $225,157 for the three-month period ended June 30, 2022, compared to a net other expense of $434,555 for the three-month ended June 30, 2021. This difference was caused by changes in the fair market value of our derivatives, and a decrease in interest expense.

Foreign exchange loss was $32,902 for the six month period ended June 30, 2022, compared to a loss of $37,405 for the six month period ended June 30, 2021. The change is from fluctuations in the value of the United States dollar against the Canadian dollar.

Net Income (Loss)

Net loss for the six months ended June 30, 2022, was $646,280, compared to a net loss of $1,393,684 for the six months ended June 30, 2021. The primary reasons for the change was increased production from the Utikuma field, the reduced general and administrative expense, and the change in the fair value of our derivative liabilities.

Liquidity and Capital Resources

The financial condition of the Company has improved slightly throughout the period from December 31, 2021 to June 30, 2022.

As of June 30, 2022, we had total current assets of $1,060,844 and total assets of $8,658,785. Our total current liabilities as of June 30, 2022 were $8,138,359 and our total liabilities as of June 30, 2022 were $10,466,566. We had negative working capital of $7,077,695 as of June 30, 2022.

Our material asset balances are made up of oil and gas properties and related equipment. Our most significant liabilities are notes payable and notes payable related party of $4,102,924 along with accounts payable and accrued liabilities. Our largest accounts payable balances are with administrative and operations contractors, including $1,346,086 owed to the operator of our Canadian property. The largest accrued liabilities are $904,489 of accrued dividends on our preferred stock and $638,000 owed to related parties for board fees and other compensation.



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Net cash generated (used) by operating activities was $1,153,397 and $(87,489) for the six months ended June 30, 2022, and 2021, respectively. The primary cause for the decrease was a reduction in general and administrative expenses, and the receipt of revenue from oil sales.

Net cash from investing activities was $0.00 for the six months ended June 30, 2022, and the six months ended June 30, 2021.

Net cash used by financing activities was $113,304 for the six months ended June 30, 2022; net cash used by financing activities was $38,582 for the six months ended June 30, 2021. The change was caused by proceeds from issuance of preferred stock in 2022, and increased payments to debt holders.

During the six months ended June 30, 2022, the Company operated at a positive cash flow from operations of approximately $190,000 per month however our auditors have raised a going concern in their audit report published with our 10K for 2021.

The Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. We plan to generate profits by working over existing wells, reducing general and administrative expenses and resolving ongoing litigation. However, we may need to raise additional funds to workover wells through the sale of our securities, through loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any commitments or arrangements from any person to provide us with any additional capital.

If additional financing is not available when needed, we may need to cease operations. There can be no assurance that we will be successful in raising the capital needed to recomplete oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all.

Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.

Off-Balance Sheet Arrangements

As of June 30, 2022, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources or change our financial condition.

Trends Affecting Future Operations

The factors that will most significantly affect our results of operations will be (i) the sale prices of crude oil and natural gas, (ii) the amount of production from oil or gas wells in which we have an interest, and (iii) lease operating expenses. Our revenues will also be significantly impacted by our ability to maintain or increase oil or gas production through exploration and development activities, and the availability of funding to complete such activities.

It is expected that our principal source of cash flow will be from the production and sale of crude oil and natural gas reserves which are depleting assets. Cash flow from the sale of oil and gas production depends upon the quantity of production and the price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining financing. However, price increases may 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.



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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.

The company is actively working to resolve ongoing litigation in the U.S. and Canada.

Critical Accounting Policies and New Accounting Pronouncements

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

Going concern - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses of $62,079,296 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.

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